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EX-10.5 - China Polypeptide Group, Inc.v165903_ex10-5.htm
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EX-10.3 - China Polypeptide Group, Inc.v165903_ex10-3.htm
EX-10.4 - China Polypeptide Group, Inc.v165903_ex10-4.htm
EX-10.1 - China Polypeptide Group, Inc.v165903_ex10-1.htm
EX-10.2 - China Polypeptide Group, Inc.v165903_ex10-2.htm
EX-10.7 - China Polypeptide Group, Inc.v165903_ex10-7.htm
EX-3.2A - China Polypeptide Group, Inc.v165903_ex3-2a.htm
EX-10.8 - China Polypeptide Group, Inc.v165903_ex10-8.htm
EX-10.6 - China Polypeptide Group, Inc.v165903_ex10-6.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported):  November 13, 2009

HAMPTONS EXTREME, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
 
333-151148
 
20-8731646
(State or Other Jurisdiction
 
(Commission File Number)
 
(IRS Employer
of Incorporation)
  
 
  
Identification No.)

No. 11 Jiangda Road
Jianghan Economical Development Zone
430023 Wuhan, P.R. China
 
(Address of Principal Executive Offices)

509 S. San Clemente Street
Ventura, California 93001
 
(Former name or former address, if changed since last report.)

Registrant's telephone number, including area code:  86 27 835 183 96

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 

 

TABLE OF CONTENTS

Item No.
 
Description of Item
 
Page No.
         
Item 1.01
 
Entry Into a Material Definitive Agreement
    2
           
Item 2.01
 
Completion of Acquisition or Disposition of Assets
    2
           
Item 3.02
 
Unregistered Sales of Equity Securities
    40
           
Item 5.01
 
Changes in Control of Registrant
    40
           
Item 5.02
 
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
    40
           
Item 5.03
 
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
    40
           
Item 5.06
 
Change in Shell Company Status
    41
           
Item 9.01
 
Financial Statements and Exhibits
    41
 
 
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Current Report on Form 8-K and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this report entitled “Risk Factors”) as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results. The following discussion should be read in conjunction with our pro forma financial statements and the related notes that will be filed herein.

Currency, exchange rate, and “China” and other references

Unless otherwise noted, all currency figures in this Current Report on Form 8-K are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan, which is also known as the renminbi. According to the currency exchange website www.xe.com, on October 21, 2009, $1.00 was equivalent to 6.82840 yuan.

References to “PRC” are to the People’s Republic of China.

Explanatory Note

Unless otherwise specified or required by context, references to “we,” “the Company,” “our” and “us” refer collectively to Hamptons Extreme, Inc., a Delaware corporation (the “Company”), together with its wholly-owned subsidiary, Cantix International Ltd., a British Virgin Islands limited company (“Cantix”), Cantix’s wholly-owned direct subsidiary, Moneyeasy Industries Limited, a Hong Kong limited company (“Moneyeasy”), Moneyeasy’s wholly-owned direct subsidiaries, Wuhan Tallyho Biological Product Co., Ltd., a PRC limited company (“Tallyho”), and Wuhan Polypeptide Anti-Aging Research and Development Co., Ltd., a PRC limited company (“Wuhan Anti-Aging”), and Tallyho’s operating PRC subsidiary, Guangdong Haopu Polypeptide Biological Technology Co., Ltd. (“Haopu”).  Specific discussions or comments relating only to Hamptons Extreme, Inc. will reference the “Hamptons” and those relating only to Cantix and its subsidiaries will reference “Cantix.”
 
 
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Item 1.01. Entry into a Material Definitive Agreement

Reference is made to the disclosure made under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.

Item 2.01 Completion of Acquisition or Disposition of Assets.

On November 13, 2009, Hamptons completed the acquisition of all of the issued and outstanding capital stock of Cantix from China Polypeptide Group, Ltd. (“CPG”) pursuant to a Stock Exchange Agreement (the “Exchange Agreement”) by and between Hamptons, Cantix and CPG.  Pursuant to the Exchange Agreement, Hamptons issued to CPG 1,100,000 shares of Hamptons’ common stock, $.0001 par value per share (the “Common Stock”) in exchange for 100% of the outstanding capital stock of Cantix (the “Exchange”).  Following the Exchange (i) Cantix became the wholly owned subsidiary of Hamptons, and (ii) CPG became a stockholder of Hamptons, owning approximately 88% of the issued and outstanding shares of Common Stock.

As a result of the Exchange, our principal business became the business of Cantix, who, through its PRC-based indirect operating subsidiaries Wuhan Anti-Aging and Tallyho, engage in the research and development, manufacturing and marketing of polypeptide-based nutritional supplements and health foods.  Polypeptides are small molecular structures consisting of 10-50 amino acids and have been found to have high nutritional value and support body functions such as regulating immunological functions in humans.

Our board of directors (the “Board”) as well as the directors and a majority of the stockholders of CPG, each approved the Exchange Agreement and the transactions contemplated thereunder.

Effective November 13, 2009, John Delaney resigned as the Company’s President, Chief Executive Officer, and as a director, and Brien Reidy resigned as Vice President and Secretary of the Company.  Concurrently therewith, Dongliang Chen, Shengfan Yan, Lirong Hu were appointed to the Company’s board of directors and Dongliang Chen was appointed Chief Executive Officer and Chairman of the Board, Shengfan Yan was appointed President, Lirong Hu was appointed Chief Financial Officer and Treasurer and Jun Li was appointed Secretary.

Item 2.01(f) of Form 8-K provides that if a registrant reporting a transaction under Item 2.01 was a “shell company” (as such term is defined in Rule 12b-2 promulgated under the Exchange Act), prior to such transaction, the registrant must disclose the information that would be required if it were filing a general form for securities registration on Form 10.  Please note that the information provided below relates to the Company after the Exchange.  Since Hamptons’ operations after the Exchange will consist solely of CPG’s operations, the following discussion of our business and operations will refer to CPG’s business and operations.
 
 
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Overview of Our Business

Hamptons

Hamptons is a development stage company incorporated in Delaware in March 2007 with no material assets or operations.  Hamptons was formed to engage in the design, manufacture, distribution and marketing of surfboards and related equipment.  Since its inception, Hamptons has generated no revenues.  Hampton’s common stock is quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol HMEX.  After the Exchange, Hamptons became the sole owner of Cantix, and it adopted the business of Cantix.

Cantix

Cantix, through its PRC-based indirect operating subsidiaries, Tallyho and Wuhan Anti-Aging is primarily engaged in the research and development, manufacturing and marketing of polypeptide-based nutritional supplements and health foods.  Polypeptides are small molecular structures consisting of 10-50 amino acids that have been found to have nutritional value and support body functions such as regulating immunological functions in humans.  We focus on enzyme engineering in order to produce macromolecular protein structures in the form of certain functional peptides for use as nutritional additives and supplements.  Our key products include Polypeptide Protein Powder, which has been approved by the PRC State Food and Drug Administration (the “SFDA”), and Shenguo Polypeptide Capsules, which has been approved by the provincial Administration of Health of Hubei and is in the process of gaining SFDA approval.  We currently manufacture and market lipid lowering soy peptide products in China, using our patented processing methods.   Our products are sold to retail consumers directly and enterprises, through an established global network of distributors and retailers.  Most of our products are manufactured in our owned and operated production facilities located in China. Some of our nutritional supplements and personal care products are manufactured for us through contractual relationships with other manufacturing companies, in accordance with our own proprietary formulations.

Cantix’s sales revenue for the fiscal years ended September 30, 2008 and 2007 were $35,590,341 and $1,970,673, respectively, and net income was $10,240,474 and $43,162, respectively.  In the fiscal year ended September 30, 2008, $28,947,346.91, or 81.33%, of Cantix’s sales revenue, was generated from sales of its Polypeptide Protein Powder.
 
Background of Cantix

Cantix was incorporated in the British Virgin Islands as a startup stage company on January 29, 2007.  Prior to the reverse acquisition described below, Cantix was wholly-owned by Ablepeak International Limited (“Ablepeak”), a British Virgin Islands company that is owned and controlled by Mr. Choi Fat Siu, its sole shareholder.  On January 1, 2008, Mr. Siu granted an option to the founders of Tallyho and Wuhan Anti-Aging to purchase all of his ownership interest in Ablepeak for an exercise price of $20,000.  The option is exercisable on or after July 15, 2009.  As of November 13, 2009, the option has not been exercised.

Cantix’s wholly-owned subsidiary, Moneyeasy, is a Hong Kong business organization that was incorporated as a startup stage company on August 25, 2006.  On November 5, 2007, Moneyeasy entered into an equity purchase agreement, to acquire all the equity interest of Tallyho for RMB 40,230,000 (approximately $5,388,788).  Tallyho was organized under the laws of the PRC on November 28, 1996 under the name of Wuhan XinRongxin Biological Product Co., Ltd.  The name was changed to its current name on January 6, 1999.  Tallyho’s scope of business includes research and development, production and sale of biological and nutritional supplements.  Tallyho’s business license is valid through December 24, 2037.

An Approval for Establishment of Enterprise with Investments from Taiwan, Hong Kong, Macao and Overseas Chinese was issued by the People’s Government of Wuhan Municipality (the “Wuhan Municipality”), on November 27, 2007, in connection with Moneyeasy’s acquisition of Tallyho.  The transaction was also approved by the Wuhan City Bureau of Commerce (the “WCBC”), subject to the PRC Regulations on Merger with and Acquisition of Domestic Enterprises by Foreign Investors (the “Merger Regulations”), which require the equity interest transfer price to be paid in full by a date certain (July 26, 2008), or in the absence of such express date, within one (1) year commencing from the issuance of the new business license.  On March 25, 2008, a renewed Business License was issued by the Wuhan Administration for Industry and Commerce (the “Wuhan AIC”), and Tallyho was converted into a wholly foreign owned enterprise.

On December 18, 2007, Moneyeasy entered into another equity purchase agreement to acquire all the capital of Wuhan Anti-Aging for RMB 8,000,000 (approximately $1,095,000).  Wuhan Anti-Aging was organized under the laws of the PRC on June 27, 2007.  Its primary business is research and development of protein and polypeptide anti-aging biological products, sales and distribution of developed products.  Wuhan Anti-Aging’s business license is valid through June 13, 2037.
 
 
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Wuhan Anti-Aging received the Certificate of Approval issued by the Wuhan Municipality on December 29, 2007, and a renewed Business License from the Wuhan AIC on January 3, 2008.  The acquisition of Wuhan Anti-Aging pursuant to the Anti-Aging Equity Purchase Agreement was closed on January 3, 2008 and Wuhan Anti-Aging became a wholly foreign owned enterprise. The transaction contemplated by the Wuhan Anti-Aging Equity Purchase Agreement was approved by the WCBC, subject to the Merger Regulations.  However, in this case, the WCBC did not specify an exact date on which the full purchase price has to be paid for the transferred equity.  As such, pursuant to the Merger Regulations, Moneyeasy was not required to pay the full purchase price under the agreement for one (1) year, commencing from the issue of the new business license (i.e. January 2, 2009).  Effective October 30, 2009, Moneyeasy the full purchase price has been paid.

On November 13, 2007, Tallyho established its operating PRC subsidiary, Guangdong Haopu Polypeptide Biological Technology Co., Ltd. (“Haopu”) and contributed $1,347,346 to Haopu.  Haopu specializes in service-based sales of health and anti-aging products.
 
Prior Reverse Acquisition
  
On July 28, 2008, CPG completed a reverse acquisition transaction through a share exchange with Ablepeak and Cantix, whereby CPG issued to Ablepeak 55,487,956 shares of its common stock, $.001 par value, in exchange for all of the issued and outstanding capital stock of Cantix.  Cantix thereby became CPG’s wholly-owned subsidiary and its four direct and indirect subsidiaries, Moneyeasy, Tallyho, Wuhan Anti-Aging and Haopu became CPG’s indirect subsidiaries.  On July 28, 2008, CPG changed its name from “TSI Services, Inc.” to “China Polypeptide Group Ltd.” to more accurately reflect its new business operations as described herein.

As a result of the reverse acquisition, on July 28, 2008, all of the then officers and directors of CPG resigned and Dongliang Chen was appointed Chief Executive Officer, Shengfan Yan was appointed President, and Lirong Hu was appointed Chief Financial Officer and Treasurer of CPG. On the same day, the board of directors appointed Dongliang Chen, Shengfan Yan, Lirong Hu, Leung Miu Ching and Xinfeng Liang to serve as members of the board of directors of CPG, with Dongliang Chen serving as Chairman of the board of directors.
 
Our Industry and Market Trends
  
Our products are targeted for use in the nutritional health supplements industry, the anti-aging industry, the cosmetics industry and other health care industries.

Nutritional Health Supplements Industry

We believe that the nutritional health supplements industry is currently made up of many small and medium-sized companies that manufacture and distribute products generally intended to, or marketed for the purpose of, maintaining, and sometimes improving, the body’s health and general well being.  We believe that in 2007, sales of nutritional health supplements in China reached $75 billion.  According to the China Personal Health and Supplemental Industry 2005 Survey (the “2005 Health Survey”), the annual growth rate of health supplement consumption in China lies between 15% and 30%, compared to around 13% in other developed countries.

According to the China Enterprises Association, there are currently over 3,000 manufacturers of health supplement products in China, with an annual production value of over $6.25 billion.  Of these manufacturers, large enterprises with over $12.5 million in registered capital only account for 1.45%, medium-sized enterprises with registered capital of under $12.5 million, but over $6.25 million, make up 38%, and workshop-style enterprises with below $12,500 in registered capital make up 12.5% of the total number of manufacturers.  According to the 2005 Health Survey, sales of health supplement products in China are expected to reach RMB70 billion (approximately $8.75 billion) in 2009, with a compounded annual growth rate of 15.24%.

In a move to encourage the development and commercialization of polypeptide technology, the PRC’s Science and Technology Institute has formally recognized polypeptide product technology as proprietary intellectual property. As such, polypeptide product technology may be protected by Chinese intellectual property law even if such technology is not patented.  As a result, polypeptide companies such as ours have instituted strict measures to protect their product technology from being misappropriated.

Anti-aging Industry
 
According to a report by the US Census Bureau issued in April 2005, the number of seniors over 65 years old is increasing at an annual rate of 2.5%. Statistics and predictions from the World Health Organization estimate that the elderly population will reach two billion by 2050.
 
A report published by Ministry of Health of the People's Republic of China in October 2004, disclosed that the number of residents of China with chronic non-communicable diseases is rising rapidly as a result of unhealthy lifestyle. It was also reported that the prevalence of hypertension was increasing and that out of 160 million patients in China, the rate of hypertension in residents over eighteen years old was 18.8%. In addition, only 30.2% patients with hypertension knew were aware of that they suffered from hypertension, and the treatment rate and control rate were 24.7% and 6.1% respectively. The report also showed that chronic diseases replaced infectious diseases as a major cause of death of residence in China.
 
 
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We believe that due to lifestyle changes, deterioration of the environment, and increasing life expectancy of Chinese citizens, the demand for nutritional supplements and health foods is growing in China.
 
We believe that anti-aging medicine has become one of the most important and extensive service areas in the medical industry. The service includes general medical care, medicines for chronic disease and anti-aging purposes. We believe that currently, anti-aging service accounts for more than 50% of all the medical service.
 
Cosmetic Industry
 
We believe that the cosmetics products and services industry has been one of the fastest growing industries in China over past 10 years. According to an investment analysis and forecast report on Chinese cosmetics market issued by Chinese Investment Consultant on 2008, from 2009 to 2021, the sales of the cosmetics market are expected to increase annually by more than 20%, with a maximum growth rate of 41%. It is expected that the annual sale of the cosmetics will amount to RMB 800 billion with an annual increase rate of 8.9%; the planned sale from 2010 to 2015 will amount to RMB 1100 billion with an annual increase rate of 6.22%.
 
We believe that the global nutrition and health care products market increased from $392 billion in 1999 to $750 billion in 2007. We also believe that the nutrition and health care market in the USA increased from $171 billion in 2002 to $300 billion in 2007.  We believe that this market is expected to reach $400 billion in 2010 with annual increases of more than 10%. According to a Chinese health care market investigation report, the health care industries in China is expected to increase from $100 billion in 2007 to $150 billion in 2010, with an annual increases of more than 15%.
 
Our Products
 
Through our operating subsidiaries in China, we are engaged in research, development, production and sale of polypeptide-based nutritional supplements and health foods and we believe we are one of the leading manufacturers of these products in China.  Our key products include Polypeptide Protein Powder, which has been approved by the PRC State Food and Drug Administration (the “SFDA”), and Shenguo Polypeptide Capsules, which has been approved by the provincial Administration of Health of Hubei and is in the process of gaining SFDA approval.  We currently manufacture and market lipid lowering soy peptide products in China, using our patented processing methods. Our products are sold to retail consumers directly and enterprises, through an established global network of distributors and retailers.  Most of our products are manufactured in our owned and operated production facilities located in China. Some of our nutritional supplements and personal care products are manufactured for us through contractual relationships with other manufacturing companies, in accordance with our own proprietary formulations.
 
Polypeptides are small molecular structures consisting of 10-50 amino acids that have been found to have nutritional value and support body functions such as regulating immunological functions in humans.  We focus on enzyme engineering in order to produce macromolecular protein structures in the form of certain functional peptides for use as nutritional additives and supplements.
 
Research studies conducted by scientists at Hanyang University in Korea, the University of Milan and the University of California (Davis), found that soy protein peptide extracted from certain soybeans could inhibit the growth of metastatic tumor cells, that the addition of soy protein to the diet could have the effect of lowering total cholesterol concentrations in the body, and that soybean peptide may prevent cancer from occurring in cultured cells and animals.  Polypeptide can be extracted from the tissues and organs of animals and plants and processed in powder, capsule/tablet or injection form for internal use, or as creams and lotions for topical use.  Our polypeptide-based products are produced in powder and capsule/tablet form. Different combination of polypeptides may be combined with other nutritional factors to form different products with different benefits.
 
We have built our reputation on developing formulas that blend the best of nature with innovative techniques from nutrition science, to appeal to the growing base of consumers desiring a healthier lifestyle and seeking differentiated nutritional supplement and health food products.  Our products are manufactured using our proprietary processing methods.
 
We market seventy-six kinds of polypeptide-based nutritional products and health foods in three (3) categories according to their service target and functional features: (i) Functional Peptide Material Products; (ii) Domestic Peptide Healthy Foods and (iii) Polypeptide Series Special Nutritional Foods.
 
Functional Peptide Material Products

Functional peptide material products are peptide materials which perform certain physiological functions.  We produce twelve different functional peptide material products that we supply to other food, medicine and cosmetics manufacturers.  Our functional peptide material products are used in a variety of products ranging from nutritional supplements to skin care products.
 
 
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Domestic Polypeptide Health Foods
 
Domestic polypeptide health foods are edible products with specific health care functions.  Included in this category is one of our key products, Polypeptide Protein Powders.  These products are verified, approved and licensed by PRC Ministry of Health or State Food and Drug Administration (the “SFDA”).  We produce three domestic polypeptide health foods, which are mainly sold under our own brands through Haopu for end-market sale, or directly sale to customers.
 
The following is a brief description of our domestic polypeptide health food products:

 
·
Puzhongren protein powder, which is marketed as a supplement to strengthen the immune system.
 
·
Tallyho Ziqing Soft Capsule, which is marketed as a supplement to aid in the regulation of blood fat; and
 
·
Anya Taihe Slimming Capsule, which is marketed as a weight loss supplement.

Polypeptide Series Special Nutritional Foods

Polypeptide series special nutritional foods are edible products with what we believe to be special nutritional features which we sell directly to consumers and to wholesale distributors.  Included in this category is one of our other key products, Shenguo Polypeptide Capsules.  We market these products as nutritional supplements and immunity enhancers.  We produce sixty-one different polypeptide series special nutritional food products.  Certain of these products are sold under our own brands through Haopu for end-market sale or directly sold to customers.  We also sell these products to other healthy food companies for use as raw materials in their products. In addition, we manufacture specific products according to formula and the standards provided to us by our customers.  We also market these products through the internet.

We are planning on developing oral administrated skin care and anti-aging nutritional products targeted for elderly customers based on new polypeptide materials. We also plan to establish an oral administered beauty and cosmetics market network “A2H” targeted for the youth and fashion markets.

Manufacturing

Most of our products are manufactured in our own production facilities on a 16,430 square meters site located in the Hannan Economic Development Zone, Wuhan City, Hubei Province, China.  We currently have protein powder production capacity of 250 tons per annum.

Some of our nutritional supplements and personal care products are manufactured for us through contractual relationships with other manufacturing companies, in accordance with our own proprietary formulations.  We work closely with such production facilities in an effort to achieve the highest quality standards and product availability.

In order to coordinate and manage the manufacturing of our products, we utilize a demand planning and forecasting process that is directly tied to our production planning and purchasing systems.  Using this sophisticated planning software and process allows us to balance our inventory levels to provide products to distributors while minimizing working capital and inventory obsolescence.

Raw Materials

Raw materials for our products come from natural animal and vegetable proteins. For example, collagen peptides and collagen tripeptides are extracted from marine fish such as tilapia; Soybean polypeptide products come from soybeans; Albumin polypeptide comes from eggs; peanut peptides and corn peptides are taken from peanuts and corn,

Raw materials used in our products and our product packing materials are developed in accordance with established criteria, including national standards, industry standards, and enterprise standards.  For products to be exported, international standards must be followed.

Our suppliers of raw materials and packing materials must provide us with the following certificate of qualifications: production licenses, sanitary license and other necessary certificates issued by governmental authorities, product quality standards, product test report and certificate of conformance of products.

Personnel from our quality control department check all incoming raw materials against specifications provided by the producers. Both the raw material and its packaging are inspected, and after this inspection, raw materials are sampled according to national standards on sampling and are sent to our center test room.  Visual inspection, physical, chemical and hygiene tests are conducted according to relevant standards. We submit items we are unable to test to national test institutions for testing.  Raw materials that fail testing are returned to the suppliers and if we return a suppliers raw materials twice, they are no longer used by us.

The cost of raw materials included in our cost of sales for the fiscal years ended 2008 and 2007, were $1,885,587 and $1,078,363, respectively. The cost of raw materials for the six month ended June 30, 2009 was 1,253,585. We currently maintain a sufficient supply of raw materials for approximately seven days of production.  Prices for some of our key input materials, such as soybean, egg, herbs and packaging materials are increasing.  However, we are confident we can offset these increases with our cost reduction programs and by raising the prices of our products.

 
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Major Suppliers of our Raw Materials

The table below lists as of June 30, 2009, the suppliers who supply more than 5% of our products, raw materials and services, showing the cumulative dollar amount of raw materials purchased from them during the 2009 fiscal year, and the percentage of raw materials purchased from each supplier as compared to procurement of all raw materials.

Rank
 
Suppliers name
 
Cumulative Amount
Purchased During June 30,
2009 (RMB million)
   
Percentage of Total
Purchases During
Fiscal Year 2009
 
1
 
ShanDong Linyi ShanSong Biological Product Co.,Ltd.
    2.593       30.32 %
2
 
Wuhan Huazhong Pringing Co., Ltd.
    0.506       5.92 %
3
 
Shenzhen Jiuzhou Penda Can Manufactring Co., Ltd.
    0.482       5.64 %
4
 
JiangXi Cosen Biochemical Co.,Ltd.
    0.439       5.14 %
   
Total:
    4.02       47.02 %

Our Major Customers

We earn revenues through the sale of our products through an established sales network throughout China.  Our enterprise customers are mainly located in mainland China. In addition, our products are also exported to foreign places, such as Malaysia, Japan and Taiwan. However, the export amount is comparatively small.

The geographic distribution of our customer base in China is as depicted in the table below:

Area
 
% Quantity of Consumer
 
South
    43.89 %
North
    33.59 %
East
    7.08 %
West
    14.46 %
Middle
    0.98 %

During the fiscal years ended September 30, 2008 and 2007, our five largest customers were TianJin Tiens, NanJing PuHangTianQu Trading Co., Ltd., ShanDong TianDiJian Bioengineering Co.,Ltd., GuangZhou DongJian Co Ltd., and ShenYang ZhongPu Co Ltd.  In the aggregate, these customers accounted for approximately $640,700, or less than 1% of our total sales revenue in 2008.
We intend to export our collagen tripeptide product to Japan.  This product has passed a qualification inspection and has been approved and certified by the Ministry of Health, Labour and Welfare of Japan.  Mr. Kodama Nenkei, who has experience in the cosmetic and health food market, has been appointed the general manager of Japanese market.  At the same time, we have entered into several contacts and built relationships with a number of corporations in Japan.

Our Sales and Marketing Efforts

We are committed to build sales agent, customer and brand loyalty by providing a diverse portfolio of health-oriented and wellness products.  The breadth of our product offerings enables our sales agents to sell a comprehensive package of nutritional supplements and health foods that provide a variety of benefits, from anti-oxidants to weight management and nutrition.  Many of our product formulations have been in existence for years. However, we continually review, and if necessary, improve our product formulations based upon developments in nutritional science. We believe that the longevity and variety in our product portfolio could significantly enhance our sale agent’s abilities to expand our business.

We have a diversified sales network allowing us to effectively market products and services to our customers. Our sales and marketing department currently consists of approximately 295 full-time employees and over 300 part-time employees.  In addition to sales efforts conducted directly by our internal sales team and other employees, we also use sales agents. We sell products from our two regional sales offices in Guangzhou and Wuhan, at community sales/customer service kiosks, and at organized sales events with related products in order to maximize cross-selling opportunities for our sales agents. These programs target specific consumer market segments, such as women, men or children, as well as weight-management customers and individuals seeking to enhance their overall well-being. Our sales offices and kiosks are strategically located in residential areas of high density, in strip malls and in other easy access locations. Our customers place orders for our products through sales representatives at our sales locations or at organized sales events or seminars and we deliver their orders directly to them. Our sales network covers twenty cities in China and includes thirty-two representative offices. We plan to expand our sales network to cover more Chinese cities, including Ningbo, Changsha, and Wuxi.

 
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We set up Haopu in October 2007 to provide professional services and marketing services through branch offices.  We have established 32 branches across the country.
 
Traditional Sales Methods
 
We market and sell our products under our own brand names to consumers through regional dealers and network agents.  In addition, we also provide manufacturing services where we contract manufacture products for third parties either according to formulas and standards provided to us by such third parties or according to our formula and standards for sale under our customers’ brand names.

Innovative Sales Methods

We have developed two new marketing models: project marketing and service marketing. Currently, about 83% of our sales are derived through our service marketing model.  We are also working to develop other sales channels as well.

Service marketing is a sale model through which we work to establish strong relationships with customers by providing a series of services such as: health consultation and education services, psychological counseling services, and physical examination services, among other services.  We believe that providing these services will help us to establish brand image, promote our products, stimulate demand, and increase sales of our products.

Project marketing is a sales model used in connection with the manufacturing services we provide to customers.  In project marketing, we define each customer’s business as one project, and provide each customer with all-around services, including market consultation, technical demonstration, market positioning, product development, test and evaluation, market access, package design, market planning, marketing and after service.  We work to assist our customers in making reasonable use of polypeptide materials to develop products and promote growth of the customer’s market.  We believe that by working to increase our contract manufacturing customer’s sales grow, sales of our polypeptide materials will increase as well.

In addition, we are planning to develop a new sales model integrating current sales methods and the Internet, to attract and serve the young and the middle aged market.  In December 2009, we plan to invest RMB30,000,000 to establish a main flagship store in Shenzhen and store chains in other parts of China.
 
Our Growth Strategy
 
We are committed to growing our business in the coming years.  What we believe to be the key elements of our growth strategy are summarized below:

 
Market strategy:
 
(1) enhance and expand Haopu’s service marketing network, (2) enhance and expand sale regions, (3) improve service and quality, (4) develop products targeted to middle aged and older customers, (5) maintain and increase sale growth, (6) establish a market for oral administrated skin care and anti-aging nutritional products targeted for youths through middle aged persons, (7) create innovative, fashionable and efficient products and sales models, (8) build a network of exclusive shops  to gain new growth points for our sale market, (9) establish a sales network of polypeptide functional materials, (10) promote application of polypeptide materials, and (11) enhance the influence of our polypeptide technology.
       
 
Product strategy:
 
Develop new polypeptide technology and products according to our market development requirements,     supported by strong technical and product development capability Develop new functional peptides and products from the former products, such as collagen tripeptide, skin longevity factor peptide, corn peptide.  We intend to emphasize (i) products with anti-aging functions, (ii) products that could maintain the health of the middle and old aged people, ameliorate age related disease and improve life quality, and (iii) products that delay senility of skin and body, maintain vigor of the middle aged and the youth.  Improve manufacturability and applicability of polypeptide functional materials, and bring forth a group of high qualified raw material products with leading standard to serve producers of cosmetics and health care foods.
       
 
Sales strategy:
 
Expand our existing network; build new channel; launch new mode; create new service on the basis of current market sale; realize the advancement of current sale market, chain marketing, traditional network and sale of raw materials; interlock rehabilitation center, service marketing, chain marketing; enhance sale of raw materials and project marketing mutually.
 
 
8

 

Our Research and Development Efforts

We conduct our research and development efforts independently at our research and development facilities in Wuhan, China.  Our research and development department is responsible for developing advanced technologies and new polypeptide based products and for training.  As of September 2009, we have a total of forty-six researchers, six with doctorate degrees and eleven with masters degrees.  The rest are college graduates. Among the researchers, twelve people possess senior professional titles, fifteen people possess intermediate professional titles, and seven people possess primary professional title.

Research Centers

We have set up three research-development centers, which are:

(1)
Research Center of Peptides Materials - This research center was set up in 1998.  The primary purpose of this research center is to (i) study the methods and conditions of extracting polypeptide from the animals and plants, (ii) test and measure the functional polypeptide’s physiological regulation function on human, and (iii) test the physical and chemical indicators, which focus on basic and applied development and research. The Center’s chief scientist is Professor Wang Ajing, the company’s technology president, who enjoys the special allowance of the State Council.

(2)
Anti-aging Research & Development center (Wuhan Polypeptide Anti-aging R & D Co., Ltd.) - This center was set up in 2007. The center engages in the research and development of anti-aging products and pilot plant test work. This center focuses on developing new products with anti-aging functions (such as Shengguo polypeptide capsule, youth vigor tablet) through screening of special antioxidants and research of combination of special antioxidants with the polypeptide materials. The Center’s chief scientist is Professor Sun Xiufa, a biochemistry expert.

(3)
Application & Research Center of Polypeptide-functional Food & Cosmetics - This center was set up in 2008, which is primarily engaged in (i) the study and application works of polypeptide-functional food & cosmetics, (ii) the development of new products that are anti-aging and capable of ameliorating fundamental nourishment supply & health conditions, and (iii) improvement and innovation of food production & processing methods. Professor Xia Wenshui is the center’s chief scientist. He is an expert in Food Engineering in China.
 
Research Group
 
We employ a group of senior in-service professionals in above research centers, most of who are experts in the polypeptide industry. The leading researchers include follows:
 
Name
 
Title
 
Specialty
Chen Dongliang
 
Scientific Research Director
 
Biological/Chemical and Protein Engineering
Wang Ajing
 
Distinguished Professor
 
Biochemistry
Sun Xiufa
 
Chief Scientist
 
Biochemistry
Xia Wenshui
 
Chief Scientist
 
Food Engineering
Mo Zhaohui
 
Chief Engineer
 
Processing Technology
Ji Jinlin
 
Researcher
 
Electrophorisis, Chromatography, High
Efficienty Liquid Chromatographym etc
Yu Chenggao
  
Researcher
  
Physiology and Nutrition

During the fiscal year ended on September 30, 2008 and 2007, we incurred $391,306 and $165,441, in research and development expenses, respectively, with respect to our polypeptide-based products.

Our Competition

We believe that the health supplementary business, both within PRC and globally, is highly fragmented and intensely competitive.  In our industry, we compete based upon product quality, product cost, ability to produce a diverse range of products and logistical capabilities.  Many of our competitors, both domestic and international, have greater research and development capabilities and financial, scientific, manufacturing, marketing and sales resources than we do.  Although our marketing and sales efforts of polypeptide-based products are limited as compared to our competition, we believe that we have a competitive advantage due to the price and quality of our products and our ability to produce a diverse range of products and customer services.
 
Internationally, there are companies that apply polypeptide technology in developing new drugs, but we believe there are few companies that apply polypeptide technology to the nutritional supplement field.  We believe that in China, we are one of the largest companies focusing on developing, producing and marketing functional peptide nutritional products with over 70% market share.  We believe the rest of the companies that sell polypeptide products are either small size companies or large nutritional products companies with only small percentage of revenue deriving from polypeptide products, such as American Oriental Bioengineering, or AOB and Tiens Biotech Group, Inc., or Tiens. (Both of which are Chinese companies listed at U.S.)
 
 
9

 
 
AOB offers pharmaceutical products, soybean based peptide protein powder products and nutritional beverage products in the Chinese market. Tiens provides nutritional supplements and dietary products in powder, tea and capsule/tablet/granule form, and Tiens’ reported 2007 annual revenue was $54.9 million.
 
Competitive Advantage

We believe that our competitive strengths include the following:

(i) Advanced polypeptide technology.
 
We have been researching and developing polypeptides for many years and we believe we are one of the leading companies developing polypeptide technology. For example:

 
-
Our company was appointed by relevant department in China and became the first of standard-setting body of national criterion of “soybean polypeptide”. (GB/T22492-2008)

 
-
The collagen tripeptide project studied by our company gained the second prize of governmental progress prize in science and technology.

 
-
The polypeptide beauty-slimming capsule project developed by our company gained the progress prize of China health products.

Our polypeptide research centre, anti-aging research institution and food and cosmetic research centre have excellent researchers who have received two patents of invention and applied for an additional nine patents with State Intellectual Property Office of The PRC, seven of which have passed preliminary approval. In addition, our researches have developed seventy-six production processes.

 (ii) Experience in the production of functional peptides.
Unlike our competitors which offer soy and animal based peptide products, we provide a wide range of functional peptide products that are extracted from many different natural protein ingredients. Functional polypeptides create functional proteins which shape themselves in stable, distinctive and discrete fashions in order to perform specific functions in the body.   We believe our technology and know how in the production of functional peptides allows us to produce products that provide more body regulating and enhancement functions for consumers of varying age groups and different health needs.

We have developed over 70 kinds of functional polypeptide products, which provide a variety of benefits such as basic nutrition, health-care and anti-aging benefits.

(iii) Well known brand names.

We believe that two of our trademarks, “Tallyho” and “PuZhongren” have achieved strong name recognition in local markets.  The provinces of Hubei and Guangdong issued us certificates recognizing these two brands as “famous brands.” We believe that recognition of "Tallyho" and "PuZhongRen" brand names helps to drive the sales of our products and facilitates acceptance and market penetration of our new products. In order to protect and enhance our "Tallyho" and "PuZhongRen" brand names, we rely on stringent quality control and our ongoing marketing, advertising and public relations efforts continue to stress the quality, safety and innovativeness of our products. We believe that brand awareness in our target markets and dedicated distribution channels, will enable us to leverage goodwill from our brands into future growth.

(iv) Proven Management Team and integrated sales channel.

Our management team has a proven track record of successful management and has a great deal of experience in the nutritional supplement and anti-aging industry and business development. Our management team is led by Dongliang Chen who became the Chairman of Tallyho in October, 2007 after spending eleven (11) years with Wuhan Tallyho Co., where he most recently served as Chairman. Mr. Chen is the inventor of two key patents, and the author of a number of science and biology educational books. Since joining our Company, Mr. Chen has assembled a team of experienced executives, including: Mr. Shengfan Yan, the President of the Company, who has worked in the nutritional supplements industry for eight years and has vast experience in product production; Mr. Lirong Hu who is the Chief Financial Officer and brings more than 25 years of accounting and financial management experience to the Company; and Xinfeng Liang, the Senior Vice-President of Sales and Marketing, who brings nearly ten years of sales and marketing experience with him.

 
10

 

We have a diversified sales network which allows us to effectively market our products and services to our customers. Our sales and marketing department currently consists of approximately 295 full-time employees and over 300 part-time employees. In addition to sales efforts conducted directly by our internal sales team and other employees, we also use sales agents. We sell products from our two regional sales offices in Guangzhou and Wuhan, at community sales/customer service kiosks, and at organized sales events with related products designed to simplify weight management and nutrition and maximize cross-selling opportunities for our sales agents. These programs target specific consumer market segments, such as women, men or children, as well as weight-management customers and individuals seeking to enhance their overall well-being. Our sales offices and kiosks are strategically located in high density residential areas, in strip malls and in other easy access locations. Our customers place orders for our products through sales representatives at our sales locations or at organized sales events or seminars and we deliver their orders directly to them. Our sales network covers 20 cities in China and includes 32 representative offices. We plan to expand our sales network to cover more Chinese cities, including Ningbo, Changsha, and Wuxi.

(v) Productive technology equipment and the advantage of processing technique.

Our products are produced in our own production facilities using modern production lines, techniques and equipment. The company has passed the certification of ISO-9001, HACCP and GMP for workshops. We believe that our production facilities are satisfactory for our current production needs but we are preparing to increase capacity in the future.

Regulation

China

Polypeptide based products are classified under PRC law into three categories, based on potential use, and each category is subject to separate PRC laws and regulations.  All our polypeptide products must obtain approval from our provincial Ministry of Health (the “MOH”), prior to distribution to end users.  Additionally, for health functional foods, we are required to obtain approval from the SFDA before we can make specific claims regarding the health benefits of the product.  Currently, all of our products have received MOH approval and may be distributed to consumers.

If our polypeptide products are sold for food, they are considered to be food additives under PRC law, and the Company is required to obtain two licenses prior to the distribution of such products to consumers: the Food Hygiene License issued by the provincial MOH and the Food Production License issued by the provincial branch of the General Administration of Quality Supervision, Inspection and Quarantine (the “Quality Administration”).  We have already obtained both the Food Hygiene License issued by the Hubei MOH and the Food Production License issued by the provincial Quality Administration.

PRC law requires sellers of polypeptide products that are sold as raw materials for drugs to first obtain a Pharmaceutical Producer License from the provincial MOH, as well as approval from the provincial FDA, prior to distribution of such products to consumers.  Since we also plan to produce and sell polypeptide skin care products, we plan to apply for the Pharmaceutical Producer License from the provincial MOH and the approval from the provincial SFDA in the future.

Below is a list of the permits we received which allow us to distribute our products in China:

Product
 
Trademark
 
License Number
 
Approved by
ZiQing Soft Capsule
 
TALLYHO
 
State Health Food No.(2001)0410
 
Ministry of Health,PRC.
Albumin Polypeptide Powder
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)019
 
Health Department of Hubei Province
Soybean Polypeptide Powder
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)018
 
Health Department of Hubei Province
Aiger Nutrition Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)017
 
Health Department of Hubei Province
Anti- Oxidation 
Capsule
  
TALLYHO
  
Health Department of Hubei
Province Special Food
No.(2004)030
  
Health Department of Hubei Province
 
 
11

 

Improving Memory Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)031
 
Health Department of Hubei Province
Anti- Fatigue Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)032
 
Health Department of Hubei Province
Nutritional Enzyme Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)036
 
Health Department of Hubei Province
Beauty Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)037
 
Health Department of Hubei Province
Anti- Ebriety Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)035
 
Health Department of Hubei Province
Protecting livering Soft Capsule
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)034
 
Health Department of Hubei Province
CPP Protein Powder
 
TALLYHO
 
Health Department of Hubei
Province Special Food
No.(2004)033
 
Health Department of Hubei Province
Maigre Polypeptide Powder
 
Yue Shi
 
Wuhan Hygiene Bureau
No.(food)(2007)NO.1-472
 
Wuhan Hannan Area Hygiene Bureau
Peptide & Lotus Fat-lose Capsule
 
An Er Ya
 
State Health Food No.G20040658
 
SFDA
Nutritional Enzyme Capsule
 
An Er Ya
 
Wuhan Hygiene Bureau
No.(food)(2007)NO.1-464
 
Wuhan Hannan Area Hygiene Bureau
Colostrum Polypeptide Nutrition Powder
 
An Er Ya
 
Wuhan Hygiene Bureau
No.(food)(2005)NO.1-463
 
Wuhan Hannan Area Hygiene Bureau
Protecting livering
Soft Capsule
 
An Er Ya
 
Wuhan Hygiene Bureau
No.(food)(2007)NO.1-465
 
Wuhan Hannan Area Hygiene Bureau
Polypeptide Protein Powder
 
PZR
 
Wuhan Hygiene Bureau
No.(food)(2007)NO.1-499
 
Wuhan Hannan Area Hygiene Bureau
Shenguo Polypeptide Capsule
  
PZR
  
Wuhan Hygiene Bureau
No.(food)(2007)NO.1-349
  
Wuhan Hannan Area Hygiene Bureau

We are also subject to PRC’s foreign currency regulations.  The PRC government has control over RMB reserves through, among other things, direct regulation of the conversion of RMB into other foreign currencies.  Although foreign currencies which are required for “current account” transactions can be bought freely at authorized PRC banks, the proper procedural requirements prescribed by PRC law must be met.  At the same time, PRC companies are also required to sell their foreign exchange earnings to authorized PRC banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the PRC government.

Malaysia

Our products are also available for purchase through distributors in Malaysia.  As a result, our products are required to obtain a license from governmental health and safety agencies in Malaysia, including the Ministry of Health Malaysia.

We are also subject to product licensing and certification requirements of Malaysia’s Ministry of Health and its Drug Control Authority (“DCA”).  All registered pharmaceutical and health products sold for use in Malaysia must undergo DCA evaluation and testing for quality, safety and efficacy.  A product that successfully passes this examination is issued a license, or MAL number, which must be displayed on the product.  Furthermore, routine sampling of registered products is carried out to ensure compliance with standards.

 
12

 

In addition, registered pharmaceutical and health products, including traditional medicine and health supplements, must now display a separate “Meditag” high-security hologram label to specify that they have been approved for sale.  The secure hologram technology featured in the design and production of Meditag is similar to the ones used in currency protection and high-level government documents. In order to obtain Meditag certification, manufacturers and importers need to register with Malaysia’s Ministry of Health.

Our Intellectual Property

The continued success of our business is dependent on our intellectual property portfolio consisting of registered trademarks, design patents and utility patents related to our products.  We currently have two patents which have been granted by the State Intellectual Property Office of the PRC and nine patent applications   which have been processed by State Intellectual Property Office of The PRC.

We have four registered trademarks for our fifteen products which we intend to sell under the name PuZhongRen brand.
 
The following table lists our licensed and proprietary patents, held by Tallyho, one of our PRC operating subsidiaries:
 
Name
 
Patent No.
 
Country
 
Patent
Holder
 
Date
Awarded
 
Expiration
Date
                     
Processing method of
soy polypeptide dry
powder with the
function of blood lipid
lowering
 
179272
 
PRC
 
Wuhan
Tallyho
Biological
Product Co.,
Ltd Peptide
Research
Center
 
December
16, 2000
 
December 16,
2020
                     
Processing method of
non-bitter soy
polypeptide powder
  
181379
  
PRC
  
Wuhan
Tallyho
Biological
Product Co.,
Ltd Peptide
  
May 31,
2002
  
May 31, 2022

The following table lists our patent applications:

Name
 
Application No.
 
Country
 
Applicant
 
Acceptance condition
                 
A preparation method
of rapeseed peptide
from defatted
rapeseed by direct
enzymatic hydrolysis
 
 
2006100191362
 
PRC
 
Wuhan Industry
College, Tallyho
Biological Product Co.,
Ltd. (Co-applicant)
 
December 27, 2006
                 
Processing method of
Spirulina Polypeptide
 
2007100527787
 
PRC
 
Wuhan Tallyho
Biological Product Co.,
Ltd. 
 
2007.9.21 The preliminary
qualified notification of patent
application has been received.
2008.1.18 Patent application has
been published and the
substantive examination
procedure has been received.  
 
 
13

 

A preparation method
of corn peptide from
zein 
 
2007100527772
 
PRC
 
Wuhan Tallyho
Biological Product Co.,
Ltd.
 
2007.11.2 The preliminary
qualified notification of patent
application has been received.
2008.2.1 Patent application has
been published and the
substantive examination
procedure has been received.  
                 
Hippophae
rhamnoides nutrient
mixture with
anti-aging function
and preparation
technology thereof
 
2007100534051
 
PRC
 
Wuhan Tallyho
Biological Product Co,
Ltd
 
2008.3.7 The preliminary
qualified notification of patent
application has been received.
 2008.6.13 Patent application
has been published and the
substantive examination
procedure has been received.  
                 
A preparation
technology of egg
white protein
polypeptide
 
200810197415. 7
 
PRC
 
Dongliang Chen
 
2008.10.28 Acceptance
notification of patent application
has been received.
                 
Method of preparing
almond polypeptide
using almond
polypeptide as the
source material
 
200810197418. 0
 
PRC
 
Dongliang Chen
 
2008.10.28 Acceptance
notification of patent application
has been received.
                 
Fish skin collagen
peptide with
whitening effect and
preparation
technology and usage
thereof
 
200810048083.6
 
PRC
 
Dongliang Chen
 
2008.6.19 Acceptance
notification of patent application
has been received.
                 
Fish skin collagen
peptide with
moisturizing effect
and preparation
technology and usage
thereof
 
200810048084.0
 
PRC
 
Dongliang Chen
 
2008.6.19 Acceptance
notification of patent application
has been received.
                 
Preparation
technology of
collagen tri-peptide
 
200910061717.6
 
PRC
 
Dongliang Chen
 
2009.4.21 Acceptance
notification of patent application
has been received.
                 
New brewing
technology of cider
 
200910061716.1
 
PRC
 
Dongliang Chen
 
2009.4.21 Acceptance
notification of patent application
has been received
                 
The skin longevity
polypeptide
technology
 
200910061718.0
 
PRC
 
Dongliang Chen
 
2009.4.21 Acceptance
notification of patent application
has been received.
                 
The new brewing technology from fresh herb and fruit
  
200910061771.0
  
PRC
  
Dongliang Chen
  
2009.4.28 Acceptance notification of patent application has been received.
 
 
14

 

The following table lists our trademarks:

Trademark
 
Registration Number
 
Term
 
Country
             
Tallyho
 
3670220
 
February 21, 2005- February 20, 2015
 
PRC
             
AnErYa
 
3596358
 
January 14,2005
January 13,2015
 
PRC
             
TuoNiAoMoLiJian
 
3378137
 
March 28,2003
March 27,2013
 
PRC
             
PuZhongRen
  
3786813
  
July 28,2005
July 27,2015
  
PRC

In addition, we protect our know-how technologies through confidentiality agreements we entered into with our employees in our production department.

Our Employees

As of September 30, 2009, we had approximately 454 full-time employees and 300 part-time employees.  The following table sets forth the number of our full-time employees by function as of September 30, 2009:

Employee Function
 
Number
Executive
 
5
Administrative
 
15
Sales and Marketing
 
295
Research and Development
 
46
Production
 
84
Accounting
 
9

Our ability to achieve our operational and financial objectives depends in part upon our ability to retain key technical, marketing and operations personnel, and to attract new employees as required to support growth.  Working capital constraints may impair our ability to retain and attract the staff needed to maintain current operations and meet the needs of anticipated growth.

In addition, we rely on consultants to a significant extent to supplement our regular employee staff in certain key functional areas and to support management in the execution of our business strategy.  These consultants are independent contractors.  There can be no assurance that, if one or more of the consultants were to terminate their services, we would be able to identify suitable replacements.  Failure to do so could materially and adversely affect our operating and financial results.

As required by applicable Chinese law, we have entered into employment contracts with all of our officers, managers and employees.  The remuneration payable to employees includes basic salaries and allowances. In addition, our employees in China participate in a state pension scheme organized by Chinese municipal and provincial governments.  We are required to contribute to the scheme at a rate of 28% of the average monthly salary.  In addition, we are required by Chinese law to cover employees in China with various types of social insurance.  We have purchased social insurance for all of our employees.

We believe that our relationship with our employees is good.  We have not experienced any significant problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in recruitment and retention of experienced staff.

Legal Proceedings

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of business.  We are not currently involved in legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations.
 
 
15

 

RISK FACTORS

An investment in our Common Stock involves a high degree of risk. Prospective investors should carefully consider the following risks and uncertainties and all other information contained or referred to in this Current Report on Form 8-K before investing in our Common Stock.  The risks and uncertainties described below are not the only ones facing us.  Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.  If any of the following risks occur, our business, financial condition and/or results of operations could be materially and adversely affected.  In that case, the trading price of our Common Stock could decline, and you could lose all of your investment.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Our operations, sales, profit and cash flow will be adversely affected if our polypeptide products fail inspection or are delayed by regulators.

We are responsible for product testing in our own facility for polypeptide products sold in China and each batch of our products requires inspection by our Quality Control center prior to shipment to our customers.  The results of product testing is recorded and approved by the local Quality and Technical Supervision Department, and such testing must be in accordance with the national quality standards issued by the Standardization Administration of China, which requires testing of such factors including, but not limited to, appearance, packing capacity, thermal stability, pH value, protein content and percentage of purity of the product.  Government regulators routinely inspect samples from each batch of our polypeptide products and for export products, a sample of each shipment is tested by the China Entry/Exit Inspection and Quality department (the “CIQ”). In the event that the regulators delay the approval of our products, change the requirements in such a way that we are unable to comply with those requirements, or require our other products to be inspected by regulators before we can ship them to our customers, our operations, sales, profit and cash flow will be adversely affected.

We engage in international sales, which expose us to trade restrictions that could harm our business and competitive position.

As a result of our product sales in various geographic regions, we may be subject to the risks associated with customs duties, export quotas and other trade restrictions that could have a significant impact on our revenue and profitability.  While we have not encountered significant difficulties in connection with the sales of our products in international markets, the future imposition of, or significant increases in, the level of custom duties, export quotas or other trade restrictions could have an adverse effect on us.  Further, we cannot assure you that the laws of foreign jurisdictions where we sell and seek to sell our products afford similar or any protection of our intellectual property rights as may be available under U.S. law.  We are directly impacted by the political, economic, military and other conditions in the countries where we sell or seek to sell our products.

Expansion of our business may put added pressure on our management, financial resources and operational infrastructure, thus impeding our ability to meet any increased demand for our products and hurting our operating results.

Our business plan is intended to significantly grow our operations to meet anticipated growth in demand for existing products, and to introduce new product offerings.  Our planned growth includes the construction of several new production lines to be put into operation over the next five years.  Growth in our business may place a significant strain on our personnel, management, financial systems and other resources.  We may be unable to successfully and rapidly expand sales to potential customers in response to potentially increasing demand or control costs associated with our growth.

To accommodate any such growth and compete effectively, we may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in sufficient quantities, if at all.  If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results would suffer.

We depend on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including specifically, Dongliang Chen, our Chairman and Chief Executive Officer, Shengfan Yan, our President, Lirong Hu, our Chief Financial Officer and Treasurer. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations.  If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are unable to attract and retain skilled employees as needed, our business could suffer.  Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team.  We depend on the skills and abilities of these key employees, as well as the intellectual property owned by Chen, in managing the development, manufacturing, technical, marketing and sales aspects of our business, any part of which could be harmed by further turnover. In addition, we rely on consultants to a significant extent to supplement our regular employee staff in certain key functional areas and to support management in the execution of our business strategy.  These consultants are independent contractors.  There can be no assurance that, if one or more of the consultants were to terminate their services, we would be able to identify suitable replacements.  Failure to do so could materially and adversely affect our operating and financial results.

 
16

 

We may not be able to adequately finance the significant costs associated with the development of new polypeptide-based nutritional supplement products.

The products in the nutritional supplement market can change dramatically with new technological advancements.  We are currently conducting research and development on new products, which requires a substantial outlay of capital. To remain competitive, we must continue to incur significant costs in product development, equipment, facilities and invest in research and development of new products.  These costs may increase, resulting in greater fixed costs and operating expenses.

In addition to research and development costs, we could be required to expend substantial funds for and commit significant resources to the following:

 
·
additional engineering and other technical personnel;
 
·
advanced design, production and test equipment;
 
·
manufacturing services that meet changing customer needs;
 
·
technological changes in manufacturing processes; and
 
·
manufacturing capacity.

Our future operating results will depend to a significant extent on our ability to continue to provide new and competitive products that compare favorably on the basis of cost and performance with the design and manufacturing capabilities of competitive third-party technologies.  We will need to sufficiently increase our net sales to offset these increased costs, the failure of which would negatively affect our operating results.

Our inability to successfully research and develop new polypeptide based products could have an adverse effect on our future growth.

We believe that the successful development of nutritional supplements and health food products can be affected by many factors. Products that appear to be promising in the early phases of research and development may fail to be commercialized for various reasons, including, but not limited to, the failure to obtain the necessary regulatory approvals.   There is no assurance that our future research and development projects will be successful or that they will be completed within the anticipated time frame or budget.  Also, there is no guarantee that we will receive the necessary approvals from relevant authorities for the production of our newly developed products.  Even if such products could be successfully commercialized, there is no assurance that they will be accepted by the market as anticipated.

If we fail to effectively manage our growth, our business and operating results could be harmed.

We have experienced, and continue to experience, growth in our operations which has placed, and will continue to place, significant demands on our management, operational and financial infrastructure.  If we do not effectively manage our growth, the quality of our products and services could suffer, which could negatively affect our operating results.  To effectively manage this growth, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures.  These systems enhancements and improvements may require significant capital expenditures and management resources.  Failure to implement these improvements could hurt our ability to manage our growth and our financial position.

Future acquisitions may have an adverse effect on our ability to manage our business.

Selective acquisitions form part of our strategy to further expand our business.  If we are presented with appropriate opportunities, we may acquire additional companies, products or technologies. Future acquisitions and the subsequent integration of new companies into ours would require significant attention from our management. Our company has little experience with integrating newly acquired businesses.  Potential problems encountered by each organization during mergers and acquisitions would be unique, posing additional risks to the company.  The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business.  Future acquisitions would expose us to potential risks, including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers and suppliers as a result of integration of new businesses.
 
 
17

 

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.

Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us.  Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services.  For example, effective intellectual property protection may not be available in China and other countries in which our products are sold.  Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Any significant impairment of our intellectual property rights could harm our business or our ability to compete.  Also, protecting our intellectual property rights is costly and time consuming.  Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.

We rely on patent and trade secret laws that are complex and difficult to enforce and we may not be able to prevent others from unauthorized use of our intellectual property.  If we are not able to adequately secure and protect, or if we fail to prevent the loss or misappropriation of, or disputes over, our patent, trademark and other proprietary rights, we will lose our competitive advantage and our business will be materially affected.

The continued success of our business is dependent on our intellectual property portfolio, which consists of globally registered trademarks, design patents and utility patents related to polypeptide-based products.  We currently have two patents, Soy Polypeptide Powder with lipid lowering function and Soybean Polypeptide Powder without bitterness.  We have applied for three additional patents covering a preparation method of rapeseed peptide from defatted rapeseed by direct enzymatic hydrolysis, Processing method of Spirulina Polypeptide and a preparation method of corn peptide from zein.  The patent applications are subject to approval from the relevant PRC authorities. We may not be able to successfully obtain the approval of the PRC authorities for our patent applications.  Furthermore, third parties may assert claims to our proprietary procedures, technologies and systems. These proprietary procedures, technologies and systems are important to our business as they allow us to maintain our competitive edge over our competitors.

While we are not aware of any infringement on our intellectual property and we have not been notified by any third party that we are infringing on their intellectual property, our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others.  The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became a national effort in China in 1979 when China adopted its first statute on the protection of trademarks.  Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations such as the Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names.  China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks.  In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights.  Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries.  Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.

We rely on confidentiality agreements with our management and employees to protect our confidential proprietary information.  However, the protection of our intellectual properties may be compromised as a result of:

 
·
departure of any of our management members or employees in possession of our confidential proprietary information;

 
·
breach by such departing management member or employee of his or her confidentiality and non-disclosure undertaking to us;

 
·
infringement by others of our proprietary information and intellectual property rights; or

 
·
refusal by relevant regulatory authorities to approve our patent or trademark applications.

Any of these events or occurrences will have a material adverse effect on our operations and the measures that we have put into place to protect our intellectual property rights may not be sufficient.  Litigation to enforce our intellectual property rights could result in substantial costs to us and may not be successful.  If we are not able to successfully defend our intellectual property rights, we might lose rights to technology that we need to conduct and develop our business.  This would seriously harm our business, operating results and financial condition, and enable our competitors to use our intellectual property to compete against us.

Furthermore, if third parties claim that our products infringe their patents or other intellectual property rights, we may be required to devote substantial resources to defend against such claims.  If we are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms, if at all.

 
18

 

A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our sales.

Our products are manufactured at our production facility located in Hubei Province in the PRC.  While we have not in the past experienced any calamities which disrupted production, any disruption in the supply of utilities, particularly electricity or power supply, or any outbreak of fire, flood or other calamity or natural disaster resulting in significant damage at our facilities would severely affect our production and have a material adverse effect on our business, financial condition and results of operations.

We maintain insurance policies covering losses with respect to damages to our properties and products. We do not have insurance coverage for machinery and inventories of raw materials. There is no assurance that our insurance would be sufficient to cover all of our potential losses.

The nutritional supplement industry in the PRC is strictly regulated and changes in such regulations may have an adverse effect on our business.

The nutritional supplement industry in the PRC is strictly regulated by the state.  The regulatory regime requires administrative approval of supplements, food additives and production, and comprises a series of regulations and administrative rules. From time to time, the PRC regulatory authorities may amend such regulations and administrative rules or promulgate new ones.  Our inability to comply with any such changes in regulations and administrative rules would have an adverse impact on our business.

We may not be able to carry on our business if we lose any of the permits and licenses required by the PRC Government in order to carry on our business.

All nutritional supplement manufacturing and distribution enterprises in the PRC are required to obtain from various PRC governmental authorities certain permits and licenses, including, in the case of manufacturing enterprises and distribution enterprises such as ours, a Food Manufacturing Permit, a Food Product Distribution Permit, and a Good Manufacturing Practice (“GMP”) certificate.

We have obtained permits and licenses and the GMP certificates, required for the manufacture of our nutritional supplement products.  However, the permits and licenses held by us are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities and the standards of compliance required in relation thereto may from time to time be subject to change.  We intend to apply for the renewal of such permits and licenses when required by applicable laws and regulations.  Any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability.   Any failure by us to obtain such renewals may have a material adverse effect on the operation of our business.  In addition, we may not be able to carry on business without such permits and business licenses being renewed.

We may encounter increased competition from both local and overseas enterprises as a result of a relaxation of the PRC regulatory approval process for polypeptide-based biopharmaceutical products or due to an ease in international trade restrictions.  A change in our competitive environment could adversely affect our profitability and prospects.

Our continued ability to compete depends on the development of the polypeptide-based nutritional supplement manufacturing industry in China. The polypeptide-based nutritional supplement manufacturing industry in China is highly regulated by both provincial and central governments.  Prior to engaging in the production and distribution of polypeptide-based nutritional supplement products, companies such as ours are required to obtain production permits and certificates for each new product formulation from the various provincial food and drug authorities.  We have the advantage of having been approved by the state to produce and distribute polypeptide-based nutritional supplement products in Wuhan Province, and our research and development department has become familiar with the provincial product approval process.  However, while we believe that the regulatory requirements pose a competitive barrier to entry into the nutritional supplement industry, there may be new entrants over time.  If the government relaxes these restrictions and allow more competitors to enter into the market, these competitors may have more capital, better research and development resources, manufacturing and marketing capability and experience than us.  Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices; or (iii) competitors develop new products having comparable applications or therapeutic effects which are more effective and/or less costly than those produced by us.

In addition we expect that competition from imported products will increase as a result of a trend towards lower import tariffs and China’s admission as a member of the World Trade Organization (“WTO”) in December 2001.  We believe that lower import tariffs will result in more affordable pricing for imported polypeptide-based nutritional supplement products manufactured overseas as compared to domestically manufactured products such as ours.  In addition, China’s membership in the WTO makes it more accessible to foreign biopharmaceutical manufacturers who may wish to set up production facilities in the PRC and compete directly with domestic manufacturers. The expected increased supply of both domestic and foreign competitively priced biopharmaceutical products in the PRC will result in increased competition.  There is no assurance that our strategies to remain competitive can be implemented successfully as scheduled, if at all.  Our inability to remain competitive may have an adverse effect on our profitability and prospects.

 
19

 

We may incur material product liability claims, which could increase our costs and harm our financial condition and operating results.

Our products consist of herbs, vitamins and minerals and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain innovative ingredients that do not have long histories of human consumption. We generally do not conduct or sponsor clinical studies for our products and previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may again be, subjected to various product liability claims, including that the products contain contaminants, the products include inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary damages and adversely affecting our business. Finally, given the higher level of self-insured retentions that we have accepted under our current product liability insurance policies, which are as high as approximately $10 million, in certain cases we may be subject to the full amount of liability associated with any injuries, which could be substantial.

An increase in the cost of raw materials will affect sales and revenues.

Raw materials required for polypeptide production include soybeans, collagen extract, eggs, herbs, fish and packaging materials.  Any increase in the prices of these raw materials will affect the price at which we can sell our products.  If we are not able to raise our prices to pass on increased costs, we would be unable to maintain our margins.

We may require additional financing to expand and/or fund our operations; our failure to obtain necessary financing may impair our operations.

As of June 30, 2009, we had working capital of approximately $6,561,393.  Our capital requirements in connection with the development of our business are significant.  During the quarter ended June 30, 2009, we spent approximately $1,925,676 for the purchase of raw materials and equipment, and paid our key personnel $85,000 for their services and consulting.  We may require additional financing to fund and expand our operations.  If we seek to obtain additional financing through sales of our securities, it may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other terms which may be disadvantageous to us.  In connection with any such financing, we may be required to provide registration rights to the investors and pay damages to the investor in the event that the registration statement is not filed or declared effective by specified dates.  The price and terms of any financing which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our stock prices.  The inability to obtain additional financing on favorable terms, if at all, could have a material adverse effect on our business.

We may need to obtain additional debt or equity financing which may result in dilution to our shareholders and have a material adverse economic effect on our business.

We may need to obtain additional debt or equity financing to fund our capital expenditures.  Additional equity financing may result in dilution to our shareholders.  Additional debt financing may be required, which, if obtained, may:

 
·
limit our ability to pay dividends or require us to seek consents for the payment of dividends;

 
·
increase our vulnerability to general adverse economic and industry conditions;

 
·
limit our ability to pursue our growth plan;

 
·
require us to dedicate a substantial portion of our cash flow from operations as payment for our debt, thereby reducing availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and/or

 
·
limit our flexibility in planning for, or reacting to, changes in our business and our industry.

We cannot assure you that we will be able to obtain the additional financing on terms that are acceptable to us, if at all.
 
 
20

 

Our cash flow could be negatively affected as a result of our extension of relatively long payment terms to customers that we believe are credit worthy.

As is customary in our industry, we extend relatively long payment terms (up to six months) to customers that we believe are credit worthy.  The dollar amount of our accounts receivable net of allowance for doubtful accounts as of June 30, 2009 was $5,219,570. Although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.

We face risks associated with debt financing (including exposure to variation in interest rates).

Our total liabilities as of June 30, 2009 were $ 14,915,936, of which $574,280 consisted of short term loans. Our obligations under our existing loans have been mainly met through the cash flow from our operations and our financing activities.  We are subject to risks normally associated with debt financing, including the risk of significant increase in interest rates and the risk that our cash flow will be insufficient to meet required payment of principal and interest.  In the past, cash flow from operations had been sufficient to meet payment obligations and/or we have been able to roll over our borrowings.  There is however no assurance that we will be able to do so in the future. We may also underestimate our capital requirements and other expenditures or overestimate our future cash flows.  In such event, additional capital, debt or other forms of financing may be required for our working capital.  If any of the aforesaid events occur and we are unable for any reason to raise additional capital, debt or other financing to meet our working capital requirements, our business, operating results, liquidity and financial position will be adversely affected.

RISKS RELATING TO DOING BUSINESS IN CHINA

Substantially all of our assets are located in, and substantially all of our revenue is sourced from, the PRC. Accordingly, our results of operations, financial position and prospects are subject to a significant degree to the economic, political and legal developments of the PRC.
 
Changes in China's political or economic situation could harm us and our operating results.
 
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time.  This could either benefit or damage our operations and profitability.  Some of the things that could have this effect are:

 
·
Level of government involvement in the economy;

 
·
Control of foreign exchange;

 
·
Methods of allocating resources;

 
·
Balance of payments position;

 
·
International trade restrictions; and

 
·
International conflict.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (the “OECD”), in many ways.  For example, state-owned enterprises still constitute a large portion of the Chinese economy and weak corporate governance and a lack of flexible currency exchange policy still prevail in China.  As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy was similar to those of other OECD member countries.
 
Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.
 
The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used.  The overall effect of legislation enacted over the past 20 years has been to enhance the legal protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses.
 
 
21

 

Substantially all of our executive officers reside in the PRC, and substantially all of our assets are located within the PRC. It may not be possible for investors to effect service of process upon those persons in the PRC or to enforce any judgment obtained from non-PRC courts against them in the PRC or against our assets in the PRC.

In China, if a foreign party wants to petition to recognize and enforce a foreign judgment, it has to petition to a PRC intermediate court for such recognition and enforcement.   After receiving such a petition, a Chinese court has broad discretion in evaluating whether to enforce foreign judgments according to international treaties into which China has entered, or by the principle of reciprocity.  If the PRC and the foreign country have not entered into or acceded into any international treaties and both countries do not have established reciprocity relationships, the judgment made by the court of the foreign country will not be recognized and enforced in China.  In such case the foreign party would have to institute a lawsuit with the PRC court having jurisdiction over the action if it wishes to enforce the judgment.

In 1987, China acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).  Under the New York Convention, arbitral awards rendered in other signatory countries are recognized and enforceable in China.  However, thus far, China has not yet acceded to the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, or the Hague Convention, nor does it have treaties providing for the reciprocal recognition and enforcement of judgments of courts in the United States, the United Kingdom, Japan or many other countries.  Therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in respect of any matter not subject to a binding arbitration provision may be difficult or impossible.
 
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
 
China only recently has permitted provincial and local economic autonomy and private economic activities.  The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.  Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters.  We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.  However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
 
Future inflation in China may inhibit our ability to conduct business in China.
 
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation.  These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
 
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
 
The majority of our revenues will be settled in Renminbi and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars.  Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.

 
22

 
 
Our primary source of funds for dividends and other distributions from our operating subsidiaries in China are subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders are negatively affected by those restrictions and uncertainties.

We are a company established in Delaware and conduct our core business operations through Cantix’s principal operating subsidiaries, Tallyho and Wuhan Anti-Aging, in China.  As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from Tallyho and Wuhan Anti-Aging.  If either subsidiary incurs debt on its own behalf, the debt instruments may restrict its ability to pay dividends or make other distributions, which in turn would limit our ability to pay dividends on our shares.  Under the current PRC laws, because we are incorporated in the Delaware, Cantix’s PRC subsidiaries are regarded as a sino-foreign joint venture enterprise in China.  Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations.  Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses.  In addition, if we make additional capital contributions to Cantix’s PRC subsidiaries (which may occur through the capitalization of undistributed profits), then additional approval of the PRC government would be required due to an increase in our registered capital and total investment in Tallyho and Wuhan Anti-Aging.  Under the PRC laws, Tallyho and Wuhan Anti-Aging are required to set aside a portion of its net income each year to fund designated statutory reserve funds.  These reserves are not distributable as cash dividends.  As a result, our primary internal source of funds of dividend payments from our subsidiaries are subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders.  Moreover, any transfer of funds from us to our subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities.  These limitations on the flow of funds between us and our subsidiaries could restrict our ability to act in response to changing market conditions. We currently do not intend on paying any dividends in the future and expect to retain all available funds to support our operations and to finance growth and development of our business. We have never declared dividends or paid cash dividends.  Our board of directors will make any future decisions regarding dividends.  We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the near future.  Therefore, any gains on an investment in our Common Stock will likely occur through an increase in our stock price, which may or may not occur.
 
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
 
In October 2005, the PRC State Administration of Foreign Exchange (“SAFE”), issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company (“SPV”), for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC resident’s funds used to establish or acquire the offshore entity; (3) covering the use of existing offshore entities for offshore financings; (4) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (5) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries.  However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75.  Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.  For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.  In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75.  We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures.

 
23

 

The value of our securities will be affected by the currency exchange rate between U.S. dollars and RMB.

The value of our Common Stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated.  For example, if we need to convert U.S. dollars into RMB for our operational needs and the RMB appreciates against the U.S. dollar at that time, our financial position, our business, and the price of our Common Stock may be harmed.  Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our Common Stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.

Our procurement strategy is to diversify our suppliers both in the PRC and overseas.  Additionally, some of our raw materials and major equipments are currently imported.  These transactions are often settled in U.S. dollars or other foreign currency.  In the event that the U.S. Dollar or other foreign currency appreciate against the RMB, our costs will increase.  If we cannot pass the resulting cost increase to our customers, our profitability and operating results will suffer.  In addition, because our sales to international customers are growing, we are subject to the risk of foreign currency depreciation.

A downturn in the economy of China may slow our growth and profitability.

The growth of the Chinese economy has been uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady or that any downturn will not have a negative effect on our business.

Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

RISKS RELATING TO OUR COMMON STOCK

There is not now, and there may not ever be, an active market for our Common Stock and we cannot assure you that the Common Stock will become liquid or that it will be listed on a securities exchange.

There currently is a limited market for our Common Stock. We plan to file an application to list our Common Stock on a national exchange as soon as practicable, however,  we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.  Our Common Stock is currently quoted in the OTCBB and, as such investors may find it difficult to obtain accurate quotations as to the market value of our Common Stock and trading of our Common Stock may continue to be extremely sporadic and a more active market for our Common Stock may never develop.  In addition, we believe that our Common Stock is considered to be a “penny stock” under criteria set forth in SEC regulations.  As a result, various requirements are on broker-dealers who sell our Common Stock to persons other than established customers and accredited investors.  Consequently, as long as our Common Stock is a “penny stock”, such regulations may deter broker-dealers from recommending or selling our Common Stock, which may further affect its liquidity.  This would also make it more difficult for us to raise additional capital.
 
 
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Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiaries.  While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments.  In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below.  We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future.  If we determine that we will pay dividends to the holders of our Common Stock, we cannot assure that such dividends will be paid on a timely basis.  As a result, you will not receive any return on your investment prior to selling your shares in our company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our company and your shares may become worthless.  If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Investor confidence and market price of our shares may be adversely impacted if we or our independent registered public accountants are unable to attest to the adequacy of the internal controls over our financial reporting as of September 30, 2010, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.

We are subject to the reporting requirements of the U.S. Securities and Exchange Commission (the “SEC”).  The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management of their internal control structure and procedures for financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of their internal controls over financial reporting.  In addition, independent registered public accountants of these public companies must attest to and report on management’s assessment of the effectiveness of their internal controls over financial reporting.  These requirements will first apply to our annual report on Form 10-K for the fiscal year ended on September 30, 2010, and the auditor attestation will be required in our annual report on Form 10-K for the fiscal year ended on September 30, 2010.

The rights of the holders of Common Stock may be impaired by the potential issuance of preferred stock.

Our Certificate of Incorporation, as amended authorizes the Company to issue preferred stock and gives our board of directors the right to issue shares of preferred stock and to designate the rights, privileges and preferences of such class of preferred stock.   As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that could adversely affect the voting power and equity interest of the holders of Common Stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our Common Stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock and the certificate of designation relating to the Preferred Shares restricts our ability to issue additional series of preferred stock, we may issue such shares in the future.

The issuance of shares through our stock compensation plans may dilute the value of existing stockholders and may affect the market price of our stock.

Although we do not have an option or other equity-based incentive plan at present, in the future we may use stock options, stock grants and other equity-based incentives, to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives will result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying shares of Common Stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock.
 
 
25

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
Overview of Our Business
 
Through Cantix’s PRC operating subsidiaries, Tallyho, Haopu, and Wuhan Anti-Aging, we are primarily engaged in the design, manufacturing and marketing of polypeptide-based nutritional supplements and health foods.  Our products are sold to customers primarily in China, through an established network of sales agents.  In 2005, we began selling our nutritional supplement products in Taiwan and Malaysia through local distributors.

Our products are primarily manufactured in our production facilities located on 8,529 square meters of land in the Hannan Economic Development Zone in Wuhan, China.  Our products have been tested and approved by domestic and Malaysian governmental safety agencies such as the Ministry of Health Malaysia, and the SFDA and MOH in China.  Our research and development efforts are conducted at Tallyho’s facilities in Wuhan, China.

Our sales revenue for the fiscal years ended September 30, 2008 and 2007 were $35,590,341 and $1,970,673, respectively, and our net income for the fiscal years ended September 30, 2008 and 2007 were $10,240,474 and $43,162, respectively.  In the fiscal year ended September 30, 2008, $28,947,347, or 81.33% of our sales revenue, was generated from sales of our Protein Powder.  We expect our revenues to continue to grow in future periods as a result of our plans to extend our distribution network and expand our manufacturing capacity.

Principal Factors Affecting Our Financial Performance
 
Production Capacity

Our sales volume is limited by our annual production capacity.  As we grow our business in the future, our ability to fulfill additional and larger orders will be dependent on our ability to increase our production capacity.  Our plan to expand our production capacity will depend on, inter alia, the availability of capital to meet our needs of expansion or upgrading of production lines, and the availability of a steady supply of raw materials.
 
Currently, our production capacity is 250 tons per annum.  We estimate that the production capacity of our major competitors ranges from 250 tons to 1000 tons per annum.
 
Competition

We are subject to intense competition from other producers of polypeptide products, both foreign and domestic.  These competitors may have more capital, better research and development resources, manufacturing and marketing capability and experience than us.  In our industry, we compete based upon product quality, product cost, ability to produce a diverse range of products and logistical capabilities.  Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices; or (iii) competitors develop new products or product substitutes having comparable medicinal applications or therapeutic effects which are more effective and /or less costly than those produced by us.

Market and Macro-Economic Trends

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy.  The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources.  Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

Further, we are reliant on additional financing to support our intended growth and business plan.  There can be no assurance that the recent downturn in the global economy will reverse and will not have a negative effect on our business.

Results of Operations
 
As a result of the Exchange, Cantix became a wholly-owned subsidiary of Hamptons and its four direct and indirect subsidiaries, Moneyeasy, Tallyho, Wuhan Anti-Aging, and Haopu, became Hamptons’ indirect subsidiaries.  Our primary business is now the research and development, manufacturing and marketing of polypeptide-based nutritional supplements and health foods.

The financial information discussed below represents the financial information of Cantix and its subsidiaries prior to the Exchange.

 
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Consolidated Comparison of Nine Months Ended June 30, 2009 and June 30, 2008 (Unaudited)

The following table summarizes the results of our operations during the fiscal quarters ended June 30, 2009 and provides information regarding the dollar and percentage increase or (decrease) from the third quarter of fiscal year 2009 to the same period of 2008.

 (All amounts are in U.S. dollars)

   
Nine Months Ended
   
Increase
   
Percentage Increase
 
Item
 
30-Jun-09
   
30-Jun-08
   
(Decrease)
   
(Decrease)
 
Revenues
    25,272,971       25,758,585       -485,614       -1.89 %
Cost of Sales
    1,597,977       1,337,877       260,100       19.44 %
Gross Profit
    23,674,994       24,420,708       -745,714       -3.05 %
Selling and Administrative Expenses
    15,022,666       14,741,486       281,180       1.91 %
Salary
                       
R&D Expense
                       
Income (Loss) From Operations
    8,652,328       9,679,222       1,026,894       -10.61 %
Interest Expense
    41,636       35,521       6,115       17.22 %
Net Income
    6,578,832       6,830,953       -252,121       -3.69 %
 
Revenues
 
Net sales for the nine months ended June 30, 2009 totaled $25,272,971, compared to $25,758,585 for the same period in 2008, a decrease of $485,614, or approximately 1.89%.  The total revenue for the nine months ended June 30, 2009 is as much as the same period in 2008.
 
Cost of Sales
 
Cost of sales for the nine months ended June 30, 2009 totaled $1,597,977, or approximately 6.32% of net sales, compared to $1,337,877, or approximately 5.19% of net sales, for the same period in 2008.

Gross Profit

The gross profit decreased by $745,714, or 3.05%, to $23,674,994 for the nine months ended June 30, 2009, from $24,420,708 for the same period in 2008.  However, as a percentage of sales revenue, our cost of revenues increased by 1.13% from 5.19% for the nine months ended June 30, 2008, to 6.32% for the same period in 2009.  The increase in our cost as a percentage of revenues is due primarily to increased cost of material and cost of products.
 
Selling and Administrative Expenses
 
Selling and administrative expenses for the nine months ended June 30, 2009 totaled $15,022,666 or approximately 59% of net sales, compared to $14,741,486 or approximately57% of net sales, for the same period in 2008. This increase was primarily due to the fact that Haopu spent more money on promotion activities.

Income (Loss) from Operations

Income from operations in the nine months ended June 30, 2009 was $8,652,328 as compared to income from operations of $9,679,222 for the same period in 2008, a decrease of $1,026,894, or approximately 10.61%. This decrease was due to the increased cost.

Interest Expense

Interest expense for the nine months ended June 30, 2009 totaled $41,636, compared to $35,521 for the same period in 2008, an increase of $6,115.

 
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Net Income

Net income was $6,578,832 for the nine months ended June 30, 2009, compared to net income of $6,830,953 for the same period in 2008, a decrease of $252,121.

Year Ended September 30, 2008 compared to the fiscal year ended September 30, 2007

The following table summarizes the results of our operations during the fiscal years ended September 30, 2008 and 2007 and provides information regarding the dollar and percentage increase or (decrease) from the 2007 fiscal year to the 2008 fiscal year.

(All amounts are in U.S. dollars)

               
Increase
   
Percentage Increase
 
Item
 
FY 2008
   
FY 2007
   
(Decrease)
   
(Decrease)
 
Revenues
    35,590,341       1,970,673       33,619,668       1706.00 %
Cost of Sales
    2,499,403       1,163,615       1,335,788       114.80 %
Selling and Administrative Expenses
    20,048,948       607,854       19,441,094       3198.32 %
Income (Loss) From Operations
    13,041,990       199,204       12,842,786       6447.05 %
Interest Expense
    48,140       61,771       -13,631       -22.07 %
Net income
    10,240,474       43,162       10,197,312       23625.67 %
 
Revenues
 
Net sales for 2008 totaled $35,590,341 compared to $1,970,673 for 2007, an increase of $33,619,668, or approximately 1706.00%. The increase in 2008 was due to the establishment of the subsidiary company in Guangzhou.

Cost of Sales

Cost of sales for 2008 totaled $2,499,403, or approximately 7% of net sales, compared to 1,163,615, or approximately 59% of net sales, for 2007. The decrease in cost of sales as a percentage of net sales was due to the high gross profit margin of Haopu.
 
Selling and Administrative Expenses
 
General and administrative expenses for 2008 totaled $20,048,948, or approximately 56% of net sales, compared to $607,854, or approximately 31% of net sales, for 2007. This increase in general administrative expense was mainly due to the fact that Haopu spent much money on promotion activities.

Income (Loss) From Operations

Income from operations in 2008 was $13,041,990 as compared to income from operations of $199,204 for 2007, an increase of 12,842,786 , or approximately 6447%.  This increase was due to the high gross margin rate of Haopu.
 
Interest Expense.
 
Interest expense for 2008 totaled $48,140 compared to $61,771 for 2007, a decrease of 13,631.

Net Income (Loss)

Net income was $10,240,474 for 2008, compared to net income of $43,162 for 2007, an increase of $ 10,197,312. This increase was due to the high gross margin rate of Haopu.
 
 
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Consolidated Cash Flows for the Fiscal Year ended September 30, 2008 and 2007

As of September 30, 2008, we had cash and cash equivalents of $5,918,414.  The following table sets forth a summary of our cash flows for the periods indicated:

(All amounts are in U.S. dollars)
   
September 30,
 
   
2008
   
2007
 
             
Net cash (used in) / provided by operating activities
    8,351,932       (668,444 )
Net cash used in investing activities
    3,613,175       491,795  
Net cash (used in) / provided by financing activities
    947,036       1,143,546  
Effect of exchange rate changes on cash and cash equivalents
    213,752       1,354  
Net increase in cash and cash equivalent
    5,899,545       (15,339 )
Cash and cash equivalents at the beginning of period
    18,869       34,208  
Cash and cash equivalents at the end of period
    5,918,414       18,869  

As of the fiscal year ended September 30, 2008, our unrestricted cash resources were $5,918,414 as compared to $18,869 as of the fiscal year ended September 30, 2007.  We believe that the company will have sufficient funds to meet all the obligations that are due in the next year.

Operating Activities

For the fiscal years ended September 30, 2008 and 2007, net cash used by operating activities totaled $8,351,932 and $668,444, respectively.  This change relates directly to the increase in sales.

Investing Activities

Net cash used for investing activities in the fiscal years ended September 30, 2008 and 2007 was $3,613,175 and $491,795, respectively.  The increase of net cash used for investing activities was mainly attributable to the increase in purchasing of property, plant and equipment.  In 2008 and 2007, $3,647,241 and $254,508 were spent on purchase of property, plant and equipment.

Financing Activities

Net cash used in financing activities in the fiscal year ended September 30, 2008 totaled $947,036 as compared to $1,143,546 provided by financing activities in the fiscal year ended September 30, 2007.  The decrease of the cash provided by financing activities was mainly attributable to the large increase in repayment to the related parties.

As of September 30, 2008, our debt-to-equity ratio was 7.87%.
 
Loan Facilities
 
As of September 30, 2008, the Company and its subsidiaries had been extended bank loans with the following terms:

All amounts, other than percentages, are in U.S. dollars

Type
 
Contracting Party
 
Maturity Date
 
Duration
 
Amount
   
Monthly
Interest
Rate
 
Facility Bank Loan
 
Agriculture Bank of China, Changjiang Branch
    2003-09-28  
2 years
    379,280       0.525 %
Facility Bank Loan
 
Wuhan Finance Bureau
    2001-11-02  
2 years
    218,815       0.4955 %
Facility Bank Loan
 
Wuhan Pan-Asian
    2009-02-02  
2 years
    688,188       0.6858 %

The loans shown in the above table total approximately $1,286,283.  The term of the loan from Agriculture Bank of China and the Wuhan Finance Bureau expired in 2003 and 2001, respectively.  However, the lenders have not yet demanded repayment.  We will repay each of the other loans when they mature, either by an internal source of funds or via a refinancing of said debt.  Interest accrues on a monthly basis based on the original rate.

 
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Interest expense for the nine months ended June 30, 2009 and 2008 totaled $41,636 and $35,521, respectively.

We believe that our currently available working capital, after receiving the aggregate proceeds of the capital raising activities discussed herein, should be adequate to sustain our operations at our current levels through at least the next twelve months.

Obligations Under Material Contracts

Except for our repayment obligations in connection with the loans disclosed herein, as of June 30, 2009, we do not have any obligations under material contracts or agreements.

Critical Accounting Policies

Principles of consolidation

The consolidated financial statements, prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”), include the assets, liabilities, revenues, expenses and cash flows of the Company and all its subsidiaries. This basis of accounting differs in certain material respects from that used for the preparation of the books and records of the Company's principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (the “PRC GAMY”), the accounting standards used in the place of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books and records of the Company's subsidiaries to present them in conformity with US GAAP. All significant inter-company accounts, transactions and cash flows are eliminated on consolidation. Investment in affiliates in which the Company exercises significant influence but do not control and are not the primary beneficiary are accounted for using the equity method.

Use of Estimates

The preparation of the Company’s financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statements include some amounts that are based on management’s best estimates and judgments. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, other receivables, inventories, taxes payable, and the estimation on useful lives of property, plant and equipment and intangible assets. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Revenue Recognition

Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by its customers, the price is fixed or determinable, and collectability is reasonably assured.  Customers do not have a general right of return on products shipped. The number of products returned to the Company was insignificant during past years.  There are no post-shipment obligations, price protection and bill and hold arrangements.

Currency Risk and Foreign Currency Translation

Most of the transactions of the Company were settled in RMB and/or U.S. dollars.  In the opinion of management, the Company does not have significant foreign currency risk exposure.

Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in other income (expense), net on the consolidated statements of operations.

Foreign currency translation.  The consolidated financial statements of the Company are presented in United States dollars (“US$”).  Transactions in foreign currencies during the year are translated into US$ at the exchange rates prevailing at the transaction dates.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into US$ at the exchange rates prevailing at that date.  All transaction differences are recorded in the income statement.

The Company uses its local currency, Renminbi (“RMB”), as their functional currency.  On consolidation, the financial statements of the Company are translated from RMB into US$ in accordance with SFAS No. 52, “Foreign Currency Translation.”  Accordingly, all assets and liabilities are translated at the exchange rates prevailing at the balance sheet dates and all income and expenditure items are translated at the average rates for each of the period.

 
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RMB is not a fully convertible currency.  All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”), or other institutions authorized to buy and sell foreign currencies.  The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.  Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:

 
September 30, 2008
   
 
Balance sheet
 
RMB 6.8551 to US$1.00
 
Statement of income and comprehensive income
 
RMB 7.1106 to US$1.00
       
 
September 30, 2007
   
 
Balance sheet
 
RMB 7.5176 to US$1.00
 
Statement of income and comprehensive income
 
RMB 7.7257 to US$1.00

Commencing on July 21, 2005, China has adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies.  The exchange rate of the US$ against the RMB was adjusted from approximately RMB 8.28 per US$1 to approximately RMB 8.11 per US$1 on July 21, 2005.  Since then, the PBOC administers and regulates the exchange rate of US$ against RMB taking into account supply and demand of RMB, as well as domestic and foreign economic and financial conditions.

Recently Issued Accounting Pronouncements

 
·
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on the company's financial position, financial performance, and cash flows.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No.161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

 
·
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 was effective for fiscal years beginning after December 15, 2006. In January 2008, the FASB approved FASB Staff Position (“FSP”) No. FIN 48-6 - “Effective Date of FASB Interpretation No. 48 for Nonpublic Enterprise,” permitting nonpublic enterprises to defer implementation of FIN 48 until the period beginning after December 15, 2007. The Company has not yet determined the impact of the adoption of FIN 48 on its financial statements and footnotes disclosures.

·
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS No. 157 shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year.  The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except in some circumstances where the statement shall be applied retrospectively.  We are currently evaluating the effect, if any, of SFAS No. 157 on our financial statements.

 
·
In September 2006, the FASB issued SFAS No. 158, “Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements 87, 88, 106 and 132(R).”  SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employer's fiscal year-end statement of financial position (with limited exceptions). Management does not expect the adoption of SFAS No. 158 to have a material impact on the Company's financial statements.
 
 
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·
In September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the company's financial statements and the related financial statement disclosures. SAB 108 permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006, by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.  We do not anticipate that SAB 108 will have a material impact on our financial statements.
 
 
·
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with few exceptions.  SFAS No. 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities.  The requirements of SFAS No. 159 are effective for the 2008 fiscal year.  We are in the process of evaluating this guidance and therefore have not yet determined the impact that SFAS No. 159 will have on our financial statements upon adoption.

 
·
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations.”   SFAS No. 141R replaces SFAS No. 141, “Business Combinations,” although it retains the fundamental requirement stated in SFAS No.141 that the acquisition method of accounting be used for all business combinations. SFAS No.141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; and (c) determines what information to disclose regarding the business combination. SFAS No. 141R applies prospectively to 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, 2008. The Company is currently assessing the potential effect of SFAS No. 141R on its financial statements.

 
·
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements.”  SFAS No.160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary, commonly referred to as minority interest.  Among other matters, SFAS No.160 requires: (a) the non-controlling interest be reported within equity in the balance sheet; and (b) the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly presented in the statement of income. SFAS No.160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. SFASNo.160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company is currently assessing the potential effect of SFAS No.160 on its financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

Seasonality
 
Historically, the Company’s sales revenue for the first and forth quarters in each fiscal year have been better than sales revenue for the second and third fiscal quarters.  We believe that this is partially due to the number of festivals and holiday celebrations that occur in China during our fourth and first fiscal quarters.

PROPERTIES

All land in China is owned by the State or collectives.  Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes.  In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years.  This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws.  Granted land use rights are transferable and may be used as security for borrowings and other obligations.

Our executive offices are located at No. 11 Jiangda Road, Jianghan Economic Development Zone, Wuhan City, Hubei Province, China.  Our executive offices consist of approximately 2,780 square meters consisting entirely of administrative office space.  The administrative office is owned by the Company and therefore we do not pay rent for the use of the office space.  The sale offices and service kiosks are leased from individual owners on a month-to-month basis, at an aggregate monthly cost of $11,331.

 
32

 

Our main production facilities are located in the Hannan Economic Development Zone, in Wuhan City, Hubei Province, China.  The total site area is approximately 16,430 square meters. Tallyho purchased the right to use the land and built the production facilities in 1996.

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.  We do not have property insurance on any of our properties.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of our common stock as of November 13, 2009: (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.

Unless otherwise specified, the address of each of the persons set forth below is in care of the Company at No. 11 Jiangda Road, Jianghan Economical Development Zone, Wuhan, 430023 P.R. China.

Name and Address of
Beneficial Owner
 
Office, if Any
 
Title of Class
 
Amount and Nature
of Beneficial
Ownership (1)
   
Percent of Class (2)
 
                     
Officers and Directors
 
Dongliang Chen
 
Chairman and CEO
 
Common Stock
    1,875       *  
                         
Shengfan Yan
 
President and Director
 
Common Stock
    0       *  
                         
Lirong Hu
 
Chief Financial Officer, Treasurer and Director
 
Common Stock
    0       *  
                         
All officers and directors as a group (3 persons named above)
     
Common Stock
    1,875       *  
                         
5% Securities Holder
 
China Polypeptide Group Ltd. (3)
No. 11 Jiangda Road
Jianghan Economical Development Zone
430023 Wuhan, P.R. China
     
Common Stock
    1,100,000       88.0 %
 

* Less than 1%

(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our Common Stock.
 
(2)
As of November 13, 2009, after the completion of the Exchange and the cancellation of 887,000 shares of Common Stock owned by our former Chief Executive Officer, there were 1,250,000 shares of our Common Stock issued and outstanding.
 
(3)
Dongliang Chen, our Chief Executive Officer, is the Chief Executive Officer of China Polypeptide Group, Ltd.
 
 
33

 

DIRECTORS AND EXECUTIVE OFFICERS

Directors, Executive Officers, Promoters and Control Persons

In connection with and pursuant to the Exchange Agreement, effective November 13, 2009, John Delaney   resigned as President, Chief Executive officer and Director, and Brien Reidy resigned as Vice President and Secretary of Hamptons and Dongliang Chen, Shengfan Yan, Lirong Hu were appointed as officers and directors.  As such, all of our officers and directors are residents of the PRC.  As a result, it may be difficult for investors to effect service of process within the United States upon any of them or to enforce court judgments obtained against them in United States courts.

The following sets forth the name and position of each of our current executive officers, directors and significant employees and their ages and titles as of November 13, 2009:

Name
 
Age
 
Position
       
Chief Executive Officer
Dongliang Chen
 
47
 
Chairman of the Board
Shengfan Yan
 
42
 
President and Director
Lirong Hu
 
51
 
Director, Treasurer, and
 
  
 
  
Chief Financial Officer
 
Dongliang Chen. Dongliang Chen was appointed our Chief Executive Officer and a Director effective November 13, 2009. Since June 2008, Dongliang Chen has served, and he continues to serve, as the Chief Executive Officer and a director of CPG. Mr. Chen is also the Chairman and Chief Executive Officer of Tallyho, a position he has held since December 1996. Prior thereto, Mr. Chen was the CEO of Wuhan Sanrong Group Ltd. From 1990 to 1992, Dongliang Chen was the Chief Technology Officer at Union Technology Limited in Hong Kong from 1990 to 1992.  Mr.Chen is a committee member of China Health Management Association of the Chinese Medical Association and also is a visiting professor at Wuhan Bioengineering Institute of China.
 
Shengfan Yan. Shengfan Yan was appointed our President and a director effective November 13, 2009.  Since June 2008, Shengfan Yan has served, and he continues to serve, as the President and a director of CPG. Mr. Yan is also the President and a director of Tallyho, positions he has held since November 2007. Prior thereto, Mr. Yan was the President of GuangDong Puzhongren Group, a provider of polypeptide protein and polypeptide capsules, from March 2001 through October 2007.  Prior to his employment at GuangDong Puzhongren, he was the General Sales Manager at GuangDong Zhengguo Group, a provider of Anti-cancer drugs.  Mr. Yan holds an Executive MBA from San Yat-Sen University and a Bachelor degree from HuHan Normal University with a major in History.

Lirong Hu. Lirong Hu was appointed our Chief Financial Officer and Treasurer and a director effective November 13, 2009. Since June 2008, Lirong Hu has served, and she continues to serve, as the Chief Financial Officer and a director of CPG. Ms. Hu is also the Chief Financial Officer and a director of Tallyho.  Ms. Hu was appointed the Chief Financial Officer of Tallyho in 1999 and became a director of Tallyho in November 2007.  Prior thereto, Ms. Hu was an accountant at Wuhan Sandi Electronic Apparatus Company from 1991to 1998.  Ms. Hu received a Bachelor’s degree in Industrial Accounting from Hubei Unversity in 1987.

There are no agreements or understandings for any of our executive officers, directors or significant employees to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

Family Relationships

There are no family relationships among our directors or officers.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers have been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or have been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws (except where not subsequently dismissed without sanction or settlement), or from engaging in any type of business practice, or a finding of any violation of federal or state securities laws.  To the best of our knowledge and except as set forth below, no petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of any of our directors or officers, or any partnership in which any of our directors or officers was a general partner at or within two years before the time of such filing, or any corporation or business association of which any of our directors or officers was an executive officer at or within two years before the time of such filing.  Except as set forth in our discussion herein, under the heading “Transaction with Related Persons, Promoters and Certain Control Persons; Corporate Governance,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 
34

 

EXECUTIVE COMPENSATION

Hamptons Executive Compensation Summary

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid by Hamptons to the following persons for services rendered in all capacities during the noted periods.  No other executive officers received total annual salary and bonus compensation in excess of $100,000.
 
Name and
Principal
Position
 
Fiscal
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
   
Non-equity
Incentive Plan
Compensation
($)
   
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
John Delaney
                                                   
(former President,
 
2008
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  
Chief Executive
                                                                   
Officer and
                                                                   
Director) (1)
                                                                   
   
2007
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                                     
Brien Reidy
                                                                   
(former Vice
 
2008
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  
President and
                                                                   
Secretary) (2)
                                                                   
   
2007
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  

(1)
John Delaney resigned as the Company’s President, Chief Executive Officer and director effective November 13, 2009.

(2)
Brien Reidy resigned as the Company’s Vice President and Secretary effective November 13, 2009.
 
 
35

 

Cantix Executive Compensation Summary

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid by Cantix to the following persons for services rendered in all capacities during the noted periods.  No other executive officers received total annual salary and bonus compensation in excess of $100,000.

Name and
Principal
Position
 
Fiscal
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
   
Non-equity
Incentive Plan
Compensation
($)
   
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
                                                     
Dongliang Chen
                                                   
(CEO and
 
2008
    14,069       -0-       -0-       -0-       -0-       -0-       -0-       14,069  
Chairman of the
                                                                   
Board of
                                                                   
Directors)
 
2007
    14,069       -0-       -0-       -0-       -0-       -0-       -0-       14,069  
                                                                     
Shengfan Yan
                                                                   
(President and
 
2008
    10,551       -0-       -0-       -0-       -0-       -0-       -0-       10,551  
Director)
                                                                   
   
2007
    10,551       -0-       -0-       -0-       -0-       -0-       -0-       10,551  
                                                                     
Lirion Hu
                                                                   
(CFO, Treasurer
 
2008
    7,035       -0-       -0-       -0-       -0-       -0-       -0-       7,035  
and Director)
                                                                   
   
2007
    7,035       -0-       -0-       -0-       -0-       -0-       -0-       7,035  

Summary of Employment Agreements and Material Terms

Our executive officers are not entitled to severance payments upon the termination of their employment agreements. They are subject to the customary non-competition and confidentiality covenants.
 
Bonuses and Deferred Compensation
 
We do not have any bonus, deferred compensation or retirement plan. We do not have a compensation committee. All decisions regarding compensation are determined by our board of directors.

Director Compensation

No director has received any cash or other compensation for serving as a director and the Company does not plan to pay any cash or other compensation to any person for serving as a director. The Company does not have any Stock Option Plan or other equity compensation plans.

As a result of the Exchange, Dongliang Chen, Shengfan Yan, Lirong Hu became directors of Hamptons.

Board Committee

Our board of directors does not have any committees.

 
36

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was incorporated on March 19, 2007 at which time 985,000 shares of common stock were issued to John Delaney, the Company’s founder, and 15,000 shares of common stock were issued to the Company’s legal counsel for cash at the par value of $0.0001 or a total $100.

Mr. Chen, who is our Chief Executive Officer and a director, is also the Chief Executive Officer and a director of CPG.  CPG is the holder of 88% of our outstanding Common Stock.

Pursuant to a Patent License Agreement, between Mr. Chen and Wuhan Tallyho Biological Product Lts., our subsidiary, Mr. Chen has licensed to Tallyho the rights to use certain processes and technologies for which Mr. Chen has filed patent applications.

Director Independence

Our board of directors has not yet appointed an independent director that possesses the accounting or related financial management experience that qualifies as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules, or that would qualifies as an “audit committee financial expert” as defined by the rules and regulations of the SEC.

LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings in the ordinary course of our business.  We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse affect on our business, financial condition or operating results.
 
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

Market Information

Our Common Stock is traded over-the-counter on the OTC Bulletin Board under the designation HMEX and there is no established public trading market for our Common Stock.

Holders

As of September 30, 2009, there were approximately 50 stockholders of record of our Common Stock.  The number of record holders does not include persons who held our Common Stock in nominee or “street name” accounts through brokers.

Dividend Policy

We have not paid any dividends on our common stock to date and there are no plans for paying dividends on the common stock in the foreseeable future. We intend to retain earnings, if any, to provide funds for the implementation of our business plan. We do not intend to declare or pay any dividends in the foreseeable future. Therefore, there can be no assurance that holders of our common stock will receive any additional cash, stock or other dividends on their shares of our common stock until we have funds which the Board of Directors determines can be allocated to dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company does not have any stock option plan or other equity compensation plans.

DESCRIPTION OF SECURITIES

On November 5, 2009 we filed a certificate of amendment to our certificate of incorporation which increased our authorized capital stock to 120,000,000 shares of Common Stock and 1,000,000 shares of preferred stock.

 
37

 
 
Preferred Stock

Our certificate of incorporation authorizes the issuance of 1,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors.  No shares of preferred stock have been designated, issued or are outstanding.  Accordingly, our board of directors is empowered, without stockholder approval, to issue up to 1,000,000 shares of preferred stock with voting, liquidation, conversion, or other rights that could adversely affect the rights of the holders of the common stock.  Although we have no present intention to issue any shares of preferred stock, there can be no assurance that we will not do so in the future.

Among other rights, our board of directors may determine, without further vote or action by our stockholders:
 
the number of shares and the designation of the series;
whether to pay dividends on the series and, if so, the dividend rate, whether dividends will be cumulative and, if so, from which date or dates, and the relative rights of priority of payment of dividends on shares of the series;
whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights;
whether the series will be convertible into or exchangeable for shares of any other class or series of stock and, if so, the terms and conditions of conversion or exchange;
whether or not the shares of the series will be redeemable and, if so, the dates, terms and conditions of redemption and whether there will be a sinking fund for the redemption of that series and, if so, the terms and amount of the sinking fund; and
the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series.

We presently do not have plans to issue any shares of preferred stock.  However, preferred stock could be used to dilute a potential hostile acquirer.  Accordingly, any future issuance of preferred stock or any rights to purchase preferred shares may have the effect of making it more difficult for a third party to acquire control of us.  This may delay, defer or prevent a change of control in our company or an unsolicited acquisition proposal.  The issuance of preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock.

 Common Stock

Our certificate of incorporation authorizes the issuance of 120,000,000 shares of common stock. As of November 13, 2009, there were 1,250,000 shares of Common Stock issued and outstanding.  The holders of our common stock:

 
·
have equal ratable rights to dividends from funds legally available for payment of dividends when, as and if declared by the board of directors;
 
·
are entitled to share ratably in all of the assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs;
 
·
do not have preemptive, subscription or conversion rights, or redemption or access to any sinking fund; and
 
·
are entitled to one non-cumulative vote per share on all matters submitted to stockholders for a vote at any meeting of stockholders.

Authorized but Un-issued Capital Stock

Delaware law does not require stockholder approval for any issuance of authorized shares.  These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions.

One of the effects of the existence of un-issued and unreserved common stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our board by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of our common stock at prices higher than prevailing market prices.
 
 
38

 

Delaware Anti-Takeover Law

We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers.  This section prohibits, subject to exceptions, publicly-traded Delaware corporations from engaging in a business combination, which includes a merger or sale of more than 10% of the corporation's assets, with any interested stockholder.  An interested stockholder is generally defined as a person who, with its affiliates and associates, owns or, within three years before the time of determination of interested stockholder status, owned 15% or more of a corporation's outstanding voting securities.  This prohibition does not apply if: the transaction is approved by the board of directors before the time the interested stockholder attained that status; upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the start of the transaction; or at or after the time the stockholder became an interested stockholder, the business combination is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

A Delaware corporation may opt out of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from an amendment approved by at least a majority of the outstanding voting shares.  However, we have not opted out of this provision.  This provision of the Delaware General Corporation Law could prohibit or delay a merger or other takeover or change-in-control attempts and may discourage attempts to acquire us.

Shareholder Matters

Certain provisions of Delaware law create rights that might be deemed material to our shareholders.  Other provisions might delay or make more difficult acquisitions of our stock or changes in our control or might also have the effect of preventing changes in our management or might make it more difficult to accomplish transactions that some of our shareholders may believe to be in their best interests.

Dissenters' Rights

Among the rights granted under Delaware law which might be considered as material is the right for shareholders to dissent from certain corporate actions and obtain payment for their shares (see Delaware Revised Statutes ("DRS") 92A.380-390).  This right is subject to exceptions, summarized below, and arises in the event of mergers or plans of exchange.  This right normally applies if shareholder approval of the corporate action is required either by Delaware law or by the terms of the articles of incorporation.

A shareholder does not have the right to dissent with respect to any plan of merger or exchange, if the shares held by the shareholder are part of a class of shares which are:

listed on a national securities exchange,

included in the national market system by the National Association of Securities Dealers, or

held of record by not less than 2,000 holders.

This exception notwithstanding, a shareholder will still have a right of dissent if it is provided for in the articles of incorporation (our certificate of incorporation does not so provide) or if the shareholders are required under the plan of merger or exchange to accept anything but cash or owner's interests, or a combination of the two, in the surviving or acquiring entity, or in any other entity falling in any of the three categories described above in this paragraph.

Inspection Rights

Delaware law also specifies that shareholders are to have the right to inspect company records.  This right extends to any person who has been a shareholder of record for at least six months immediately preceding his demand.  It also extends to any person holding, or authorized in writing by the holders of, at least 5% of our outstanding shares.  Shareholders having this right are to be granted inspection rights upon five days' written notice.  The records covered by this right include official copies of: the articles of incorporation, and all amendments thereto, bylaws and all amendments thereto; and a stock ledger or a duplicate stock ledger, revised annually, containing the names, alphabetically arranged, of all persons who are stockholders of the corporation, showing their places of residence, if known, and the number of shares held by them, respectively.

In lieu of the stock ledger or duplicate stock ledger, Delaware law provides that the corporation may keep a statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the present and complete post office address, including street and number, if any, where the stock ledger or duplicate stock ledger specified in this section is kept.
 
 
39

 

Transfer Agent

The transfer agent for our common stock is Island Stock Transfer, 100 2nd Ave South, Suite 300, St. Petersburg, Florida, 33701, Phone (727)289- 0069

RECENT SALES OF UNREGISTERED SECURITIES

On March 19, 2007 we issued 985,000 shares of our common stock to John Delaney, our former president for $98.50.  On March 19, 2007 we also issued 15,000 shares of our common stock to Frank J. Hariton, Esq for $1.50.  All of such transactions with the Company’s founders were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).  All of the shares issued in such transactions bear an appropriate restrictive legend.

An additional 37,000 shares were issued to 35 shareholders for $37,000 paid in cash ($1.00 per share) during the period from June 2007 to May 2008. These shares were issued in a private offering pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder, and each of the investors therein represented in writing that such investor was an accredited investor as that term is defined in Regulation D and that he was acquiring the shares for his own account and for investment.

No underwriter participated in the foregoing transactions, and no underwriting discounts or commissions were paid, nor was any general solicitation or general advertising conducted. The securities bear a restrictive legend and stop transfer instructions are noted on our stock transfer records.

Exchange Agreement

Pursuant to the Exchange Agreement, we issued 1,100,000 shares of our Common Stock to China Polypeptide Group in exchange for all of the outstanding capital stock of Cantix.  The shares of Common Stock issued to China Polypeptide Group were issued pursuant to the exemption from registration provided pursuant to Section 4(2) of the Act.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

Section 145 of the General Corporation Law of the State of Delaware authorizes a court to award, or a corporation’s board of directors to grant indemnity to directors and officers in terms sufficiently broad to permit indemnification, including reimbursement of expenses incurred, under certain circumstances for liabilities arising under the Securities Act of 1933, as amended. The Company’s Certificate of Incorporation and Bylaws eliminate the liability of the directors of the registrant for monetary damages to the fullest extent permissible under Delaware law. In addition, the registrant’s Amended and Restated Articles of Incorporation and Bylaws provide that the registrant has the authority to indemnify the registrant’s directors and officers and may indemnify the registrant’s employees and agents (other than officers and directors) against liabilities to the fullest extent permitted by Delaware law. The registrant is also empowered under the registrant’s Bylaws to purchase insurance on behalf of any person whom the registrant is required or permitted to indemnify.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item begin on page F-1 hereof.

Item 3.02 Unregistered Sales of Equity Securities.

Reference is made to the disclosure made under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.

Item 5.01 Changes in Control of Registrant.

Reference is made to the disclosure made under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Directors

Reference is made to the disclosure made under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

 
40

 

On November 13, 2009, concurrent with the Exchange with CPG, we adopted the fiscal year end of Cantix, thereby changing our fiscal year end from December 31 to September 30. The audited financial statements for the new fiscal year will be reflected in the Company’s Form 10-K for the year ending September, 2009.

On November 5, 2009, filed an amended to our certificate of incorporation to increase our authorized shares of Common Stock from 20,000,000 to 120,000,000 shares of Common Stock.  We did not change the number of authorized shares of preferred stock.

Item 5.06 Change in Shell Company Status.

As explained more fully in Item 2.01 above, we were a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act) immediately before the closing of the Exchange. As a result of the Exchange, Cantix became our wholly-owned subsidiary and main operating business. Consequently, upon the closing of the Exchange we ceased to be a shell company. For information about the Exchange, please see the information set forth above under Item 2.01 of this Current Report above, which information is incorporated herein by reference.

Item 9.01  Financial Statements and Exhibits.

(a)
Financial statements of businesses acquired.

The audited financial statements of Cantix as of September 30, 2008 and 2007 and unaudited financial statements as for the nine months ended June 30, 2009 and 2008 are appended to this report beginning on page F-1.

(b)
Pro forma financial information.

The Pro Forma Financial Information concerning the acquisition of the business operations of the Company are appended to this report beginning on page F-37.

(c)  Shell company transactions.

Reference is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein, which are incorporated herein by reference.

(d) The following exhibits are filed with this report:

 
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EXHIBITS

Exhibit
   
Number
 
Exhibit Title
3.1
 
Certificate of Incorporation (1)
     
3.2
 
Certificate of Amendment of Certificate of Incorporation (2)
     
3.2(a)
 
Certificate of Amendment of Certificate of Incorporation
     
3.3
 
Bylaws(1)
     
2.1
 
Stock Exchange Agreement, dated as of November 13, 2009, by and among China Polypeptide Group Ltd., Cantix International Limited and Hamptons Extreme, Inc.
     
10.1
 
Agreement for Return on Purchase Price, dated as of July 14, 2008, by and among Wuhan Tallyho Biological Product Co., Ltd. (“Tallyho”), Wuhan Polypeptide Anti-Aging Research and Development Co., Ltd. (“Wuhan Anti-Aging”), Moneyeasy Industries Limited and the shareholders of Tallyho and Wuhan Anti-Aging.
     
10.2
 
Tallyho Acquisition Agreement, dated November 5, 2007, among Moneyeasy Industries Limited, Wuhan Tallyho Biological Product Co., Ltd. (“Tallyho”) and the shareholders of Tallyho.
     
10.3
 
Wuhan Anti-Aging Acquisition Agreement, December 18, 2007, between Moneyeasy Industries Limited, Wuhan Polypeptide Anti-Aging Research and Development Co., Ltd. (“Wuhan Anti-Aging”) and the shareholders of Tallyho.
     
10.4
 
Ceiling Amount Security and Loan Contract between Wuhan Xianfeng Rural Credit Cooperative and Wuhan Fanya Peptide Material Research Ltd. Wuhan Tallyho Biological Product Ltd is the Mortgager for the loan of a maximum amount of RMB 5,000, 000 from January 25, 2008 and January 25, 2013.
     
10.5
 
Loan Agreement, dated as of December 5, 2008, between Guangdong Hope Polypeptide Biotechnology Co., Ltd and Era Biotechnology (Shenzhen) Co., Ltd.
     
10.6
 
Supplementary Agreement, dated as of July 28, 2009, between Guangdong Hope Polypeptide Biotechnology Co., Ltd and Era Biotechnology (Shenzhen) Co., Ltd.
     
10.7
 
Agency Contract, dated as of June 30, 2009, between Guangdong Hope Polypeptide Biotechnology Co., Ltd and Jinjiang Shukun Food Trade Co., Ltd
     
10.8
 
  Supplementary Agreement, dated as of October 26, 2009, between Guangdong Hope Polypeptide Biotechnology Co.,
  Ltd and Jinjiang Shukun Food Trade Co., Ltd
     
21.1
  
List of Subsidiaries of the Registrant.

(1) Incorporated by reference to the exhibit of the same number to our registration statement on Form S-1 filed with the SEC on May 23, 2008;
(2) Incorporated by reference to the exhibit 3.2 to our registration statement on Form S-1 filed with the SEC on May 23, 2008.
 
 
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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
HAMPTONS EXTREME, INC.
   
Date: November 16, 2009
 
 
/s/ Dongliang Chen
 
Name: Dongliang Chen
 
Title: Chairman and Chief Executive Officer
 
 
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CANTIX INTERNATIONAL LIMITED
Unaudited Financial Statements
For Nine Months Ended June 30, 2008 and 2009
Audited Financial Statements
2007 and 2008 fiscal year
(Stated in U.S. dollars)

 
44

 

Cantix International Limited
Consolidated Financial Statements
June 30, 2009

 
 

 
 
TABLE OF CONTENTS

Unaudited Consolidated Financial Statements of Cantix International Limited and Subsidiaries
 
Page
     
Consolidated Balance Sheets
 
F-2
     
Consolidated Statements of Income and Comprehensive Income
 
F-3
     
Consolidated Statements of Cash Flows
 
F-4
     
Notes to Consolidated Financial Statements
 
F-5

 
F-1

 

Cantix International Limited and Subsidiaries
Consolidated Balance Sheets

   
June 30, 2009
   
September 30, 2008
 
  
 
Unaudited
   
Audited
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 5,940,270     $ 5,918,414  
Accounts receivable, net
    5,219,570       1,624,348  
Inventories, net
    323,113       551,219  
Prepayments and other receivables
    9,391,764       5,563,638  
Deferred tax assets
    191,350       159,058  
Other assets
    411,262       409,513  
Total current assets
    21,477,329       14,226,190  
                 
Non-current assets
               
Property, plant and equipment, net
    6,998,556       2,748,656  
Long term investment
    254,079       482,212  
Land use right, net
    283,939       134,207  
Prepayment for construction
    -       2,917,536  
Goodwill
    113,637       113,153  
    $ 29,127,540     $ 20,621,954  
                 
Liabilities and Shareholders’   Equity
               
Current liabilities
               
Accounts payable
  $ 240,848     $ 316,154  
Accrued expenses and other liabilities
    2,744,559       3,025,633  
Taxes payable
    5,007,530       2,419,551  
Short-term loans
    574,280       598,095  
Amounts due to related companies
    6,348,719       6,660,838  
Total current liabilities
    14,915,936       13,020,271  
                 
Shareholders’   equity
               
Common stock: authorized 50,000 shares,
Par value US$1, 1 share issued and outstanding
    1       1  
Additional paid-in capital
    169,843       169,843  
Unappropriated retained earnings
    12,899,204       6,449,420