Attached files
file | filename |
---|---|
EX-10.15 - Asia Cork Inc. | akrk_ex1015.htm |
EX-10.14 - Asia Cork Inc. | akrk_ex1014.htm |
EX-10.10 - Asia Cork Inc. | akrk_ex1010.htm |
EX-10.6(A) - Asia Cork Inc. | akrk_ex106a.htm |
EX-10.9 - Asia Cork Inc. | akrk_ex109.htm |
EX-23.1 - Asia Cork Inc. | akrk_ex231.htm |
EX-10.12 - Asia Cork Inc. | akrk_ex1012.htm |
EX-10.6(B) - Asia Cork Inc. | akrk_ex106b.htm |
EX-14.4 - Asia Cork Inc. | akrk_ex144.htm |
EX-10.11 - Asia Cork Inc. | akrk_ex1011.htm |
EX-10.13 - Asia Cork Inc. | akrk_ex1013.htm |
EX-10.16 - Asia Cork Inc. | akrk_ex1016.htm |
EX-10.17 - Asia Cork Inc. | akrk_ex1017.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ASIA
CORK INC.
(Name of
Registrant as Specified in Its Charter)
Delaware
|
2435 |
13-3912047
|
||
(State
or Other Jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
Incorporation
or Organization)
|
Classification
Code Number)
|
Identification
No.)
|
3rd
Floor, A Tower of Chuang Xin
Information
Building
No. 72
Second Keji Road, Hi Tech Zone
Xi’An
China
(011)
86 - 13301996766
(Address
and Telephone Number of Principal Executive Offices)
(Name,
Address and Telephone Number of Agent for Service)
COPIES
TO:
Steve
Schuster, Esq
McLaughlin
& Stern, llp
|
SUNNY
J. BARKATS, ESQ
JSBarkats, PLLC
|
|
260
Madison Avenue
New
York, New York 10016
(212) 448 1100
Fax (212)
448 0066
|
100
Church Street, 8th
Fl.
New
York, NY 10007
(646)
502-7001
Fax
(646) 607-5544
|
Approximate Date of Proposed Sale to
the Public: As soon as practicable after the effective date of this
Registration Statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
Non-accelerated
filer
¨
|
Smaller
reporting company þ
|
|||
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of Securities to Be Registered
|
Amount to Be
Registered (1)
|
Proposed
Maximum
Offering Price
per Share
|
Proposed Maximum
Aggregate
Offering Price
|
Amount of
RegistrationFee
|
||||||||||||
Units,
each consisting of one share of Common Stock and one
Warrant
|
(2)(4) | $ | $ | 9,315,000 | $ | 664.16 | ||||||||||
Common
Stock, $0.0001 par value per share (3)
(4)
|
— | $ | — | $ | 9,315,000 | $ | 664.16 | |||||||||
Units,
each consisting of one share of Common Stock and one Warrant
(5)
|
$ | $ | 931,500 | $ | 66.42 | |||||||||||
Common
Stock, $0.0001 par value per share (5)(6)
|
$ | $ | 931,500 | $ | 66.42 | |||||||||||
Common
Stock, $0.0001 par value per share (7)
|
$ | $ | 350,000 | $ | 24.96 | |||||||||||
Common
Stock, $0.0001 par value per share (8)
|
$ | $ | 1,136,000 | $ | 72.98 | |||||||||||
Total
Registration Fee
|
$ | $ | 21,979,000 | $ | 1567.10 |
(1)
|
In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of additional shares of common stock that shall be
issuable pursuant to Rule 416 pursuant to the anti-dilution provisions of
the underwriter’s warrants, the Warrants and warrants
previously issued selling
shareholders.
|
(2)
|
Includes
___________ Units issuable upon exercise of the Underwriter’s
over-allotment option. This Registration Statement covers the
public offering of up
to Units, each Unit
consisting of one share of common stock and one Warrant under a Public
Offering Prospectus through the underwriter. The registration fee for
securities to be offered by the Registrant is based on an estimate of the
Proposed Maximum Aggregate Offering Price of the securities, and such
estimate is solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
|
(3)
|
Issuable
upon exercise of the Warrants
|
(4)
|
Assumes
the Underwriter’s over-allotment option is exercised in full.
|
(5)
|
Issuable
upon exercise of the Underwriter’s Warrants
|
(6)
|
Issuable
upon exercise of the Warrants issuable upon exercise of the Underwriter’s
Warrants
|
(7)
|
Represents
shares of the Registrant’s common stock being registered for resale that
have been or may be acquired upon the exercise of warrants that have been
previously issued to selling stockholders named in the Resale
Prospectus.
|
(8)
|
Represents
shares of the Registrant’s common stock being registered for resale that
have been or may be acquired upon the conversion of Promissory Notes that
have been previously issued to selling stockholders named in the Resale
Prospectus.
|
(9)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457. In accordance with Rule 457(g) under the Securities
Act, because the shares of the Registrant’s common stock underlying the
underwriter’s warrants are registered hereby, no separate registration fee
is required with respect to the warrants registered
hereby.
|
THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS
AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE
AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a) MAY
DETERMINE.
EXPLANATORY
NOTE
This
Registration Statement contains two prospectuses, as set forth
below.
Public Offering
Prospectus. A prospectus to be used for the public offering by the
Registrant of up to Units of the Registrant, each consisting of one share
of common stock and one Warrant to purchase one share of
common stock (in addition to Units that may be sold upon exercise of the
underwriter’s over-allotment option) through the underwriter named on the cover
page of the Public Offering Prospectus.We are also registering the
Units (including the shares of common stock underlying the warrants to be
received by the underwriter in this offering (the “Public Offering
Prospectus”).
Resale
Prospectus. A prospectus to be used for the resale by selling
stockholders (the “Selling Stockholders”) of up to___________ shares of the
Registrant’s common stock (including shares that have been or may be
acquired upon the exercise of warrants, and shares that have been or may be
acquired upon the conversion of Promissory Notes that have been previously
issued to selling stockholders named in the Resale Prospectus) (the “Resale
Prospectus”).
The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
•
|
they
contain different outside and inside front covers;
|
•
|
they
contain different Offering sections in the Prospectus Summary section on
page __;
|
•
|
they
contain different Use of Proceeds sections on page __;
|
•
|
The
Capitalization and Dilution sections are deleted from the Resale
Prospectus on page __;
|
•
|
A
Selling Stockholder section is included in the Resale Prospectus beginning
on page __;
|
•
|
references
in the Public Offering Prospectus to the Resale Prospectus will be deleted
from the Resale Prospectus;
|
•
|
the
Underwriting section from the Public Offering Prospectus on page __
is deleted from the Resale Prospectus and a Plan of Distribution is
inserted in its place;
|
•
|
The
Legal Matters section in the Resale Prospectus on page __ deletes the
reference to counsel for the underwriter; and
|
•
|
the
outside back cover of the Public Offering Prospectus is deleted from the
Resale Prospectus.
|
The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
Resale Prospectus as compared to the Public Offering Prospectus.
The
Selling Stockholders named in the Resale Prospectus holding an aggregate
of shares of common stock, including, shares of common stock issuable upon
the exercise of warrants and shares of common stock underlying Promissory Notes,
have agreed that they will not sell any of such shares of common stock for a
period of ________months [STILL SUBJECT TO NEGOTIATION] after the Offering is
completed, when all of their shares will be released from the lock-up
restrictions.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission becomes effective. This
prospectus is not an offer to sell these securities and we are not
soliciting offers to buy these securities in any state where the offer or
sale is not permitted.
|
Subject to Completion
Preliminary Prospectus Dated February 12, 2009
PROSPECTUS
___________Units
ASIA
CORK, INC.
Each
Unit Consisting of
One
Share of Common Stock and One Warrant to Purchase One Share of Common
Stock
This is a
public offering of ________________ units (the “Units”) of Asia Cork, Inc.,
a Delaware corporation (the “Company”), (the “Offering”).
Each of the _______ Units offered hereby consists of one share of our
common stock, $.0001 par value per share, and one warrant entitled
the registered holder thereof to purchase one share of common
stock (the “Warrants”). The Warrants are exercisable to
purchase one share of common stock at $______ per share at any time from the
date of issuance through _______, 2015 (five years after the date of this
Prospectus). Each share of Common Stock and Warrant will not separately
transferable for a period of one year, unless sooner as may be approved by the
underwriter, in its sole discretion. The Warrants are subject to
redemption commencing one year after the date hereof at $.05 per
Warrant on 20 days prior written notice provided the closing price
of the Common Stock for 20 consecutive trading days ending within 15
days of the date of notice of redemption averages in excess
of $______ per share. (___% of the initial offering
price) See “Description of Securities.”
We are a
reporting company under the Securities Exchange Act of 1934, as
amended. Our common stock is quoted on the OTC Bulletin Board
maintained by the Financial Industry Regulatory Authority (“FINRA”) under the
symbol “AKRK.” The closing bid price for our common stock on
December , 2009 was $ .00
per share, as reported on the OTC Bulletin Board. We intend to apply
to have the units listed on the American Stock Exchange (“AMEX”) under the
symbol “_____” on or promptly after the date of this prospectus. Each of the
underlying common stock and warrants shall trade separately on the nearest
trading date which is 180 days after the date of this prospectus, provided,
however , the representative of the underwriters may determine that an earlier
date is acceptable. Prior to their separate trading we will apply to have the
common stock and warrants comprising the units listed on AMEX under the symbols
“___” and “___” or if eligible directly apply for the listing of our common
stock on the NASDAQ Stock Market LLC (“NASDAQ”) {and anticipate having our
common stock approved for listing as of the date of this
prospectus]. We expect that the public offering price of our Units
will be between $ .00 and $ .00 per
unit.
Concurrently
with this Offering, there are being offered, pursuant to a Resale Prospectus, by
certain security holders (collectively, the “Selling
Stockholders”), _______shares of Common Stock (collectively, the “Selling
Stockholders’ Securities”). Each of the Selling Stockholders have agreed not to
sell any of the Selling Stockholders’ Securities for a period
of [_____} months after the date of this prospectus
without the prior consent of the underwriter of the offering by the Company...
Sales of the Selling Stockholders’ Securities in such offering (the “Concurrent
Offering”) will be subject to the prospectus delivery requirements and other
requirements of the Securities Act.
The
purchase of the securities involves a high degree of risk. See section entitled
“Risk Factors” beginning on page 5.
Price
to the Public
|
Underwriting
Discounts
And
Commissions (1)
|
Proceeds
to the Company (2)
|
||||||||||
Per
Unit(3)
|
$ | $ | $ | |||||||||
Total
(4)
|
$ | 8,100,000 | $ | 729,000 | $ | 7,371,000 |
(1) Does
not include additional compensation to the Underwriters in the form of (i) a
non-accountable expense allowance equal to 2.0% of the gross proceeds of this
Offering (of which $20,000 has been paid), (ii) a Warrant (the "Underwriters
Warrants") to purchase up to Units (each Unit consisting of one share of
Common Stock and one Warrant at an exercise price equal to $_____ per Unit), and
(iii) a $60,000 consulting agreement. In addition, the Company has
agreed to indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before
deducting expenses payable by the Company (including the Underwriter’s
non-accountable expense allowance and consulting
agreement) estimated at $_____, ($_______, if the Underwriter’s over-allotment
option is exercised in full.)
(3) Includes
only the Units being offered hereby by the Company.
(4) The
Company has granted the Underwriter a 60-day option to purchase up to _______
additional Units on the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If such option is exercised in full,
the total price to Public will be $9,315,000, the total Underwriting Discounts
and Commissions will be $838,350 and the total Proceeds to Company will be
$8,476,650. See "Underwriting."
The Units are being offered by the
Underwriter, subject to prior sale, when, as and if delivered to and accepted by
it, and subject to approval of certain legal matters by its counsel and to
certain other conditions. The Underwriters reserves the right to
withdraw, cancel or modify this Offering and to reject any order in whole or in
part. The underwriter expects to deliver the Units to
purchasers on or about [ ], 2010.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The
Date of this Prospectus is: February 12, 2010
Asia
Cork, Inc.
TABLE
OF CONTENTS
Page
|
|
Prospectus
Summary
|
1 |
Risk
Factors
|
5 |
Risks
Related To Our Business
|
5 |
Risks
Related To Doing Business in China
|
8 |
Risks
Related to the Market of Our Stock
|
12 |
Use
of Proceeds
|
14 |
Dividend
Policy
|
15 |
Capitalization
|
16 |
Market
for Common Equity and Related Stockholder Matters
|
16 |
Dilution
|
17 |
Accounting
for the Share and Exchange
|
18 |
Description
of Business
|
19 |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
34 |
Management
|
43 |
Certain
Relationships and Related Transactions
|
49 |
Security
Ownership of Certain Beneficial Owners and Management
|
50 |
Description
of Securities
|
51 |
Shares
Eligible for Future Sale
|
54 |
Underwriting
|
55 |
Legal
Matters
|
57 |
Experts
|
57 |
Additional
Information
|
57 |
Financial
Statements
|
F-1 |
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not, and
the underwriter has not, authorized any other person to provide you with
different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
PROSPECTUS
SUMMARY
Because
this is only a summary, it does not contain all of the information that may be
important to you. You should carefully read the more detailed information
contained in this prospectus, including our financial statements and related
notes. Our business involves significant risks. You should carefully consider
the information under the heading “Risk Factors” beginning on
page . Unless otherwise indicated, all share and per share
information gives effect to the conversion of all of our outstanding Selling
Stockholder’s Promissory Notes into shares of our common stock (the “Promissory
Note Conversion”).
As used
in this prospectus, unless otherwise indicated, the terms “we”, “our”, “us”,
“Company” and “Hanxin” refer to ASIA CORK, INC., a Delaware corporation,
formerly known as Hankersen International Corp . (“Hankersen”); its wholly-owned
subsidiary, Hanxin (Cork) International Holding Co., Ltd., a company organized
in the British Virgin Islands (“Hanxin International”); its wholly-owned
subsidiary, Xi’An Cork Investments Consultative Management co., Ltd., a company
organized in the People’s Republic of China (“Xi’An”); Xian Hanxin Technology
co., Ltd. (“Hanxin”), the subsidiary which it owns 92% equity interest and was
organized in the People’s Republic of China,
and Hanxin owns 75% equity interestof Cork Import and
Export Co., Ltd., a company organized in the People’s Republic of China (“Cork
I&E”). “China” or “PRC” refers to the People’s Republic of China. “RMB” or
“Renminbi” refers to the legal currency of China and “$” or “U.S. Dollars”
refers to the legal currency of the United States.
THE
COMPANY
Asia
Cork, Inc.
We are a
holding company whose primary business operations are conducted through our
wholly-owned subsidiary Hanxin International, and its subsidiaries, Hanxin and
Cork I&E. We are engaged in the development, manufacture and distribution of
cork wood floor, wall, sheets, rolls and other cork decorating materials in
China and other countries.
Our
Background History
Asia Cork
Inc. (f/k/a Hankersen International Corp.), was incorporated under the laws of
the State of Delaware on August 1, 1996. We were formed in connection with
the merger acquisition of Kushi Macrobiotics Corp. (“KMC”) with American Phoenix
Group, Inc. (“APGI”) in 1996. Prior to such acquisition, KMC had operated a
business of marketing a line of natural foods (the “Kushi Cuisine”). This
business was not successful and management determined that it would be in the
shareholder’s interest for KMC to operate a different business.
In
August 2005, we, through Kushi Sub, Inc., a newly formed Delaware
corporation and wholly-owned subsidiary of us ("Acquisition Sub") acquired all
the ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. We acquired Hanxin International in exchange
for 24,000,000 shares of common stock and 1,000 shares of the Series A
Preferred Stock, which such shares converted into 29,530,937 shares of common
stock. Subsequent to the merger and upon the conversion of the Series A
Preferred Stock, the former shareholders of Hanxin International own 95% of the
outstanding shares of our common stock.
Hanxin
International has no other business activities other than owning 100% of Xi'An
Cork Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of
Xian Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002,
both Xi'An and Hanxin are People's Republic of China (PRC) corporations. Most of
our operating and business activities are conducted through Hanxin. Hanxin
is our principal operating subsidiary.
During
the year ended December 31, 2005, Hanxin acquired a 75% equity interest of
Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation that engages
in cork trading businesses.
We are a
reporting company under Section 13 of the Securities Exchange Act of 1934, as
amended. Our shares of common stock are not currently listed or quoted for
trading on any national securities exchange or national quotation system. We
intend to apply for the listing of our common stock on the NASDAQ or the
American Stock Exchange.
1
Recent
Events
Merger
and Change of Name
On
July 11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc., was
merged into its parent, the Company, in order to change the name of the Company,
after approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008
and had no material assets.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB”
Reverse
Stock Split
Concurrently
with the date of this prospectus, the Company will effectuate a ___ to one
reverse stock split (the “Reverse Split”). The Reverse Split
will be subject to approval by our stockholders, which approval is a condition
to the Offering. All references to the outstanding shares of our
common stock in this prospectus give effect to the Reverse
Split. [THE TERMS OF THE REVERSE SPLIT HAVE NOT YET BEEN
DETERMINED]
Selling
Stockholder Promissory Notes and Warrants
On
June 4 and June 12, 2008, the Company consummated an offering to the
Selling Stockholders of convertible promissory notes and warrants for aggregate
gross proceeds of $700,000. The notes matured in June 2009 and remain
outstanding. The interest rate on the Selling Stockholders’
promissory notes through the maturity dates was 18% per annum and the interest
rate since the maturity dates is 24% per annum. Each investor has the option to
(i) be paid the principal and interest due under the promissory note or (ii)
convert the note into shares of common stock at a conversion price of $0.228 per
share (without giving effect to the Reverse Split) or (iii) convert the note
into shares of common stock at a conversion price equal to 50% of the offering
price per share of common stock in this Offering. . Each investor
also received warrants exercisable for 4 years to purchase shares of our common
stock at an exercise price $.228 per share. Under the warrants, investors can
purchase an amount of shares for an aggregate consideration up to 50 per cent of
the amount of their investment. Our obligations under the promissory
notes are secured by 7,630,814 shares of common stock pledged by
Mr. Pengcheng Chen, our Chief Executive Officer, and by Mr. Fangshe
Zhang, our Chairman. We have not repaid the Selling Stockholders’ Promissory
Notes to date and the Selling Stockholders have not sought the shares being held
in escrow
The
shares of common stock issuable upon conversion of the Selling Stockholders’
Promissory Notes and exercise of the Selling Stockholders Warrants are the
Selling Stockholders Securities being offered for resale pursuant to the Resale
Prospectus.
2
THE
OFFERING
Securities
we are Offering
|
___________Units,
each consisting of one share of common stock and one warrant to
purchase one share of common stock(1)
|
|
|
Common
stock outstanding after the offering
|
|
Outstanding Prior to Offering |
_____________
shares (2)
|
|
|
Outstanding
After Offering
|
______________shares
(2)
|
|
|
Offering
price
|
$ ____to
$_______per Unit; $.____ to $_____ per share and $___ per
Warrant
|
Use
of proceeds
|
We
intend to use the net proceeds of this offering for general corporate
purposes. See “Use of Proceeds” on page _____ for more
information on the use of proceeds.
|
Risk
Factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 4 .
|
(1)
|
Excludes
(i) up to shares that may be sold upon the underwriter’s over-allotment
option and (ii) up to shares of common stock underlying warrants to be
received by the underwriter in this offering.
|
(2)
|
Based
on 35,663,850 shares of common stock issued and outstanding as
of January 20, 2010, without giving effect to the Reverse
Split, _____________ shares of common stock after giving effect
to the conversion of the Selling Stockholders’ Promissory Notes)
and shares of common stock issued in the public offering (excluding
the shares issuable upon exercise of the Warrants, the underwriter’s
over-allotment option of up to Units and
theunderwriter’s warrants to purchase up to shares of
common stock).
|
3
SUMMARY
OF CONSOLIDATED FINANCIAL INFORMATION
The
following tables summarize our consolidated financial data for the periods
presented. You should read the following financial information together with the
information under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and the
related notes to these consolidated financial statements appearing elsewhere in
this Prospectus. The selected consolidated statements of operations data for the
nine months financial period ended September 30, 2009 and 2008, and the
consolidated balance sheet data as of September 30, 2009 are derived from our unaudited
consolidated financial statements, which are included elsewhere herein. The
unaudited consolidated financial statements have been prepared on the same basis
as our audited financial statements and include, in the opinion of management,
all adjustments that management considers necessary for a fair presentation of
the financial information set forth in those statements. The selected
consolidated statements of operations data for the financial years ended
December 31, 2008 and 2007; and the selected consolidated balance sheet data as
of December 31, 2008 are derived from our consolidated financial statements,
which are included elsewhere herein, and have been audited by MS Group CPA, LLC,
an independent registered public accounting firm, as indicated in their report.
Whereas the selected consolidated statements of operations data for the
financial years ended December 31, 2006 and 2005, and the selected consolidated
balance sheet data as of December 31, 2006 and 2005 are derived from our
consolidated financial statements, which are not included in this prospectus,
and have been audited by MS Group CPA LLC and the selected
consolidated statements of operations data for the financial year ended December
31, 2004; and the selected consolidated balance sheet data as of December 31,
2004 have been audited by Most & Company LLC, an independent
registered public accounting firm, as indicated in their report. Historical
results are not necessarily indicative of the results to be expected in future
periods.
Year
Ended December 31,
|
Nine
Months Ended
September
30,
|
|||||||||||||||||||||||||||
2004
|
2005
|
2006
|
2007 |
2008
|
2009
|
2008
|
||||||||||||||||||||||
(in
thousands)
|
(unaudited)
|
|||||||||||||||||||||||||||
Revenue
|
$ | 10,473 | $ | 12,156 | $ | 12,042 | $ | 16,051 | 21,378 | $ | 17,057 | $ | 17,841 | |||||||||||||||
Cost
of sales
|
5,523 | 7,045 | 9,333 | 10,990 | 13,937 | 11,033 | 11,666 | |||||||||||||||||||||
Gross
profit
|
4.950 | 5,111 | 2,709 | 5,061 | 7,441 | 6,024 | 6,175 | |||||||||||||||||||||
Depreciation
and amortization
|
179 | 232 | 238 | 249 | 286 | 223 | 198 | |||||||||||||||||||||
Selling
and distribution expenses
|
1,144 | 1,312 | 1,363 | 1,954 | 2,712 | 2,723 | 2,265 | |||||||||||||||||||||
General
and administrative expenses
|
673 | 796 | 563 | 513 | 759 | 501 | 661 | |||||||||||||||||||||
Other
income (expense)
|
72 | (51 | ) | 68 | 24 | 74 | 79 | 31 | ||||||||||||||||||||
Interest
income (expense)
|
32 | 47 | 51 | (6 | ) | (275 | ) | (259 | ) | (160 | ) | |||||||||||||||||
Loss
on fix assets disposal
|
0 | (23 | ) | (72 | ) | (342 | ) | (159 | ) | 0 | 0 | |||||||||||||||||
Income
before income tax
|
3,237 | $ | 2,976 | $ | 830 | 2,269 | 3,610 | 2,620 | 3,120 | |||||||||||||||||||
Income
tax expense
|
0 | $ | 482 | $ | 134 | 349 | 597 | 477 | 501 | |||||||||||||||||||
Net
income attributable to the Shareholders
of
the Company
|
$ | 2,978 | $ | 2,274 | $ | 633 | 1,762 | 2,732 | 1,964 | 2,404 | ||||||||||||||||||
Earnings
per Share — basic (US$) (1)
|
$ | 0.52 | $ | 0.39 | $ | 0.04 | 0.05 | 0.08 | 0.06 | 0.07 | ||||||||||||||||||
Earnings
per Share — diluted (US$) (2)
|
$ | 0.52 | $ | 0.32 | $ | 0.02 | 0.05 | 0.08 | 0.06 | 0.07 |
Note:
(1)
|
Actual
figures (not in thousands), and assume there are shares of basic
common stock outstanding after this offering was applied
retrospectively.
|
(2)
|
Actual
figures (not in thousands), and assume there are shares of diluted
common stock outstanding after this offering was applied
retrospectively.
|
4
As
at December 31,
|
As
at
|
|||||||||||||||||||||||
2004
|
2005
|
2006
|
2007
|
2008
|
September 30, 2009 | |||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
Balance Sheet Data: |
(in
thousands)
|
|||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 16 | $ | 575 | $ | 565 | $ | 367 | $ | 24 | $ | 544 | ||||||||||||
Total
current assets
|
16 | 7,850 | 6,695 | 6,109 | 11,806 | 14,296 | ||||||||||||||||||
Total
assets
|
16 | 12,104 | 14,029 | 17,399 | 22,348 | 26,780 | ||||||||||||||||||
Short-term
borrowings
|
0 | 372 | 897 | 535 | 1,014 | 915 | ||||||||||||||||||
Total
current liabilities
|
18 | 1,082 | 1,920 | 2,440 | 2,905 | 5,203 | ||||||||||||||||||
Total
stockholders’ equity
|
(2)
|
9,721 | 10,745 | 13,437 | 17,641 | 19,595 |
RISK
FACTORS
Any
investment in our common stock involves a high degree of
risk. Investors should carefully consider the risks described below
and all of the information contained in this prospectus before deciding whether
to purchase our common stock. Our business, financial condition or
results of operations could be materially adversely affected by these risks if
any of them actually occur. The trading price could decline due to
any of these risks, and an investor may lose all or part of his
investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting our
company. This prospectus also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks we face as described below and
elsewhere in this prospectus.
RISKS
RELATED TO OUR BUSINESS
During
The Fourth Quarter of 2008 And The First Quarter Of 2009, Adverse
Market Conditions Caused A Decline In Revenue And Increase In Outstanding
Accounts Receivable That Adversely Affected Our Liquidity.
Our
business was adversely affected by a decline in revenues and an increase in
outstanding accounts receivable, particularly during the fourth quarter of 2008
and the first quarter of 2009. Revenues and the collection of
outstanding receivables improved significantly during the nine months ended
September 30, 2009, with nearly no accounts receivable outstanding over six
months, which improved our liquidity. However, our business may still
be subject to fluctuation, particularly if general economic conditions
deteriorate again. Such a decline would adversely affect our
liquidity and operations.
Hanxin
Must Be Able To Effectively Improve Its Products And If It Is Unable To Improve
Its Products, Its Business May Be Adversely Affected.
Hanxin is
seeking to improve its profitability by producing more finished cork products,
which generally have higher profit margins, as a percentage of its total sale.
Management believes that Hanxin’s cork products enjoy technical advantages over
its competitors in China. If Hanxin is unable to improve and develop its
products, Hanxin may not be able to improve its profit margins or improve its
ability to compete effectively.
Hanxin
Is Dependent On Its Raw Materials. Any Shortages Of The Necessary Materials
Would Have A Materially Adverse Effect On Its Business.
The
supply of cork raw material is the base of production. The shortfall of raw
material will impair the development and production of Hanxin’s products. The
supply of these raw materials can also be adversely affected by any material
change in the climate or other environmental conditions, which may have a
material adverse impact on the costs of raw materials. Our financial
performance may be affected by changes in production costs brought about by
fluctuations in the prices of our raw materials. The prices of our major raw
materials may fluctuate due to changes in supply and demand conditions. Any
shortage in supply or upsurge in demand of our major raw materials may lead to
an increase in prices, which may adversely affect our profitability due to
increased production costs and lower profit margins.
5
Hanxin
Is Dependent On Key Personnel, And The Loss Of Any Key Employees, Officers
And/Or Directors May Have A Materially Adverse Effect On Hanxin’s
Operations.
Hanxin’s
success is substantially dependent on the continued services of its executive
officers, particularly Fangshe Zhang, our Chairman, and Pengcheng Chen, our
Chief Executive Officer and other key personnel who generally have extensive
experience in the cork industry and have been employed by Hanxin for substantial
periods of time. The loss of the services of any key employees, or Hanxin’s
failure to attract and retain other qualified and experienced personnel on
acceptable terms, could have a material adverse effect on its business and
results of operations.
We
Do Not Own All Of The Cork Processing Technology Related Patents We Are Using
And Are Subject To The Terms And Conditions Of A Licensing
Agreement.
We are
dependent on the patents licensed to us from Fangshe Zhang, our Chairman and
principal shareholder. He owns 14 cork processing technology related
patents in China. Hanxin has an exclusive license to three patents in
consideration for annual payments and Hanxin has an exclusive right to use
another 11 patents for free. Hanxin also owns three patents
transferred from Mr. Zhang. As a result, our business activities related to
exploiting these patents are dependent on the license granted to us from him. In
the event that the license is terminated, such a result would have a material
adverse affect on the company as it would prevent us from using them in our
business and deriving revenue associated therewith.
Hanxin’s
Overseas Growth Is Dependent On The Strategic Plan On Expanding Foreign
Markets.
Hanxin
plans to expand the foreign markets, especially the U.S. market, for the next
few years. We have established cooperation relationships with several large
building and decoration material dealers in the U.S. and Taiwan. Should there be
any economic turndown that significantly weakens the sales ability of these
dealers and other foreign wholesalers and retailers, we may not achieve our goal
of revenues and our strategic growth would be significantly and adversely
affected.
Due
To Fluctuations Any Quarter-To-Quarter Comparisons In Our Consolidated Financial
Statements May Not Be Meaningful
Hanxin’s
business is subject to fluctuations, which may cause its operating results to
fluctuate from quarter-to-quarter. This fluctuation may result in volatility or
have an adverse effect on the market price of our common stock.
Changes
In The Extensive Regulations To Which Hanxin Is Subject Could Increase Its Cost
Of Doing Business Or Affect Its Ability To Grow.
The
governments of countries where Hanxin’s exports products, including, but not
limited to India, the United States, Germany and Japan, may, from time to time,
consider regulatory proposals relating to raw materials, market, and
environmental regulation, which, if adopted, could lead to disruptions in supply
and/or increases in operational costs, and hence indirectly affect Hanxin’s
profitability. To the extent that Hanxin increases its product prices as a
result of such changes, its sales volume and revenues may be adversely affected.
Furthermore, these governments may change certain regulations or impose
additional taxes or duties on certain Chinese imports from time to time. Such
regulations, if effected, may have a material adverse impact on Hanxin’s
operations revenue and/or profitability.
Our
Business Activities Are Subject To Certain Laws And Regulations And Our
Operation May Be Affected If We Fail To Have In Force The Requisite Licenses And
Permits.
We are
required to obtain various licenses and permits in order to conduct our business
of production and export of cork products. The business is also subject to
applicable laws and regulations. Any failure to comply with the
conditions stipulated in our licenses and permits may lead to their revocation
or non-renewal. Any failure to observe the applicable laws and regulations may
lead to the termination or suspension of some or all of our business activities
or penalties being imposed on us. The occurrence of any of these events may
adversely affect our business, financial condition and results of
operations.
6
We
Are Dependent On Our Customers’ Ability To Maintain And Expand Their Sales And
Distribution Channels. Should These Distributors Be Unsuccessful In maintaining
And Expanding Their Distribution Channels, Our Results Of Operation Will Be
Adversely Affected.
Demand
for our products from end-consumers and our prospects depend on the retail
growth and penetration rate of our products to end-consumers. Sales of our
products are conducted mainly through distributors, over whom we have limited
control. These distributors sub-distribute our products. We are thus dependent
on the sales and distribution channels of our distributors for broadening the
geographic reach of our products. Should these distributors be unable to
maintain and expand their distribution channels, our results of operations and
financial position will be adversely affected.
Hanxin
May Not Be Entitled To Certain Benefits That It Receives From The Chinese
Government, Which May Have An Adverse Affect On Its Business.
Hanxin
takes advantage of favorable tax rates and other beneficial governmental
policies afforded to it as a result of the nature of its business. In the event
that the program offered to Hanxin is amended or rescinded or Hanxin’s business
no longer meets the eligibility requirements of the program, it may not be able
to enjoy the benefits of these programs and as a result may have to pay higher
income taxes, which may have a material adverse affect on Hanxin.
The
Chinese government might adjust the current industrial policies and tax rates
with the growth of political and economic environment in China, which may
negatively impact Hanxin’s business.
Control
By Principal Shareholders, Officers And Directors.
Messrs.
Fangshe Zhang, our Chairman, and Pengcheng Chen, our Chief Executive Officer own
in the aggregate approximately 37.33 percent (37.33%) of our common stock.
As a result, such persons may have the ability to control us and direct our
affairs and business. Such concentration of ownership may also have the effect
of delaying, deferring or preventing change in control of us. See “Security
Ownership Of Certain Beneficial Owners And Management.” After giving effect to
the offering and the conversion of the Selling Stockholder’s Promissory Notes,
Messrs. Zhang and Chen will own, in the aggregate,
approximately ______% of our common stock.
We
Are Dependent On Certain Major Suppliers For Our Raw Materials. In The Event
That We Are No Longer Able To Secure Raw Materials From These Suppliers And Are
Unable To Find Alternative Sources of Supply At Similar Or More Competitive
Rates, Our Operations And Profitability Will Be Adversely Affected.
For the
production of our products, we rely on our major suppliers for a significant
portion of the supply of raw cork material. Although we purchase supplies from
approximately 24 suppliers, three suppliers accounted for about 40% of our
supply of raw material in 2008. In the event that we are unable to secure our
raw materials from these suppliers and we are unable to find alternative sources
of supply at similar or more competitive rates, our business and operations will
be adversely affected.
Indemnification
Of Officers And Directors.
Our
Articles of Incorporation and applicable Delaware Law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney’s fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on behalf of us. We will also bear the expenses of such litigation
for any of its directors, officers, employees, or agents, upon such person’s
promise to repay us therefore if it is ultimately determined that any such
person shall not have been entitled to indemnification. This indemnification
policy could result in substantial expenditures by us which it will be unable to
recoup.
Director’s
Liability Limited.
Our
Articles of Incorporation exclude personal liability of our directors to us and
our stockholders for monetary damages for breach of fiduciary duty except in
certain specified circumstances. Accordingly, we will have a much more limited
right of action against our directors than otherwise would be the case. This
provision does not affect the liability of any director under federal or
applicable state securities laws.
No
Foreseeable Dividends.
We have
not paid dividends on its Common Stock and do not anticipate paying such
dividends in the foreseeable future.
7
RISKS
RELATED TO DOING BUSINESS IN CHINA
Substantially
all of our assets are located in the PRC and substantially all of our revenues
are derived from our operations in China, and changes in the political and
economic policies of the PRC government could have a significant impact upon the
business we may be able to conduct in the PRC and accordingly on the results of
our operations and financial condition.
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business
activities. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the government of the PRC will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s
legal system is a civil law system based on written statutes. Unlike the common
law system prevalent in the United States, decided legal cases have little value
as precedent in China. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to, the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy or criminal proceedings. The
Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, because
these laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
Our
principal operating subsidiary, Hanxin, is considered a foreign invested
enterprise under PRC laws, and as a result is required to comply with PRC laws
and regulations, including laws and regulations specifically governing the
activities and conduct of foreign invested enterprises. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have on
our businesses. If the relevant authorities find us in violation of PRC laws or
regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:
•
|
levying
fines;
|
•
|
revoking
our business license, other licenses or authorities;
|
•
|
requiring
that we restructure our ownership or operations; and
|
•
|
requiring
that we discontinue any portion or all of our
business.
|
Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
Most of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and officers
are nationals and residents of China. All or substantially all of the assets of
these persons are located outside the United States and in the PRC. As a result,
it may not be possible to effect service of process within the United States or
elsewhere outside China upon these persons. In addition, uncertainty exists as
to whether the courts of China would recognize or enforce judgments of U.S.
courts obtained against us or such officers and/or directors predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof, or be competent to hear original actions brought in China against
us or such persons predicated upon the securities laws of the United States or
any state thereof.
8
We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental laws and
regulations may have a material adverse effect on our business and results of
operations.
We cannot
assure you that at all times we will be in compliance with environmental laws
and regulations or that we will not be required to expend significant funds to
comply with, or discharge liabilities arising under, environmental laws,
regulations and permits.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which became
effective on January 1, 2008, amended and formalized workers’ rights concerning
overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the new law, the Company has had to reduce the number of
hours of overtime its employees can work, substantially increase the salaries of
its employees, provide additional benefits to its employees, and revise certain
other of its labor practices. The increase in labor costs has increased the
Company’s operating costs, which the Company has not always been able to pass
through to its customers. As a result, the Company has incurred certain
operating losses as its cost of manufacturing increased. In addition, under the
new law, employees who either have worked for the Company for 10 years or more
or who have had two consecutive fixed-term contracts must be given an
“open-ended employment contract” that, in effect, constitutes a lifetime,
permanent contract, which is terminable only in the event the employee
materially breaches the Company’s rules and regulations or is in serious
dereliction of his duty. Such non-cancelable employment contracts will
substantially increase its employment related risks and limit the Company’s
ability to downsize its workforce in the event of an economic downturn. No
assurance can be given that the Company will not in the future be subject to
labor strikes or that it will not have to make other payments to resolve future
labor issues caused by the new laws. Furthermore, there can be no assurance that
the labor laws will not change further or that their interpretation and
implementation will vary, which may have a negative effect upon our business and
results of operations.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to foreign exchange control and other regulations of China.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reach 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China and a substantial majority of our revenues are
generated in China, a majority of our revenue being earned and currency received
are denominated in Renminbi (RMB). RMB is subject to the exchange control
regulation in China, and, as a result, we may unable to distribute any dividends
outside of China due to PRC exchange control regulations that restrict our
ability to convert RMB into U.S. Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Hanxin’s funds may not be readily
available to us to satisfy obligations which have been incurred outside the PRC,
which could adversely affect our business and prospects or our ability to meet
our cash obligations. Accordingly, if we do not receive dividends from our
Chinese operating subsidiary, our liquidity, financial condition and ability to
make dividend distributions to our stockholders will be materially and adversely
affected.
9
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our common stock, the dollar equivalent
of our earnings from our subsidiaries in China would be reduced should the U.S.
Dollar appreciate against the Renminbi.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including U.S. Dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China’s current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. Dollar. Under the new policy the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
U.S. Dollar.
According
to our development plan, we will expand the foreign market in the next few
years, which may increase our revenue designated in U.S. Dollar. Thus an
appreciation of U.S. Dollar against RMB may increase our revenue while
depreciation may decrease it.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability. In order to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
As our
ultimate holding company is a Delaware corporation, 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
may 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.
10
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also known as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make substantial
option grants to our officers and directors, most of who are PRC citizens.
Circular 78 may require our officers and directors who receive option grants and
are PRC citizens to register with SAFE. We believe that the registration and
approval requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that any of our equity compensation plans are
subject to Circular 78, failure to comply with such provisions may subject us
and participants of our equity incentive plan who are PRC citizens, including or
Chief Executive Officer, to fines and legal sanctions and prevent us from being
able to grant equity compensation to our PRC employees. In that case, our
ability to compensate our employees and directors through equity compensation
would be hindered and our business operations may be adversely
affected.
A
downturn in the economy of the PRC 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, especially if it results in either a decreased use of our products or
in pressure on us to lower our prices.
Our operations in the PRC are subject
to the laws and regulations of the PRC.
As our
products are exported from the PRC, we are subject to and have to operate within
the framework of the PRC legal system. Any changes in the laws or policies of
the PRC or the implementation thereof, for example in areas such as foreign
exchange controls, tariffs, trade barriers, taxes, export license requirements
and environmental protection, may have a material impact on our operations and
financial performance. The corporate affairs of our companies in the
PRC are governed by their articles of association and the corporate and foreign
investment laws and regulations of the PRC. The principles of the PRC laws
relating to matters such as the fiduciary duties of directors and other
corporate governance matters and foreign investment laws in the PRC are
relatively new. Hence, the enforcement of investors or shareholders' rights
under the articles of association of a PRC company and the interpretation of the
relevant laws relating to corporate governance matters remain largely untested
in the PRC.
Our
subsidiaries, operations and significant assets are located outside the U.S.
Shareholders may not be accorded the same rights and protection that would be
accorded under the Securities Act. In addition, it could be difficult to enforce
a U.S. judgment against our Directors and officers.
Our
subsidiaries, operations and assets are located in the PRC. Our subsidiaries are
therefore subject to the relevant laws in the PRC. U.S. law may provide
shareholders with certain rights and protection which may not have corresponding
or similar provisions under the laws of the PRC. As such, investors in our
common stock may or may not be accorded the same level of shareholder rights and
protection that would be accorded under the Securities Act. In addition, all our
current executive directors are non-residents of the U.S. and the assets of
these persons are mainly located outside the U.S. As such, there may be
difficult for our shareholders to effect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against any of these
persons.
11
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 continue to operate in
China may be affected 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.
RISKS RELATED TO THE MARKET FOR OUR
STOCK
Sales
of our common stock by the selling stockholders in a concurrent offering may
depress our stock price.
Commencing
__ months after our initial public offering, our Selling Stockholders may offer
for sale, from time to time, _______shares of our common stock. If we sell
all ___shares we are offering, we would have _____shares outstanding
(after giving effect to the conversion of the Selling Stockholder Promissory
Notes but without giving effect to the exercise of the Selling Stockholder
warrants), _______of which would be freely tradable in the public . Sales
of a substantial number of shares of our common stock by the Selling
Stockholders within a relatively short period of time could have the effect of
depressing the market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities.
We
will sell broker-dealer warrants to our underwriter in connection with the
public offering.
We will
sell to _________________, the underwriter for the initial public offering, as
additional compensation, warrants to purchase one Unit for each ten Units sold
in the offering, which is up to a maximum of _____warrants, (the
“Underwriter’s Warrants”). The Underwriter’s Warrants may be exercised at any
time commencing one year from the date of this prospectus and continuing for
five years thereafter to purchase Units at an exercise price equal
to_______% of the offering price of the Units in this offering.
During
the term of the Underwriter’s Warrants, their holders will have the opportunity
to profit from an increase in the price of the shares. The existence of the
Underwriter’s Warrants may adversely affect the market price of the shares if
they become publicly traded and the terms on which we can obtain additional
financing. The holders of the Underwriter’s Warrants can be expected to be
exercising them at a time when we would, in all likelihood, be able to obtain
additional capital on terms more favorable than those contained in the
Underwriter’s Warrants. Please see “Underwriting” and “Description of
Securities” for additional information regarding the Underwriter’s Warrants and
our common stock.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
12
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our
business, financial condition or results of operations. Any failure of these
controls could also prevent us from maintaining accurate accounting records and
discovering accounting errors and financial frauds. Rules adopted by the SEC
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
assessment of our internal control over financial reporting, and attestation of
this assessment by our independent registered public accountants. The SEC
extended the compliance dates for non-accelerated filers, as defined by the SEC.
Accordingly, the annual assessment of our internal controls requirement first
applied to our annual report for the 2007 fiscal year and the attestation
requirement of management’s assessment by our independent registered public
accountants will first apply to our annual report for the 2010 fiscal year. The
standards that must be met for management to assess the internal control over
financial reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal control over financial reporting. In addition, the
attestation process by our independent registered public accountants is new and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, investor confidence and share value may be negatively
impacted.
In
addition, management’s assessment of internal controls over financial reporting
may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions that need to be
addressed in our internal control over financial reporting, disclosure of
management’s assessment of our internal controls over financial reporting, or
disclosure of our public accounting firm’s attestation to or report on
management’s assessment of our internal controls over financial reporting may
have an adverse impact on the price of our common stock.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not
plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an investment in our
securities if they require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell their
shares of the Company at or above the price they paid for them.
13
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
registration statement contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “anticipate”, “believe”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and “would” or
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial position or state other
forward-looking information. We believe that it is important to communicate our
future expectations to our investors. However, there may be events in the future
that we are not able to predict accurately or control. The factors listed above
in the section captioned “Risk Factors,” as well as any cautionary language in
this Prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this Prospectus could have a material adverse effect on
our business, results of operations and financial position.
USE
OF PROCEEDS
We
estimate that the net proceeds from the sale of the ______ Units in the offering
will be approximately $6,896,000 after deducting the estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriter’s
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $8,475,950.
Proceeds
|
||||
Acquisition
of Inventory and Marketing Expenses Related to Expansion of Domestic
Markets
|
$ | 3,500,000 | ||
Acquisition
of Inventory and Marketing Expenses Related to Expansion of Domestic
Market
|
$ | 1,500,000 | ||
Purchase
of Equipment to Expand Production
|
$ | 1,000,000 | ||
Working
Capital (1)
|
$ | 896,000 | ||
Total net proceeds
|
$ | 6,896,000 | (1) |
(1)
Assumes that the Selling Stockholders do not demand repayment of their
promissory notes in the aggregate principal amount of $700,000. A portion of the
proceeds will be used to repay such notes in the event that the Selling
Stockholders demand repayment.
The
principal purposes of this Offering are to increase our working capital and to
expand both our domestic and oversea market shares by increasing our marketing
efforts, expand our sales channels through additional distributors and
increasing our production capacity.
The
foregoing represents our best estimate of its allocation of the net proceeds of
this Offering based upon the current state of its business operations, its
current plans, and current economic and industry conditions and is subject to
reapportionment among the categories listed above or to new
categories. The amounts and timing of our actual expenditures will
depend on numerous factors, including the status of our development efforts,
sales and marketing activities, the amount of cash generated or used by our
operations and competition. We may find it necessary or advisable to use
portions of the proceeds for other purposes, and we will have broad discretion
in the application of the net proceeds.. Pending these uses, the proceeds will
be invested in short-term, investment grade, interest-bearing securities. We
will not receive any of the proceeds from the sale of common stock by the
Selling Stockholders.
14
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant. We did not pay any cash dividends in the nine months ended
September 30, 2009 or in the fiscal years ended December 31, 2008 and
2007.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reach 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China and a substantial majority of our revenues are
generated in China, a majority of our revenue being earned and currency received
are denominated in Renminbi (RMB). RMB is subject to the exchange control
regulation in China, and, as a result, we may unable to distribute any dividends
outside of China due to PRC exchange control regulations that restrict our
ability to convert RMB into US Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Hanxin’s funds may not be readily
available to us to satisfy obligations which have been incurred outside the PRC,
which could adversely affect our business and prospects or our ability to meet
our cash obligations. Accordingly, if we do not receive dividends from our
Chinese operating subsidiary, our liquidity, financial condition and ability to
make dividend distributions to our stockholders will be materially and adversely
affected.
15
CAPITALIZATION
The
following table sets forth our capitalization as of September 30, 2009
(unaudited):
·
|
on
a pro forma basis as adjusted to give further effect to reflect our
receipt of estimated net proceeds from the sale of shares of common
stock (excluding the shares which the underwriter has the option to
purchase to cover over-allotments, if any) in this offering at an assumed
public offering price of
$ , which is the mid-point
of the estimated range of the per share offering price, and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses of approximately
$ .
|
You
should read this table in conjunction with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our financial statements and related notes included
elsewhere in this prospectus.
September
30, 2009
|
||||||||||||
Actual
|
Pro Forma
Adjustments
|
Pro Forma,
As Adjusted
|
||||||||||
(Unaudited)
|
||||||||||||
Due
to shareholder
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Stockholders'
equity:
|
||||||||||||
Common stock, $0.0001 par value,
200,000,000 shares authorized, 35,663,850 issued and outstanding on an
actual basis, issued and outstanding on a pro forma basis,
and issued and outstanding on a pro forma as-adjusted
basis (1)
|
||||||||||||
Additional
paid-in capital
|
||||||||||||
Accumulated
other comprehensive income
|
||||||||||||
Statutory
surplus reserve fund
|
||||||||||||
Retained
earnings
|
||||||||||||
Total
stockholders' equity
|
$
|
$
|
$
|
|||||||||
Total
capitalization
|
$
|
$
|
$
|
|||||||||
(1)
|
The
number of our shares of common stock shown above to be outstanding after
this offering is based on 35,663,850 shares outstanding as of September
30, 2009
|
MARKET
FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is traded on Over-The-Counter Bulletin Board under the symbol
AKRK.OB. As of February 11, 2010, there were approximately 98 holders of
record of our common stock. We intend to apply for the listing of our
common stock on either the NASDAQ or the American Stock Exchange. The following
table sets forth the range of high and low bid information for the period from
first quarter of 2007 to the fourth quarter of 2009.
Period
|
High
Bid
|
Low
Bid
|
||||||
2009
|
||||||||
First
quarter
|
$ | 0.21 | $ | 0.11 | ||||
Second
quarter
|
$ | 0.26 | $ | 0.10 | ||||
Third quarter | $ | 0.28 | $ | 0.20 | ||||
Fourth
Quarter
|
$ | 0.53 | $ | 0.23 | ||||
2008
|
||||||||
First
quarter
|
$ | 0.20 | $ | 0.09 | ||||
Second
quarter
|
$ | 0.43 | $ | 0.07 | ||||
Third
quarter
|
$ | 0.30 | $ | 0.21 | ||||
Fourth
quarter
|
$ | 0.244 | $ | 0.11 | ||||
2007
|
||||||||
First
quarter
|
$ | 0.185 | $ | 0.10 | ||||
Second
quarter
|
$ | 0.14 | $ | 0.05 | ||||
Third
quarter
|
$ | 0.16 | $ | 0.105 | ||||
Fourth
quarter
|
$ | 0.25 | $ | 0.15 |
The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Our
transfer agent is Olde Monmouth Stock Transfer, whose address is 200 Memorial
Parkway, Atlantic Highlands, NJ 07716, and their contact number is (732) 872
2727.
There are
no securities authorized for issuance under equity compensation
plans.
16
DILUTION
If you
invest in our Units, your interest will be diluted immediately to the extent of
the difference between the public offering price per share you will pay in this
offering and the net tangible book value per share of common stock immediately
after this offering.
Investors
participating in the Offering will incur immediate, substantial dilution. Our
net tangible book value as of September 30, 2009 was $____million, or $0.____per
share (unaudited) based on 35,663,850 shares of common stock outstanding.
Assuming the sale by us of ____Units (_______shares of common
stock and assuming no exercise of the Warrants),) offered in this
offering at an assumed public offering price of $____per share, and after
deducting the estimated underwriting discount and commissions and estimated
offering expenses, our as adjusted net tangible book value as of September 30,
2009 would have been $ ____million, or $0.____per share. This
represents an immediate increase in net tangible book value of $ ____per
share to our existing stockholders and an immediate dilution of $____per share
to the new investors purchasing shares of common stock in this
offering.
The
following table illustrates this per share dilution:
Public
offering price per share
|
$ | |||
Net
tangible book value per share as of September 30,
2009
|
$ | |||
Increase
per share attributable to new public investors
|
||||
Net
tangible book value per share after this offering
|
||||
Dilution
per share to new public investors
|
The
following table sets forth, on an as adjusted basis as of September 30, 2009,
the difference between the number of shares of common stock purchased from us,
the total cash consideration paid, and the average price per share paid by our
existing stockholders and by new public investors before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, using an assumed public offering price of
$ per share of common
stock:
Shares
Purchased
|
Total
Cash Consideration
|
|
||||||||||||||||||
Number
|
Percent
|
Amount
(In
Thousands)
|
Percent
|
Average
Price
per
Share
|
||||||||||||||||
Existing
stockholders
|
35,663,850 | % | $ | % | $ | |||||||||||||||
New
investors
|
% | $ | - | % | $ | |||||||||||||||
Total | 100 | % | 100 | % |
This
table does not give effect to:
§
|
shares
that may be issued pursuant to the Warrants, the underwriter’s
Warrants or the underwriter’s over-allotment
option;
|
§
|
________
shares that may be issued pursuant to the conversion of the Selling
Stockholders’ promissory notes
|
§
|
_________ shares issuable upon
exercise of the Selling Stockholders’ warrants, with an
exercise price of $___ per
share;
|
The total
consideration amount for shares of common stock held by our existing
stockholders includes total cash paid for our outstanding shares of common stock
as of September 30, 2009 and excludes the value of securities that we
have issued for services. If the underwriters’ over-allotment option
of ____Units is exercised in full, the percent of the number of shares held
by existing stockholders will be reduced to % of the total number of shares to
be outstanding after this offering; and the number of shares held by the new
investors will be increased to shares, or %, of the total number of
shares of common stock outstanding after this offering.
17
The
discussion and tables above is based on 35,663,850 shares of common stock issued
and outstanding as of December 8, 2009. In addition, we may choose to raise
additional capital due to market conditions or strategic considerations even if
we believe we have sufficient funds for our current or future operating plans.
To the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of these securities could result in
further dilution to our stockholders.
ACCOUNTING
FOR THE SHARE EXCHANGE
On August
9, 2005, the Company completed the acquisition of all of the common stock Hanxin
International pursuant to a Share Exchange Agreement. We acquired Hanxin
International in exchange for 24,000,000 shares of common stock and 1,000 shares
of the Series A Preferred Stock, which such shares converted into
29,530,937 shares of common stock. Subsequent to the merger and upon the
conversion of the Series A Preferred Stock, the former shareholders of
Hanxin International own 95% of the outstanding shares of our common stock. As a
result of this transaction, Hanxin International became a wholly-owned
subsidiary of the Company. The transaction is accounted for using the reverse
merger acquisition method of accounting in accordance with the FASB issued
ASC805, Business Combinations.
18
DESCRIPTION
OF BUSINESS
Overview
As used
in this prospectus, unless otherwise indicated, the terms “we,” “our,” “us,”
“Company” and “Asia Cork” refer to ASIA CORK, INC., a Delaware corporation,
formerly known as Hankersen International Corp (“HANKERSEN”).
Our
Corporate Structure
The
corporate structure of the Company is illustrated as follows:
Our
Corporate History
The
Company was incorporated under the laws of the State of Delaware on August 1,
1996. The Company was formed in connection with the merger acquisition of Kushi
Macrobiotics Corp. (“KMC”) with American Phoenix Group, Inc. (“APGI”) in 1996.
Prior to such acquisition, KMC had operated a business of marketing a line of
natural foods (the “Kushi Cuisine”). This business was not successful and
management determined that it would be in the shareholder’s interest for KMC to
operate a different business. In August 2005, the Company, through Kushi Sub,
Inc., a newly formed Delaware corporation and wholly-owned subsidiary of the
Company ("Acquisition Sub") acquired all the ownership interest in Hanxin (Cork)
International Holding Co., Ltd. ("Hanxin International"), a British Virgin
Islands limited liability corporation, organized in September 2004. The Company
acquired Hanxin International in exchange for 24,000,000 shares of common stock
and 1,000 shares of the Series A Preferred Stock, which such shares converted
into 29,530,937 shares of common stock. Subsequent to the merger and upon the
conversion of the Series A Preferred Stock, the former shareholders of Hanxin
International currently own 95% of the outstanding shares of the Company's
common stock.
Kushi
Sub, the surviving entity of the merger with Hanxin International, has no other
business activities other than owning 100% of Xi'An Cork Investments
Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian Hanxin
Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An and
Hanxin are People's Republic of China (PRC) corporations. Most of the Company’s
operating and business activities are conducted through Hanxin.
On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc. was merged into
its parent, the Company as approved by the Board of Directors of the Company
pursuant to the Delaware General Corporation Law. The Company is the surviving
company of the merger and Certificate of Incorporation is otherwise unchanged.
The wholly-owned subsidiary was formed in July 2008 and had no material assets.
The Certificate of Merger was filed with the Secretary of State of Delaware on
July 11, 2008.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB.”
19
Reverse
Stock Split and Change of Domicile
Concurrently
with the date of this prospectus, the Company will effectuate a ___ to one
reverse stock split (the “Reverse Split”). The Reverse Split
will be subject to approval by our stockholders, which approval is a condition
to the Offering. All references to the outstanding shares of our
common stock in this prospectus give effect to the Reverse Split.
Business Overview
The Company, through its subsidiaries,
engages in the development, manufacture and distribution of cork wood floor,
wall, sheets, rolls and other cork decorating materials, which is generally
regarded as environmentally friendly. Located in Xi’an, China, Asia Cork, Inc.
is a rapidly growing leader in the industry of cork-based building materials.
Cork is a ‘green’ renewable resource harvested only from the bark of the cork
oak tree, thus leaving forests generally undamaged. The Company’s product lines
include raw cork materials, semi-finished cork and finished cork products such
as cork floorboards and cork wallboards.
Cork is a
renewable natural resource, harvested from the bark of cork trees. Compared to other
similar products, cork products have the characteristics of their
impermeability, buoyancy, elasticity, and fire resistance.
The sustainability of production and the easy recycling of cork products
and by-products are two of its most distinctive aspects. The company’s product
lines include raw cork materials, semi-finished cork products, finished cork
products, and by-products, including cork roll, cork paper, crafts and
ornaments, cork floorboards and wallboards.
The
average wholesale price of Hanxin cork floors is around $60/m2,
while products from Portugal are usually priced at 75/m2 on
average. Hanxin enjoys significant cost advantage as its production activities
are all performed in China. Raw cork materials, mainly cork granules in China,
cost only 30~40% of the cost of the raw materials from Portugal and,
and the average labor cost in China is around 20~10% of the cost in Europe,
which gives Asia Cork a pricing advantage and higher margin.
We have
the right to use 17 patents developed by Fangshe Zhang, our Chairman regarding
cork processing technologies. We own 3 patents, lease 3 patents, and have
exclusive right to use another 11 patents for free. We believe that these 17
patents give us competitive advantages in our product
quality.
We sell
our products under the “Hanxin” brand to customers through sales
agents. All of our sales are to distributors in China, some of whom
resell the products or reprocess the products and sell their products
overseas.
Our
objective is to utilize our technology and cost advantages of being based
in China in order to become a leading cork product developer and manufacturer.
We intend to continue to develop new products, expand the market for cork
floorboard, wallboard and other products globally, and increase our sales
revenue.. In order to achieve our objectives, we intend to, among other things,
increase our sales and marketing efforts, enhance production capacity, ensure
our raw material incoming source, acquire other cork manufacturing factories and
other cork exporting companies in China, continue expanding domestic market by
establishing sales network in China, export our cork products to overseas
countries by our own sales network, and establish our own cork plantation in
China. Provided that our expansion plans above mentioned can succeed, we expect
that our production capacity will increase substantially. There is no assurance
that we will be able to achieve these objectives.
Cork
Material and Cork Products
Cork
material is a green material, a subset of generic cork tissue that is harvested
for commercial use primarily from the cork oak tree. Cork is composed of Suberin
(please see below the compound structure of cork), hydrophobic substance, and
because of its impermeability, buoyancy, elasticity, and fire resistance, it is
used in a variety of products.
20
Compound
Structure of Cork
Source:
Universita' Cattolica, Italy
Honeycomb
structure of cork
Cork's
extraordinary properties derive from its distinctive cellular structure. A one
inch cube of natural cork contains more than 200 million tiny air-filled
pockets. Some 50% of cork is captive air, which results in excellent buoyancy,
compressibility, elasticity, a high degree of imperviousness to both air and
water penetration and low thermal conductivity. The following table shows the
physical properties, constitutive monomers and average content of the main
cork components:
Component
|
Properties
|
Monomers
|
Average
content
|
Suberin
|
Resilience
Impermeability
|
Fatty
acids
Alcohols
|
45%
|
Lignin
|
Resistance
to compression
|
Aromatic
alcohols
|
27%
|
Poly-saccharides
|
Resistance
to elongation
|
Monosaccharides
|
12%
|
Tannins
|
Ellagic
acid
Proanthocyanidins
|
6%
|
|
Waxes
|
Impermeability
|
Phenols
Fatty
acids
|
7%
|
Source:
Universita' Cattolica, Italy
21
Due to
the special structure and constitution, cork is noted for the following
properties:
·
|
Environmentally
friendly – cork barks are harvested with no harmful chemicals used in the
harvesting process. Moreover, the cork production process uses no water,
emits no CO2 or
other gases, and produces no waste materials that cannot be
recycled. As a result, the cork products can be widely used
even in food-related industry, ranging from wine stoppers to the medium
for growing mushrooms.
|
·
|
No
toxic evaporation - Cork floor planks contains only 6 milligram
formaldehyde every 100 gram, lower than the Chinese national standard of 9
milligram.
|
·
|
Durability
–Cork has a high friction coefficient. As a result, cork products have
outstanding durability and can be used for many years when properly
maintained.
|
·
|
Lightness
and Low Density – The cellular structure of cork makes it very
lightweight, resulting in cork's celebrated
buoyancy.
|
·
|
Impermeability
– Cork is impermeable to both liquids and gases, giving it superior
sealing capabilities.
|
·
|
Elasticity
– Cork is pliable and rebounds well to original size and
shape
|
·
|
Low
conductivity – Cork has one of the best insulating values of any natural
material, with very low conductivity of heat, sound or vibrations. This
enables cork to reduce heating and cooling costs and makes cork a good
sound-proof material for construction and
decoration.
|
·
|
Fire
resistance – Cork has a high tolerance to
heat.
|
·
|
Anti-moth – Cork
floor is fully resistant to damage by
moths
|
The
distinct appearance of cork facilitates its use for decorating purposes, from
floor and wall tiles to wallpaper to decorative specialty uses. Cork’s
resilience helps cork products recover from compression or puncture. Longevity
under heavy usage is a cork trademark. With many special properties, cork
building material can be used to practical and aesthetic effect in diverse
environments, including retail stores, restaurants, offices, hotel rooms and
lobbies, clinics, resorts, universities, public buildings, houses of worship,
and many more public and private environments.
Our
Cork Products
Our
Company produces the following cork products:
•
|
Cork Granule: Cork
granule comes in varies sizes and is the early stage of cork material
processing. Granules of cork can also be mixed into concrete by
natural resin glue which is also environmental friendly. The composites
made by mixing cork granules and cement have low thermal conductivity, low
density and good energy absorption.
|
•
|
Cork Sheet and Cork Roll:
Cork board and sheet/roll are of different thickness according to
their usage, which need advanced processing techniques and manufacturing
requirements. Cork sheet and cork roll cost more than other
basic materials. Customers use then as raw material of cork art crafts and
to process them into underlayment for wood floors, art crafts, notepads
and similar products..
|
•
|
Glue-down Cork Floor:
Glue-down cork floor is made of two layers of cork and can be glued
down to the flat ground when being installed. The special features of cork
material have enabled it to be an ideal flooring material. With its
elasticity, cork is a natural floor cushion, being soft, comfortable and
less tiring to walk on. Cork flooring
maintains warmth and is used for sound proofing. Unlike other
materials, it resists appearing “worn out”. Cork flooring can
also be crafted into many different designs and patterns, many of which
are difficult to achieve using other raw materials. We currently produce
several series of glue-down cork floor with different designs, colors and
granules. This product is of comparatively high profit margin and is
currently our major product.
|
22
•
|
Floating Cork Floor:
Floating cork floor is the high-end cork floor board. The tiles can
interlock with each other and are therefore fast and convenient to
install. Different from glue-down floor which is usually made of two
layers which are both made completely by cork, floating cork floor tiles
consist of three layers. The surface layer is made of about three
millimeter thick cork with well designed pattern and color; the
middle layer made of about seven millimeter thick high density fiberboard,
and the under layer is made of about one millimeter
thick cork sheet. Besides being convenient and environmentally
friendly to install, the thickness provides for better comfort and a more
luxurious feeling. This product produces the highest profit margin among
all our products f and we are gradually moving our focus from sheet and
roll to the production and sale of floating cork
floor.
|
The specifications of cork floors we produce are listed below:
Testing
|
Data
|
Acoustic
absorption coefficient
|
2000-4000Hz
|
Collision
sound
|
14-16dB
|
Heat
transmission coefficient
|
0.06mk
|
Anti
static electricity
|
2.2kv
|
Abrasion
resistance
|
5000
wear cycles
|
Fire
resistant coefficient
|
22.2
|
Flame
|
40mm
high
|
Fire
rating
|
Level
two
|
Chemical
resistance
|
Can
resist muriatic acid for one hour
|
Source:
Tested by Han Xin Quality Control Department..
•
|
Cork Wallboard:
Wallboard is a high-end decorative material. All of the
wallboard products utilize Hanxin’s special staining technology
to create different colors. We produce 16 types of cork wallboard with
different patterns. Besides giving a beautiful and luxurious impression
for the decorative use, cork wallboard also possesses soundproof
qualities, making it especially suitable for rooms and
structures that demand
quiet.
|
•
|
Basic
Cork Board: Basic cork board is similar as glue-down cork floor
except that it has not been covered by a UV membrane. Cork board can
therefore be tailored to different uses according to a customer’s specific
needs, such as the underlayment for wood floor or soundproof
material.
|
23
As of
September 30, 2009, the sales percentage based on categories of products for
2009 is as follows:
24
The sales
percentages based on categories of products in 2008 is as follows:
Production
Procedures, Facilities, & Capacity
According
to the special characteristic of cork material produced in China, we have
designed a tailored production process and specified the operating requirements
in each step, which ensure the quality of our products and becomes our key
competitive edge. The basic manufacturing procedure is as follows:
From
2002 until 2008, we built five workshops in sequence on over 80 thousand square
meters of leased lands which are all located in the vicinity of Xi’an, Shaanxi
Province. All of the production procedures are performed in these workshops.
Workshop number one to number three were all established and started operation
before August 2003. The fourth workshop was built in June 2005 and started
operation in September 2005.
25
We have
two production lines installed in the first four workshops. One line is for the
production of floor plank and wallboard, the annual production of which is
approximately 300,000 square meters. The other line for production of
cork sheets and semi-finished products, such as rolls of cork, the annual
production of which is approximately 60,000 boxes of products. Due to
the unique non-standard production procedures for our product, each production
line involves several workshops. The major function and output of the four
workshops are shown as the following:
No.
|
Functions
|
No.
of workers
|
Major
product
|
Output
(per shift, 2~3 shifts everyday)
|
1
|
Cutting,
grinding, seasoning, film pressing, slicing, heated compounding, coating,
waxing, etc.
|
80~90
|
Cork
granule, sheet/role, wall boards
|
100
boxes
500
m2
wall board
|
2
|
Cutting,
grinding, film pressing, slicing, polishing, etc.
|
70~80
|
Cork
sheet/roll
|
100
boxes
|
3
|
Inspection,
packaging, warehousing
|
Around
30
|
Not
applicable
|
Not
applicable
|
4
|
Heated
pressing and compounding, edging, coating, inspection
|
70~80
|
Cork
floor boards
|
>300
m2
|
The fifth
workshop has about 6,000 square meters of capacity. Construction
commenced in the third quarter 2007 and completed in September 2008.. We planned
to establish a third production line to produce high-end cork floor planks in
the fifth workshop. We started to install production equipment in the fifth
workshop in October 2008. We expect that, upon fund availability, , the
new facility will utilize the company’s advanced patented
technologies to primarily produce floating cork floorboards of around 300,000
square meters. However, due to the adverse market conditions we
stopped purchasing new production facilities for the fifth workshop after the
completion of part of the production line at the end of 2008. We have not
determined when the additional production lines will be completed. At present
the fifth workshop is used for part of the production procedure of the new
high-end products and for the warehouse of our final products.
We have
an option to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan
Hanxin”), one of major cork raw material providers located in Sichuan Province
China. On September 20, 2009, we entered into an agreement
(“Agreement”) with the two shareholders of Sichuan Hanxin, Huadong Li and
Xiaojun Wu. The Agreement grants us an option to acquire 100% of the shares of
Sichuan Hanxin by September 20, 2010. The acquisition price shall be the
120%~150% of the net asset value as shown in the audited financial statements as
of December 31, 2009 of Sichuan Hanxin as determined by an audit firm we
designate. The amount of the premium over the net asset value is subject to
agreement by the parties, but cannot exceed 150%. Exercise of the option is
subject to satisfactory of financing situation, due diligence, and requisite
corporate approvals. In the event that any of the closing condition is not
satisfied by September 20, 2010, the Agreement will terminate except that a
party whose fault causes the failure to fulfill conditions shall be liable to
pay a penalty of RMB 10 million (equivalent to $1,464,916). According to the
Agreement, Hanxin shall pay 30% of the acquisition price within 10 days from the
date of fulfillment of all closing conditions, 30% within 60 days from the
fulfillment date, and 40% within 10 days from completing the transfer of all
assets and shares of Sichuan Hanxin. As of September 30, 2009,
Hanxin had paid a deposit of $1,362,372 (equivalent to RMB9.3 millions) to
Sichuan Hanxin. Hanxin anticipates applying the whole deposited amount to
payments for raw materials if the acquisition does not occur.
We are
also cooperating with Sichuan Hanxin to build another production line for
manufacturing the cork floor planks at their location in Sichuan province.
According to the Cork Floor Production Cooperation Agreement dated of October
14, 2009, we provided a set of production equipment, and Sichuan Hanxin agreed
to provide the workshop and supplementary equipments. We shall purchase the raw
materials from Sichuan Hanxin and Sichuan Hanxin shall be responsible for the
production of cork floor products according to the quality specifications and
standards set by us. According to the agreement, we have exclusive right to sell
the cork floor products produced from this production line. This new cork floor
production line is expected to commence operation by early 2010, with an annual
production capacity of approximately 200,000 square meters of products.
Accordingly, we will be able to increase our total annual output to 500,000
square meters. Producing the finished product at Sichuan Hanxin
allows us to produce product at less cost, as we save the higher transportation
costs associated with transporting raw material as compared to finished
product. Sichuan Hanxin also has existing buildings with the capacity
to house additional production lines.
As of
December 1, 2009, we are operating at 95% of our maximum production
capacity. Our own production capacity cannot meet expanding market
demand. We are negotiating with several other mid-sized cork product
manufacturers to be original equipment manufacturer (“OEM”) and receive our
support of technology and standards. We have not yet entered into any
OEM contracts, but expect to develop long-term OEM cooperation with several
manufacturers in the near future to enlarge our production output in a more
stable manner while saving the cost of building new production
facilities.
26
Raw
Materials
Cork is
the outer bark of a cork oak tree. During a harvest, the outer bark of a cork
oak’s trunk and major branches is carefully stripped by hand – no mechanical
stripping devices are allowed. Experienced cork strippers use a specialized cork
axe to slit the outer bark and peel it away from the tree. The cork bark is then
sorted by quality and thickness. The remaining cork (called “blocker waste,"
although it is perfectly good material!) is then ground up and processed to be
used in the production of agglomerated cork and cork & rubber compounds.
These materials are used in a variety of applications from construction and
gaskets and friction plates to sound proof materials.
A cork
tree regenerates its precious outer layer 9 or 10 times during its 150~200-year
lifetime. The first stripping of the cork bark occurs when the tree is between
15 years of age, with subsequent yields at 9 to 10 year intervals. Because of
the limited time of harvesting the cork tree during its life circle, access to
abundant natural resources of cork forest is a very important aspect of our
business. At present, the supply and price of raw materials have been stable.
There are
only two species of cork oak tree which can produce barks that are suitable for
manufacture of cork building materials, Quarks Suber and Quarks
Variabilis. Quarks Suber belongs to evergreen arbor tree, and is native to the
western Mediterranean area. On average, ten hectare Quarks Suber can shed cork
about 150 kilograms every ten years, while high-quality Portugal Quarks Suber
can produce 200 – 250, or even 500 kilograms every hectare. With its vast
reservation of over 700 thousand hectare, Portugal is the largest
source of cork products. The following graph shows the world
distribution of Quarks Suber in 2006.
Country
|
Forest
Area Hectares
|
%
of Worlds Forest Area
|
Production
Tons
(000)
|
%
of Total
Production
|
Portugal
|
736,000
|
32%
|
157
|
52%
|
Spain
|
506,000
|
22%
|
88
|
30%
|
Algeria
|
414,000
|
18%
|
17
|
6%
|
Morocco
|
345,000
|
15%
|
11
|
4%
|
France
|
92,000
|
4%
|
3
|
1%
|
Tunisia
|
92,000
|
4%
|
8
|
3%
|
Italy
|
92,000
|
4%
|
15
|
5%
|
TOTAL
|
2,277,000
|
100%
|
340
|
100%
|
Source:
The Natural Cork Quality Council, US
Quarks
Variabilis is a kind of wide-leaved deciduous tree that mainly grows in China.
The wild forest area is about 1.2 million hectares. The most important growing
area is Shaanxi Province, especially the Qin Ba Mountain area whose reservation
occupies over 65% of the wild forest in China. Different from Quarks Suber, the
cork from Quarks Variabilis is completely wild grown, while trees of Quarks
Suber in Portugal are mainly grown on plantations.
Raw
material, namely bark of Quarks Variablilis is an important aspect of our
business. We have abundant access to the cork raw materials. We
purchase all raw materials, including bark, glue, PVC membrane, paint and other
materials from over 10 suppliers. None of the suppliers provide more than 15% of
our total purchase. Three suppliers accounting for approximately 40% of our
supply of raw materials in 2008 and the first nine months of 2009 and we have
purchased product from each of our largest bark suppliers for more than three
years. We usually enter into one year purchase agreements with our
suppliers. We believe we have good relationships with our suppliers, and the raw
materials supply stays comparatively stable except for normal price
fluctuations.
All our
workshops are located in Shaanxi PRC which accounts for more than 65% of total
bark production in PRC. Besides purchasing the barks from wild Quarks
Variablilis, we may also acquire lands to establish our own plantation for high
quality cork oak trees.
27
Our
largest supplier, Sichuan Hanxin, obtained a three-year exclusive right (from
2009 to 2011) to collect, purchase, transport and process the cork bark raw
material in four counties in MianYang City, Sichuan province. Sichuan
Hanxin has the exclusive right to purchase cork bark from designated areas each
year in order to conserve the supply of cork and allow the tress in harvested
areas to regrow their bark. The MianYang Municipal government passed a
regulation on April 22, 2009 to protect the right of Sichuan Hanxin, which gives
Sichuan Hanxin an advantage in the development of its business. We have an
option to acquire Sichuan Hanxin, and its exclusive rights will help stabilize
our raw material access, reduce the raw material cost, and provide an impetus to
expand our production and market shares.
Pursuant
to our agreement with Shaanxi Shuta dated October 20, 2009, we agreed to
purchase from Shaanxi Shuta a land use right of 7,000 Mu (equal to 4,669,000
square meters) located in Baoji District, Shaanxi province. We plan to develop
our own cork forest on the land, which will help assure our raw material supply
at a lower cost. Shuta incurred RMB10,000,000 (equivalent to
$1,464,916) expenses in the process of the acquisition. The agreement
provides that in the event that we do not purchase the land by October 20, 2011,
we will be liable to pay RMB10,000,000 to Shuta as reimbursement for the
acquisition expenses. The parties anticipate that should we not purchase the
land by October 20, 2011, Shuta will not repay the RMB10 million loan
pursuant to Loan Agreement dated October 28, 2009 and the parties will have no
further obligation to each other regarding the loan or the land
purchase.
Our Marketing Strategy
We sell
our products in China through sales agents, retail sellers, and our own sales
employees. The overseas markets primarily are approached through unrelated
overseas distributors and agents.
Domestic
market
Sales
Agents
ð
|
Strategic
Cooperation Agreement with Shaanxi
Shuta
|
Shaanxi
Shuta is one of the largest wholesale distributors of cork floor boards and wall
boards in China . As of __________, 2009, Shaanxi Shuta had over 10
wholesale stores and four showrooms.
According
to our strategic cooperation agreement,, Shaanxi Shuta shall
·
|
order
three types of “Shuta Brand” cork flooring plank products to be produced
by Hanxin based on the Shuta’s specification
and
|
·
|
order
three types of “Shuta Brand” flooring plank semi-finished
products to be processed by
Hanxin.
|
As
to the “Shuta Brand” cork plank products, Shaanxi Shuta has the exclusive right
to distribute these products produced by Hanxin.
ð
|
Other
Sales Agents
|
In
addition to Shaanxi Shuta, we have distribution contracts with several other
companies to distribute our flooring plank and other products. In January 2009,
we entered into Distribution Agreements with Shanghai Yuanrui Limited., Suzhou
Juwang Ltd. , Hangzhou Zhongheng Ltd. and Shanghai Tangyi
Ltd.. These companies mainly distribute glue-down flooring planks and
floating flooring planks. We provide product warranties.
In 2010,
we plan to increase the number of our distributors and enhance support for our
distributors by providing more high-quality and delicately designed samples, and
increasing our efforts in advertising our brand name and educating
consumers.
28
Our Sales
Team
We also
distribute products through our own sales team and established sales network of
regional distributors. Xi’An is the headquarter office for
our sales force, with sales representatives in Beijing, Shanghai and Guangzhou.
We plan to hire more contracted sales representatives in two major cities: Jinan
and Shenyang, within the central and northeast regions of China to attempt to
increase our market reach. Besides our contracted sales representatives,
we also have long term relationships with over 50 independent sellers
in many regions of China. We also seek to expand our existing sales channel for
semi-finished products and other cork products such as decoration products, cork
office equipment and cork art crafts. We focus on educating the
consumer about cork products through media advertisement. We also may to
establish our own sales network through franchise store inr China, in
order to enhance the sales of our end-products including cork floor and cork
wall board.
International
market
Our
products have been sold internationally though unrelated national distributors
and agents. Our products are currently being exported to India, the United
States, Japan, and Germany by those unrelated national distributors and agents.
Commencing in May 2007, we began selling our products to overseas clients
directly through unrelated national distributors and agents. In 2010, we expect
to start our own oversea export sales network to Asian and North American
markets.
The
export destinations and percentage of exports in 2008 were approximately as
follows:
Our
strategic plan is to aggressively explore foreign markets in the next several
years. We have established relationships with two building & decorative
material dealers in New Jersey. We do not have written agreements
with these distributors. As the construction industry recovers from the
financial crisis, and because foreign retailers actively search for suppliers
with quality products and lower prices, we intend to more directly penetrate
foreign markets and gradually establish our brand name worldwide.
As of
September 30, 2009, none of our customers accounted for more than 10% of our
sales.
29
Market
Opportunities and Competition
Market
Opportunities
As an
environmentally-friendly construction material, cork has an increased demand for
building and home improvement purposes from China’s rapidly-growing middle-class
population. Even though cork is priced at a 10-15% premium over hardwood
floorboards, significant market demand exists for the obvious advantages
mentioned above that only cork flooring possesses. According to a report
released by China Investment & Consulting Net (www.ocn.com.cn),
since 2001 construction industry in china has been growing steadily at a annual
rate of approximately 20%. In 2008, unlike the real estate and construction
industry in western countries, due to the financial turbulence, the construction
industry in China was not as affected and maintained growth.
The
decoration industry in China has also grown in recent years. In 2007, the
decoration industry’s total output was RMB1410 billion; with home decoration
accounting for RMB870 billion, and a growth rate of 25% per annum since 2006
and the public construction decoration accounting for RMB 540billion,
with a growth rate of 20% per annum since 2006. The global financial
shocks commencing in 2008 has had some negative effect to the industry in China
but we believe that significant market opportunities exist.
Chinese
consumers are gradually adopting a more proactive environmental stance.
According to the director of Interior Environment Supervision Center of China
Interior Decoration Association, over 50% of consumers express concerns over
environmental safety issue regarding interior decoration materials. Also, more
consumers are concerned about the environmental impact of the production
procedures for decoration materials.. This growing concerns from
consumers creates great opportunity for cork decoration products, the harvesting
and manufacture process of which is much more environmental protective than that
of wooden and other compound floorings, as only the bark is harvested once every
nine years, leaving the forest undamaged.
In the
international market, cork building and decoration materials have been widely
recognized as environmentally friendly high-end products. Yet because of the
rareness of raw materials and the very limited output of cork floors and
wallboards compared to ordinary wood floors, cork decoration materials are not
yet fully advertised to and used by end users. We believe there is a much larger
potential market in the developed countries as a result of environmental
concerns from consumers in these countries who are more educated and informed.
In addition, the price of cork floors in these countries is similar to prices
for high quality wood floors and ceramic tiles.
We also
believe we will benefit should the recent financial shock incentivize more
distributors and retailers to search for less expensive supplies with
outstanding quality. We are able to offer products that can compete with
European products in quality and fashion design at only half to 2/3 of their
wholesale prices. We believe this will be a competitive
advantage.
Competition
International
Competition
The cork
industry is originated from Portugal, where the largest cork enterprises such as
Amorim are located. Cork industry has hundreds of year’s history in Portugal as
the country has the best Mediterranean climate for oak trees to produce high
quality bark. According to information from these large companies, their major
product is cork stopper used for wine bottles, which usually accounts for one
third of their total sales and even higher percentage of profit.
The
Portugal cork enterprises usually have their own cork oak plantations where cork
oak are grown and thinned by specialized personnel. As a result, the production
of cork from these plantations is quite limited and the market volume is heavily
dependent on the actual output capacity of these large companies, which forms a
seller’s market. Thus these companies are reluctant to invest in actively
educating consumers and advertising on cork decoration materials.
We regard
there is currently no direct and complete competition in the international
market of cork building and decoration materials, as we are ready to expand into
new market volume rather than compete in the existing market
internationally.
Domestic
Competition
While our
competition for international sales is primarily from Portuguese manufacturers,
our competitors within China are other local mid-sized cork manufacturers. These
companies’ major products are semi-finished cork boards, sheets and roles.
Compared to the competitors, Hanxin’s excels in its technology advancement,
experience, as well as product quality and design. Hanxin’s patented
technologies cannot be easily circumvented for Chinese manufacturers to produce
high quality cork floor and wallboard, which form a high entry barrier for most
of their competitors to compete with Hanxin in high-end cork floor and wallboard
market. Thus the competition between domestic cork manufacturers has not fully
developed at present.
We intend
to transfer our semi-finished products to high-margin end products, where there
is less domestic competition.
Our
Competitive Strengths include the following:
30
·
|
Access
to abundant raw material resources
|
There are
about 2.3million hectares of Quarks Suber cork forest worldwide; 32% in
Portugal, and 22% in Spain. However, in terms of production, China trailed
Portugal with an annual production of approximately 100,000 tons of Chinese cork
oak (Quarks Variabilis), which is abundant in the Shaanxi, Gansu, Henan, Hubei
and Sichuan provinces. The raw materials supply to Hanxin is stable and of much
lower price compared to that of European raw materials.
·
|
Experienced
Management Team
|
Our
senior management team has extensive business and industry experience in
cultivating and monitoring forests of oak cork trees, developing technologies in
the production of cork products, and marketing of cork products both in China
and overseas market.
·
|
Strategic Alliance with Top
Research Institutions
|
We have
been striving to improve the quality of its products through research and
development (R&D) collaboration with educational institutions such as the
Northwest Sci-Tech University of Agriculture & Forestry. Senior professors
from this institution serve as technical consultants to equip us with the latest
technical advancements. In recent years, Hanxin has reduced research and
development efforts but intend to strengthen our research and
development to develop new products should the sales improve..
Quality
Control
We place
great emphasis on the quality of its products and quality control system. In
particular:
|
·
|
In
March, 2005, Hanxin cork floor was approved by State plywood Quality
Supervision and Test Center for formaldehyde emission, TS water immersion
testing. (Certification No. Floor
2005-65/66/6768)
|
|
·
|
In
March, 2005, Hanxin cork wallboard was approved by State plywood Quality
Supervision and Test Center for formaldehyde emission testing.
(Certification No. Floor
2005-64)
|
|
·
|
In
February 2005, Hanxin cork floor passed material sound absorption
testing by Acoustics Research Center from Tong Ji
University
|
|
·
|
In
October. 2003, Hanxin cork floor was approved by Xi’an Institute of
Supervision & Testing on Product Quality in standard testing of
GB18580, GB/T18102-2000, GB/T18103-2000 with Certification
NO.G0300708.
|
|
·
|
In
Nov. 2003, Hanxin cork wallboard was approved by Xi’an Institute of
Supervision & Testing on Product Quality in standard testing of
Q/HX01-2001 with Certification
NO.G0300742.
|
|
·
|
In
October 2001, Hanxin’s products and standards were certified by the
Xi’an Quality Technology Supervision Bureau, the governmental agency
responsible for the inspection of commodities being imported and exported
to and from China
|
Currently,
our ISO9000: 2000 and ISO14001 certifications are pending.
Intellectual
Property
Currently
we have right to use 17 patents regarding cork processing technologies. We own 3
patents, lease 3 patents from Mr. Fangshe Zhang, our Chairman and a
principal shareholder, and also obtained an exclusive right to use another 11
patents of Mr. Zhang without payment of any royalties. When our
royalty payments with respect to the three patents end in 2011, we will receive
an exclusive right to use these patents without payment of any
royalties. See “Certain Relationships and Related
Transactions.”
31
PRC
Government Regulations
Environmental
Regulations
The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution.
We have
not been named as a defendant in any legal proceedings alleging violation of
environmental laws. We have no reasonable basis to believe that there is any
threatened claim, action or legal proceedings against us that would have a
material adverse effect on our business, financial condition or results of
operations due to any non-compliance with environmental laws.
Patent
Protection in China
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets. The PRC is also a
signatory to most of the world’s major intellectual property conventions,
including:
● |
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
|
● |
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
|
● |
Patent
Cooperation Treaty (January 1, 1994); and
|
● |
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents, i.e., patents for inventions, utility
models and designs respectively. The Chinese patent system adopts the principle
of first to file. This means that, where more than one person files a patent
application for the same invention, a patent can only be granted to the person
who first filed the application. Consistent with international practice, the PRC
only allows the patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical applicability. For a
design to be patentable, it should not be identical with or similar to any
design which, before the date of filing, has been publicly disclosed in
publications in the country or abroad or has been publicly used in the country,
and should not be in conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in a people’s court.
32
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount ranging from one to three times of the license fee under a contractual
license. The infringing party may be also fined by the Administration of Patent
Management in an amount of up to three times the unlawful income earned by such
infringing party. If there is no unlawful income so earned, the infringing party
may be fined in an amount of up to RMB 500,000, or approximately
$62,500.
Tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a portion
of or a full refund of the VAT that it has already paid or borne. Our imported
raw materials that are used for manufacturing export products and are deposited
in bonded warehouses are exempt from import VAT.
Foreign
Currency Exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.
Dividend
Distributions
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Employees
As of
December 31, 2009, we had 271 employees, and believe our relationship with our
employees is good. All of our employees are based in China. There are no
collective bargaining contracts covering any of our employees and we believe
that we have good relations with our employees.
33
Properties
Hanxin
owns one property in Xi’An of approximately 10,360.3 square meters.. However, in
2007, we renovated the space and built an additional student dormitory. The
constructions were completed in June 2008. The student dormitory was leased
for $21,954 (equivalent to RMB150,000) per month to the university located at
YuLerYuan and this agreement was extended to February 28,
2010.
Hanxin
also leases office space of about 436 square meters in Xi’an for approximately
$2,393 (equivalent to RMB16,352 included rent and maintenance fee) per month.
The lease for this office space expires on December 31, 2008, and has been
renewed for one more year until December 31, 2009 and is expected to be
renewed. Hanxin also leases the right to use a parcel of land which is
approximately 53,120 square meters and is used as our cork processing plant. The
lease fee for this processing plant is about $1,463 (equivalent to RMB10,000)
per month, and the lease had been extended to October 2047. The following
is a schedule of future minimum rental land payments required under these
operating leases as of September 30, 2009.
For Nine
Months Ending Septembe 30,
|
Amount
|
|||
2010
|
$ | 95,081 | ||
2011
|
17,579 | |||
2012
|
17,579 | |||
2013
|
17,579 | |||
2014
|
17,579 | |||
Thereafter
|
581,572 | |||
Total
minimum rental payments required
|
$ | 746,969 |
Rent and
properties maintenance expenses amounted to $87,480 and $137,048 for the nine
months ended September 30, 2009 and 2008, respectively.
Legal
Proceedings
There are
not any material pending legal proceedings to which the Company is a party or as
to which any of its property is subject, and no such proceedings are known to
the Company to be threatened or contemplated against it.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes, and
the other financial information included in this prospectus.
This
prospectus contains forward-looking statements. The words “anticipated,”
“believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,”
“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. Consequently, all of the forward-looking statements made in
this prospectus are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
34
Overview
Business
Summary
The
Company, through its subsidiaries, engages in developing, manufacturing and
distribution of cork wood floor, wall and decorating products. The cork industry is
generally regarded as environmentally friendly. The sustainability of production
and the easy recycling of cork products and by –products are two of its most
distinctive aspects. We sell our products directly to customers in China through
sales agents and our own sales team, and we distribute our products to customers
overseas through unrelated distributors and sales agents. Internationally, our
products have been distributed into India, the United States of America, Germany
and Japan. We own three cork processing patents in China with one patent
pending. With the patents we own and develop, we believe that we will be able to
keep our leading status in cork production industry in China.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and
liabilities. On an on-going basis, we evaluate our estimates
including the allowance for doubtful accounts, the salability and recoverability
of inventory, income taxes and contingencies. We base our estimates
on historical experience and on other assumptions that we believes to be
reasonable under the circumstances, the results of which form our basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Use
of estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Significant estimates in 2009 and 2008 include the estimated useful lives and
fair values of the assets. Actual results could differ from those
estimates.
Revenue
recognition:
The
Company's revenues from the sale of products are recognized when the goods are
shipped, title passes, the sales price to the customer is fixed and
collectability is reasonably assured. Persuasive evidence of an arrangement is
demonstrated via purchase order from distributor, our customers, product
delivery is evidenced by warehouse shipping log as well as signed bill of
lading, or shipping documents from the trucking company and no product return is
allowed except defective or damaged products, the sales price to the customer is
fixed upon acceptance of purchase order, there is no separate sales rebate,
discounts, and volume incentives.
Income
taxes
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is exempt
from income taxes.
The
Company follows the FASB issued ASC 740 - Accounting for Income Taxes, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
35
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
Recently
Adopted Accounting Pronouncements
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of ASC 105 is not expected to have a material impact on the
Company’s results of operations or financial position.
In
June 2009, the FASB issued ASC 810, Amendments to FASB Interpretation
No. 46(R), which improves financial reporting by enterprises involved with
variable interest entities. ASC 810 addresses (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) concerns
about the application of certain key provisions of FIN 46(R), including those in
which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. ASC 810 shall be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Adoption of ASC 810 is not expected to have a
material impact on the Company’s results of operations or financial
position.
In
May 2009, the FASB issued ASC 855, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of ASC 855 to
interim or annual financial periods ending after June 15, 2009. Adoption of
ASC 855 did not have a material impact on the Company’s results of operations or
financial position.
Results of
Operations
Nine Months Ended September
30, 2009 and 2008
For
Nine Months
Ended
September 30,
|
||||||||||||||||
|
2009
|
2008
|
||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Decrease)/
Increase
|
|||||||||||||
Revenues
|
$ | 17,056,777 | $ | 17,841,299 | $ | (784,522 | ) | -4.40 | % | |||||||
Cost
of Goods Sold
|
11,032,415 | 11,666,418 | (634,003 | ) | -5.43 | % | ||||||||||
Gross
Profit
|
6,024,362 | 6,174,881 | (150,519 | ) | -2.44 | % | ||||||||||
Gross
Profit Percentage
|
35.32 | % | 34.61 | % | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
2,470,208 | 2,255,551 | 214,657 | 9.52 | % | |||||||||||
Bad
debt expenses
|
253,104 | 9,052 | 244,052 | 2696.11 | % | |||||||||||
General
and administrative expense
|
500,562 | 660,932 | (160,370 | ) | -24.26 | % | ||||||||||
Total
Operating Expenses
|
3,223,874 | 2,925,535 | 298,339 | 10.20 | % | |||||||||||
Income
From Operations
|
2,800,488 | 3,249,346 | (448,858 | ) | -13.81 | % | ||||||||||
Other
Income (Expenses)
|
||||||||||||||||
Interest
expenses, net
|
(259,117 | ) | (160,128 | ) | (98,989 | ) | 61.82 | % | ||||||||
Other
income, net
|
78,760 | 30,671 | 48,089 | 156.79 | % | |||||||||||
Total
Other Expenses
|
(180,357 | ) | (129,457 | ) | (50,900 | ) | 39.32 | % | ||||||||
Income
Before Taxes
|
2,620,131 | 3,119,889 | (499,758 | ) | -16.02 | % | ||||||||||
Income
Tax Provision
|
477,030 | 500,733 | (23,703 | ) | -4.73 | % | ||||||||||
Income
Before Noncontrolling Interest
|
2,143,101 | 2,619,156 | (476,055 | ) | -18.18 | % | ||||||||||
Less:
Net income attributable to the
noncontrolling interest
|
179,190 | 214,922 | (35,732 | ) | -16.63 | % | ||||||||||
Net
Income Attributable to Asia Cork Inc.
|
$ | 1,963,911 | $ | 2,404,234 | $ | (440,323 | ) | -18.31 | % |
36
Revenues
Our
business continued to improve during the nine months ended September 30,
2009, as the market for our products improved in China, although revenue
declined to $17,056,777 during the nine months ended September 30, 2009,
compared to $17,841,299 during the nine months ended September 30, 2008,
The decreased revenue during the nine months ended September 30, 2009 was
mainly due to the adverse market condition for home and commercial renovation
during the fourth quarter of 2008 and the first quarter of 2009, compared to the
prior periods. However, our business has improved as the market recovered during
the second and third quarter of 2009.
Cost
of Sales and Gross Profit
During
the nine months ended September 30, 2009, cost of sales amounted to
$11,032,415 or 64.68% of net revenues as compared to cost of sales of
$11,666,418 or 65.39% of net revenues during the nine months ended
September 30, 2008. Gross profit during the nine months ended
September 30, 2009 was $6,024,362 or 35.32% of revenues, as compared to
$6,174,881 or 34.61% of revenues during the nine months ended September 30,
2008. The gross margin during the nine months ended September 30, 2009 is
almost same as the same period of 2008. The gross margin increased slightly as a
result of slightly reduced manufacture costs in the current year of 2009,
compared to the same period of 2008.
Operating
Expenses
During
the nine months ended September 30, 2009, total operating expenses were
$3,223,874 as compared to $2,925,535 during the nine months ended
September 30, 2008, an increase of $298,339 or 10.20%. This increase was
attributable to an increase in selling expenses, freight costs and commissions
associated with our increased revenue, and bad debt allowance. Our accounts
receivable outstanding more than six months declined from $1,551,836 of the
$4,979,792 total accounts receivable at December 31, 2008 to nearly none of
the total of $5,599,865 in accounts receivable at September 30, 2009. In
addition, commencing from July 2009, we adopted a bad debt allowance at 5%
of the outstanding account receivable at. September 30, 2009 which
increased the bad debt expenses to $253,104, compared to $9,052 during the nine
months ended September 30, 2008. Meanwhile, our general and administrative
costs were reduced to $550,562, a decrease of $160,370 or 24.26%, compared to
$660,932 during the nine months ended September 30, 2008 to offset part of
the increase in selling expenses and bad debt allowance. The decrease in general
and administrative costs was primarily attributable to decreased consulting
fees, advisory fees and professional fees during the nine months ended
September 30. 2009 as compared to the nine months ended September 30,
2008.
Other
Income (expense)
During
the nine months ended September 30, 2009, other expense, net, amounted to
$180,357 as compared to other expense, net of $129,457 during the nine months
ended September 30, 2008, an increase of $50,900 or 39.32%.
Other
expense, net during the nine months ended September 30, 2009 and 2008 is
related to the income received from the rental of our entertainment facility.
This rental income was primarily offset by the franchise tax accrued for the
State of Delaware and the donation contribution made by the Company during the
three months ended September 30, 2008 in the amount of $71,822 and which
such donation was made in connection with the earthquake in Sichuan
PRC.
For the
nine months ended September 30, 2009, net interest expense was $259,117 as
compared to net interest expenses of $160,128 during nine months ended
September 30, 2008, an increase of $98,989, or 61.82%. This increase was
primarily attributable to the Company consummating an offering of convertible
debt and common stock purchase warrant in June 2008 which increased the interest
expense been accrued for the nine months ended September 30, 2009 as compared to
same period of 2008, and its interest rate had been increased to 24% from 18%
after default the original mature date on June 4, 2009. Accordingly, more
interest expenses had been accrued during the nine months of 2009 as compared to
same period of 2008.
37
Income
Tax
The
income taxes decreased by $23,703 to $477,030 during the nine months ended
September 30, 2009 compared to $500,733 during the nine months ended
September 30, 2008, a decrease of 4.73%. This decrease was primarily due to
an increased operating expense during the nine months of 2009 as compared to the
same period of 2008. . The Company's tax-exempt status ended as of
December 31, 2004. Hanxin is subject to a 15% corporate income tax starting
from year 2005. CIE is subject to 33% and 25% corporate income tax before and
after January 1, 2008, respectively.
Net
Income
Our net
income during the nine months ended September 30, 2009 was $1,963,911
compared to $2,404,234. Such a decrease was due to our dropped revenues and
increase operating expense during the nine months ended September 30, 2009,
compared to the same period of 2008.
Years Ended December 31,
2008 and 2007
Revenues
For the
year ended December 31, 2008, our revenues were $21,378,041 as compared to
$16,050,938 for the year ended December 31, 2007, an increase of $5,327,103
or approximately 33.19%. The reason for the increase is primarily due to our
selling efforts, increased sales of our major finished goods (wood materials,
floors, and boards) increased as compared to the sales quantities in year 2007.
Also,we
increased our unit sales prices by 20% commencing from October 2007. For
the year ended December 31, 2008, our revenues from wood materials, boards,
and floor sales were $1,005,315, 103,676, and $2,532,052 respectively more than
the revenue from sales of those items during the year ended December 31,
2007. Even though we had decreased sales on the tree skin raw material for the
year ended December 31, 2008.
However,
adverse market conditions for home and commercial renovation has recently
significantly adversely affected revenues. Our revenues for the fourth quarter
of 2008 declined to $3,536,742, compared to $8,958.570 for the third quarter,
$6,366,384 for the second quarter and $2,516,345 for the traditionally slow
first quarter. Fourth quarter revenues for 2008 were also below third and fourth
quarter revenues for 2007. While we have successfully grown our
revenues over recent years, we cannot predict when the industry will
recover.
Cost
of Sales and Gross Profit
For the
year ended December 31, 2008, cost of sales amounted to $13,937,361 or
65.19% of net revenues as compared to cost of sales of $10,990,041 or 68.47% of
net revenues for the year ended December 31, 2007, a percentage
decrease of 3.28%. The decrease was primarily due to reduction of waste of
materials resulting in more efficient work from repaired and improved machinery
and equipment used by us. Accordingly, gross profit for the year ended
December 31, 2008 increased $2,379,783 to $7,440,680 from $5,060,897 in the
year ended December 31, 2007. We are currently working with a vendor of raw
materials to secure future price by proposing long term supplier
contracts.
Operating
Expenses
For the
year ended December 31, 2008, total operating expenses were $3,470,991 as
compared to $2,467,341 for the year ended December 31, 2007, an increase of
$1,003,650 or 40.68%.
Included
in this increase were:
* For the
year ended December 31, 2008, selling expenses amounted to $2,711,764 as
compared to $1,954,225 for the year ended December 31, 2007, an increase of
$757,539 or 38.76%. For the year ended December 31, 2008, we experienced a
significant increase in sales commission expenses of $749,433 and in freight
expenses of $44,505 with our increased revenue.
* For the
year ended December 31, 2008, general and administrative expenses were
$759,227 as compared to $513,116 for the year ended December 31, 2007, an
increase of $246,111 or 47.96%. The increase in general and administrative costs
was primarily attributable to increases in consulting fees, advisory fees, legal
fees and professional fee in connection with our SEC filing, name change, and
USA capital market fund raising and public relationship advisory charges in the
current year.
38
Other
Income (Expense)
For the
year ended December 31, 2008, other expense amounted to $360,378 as
compared to other expense of $324,409 for the year ended December 31, 2007.
Other (expense) income, net for the years ended December 31, 2008 and 2007
were primarily related to net rental income $159,495 and $78,226 respectively
from our leasing entertainment facility. These rental net incomes had been
offset by the franchise taxes $10,116 and $55,000 accrued in the year 2008 and
2007, respectively. Also, this rental income was primarily offset by the
donation made by the Company during the second quarter of 2008 in the amount of
$72,975 in connection with the earthquake in Sichuan PRC.
For the
year ended December 31, 2008, net interest expense was $273,105 as compared
to net interest expense of $6,270 for the year ended December 31, 2007, an
increase of $268,835. This was attributable to the Company acquired a
convertible note for USA investors in amount of $700,000 (approximately
RMB4.8 million) in June 2008 with 18% annual rate and mature date due
in June 2009 and offered common stocks purchase warrant with convertible
note. Thus, the Company had incurred more interest expense in the current year,
as compared to the year of 2007.
For the
year ended December 31, 2008, the Company incurred less loss on disposition
of fix assets than 2007 by $182,763 or (53.42%). Since the loss incurred in year
2008 was not deductible for the tax purpose in P.R. China, the Company had
recognized deferred income taxes assets for the time difference.
Income
Taxes
Net
income taxes expenses increased by $248,582 to $597,453 for the year ended
December 31, 2008 as compared to $348,871 for the year ended
December 31, 2007. This increase was due to an increase in net income
before income taxes in year 2008, although it had been offset with deferred
income taxes benefits $23,905 in year 2008.
Minority
Interest
For the
year ended December 31, 2008, we reported a minority interest in income of
subsidiary of $279,704 as compared to $158,235 for the year ended
December 31, 2007. The minority interests income of subsidiaries were
attributable to Hanxin and Cork I&E, which we allocated to the minority
stockholders, and reduced our net income.
Years Ended December 31,
2007 and 2006
Revenues
For the
year ended December 31, 2007, our revenues were $16,050,938 as compared to
$12,041,588 for the year ended December 31, 2006, an increase of $4,009,350 or
approximately 33.3%. The reason for the increase is primarily due to our selling
efforts, increased sales of our major finished goods (wood materials, floors,
and boards) increased as compared to the sales quantities in year 2006.
Also,we
increased our unit sales prices by 20% starting in October 2007. For the year
ended December 31, 2007, our revenues from wood materials, boards, and floor
sales were $832,318, 434,954, and $2,123,730 respectively more than the revenue
from sales of those items during the year ended December 31, 2006. Even though
we had decreased sales on the wood paper products, this was offset by the
increase sales amount in tree skin raw material for the year ended December 31,
2007.
Cost
of Sales and Gross Profit
For the
year ended December 31, 2007, cost of sales amounted to $10,990,041 or 68.47% of
net revenues as compared to cost of sales of $9,333,361 or 77.51% of net
revenues for the year ended December 31, 2006, a percentage decrease of
9.04%. The decrease was primarily due to reduction of waste of
materials resulting in more efficient work from repaired and improved machinery
and equipment used by us. Accordingly, gross profit for the year
ended December 31, 2007 increased $2,352,670 to $5,060,897 from $2,708,227 in
the year ended December 31, 2006. We are currently working with a vendor of raw
materials to secure future price by proposing long term supplier
contracts.
39
Operating
Expenses
For the
year ended December 31, 2007, total operating expenses were $2,467,341 as
compared to $$1,926,056 for the year ended December 31, 2006, an increase of
$541,285 or 28.1%.
Included
in this increase were:
* For the
year ended December 31, 2007, selling expenses amounted to $1,954,225 as
compared to $1,363,494 for the year ended December 31, 2006, an increase of
$590,731 or 43.32%. For the year ended December 31, 2007, we experienced a
significant increase in sales commission expenses of $282,751 and in freight
expenses of $22,843 with our increased revenue. Another reason for
the increase in selling expenses was the increase in advertising costs of
$191,342 to improve sales quantities.
* For the
year ended December 31, 2007, general and administrative expenses were $513,116
as compared to $562,562 for the year ended December 31, 2006, a decrease of
$49,446 or 8.79%. The decrease in general and administrative costs were
primarily attributable to a $94,294 decrease in directors conference fees,
technical fees and legal fee associated with decreased operations. The decrease
was offset by, an increase of $34,775 employees’ salaries, bonus, employee
benefits, entertainment fees as well as accounting and professional fees during
2007 in connection with our SEC filings and continued compliance with the
provisions of the Sarbanes-Oxley Act of 2002, including new provisions which
will be effective in year 2008.
Other
Income (Expense)
For the
year ended December 31, 2007, other expense amounted to $324,409 as compared to
other income of $47,855 for the year ended December 31, 2006. Other (expense)
income, net for the years ended December 31, 2007 and 2006 were primarily
related to net rental income $78,226 and $68,618 respectively from our leasing
entertainment facility. These rental net incomes had been offset by the
franchise taxes $55,000 and $0 accrued in the year 2007 and 2006,
respectively.
.
For the
year ended December 31, 2007, net interest expense was $6,270 as compared to net
interest income of $50,952 for the year ended December 31, 2006, a decrease of
$57,222. This was attributable to (i) loans made to its related party
DeRong during first nine months of 2006 and (ii) loans made to us from
banks.
Income
Taxes
Income
taxes increased by $215,291 to $348,871 for the year ended December 31, 2007 as
opposed to $133,580 for the year ended December 31, 2006. This
increase was due to an increase in net income before income taxes.
Minority
Interest
For the
year ended December 31, 2007, we reported a minority interest in income of
subsidiary of $158,235 as compared to $63,486 for the year ended December 31,
2006. The minority interests income of subsidiaries were attributable to Hanxin
and Cork I&E, which we allocated to the minority stockholders, and reduced
our net income.
Liquidity and Capital
Resources
Operating
working capital was $9,092,499on September 30, 2009, an increase of
$191,740 or 2.15% compared to $8,900,759 at December 31, 2008. The increase
was primarily due to an increase of $520,153 in cash and equivalents and an
increase of $4,552,102 in inventories, respectively, as of September 30,
2009. However, these increases were significantly offset by the decrease in the
current assets related to a loan to unrelated party and advance
to suppliers, and the increase in current liabilities for tax payable and
account payable and accrued expenses on September 30, 2009.
40
Cash
provided by operating activities was $1,455,045 during the nine months ended
September 30, 2009 as compared to ($1,277,280) used in during the nine
months ended September 30, 2008. This increase was primarily because we
advance less money to our suppliers during the nine months ended
September 30, 2009 as compared to the same period of last
year.
Cash used
in investing activities was $708,962 during the nine months ended
September 30, 2009, compared to net cash provided by investing activities
of $1,162,600 in the same period 2008. The financing cash inflow increase during
the first nine months of 2008 was primarily because a deposit for the purchase
of intangible assets was refunded in September 2008.
Cash used
in financing activities was $224,132 during the nine months ended
September 30, 2009, compared with net cash provided by financing activities
of $567,450 in the same period 2008. The greater financing cash inflow during
the first nine months of 2008 was primarily because we issued convertible notes
in the principal amount of $700,000 in June 2008.
On
June 4 and June 12, 2008, the Company consummated the offering of the
Selling Stockholder Promissory Notes and common stock purchase warrants for
aggregate gross proceeds of $700,000. The notes matured one (1) year from the
date of issuance and bore interest at an annual rate of 18%, payable at maturity
in USD. Since the notes were not paid at maturity, the annual interest rate
increased to 24%.Upon the successful closing of this Offering, ,, the promissory
notes will be convertible into shares of common stock at a 50% discount to the
price per share of Common Stock sold in the Offering., Each Selling Stockholder
also has the option to be paid the principal and interest due under the
promissory note or., since the Offering was not achieved within the one year
term of the promissory notes, convert the note into shares of common
stock at a conversion price of $0.228 per share (without giving effect to the
Reverse Split). The warrants are exercisable at any time after the consummation
of the Offering through the fourth anniversary of the consummation of the
Offering (the "Financing Expiration Date"). Each holder is entitled to purchase
the number of shares of common stock equal to the initial principal amount of
such investor's promissory note divided by the offering price of our common
stock (the "Financing Based Conversion Price") at an exercise price equal to the
Financing Based Conversion Price. Since the Offering did not occur
within 12 months of the issuance of the warrants, each warrant is
exercisable for the number of shares of common stock equal to 50% of the initial
principal amount of the promissory note divided by $0.228, at an exercise price
equal to $0.228, subject to certain adjustments as set forth in the warrant. The
interest payable regarding the convertible notes has been accrued and recorded
as of September 30, 2009. . The promissory notes are secured by common
stock pledged by Pengcheng Chen, our Chief Executive Officer and Fangshe Zhang,
our Chairman. The Selling Stockholders have not sought to take possession of
such collateral to date. However, at the present time, we may not
have sufficient cash or cash equivalents to repay the promissory note should the
Selling Stockholders demand payment prior to the closing of the
Offering.
Occasionally
we have borrowed short-term loans from local banks to fund our
operations. On November 30, 2007, the Company obtained a short-term
loan of RMB3.9 million (equivalent at that time to $534,642 ) from Xian
Xitaoyuan Credit Bank by pledging the Company's building in YuLerYuan as
collateral,. The Company paid the principal of RMB3.9 million and all accrued
interest on June 30, 2008. On the same day, the Company borrowed RMB3 million
(equivalent to $439,722) from the same bank. This loan was fully paid when due
on June 29, 2009.
On
November 10, 2005, the Company signed the Entrust Purchase Agreement to purchase
a factory’s fixed assets through an unrelated agent. The Company has paid
deposits of $2,021,584 (equivalent to RMB 13,800,000) to the agent as of
September 31, 2009. The agency agreement has no firm commitment on the purchase
but it states a maximum price of RMB 50,000,000 that the Company is willing to
pay for the fixed assets. The deposit is fully refundable if the purchase does
not close by June 30, 2010.
In 2008,
to assist the operation of our customer Shaanxi Shuta, we loaned
RMB10 million (equivalent to $1,464,916) to Shaanxi Shuta for one year
starting from October 27, 2008 and this loan is renewed on October 28, 2009
for another two years until October 27, 2011 . This loan is non-interest
bearing and unsecured.
Pursuant
to our agreement with Shaanxi Shuta dated October 20, 2009, we agreed to
purchase from Shaanxi Shuta undeveloped land of 7,000 Mu (equal to 4,669,000
square meters) located in Baoji District, Shaanxi province. We plan to develop
our own cork forest on the land, which will help assure our raw material supply
at a lower cost. Shuta incurred approximately RMB10,000,000 expenses
in the process of the acquisition. The agreement provides that in the event that
we do not purchase the land by October 20, 2011, we will be liable to pay
RMB10,000,000 to Shuta as reimbursement for the acquisition expenses. The
parties anticipate that should we not purchase the land by October 20, 2011,
Shuta will not repay the loan and the parties will have no further obligation to
each other regarding the loan or the land purchase.
41
With
approximately $9.1 million of net working capital (total current assets
less total current liabilities), improvements in our collections of accounts
receivable and positive cash flow from operations as of September 30, 2009,
we believe we have sufficient resources to finance our operations for the coming
year.
Off-Balance
Sheet Arrangements
None.
42
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following table sets forth the names, ages, principal offices and positions and
the date each such person became a director or executive officer. Executive
officers are elected annually by our Board of Directors. Each executive officer
holds his office until he resigns, is removed by the Board or his successor is
elected and qualified. Directors are elected annually by our stockholders at the
annual meeting. Each director holds his office until his successor is elected
and qualified or his earlier resignation or removal.
Name
|
Age
|
Positions
Held
|
||
Fangshe
Zhang
|
52
|
Chairman
|
||
Pengcheng
Chen
|
34
|
CEO/Director
|
||
Yi
Tong
|
38
|
Chief
Financial Officer
|
||
Shengli
Liu
|
42
|
Chief
Operating Officer/Vice Manager/Director
|
||
Tianbao
Guo
|
61
|
Chief
Technical Officer
|
||
Genshe
Bai
|
50
|
Director
|
||
Genhu
Yang
|
56
|
Director
|
||
Xiaodong
Wen
|
41
|
Director
|
||
Tao
Wang
|
39
|
Director
|
The
directors named above serve until the annual meeting of our stockholders.
Thereafter, directors are elected for one-year terms at the annual stockholders’
meeting. Officers hold their positions at the pleasure of the Board of
Directors, absent any employment agreement. There is no arrangement or
understanding between our directors and officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer.
Biographical
Information
Mr. Fangshe
Zhang, Chairman
Mr. Zhang
founded Hanxin in 2001 and has acted as its Chairman of the Board of Directors
since its inception. Prior to forming Hanxin, Mr. Zhang was the general
manager of Xi’an Dong Da Terrestrial Heat Heating Co., Ltd., a company whose
primary business was the development of terrestrial heat. Mr. Zhang is a
technical expert in cork processing technology, holding more than fourteen
patents in China.
Mr. Pengcheng
Chen, CEO/Director
Mr. Chen
is our Chief Executive Officer and a director since 2004, and has worked at
Hanxin since 2002. From 1997 to 1998 he worked for Xi'an
Tangcheng Hotel as an assistant general manager. From 1998 to 2000 he served as
general manager of Xi'an Qingye Virescence Co. Ltd, a gardening engineering
company.
Mr. Shengli
Liu, Chief Operating Officer/Vice Manager/Director
Mr. Liu
has served as our Chief Operating Officer and Vice Manager since October 2009,
has been a director since 2004, and worked for Hanxin since 2002. From 1997 to
2002 he was the director for the 12th section of Xikang railway project of China
Railway 18th Bureau Group Co., Ltd. From 1989 to 1997 he worked as a manger in
the metals division of the Xi'an Commodity Bureau.
43
Mr. Yi
Tong, Chief Financial Officer
Mr. Tong
has served as our Chief Financial Officer since February 2004. Mr. Tong was
a director from 2004 through October 2009. Mr. Tong has
previously worked for several financial institutions. From May 2003 to
February 2004, he served as chief representative of Federal International
Finance Inc., Canada. From August 2001 to May 2003 he worked as a
senior manager for China Dragon Securities Co., Ltd. and from April 2001 to
August 2001 he worked as project manager of China Eagle Securities Co.,
Ltd.
Mr. Tianbao
Guo, Chief Technical Officer
Mr. Guo
has been our Chief Technical Officer since October 2009, and he has worked for
Hanxin since 2005. Before joining Hanxin he worked in Xi’an Forestry Chemicals
factory as engineer beginning 1982 and had become the president of that factory
in 1992.
Mr. Genshe
Bai, Director
Mr. Bai
has been an independent director since 2002. From 1996 to 2002, he worked as the
general manager of Xi’an Commodity Development Co., Ltd., a company engaged in
the purchase and sale of commodities. From 1980 through 1996, Mr. Bai
worked as a manager of the auditing department for Xi’an Commodity Bureau, a
governmental agency responsible for the regulation of commodities.
Mr.
Genhu Yang, Director
Mr. Yang
has been an independent director since December 2009. He obtained his
bachelor degree in Materials Science in Xi’an Science and Technology University
in 1980. He has been a technician in the Xi’an Wood Company and Xi’an Forestry
Chemicals Factory for12 years. He had been awarded the 3rd
Price of Technological Invention by Xi’an Science and Technology
Counsel.
Mr.
Xiaodong Wen, Director
Mr.
Xiaodong Wen has been an independent director since December 2009. He has a MBA
degree in New York University of U.S. and a bachelor degree in Law in Beijing
University of International Business and Economics. Mr. Wen had been working in
Solomon Brothers from 1993 to 1995 in the area of issuance and listing of ABS,
MBS, and junk bond. From 1995 to 1999, he worked for Nomura Securities and First
Pacific Rim, Inc to be in charge of the investment banking and consulting
business in Asia-pacific areas. Mr. Wen has over 15 years of professional
experience in capital markets, especially in public offerings and private equity
in Hong Kong and the U.S. for Chinese companies.
Mr.
Tao Wang, Director
Mr. Tao
Wang has been an independent director and chairman of the Audit Committee since
December 2009..He is a CPA in China and has been working as professional auditor
since 1995. He established Shaanxin Zhixin Auditing Firm in 2001, a local
auditing firm in Shaaxi Province. Mr. Wang has extensive experience
both in finance and management.
Significant
employees
Other
than the officers described above, we do not expect any other individuals to
make a significant contribution to our business.
Family
Relationships
There are
no family relationships among our officers, directors, persons nominated for
such positions, or significant shareholders.
44
Involvement
in Certain Legal Proceedings
None of
our directors, executive officers, or control persons has been involved in any
of the following events during the past ten years:
·
|
Any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of
bankruptcy or within two years prior to that
time;
|
·
|
Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
·
|
Being
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
·
|
Being
found by a court of competent jurisdiction (in a civil violation), the SEC
or the Commodity Future Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
|
Board
Committees
The Board
of Directors is composed of seven directors, Mr. Fangshe Zhang, Mr. Pengcheng
Chen, Mr. Shengli Liu, Mr. Genshe Bai, Mr. Genhu Yang, Mr. Xiaodong Wen, and Mr.
Tao Wang. The last four directors are independent directors. All board action
requires the approval of a majority of directors in attendance at a meeting at
which a quorum is present.
In
December, 2009, we established an Audit Committee of the Board with the
responsibility for assisting the Board in fulfilling its oversight role
regarding the Company’s financial reporting process, its system of internal
control and its compliance with applicable laws, regulations and company
policies. Tao Wang, Genshe Bai, and Xiaodong Wen were elected to
be members of the Audit Committee and shall serve the Committee until their
successors are duly elected and qualified.
In
December 2009, we also established a Governance Committee and a Compensation
Committee, and elected Genshe Bai and Xiaodong Wen as members of each
Committee.
The Audit
Committee is primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The Governance Committee is primarily responsible
for nominating directors and setting policies and procedures for the nomination
of directors. The Governance Committee is also responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The Compensation Committee is primarily responsible
for reviewing and approving our salary and benefit policies (including
equity plans), including compensation of executive officers.
Code
of Ethics
We
adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of
2002 on January 24, 2008. The Code is designed to deter wrongdoing and to
promote:
·
|
Honest
and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships;
|
·
|
Full,
fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC, and in other public
communications that we made;
|
·
|
Compliance
with applicable governing laws, rules and
regulations;
|
·
|
The
prompts internal reporting of violations of the Code to the appropriate
person or persons; and
|
·
|
Accountability
for adherence to this Code.
|
This Code
requires the highest standard of ethical conduct and fair dealing of its
Directors and employees While, per Sarbanes-Oxley, this policy is intended to
only cover the actions of the CFO, we expect our other officers, directors and
employees to also review the Code and abide by its provisions. We believe that
our reputation is a valuable asset and must continually be guarded by all
associated with us so as to earn the trust, confidence and respect of our
suppliers, customers and stockholders. Our CFO is committed to conducting
business in accordance with the highest ethical standards. The CFO must comply
with all applicable laws, rules and regulations. Furthermore, the CFO must not
commit an illegal or unethical act, or instruct or authorize others to do
so.
45
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Background
and Compensation Philosophy
Our
Compensation Committee consists of Genshe Bai and Xiaodong Wen , both
independent directors The Compensation Committee and , prior to its
establishment, our board of directors determined the compensation to be paid to
our executive officers based on our financial and operating performance and
prospects, and contributions made by the officers’ to our
success. Each of the named officers will be measured by a series of
performance criteria by the board of directors, or the compensation committee on
a yearly basis. Such criteria will be set forth based on certain
objective parameters such as job characteristics, required professionalism,
management skills, interpersonal skills, related experience, personal
performance and overall corporate performance.
Our board
of directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee will make an independent
evaluation of appropriate compensation to key employees, with input from
management. The Compensation Committee has oversight of executive
compensation plans, policies and programs.
Elements
of Compensation
Before
2009 we provided our executive officers solely with a base salary to compensate
them for services rendered. Our policy of compensating our executives
with a cash salary has served us well. To better attract and retain
executive talent, and to stimulate executive activeness, we believe it is
necessary at this time to provide our executives discretionary bonuses and
equity incentives in order for us to continue to be successful. We plan to
distribute bonus, and to allocate company stocks and stock options to our
executive officers commencing in 2010, the actual amount of which shall be based
on considerations of the board of directors. We shall also issue certain amount
of company stock options to the executive officers on an annual basis commencing
from 2010. We plan to grant our CEO Pengcheng Chen shares of stock, stock
options or stock awards as compensation for his contribution to the company as
he had successfully lead the company through the worldwide financial crisis
since 2007.
Base
Salary
The base
salaries paid to Fangshe Zhang, Pengcheng Chen, Yi Tong, Yi Zhang, and Pingjun
Zhang during 2008, 2007 and 2006 are listed in the compensation table
below. All such amounts were paid in cash. The value of
base salary reflects each executive’s skill set and the market value of that
skill set in the sole discretion of our board of directors and/or our executive
officers. In 2009 the base salary was increased.
Discretionary
Bonus
The Board
of Directors has decided to provide our executive officers with discretionary
bonuses at the end of each fiscal year. Our Compensation Committee and board of
directors will review the grant of bonuses on a yearly basis based on
our financial and operating performance and prospects, the level of compensation
paid to similarly situated executives in comparably sized companies and
contributions made by the officers’ to our success. In 2009, our financial
status had recovered due to the effort made by the staff, and we intend to
distribute more bonuses at the end of year to our executive
officers.
46
Equity
Incentives
We have
not established equity based incentive program and have not granted stock based
awards as a component of compensation. We are planning to adopt and establish an
equity incentive plan, as our board of directors has determined that it is in
the best interests of our stockholders and the Company. The incentive program
includes issuing stock and options to executive officers for services rendered
in 2009, and to issue certain amount of options to executive officers every year
starting from 2010.
Retirement
Benefits
Our
executive officers are not presently entitled to company-sponsored retirement
benefits.
Perquisites
We have
not provided our executive officers with any material perquisites and other
personal benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.
Deferred
Compensation
We do not
provide our executives the opportunity to defer receipt of annual
compensation.
Summary
Compensation Tables
The
following table discloses executive compensation received for the fiscal year
ended December 31, 2008 as well as the preceding three years.
SUMMARY
COMPENSATION TABLE
Annual
Compensation
|
Long-Term
Compensation
Awards
|
|||||||||||||||||||||
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Restricted
Stock
Award
|
Securities
Underlying
Options
|
Total
Compensation
|
||||||||||||||||
Fangshe
Zhang,
|
2008
|
$ | 3,013 | $ | - 0 - | $ | - 0 - | $ | - 0 - | $ | 3,013 | |||||||||||
Chairman
|
2007
|
$ | 3,971 | $ | 3,945 | $ | - 0 - | $ | -0 - | $ | 7,916 | |||||||||||
2006
|
$ | 3,972 | $ | 3,844 | $ | - 0 - | $ | - 0 - | $ | 7,816 | ||||||||||||
Pengcheng
Chen,
|
2008
|
$ | 5,182 | $ | - 0 - | $ | - 0 - | $ | - 0 - | $ | 5,182 | |||||||||||
Chief
Executive Officer
|
2007
|
$ | 6,143 | $ | 3,945 | $ | - 0 - | $ | - 0 - | $ | 10,088 | |||||||||||
2006
|
$ | 5,766 | $ | 3,844 | $ | - 0 - | $ | - 0 - | $ | 9,610 | ||||||||||||
Yi
Tong,
|
2008
|
$ | 3,013 | $ | - 0 - | $ | - 0 - | $ | - 0 - | $ | 3,013 | |||||||||||
Chief
Financial Officer
|
2007
|
$ | 3,656 | $ | 13,151 | $ | - 0 - | $ | - 0 - | $ | 16,807 | |||||||||||
2006
|
$ | 3,588 | $ | 3,588 | $ | - 0 - | $ | - 0 - | $ | 7,176 | ||||||||||||
Yi
Zhang,
|
2008
|
$ | 3,013 | $ | - 0 - | $ | - 0 - | $ | - 0 - | $ | 3,013 | |||||||||||
Chief
Operating Officer
|
2007
|
$ | 3,656 | $ | 6,575 | $ | - 0 - | $ | - 0 - | $ | 10,231 | |||||||||||
2006
|
$ | 3,588 | $ | 3,203 | $ | - 0 - | $ | - 0 - | $ | 6,791 | ||||||||||||
Pingjun
Zhang,
|
2008
|
$ | 3,013 | $ | - 0 - | $ | - 0 - | $ | - 0 - | $ | 3,013 | |||||||||||
Chief
Technical Officer
|
2007
|
$ | 3,656 | $ | 6,575 | $ | - 0 - | $ | - 0 - | $ | 10,231 | |||||||||||
2006
|
$ | 3,306 | $ | 3,203 | $ | - 0 - | $ | - 0 - | $ | 6,509 |
Outstanding
Equity Awards
There
were no option exercises or options outstanding as of September 30,
2009.
Employment
Agreements
We have
employment contracts with four of our executive officers, Pengcheng Chen, our
CEO, Yi Tong, our CFO, Tianbao Guo, our CTO, and Shengli Liu, our COO and Vice
Manager. The terms of the contracts are one year subject to renewal. Our
employment contract with Yi Tong was signed on April 1, 2009, and the other
three executive officers’ contracts were signed on October 9, 2009. According to
the employment agreements, the base salaries to Pengcheng Chen, , Tianbao Guo,
and Shengli Liu for one year term ended October 9, 2010 are RMB 114,000
(equivalent to $16,697), , RMB78,000 (equivalent to $11,424), and RMB 67,200
(equivalent to $9,843), respectively. The base salary payable to Yi Tong for the
one year term ended April 20, 2010 are RMB91,200 (equivalent to $13,354) . To
better attract and retain executive talent, and to stimulate performance we
intend to provide our executives with discretionary bonuses and equity
incentives. We plan to distribute bonus, and to issue common stocks and/or stock
options to our executive officers for services rendered in 2009. The amount of
such equity awards will be determined by the Compensation Committee and the
Board of Directors.
47
Director
Compensation
The
Company did not and does not currently have an established policy to provide
compensation to members of its board of directors for their services in that
capacity. The Company intends to develop such a policy in the near
future.
Indemnifications
of Directors and Executive Officers and Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
Articles of Incorporation provides for the indemnification of our directors,
officers, employees, and agents, under certain circumstances, against attorney’s
fees and other expenses incurred by them in any litigation to which they become
a party arising from their association with or activities on behalf of us. We
will also bear the expenses of such litigation for any of its directors,
officers, employees, or agents, upon such person’s promise to repay us therefore
if it is ultimately determined that any such person shall not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by us which it will be unable to recoup.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the closing of the Share Exchange, we have not entered into
any indemnification agreements with our directors or officers, but may choose to
do so in the future. Such indemnification agreements may require us, among other
things, to:
● |
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or directors;
|
● |
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions; or
|
● |
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
48
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Loan
to Related Parties
As of
September 30, 2009, amounts due to stockholder/officer are unsecured,
non-interest bearing and due on demand. The total net amount due to the
stockholder/officer was $177,600 which represented the net amount lent by
officers to us.
Patent
License Agreement and Patent Assignment Agreement
Mr. Fangshe
Zhang, our Chairman and a principal shareholder leases us three cork processing
technology related patents in China under operating lease agreements that expire
on April 16, 2011. During the years ended December 31, 2008 and
December 31, 2007 respectively, we paid him license fees for these patents
in the aggregate amount of $345,444 and $315,615.
The
following is a schedule of future minimum rental payments required under these
operating leases as of September 30, 2009.
For
Nine Months Ending September 30,
|
Amount
|
|||
2010
|
$
|
351,580
|
||
2011
|
191,416
|
|||
Total
minimum rental payments required
|
$
|
542,996
|
Patent
lease expenses amounted to $263,685 and $257,726 for the nine months ended
September 30, 2009 and 2008, respectively.
Review
Approval or Ratification of Transactions with Related Persons
All
ongoing and future transactions between us and any of our officers and directors
and their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by the Corporate Governance
and Nominating Committee (whose members are “independent” directors) and by a
majority of our disinterested “independent” directors (to the extent we have
any) or the members of our board who do not have an interest in the transaction,
in either case who had access, at our expense, to our attorneys or independent
legal counsel. We will not enter into any such transaction unless our
disinterested “independent” directors) determine that the terms of such
transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not
enter into a business combination or invest alongside any of our directors,
officers, any affiliate of ours or of any of our directors or officers or a
portfolio company of any affiliate of our directors or officers.
49
Potential
Conflicts of Interests
Save as
disclosed below and under the section “Interested Person Transactions”, during
the past three financial years:
a)
|
None
of our directors, executive officers or controlling shareholder or their
affiliates had any interest, direct or indirect, in any material
transaction to which we are a
party.
|
b)
|
None
of our directors, executive officers or controlling shareholder or their
affiliates had any interest, direct or indirect, in any company that
carries the same business or similar trade which competes materially and
directly with our existing
business.
|
c)
|
None
of our directors, executive officers or controlling shareholder or their
affiliates had any interest, direct or indirect, in any enterprise or
company that is our major customer or supplier of goods or
services.
|
d)
|
None
of our directors, executive officers or controlling shareholder or their
affiliates has had any interest, direct or indirect, in any material
transaction we have undertaken within the last three
years.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this report are deemed outstanding even if they have not
actually been exercised. Those shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other
person.
The
following table sets forth as of February 2, 2010, information with respect to
the beneficial ownership of our outstanding Common Stock by (i) each director
and executive officer of us, (ii) all directors and executive officers of us as
a group, and (iii) each shareholder who was known by us to be the beneficial
owner of more than 5% of our outstanding Common Stock. Except as otherwise
indicated, the persons or entities listed below have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them. The
table is based on 35,663,850 shares outstanding.
Name
and Address of
Beneficial Owner of Shares
|
Position
|
Number
of shares
held by Owner
|
Percent
of
Class
|
|||||||
Pengcheng
Chen (1)
|
CEO/Director
|
7,911,457 | (1) | 22.18 | % | |||||
Fangshe
Zhang (2)
|
Chairman
|
5,402,096 | (2) | 15.15 | % | |||||
Yi
Tong
|
CFO
|
–– | –– | |||||||
Shengli
Liu
|
Chief
Operating Officer/Vice Manager/Director
|
800,000 | 2.24 | % | ||||||
Tianbao
Guo
|
Chief
Technical Officer
|
–– | –– | |||||||
Genshe
Bai
|
Director
|
1,200,000 | 3.36 | % | ||||||
Genhu
Yang
|
Director
|
800,000 | 2.24 | % | ||||||
Xiaodong
Wen
|
Director
|
--- | --- | |||||||
Tao
Wang
|
Director
|
--- | --- | |||||||
Executive
Officers & Directors as a Group
|
16,113,553 | 45.17 | % |
———————
(1)
|
Having
an address at No. 23, Tiyu Street, Chang’an District, Xi’an,
China.
|
(2)
|
Having
an address at No. 5, Beisan Street, Beida Village, Dongda Town,
Chang'an County, Xi'an, China.
|
50
DESCRIPTION
OF SECURITIES
Preferred
Stock
We are
authorized to issue up to 5,000,000 shares of $.0001 par value preferred stock.
We have no shares of preferred stock outstanding. Under our Amended Articles of
Incorporation, our board of directors has the power, without further action by
the holders of the common stock, to determine the relative rights, preferences,
privileges and restrictions of the preferred stock, and to issue the preferred
stock in one or more series as determined by the board of directors. The
designation of rights, preferences, privileges and restrictions could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the common stock.
The
issuance of any preferred stock could diminish the rights of holders of our
common stock, and therefore could reduce the value of such common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict our ability to merge with, or sell assets to, a third party.
The ability of our board of directors to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change-in-control, which in turn could prevent the stockholders from
recognizing a gain in the event that a favorable offer is extended and could
materially and negatively affect the market price of our common stock. The
Company’s Bylaws or Articles of Incorporation do not contain any other
provisions that would have the effect of delaying or preventing a change in
control.
Common
Stock
We are
authorized to issue 200,000,000 shares of common stock, $0.0001 par value per
share, of which 35,663,850 shares are issued and outstanding. Each outstanding
share of common stock is entitled to one vote, either in person or by proxy, on
all matters that may be voted upon by their holders at meetings of the
stockholders.
Holders
of our common stock:
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our board of directors;
|
(ii)
|
are
entitled to share ratably in all of the Company’s assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up;
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our stockholders.
|
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
We have
never paid or declared dividends. However, holders of our common stock are
entitled to dividends if declared by the board of directors out of funds legally
available. We do not, however, anticipate the declaration or payment of any
dividends in the foreseeable future. We intend to retain earnings, if any, to
finance the development and expansion of our business. Future dividend policy
will be subject to the discretion of the board of directors and will be
contingent upon future earnings, if any, our financial condition, capital
requirements, general business conditions and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be
paid.
Warrants
The
Warrants expire five years from the date of this Prospectus and become
exercisable one year from the date of issuance. Warrants are not
separately tradable for a period of one year after issuance, unless sooner as
may be approved by the underwriter, in its sole discretion. During the exercise
period, each Warrant will entitle the holder thereof to purchase one share of
Common stock at an exercise price of $_____ per share. Warrants may
be exercised by surrendering the Warrants to the warrant agent and paying the
exercise price. No fractional shares of Common stock will be issued
in connection with the exercise of Warrants. Upon exercise, the
Company will pay to the holder the value of any such fractional shares based
upon the market value of the Common stock at such time. The Company
is required to keep available a sufficient number of authorized shares of Common
stock for issuance to permit exercise of the Warrants.
51
The
Warrants are redeemable by the Company at a price of $.05 per Warrant commencing
one year after the date of this Prospectus and prior to their expiration,
provided that (i) prior notice of not less than 30 days is given to the holders
of the Warrants, and (ii) the closing sale price of the common stock as reported
on the national exchange on which the shares of common stock are listed, or if
the shares of common stock are not listed on a national securities exchange, the
closing bid price on the OTCBB for 20 consecutive trading days, ending on the
tenth day prior to the date on which the Company gives notice of redemption, has
been at least $____, 180% of the initial public Offering price of the
Shares. The holders of the Warrants shall have the exercise rights
until the close of the business day preceding the date fixed for
redemption. Warrants may be exercised anytime after the closing
of Offering and prior to the date fixed for call or the expiration
date.
The
Warrants will expire at 5:00 p.m., New York time, on the fifth anniversary
of the effective date of this Prospectus. Holders of the Warrants as
such will not have any of the rights or privileges of shareholders of the
Company prior to the exercise of the Warrants. In the event a holder
of Warrants fails to exercise the Warrants prior to their expiration, the
Warrants will expire and the holder thereof will have no further rights with
respect thereto. A holder of Warrants as such will not have any
rights, privileges, or liabilities as a shareholder of the
Company. In the event of the liquidation, dissolution or winding up
of the Company, holders of the Warrants as such are entitled to participate in
the distribution of the Company's assets.
The
exercise price of the Warrants and the number of shares issuable upon exercise
of the Warrants will be subject to adjustment to protect against dilution in the
event of stock dividends, stock splits, combinations, subdivisions, and
reclassifications. No assurance can be given that the market price of
the Common stock will exceed the exercise price of the Warrants at any time
during the exercise period.
Purchasers
of the Warrants will have the rights to exercise the Warrants to purchase shares
of Common stock only if a current registration statement relating to such shares
is then in effect and only if the shares are qualified for sale under the
securities laws of the jurisdictions in which the various holders of the
Warrants reside. The Company has undertaken to maintain the
effectiveness of the Registration Statement of which this Prospectus is a part
or to file and maintain the effectiveness of another registration statement so
as to permit the purchase of the common stock underlying the Warrants, but there
can be no assurance that the Company will be able to do so. The
Warrants may be deprived of any value if this Registration Statement or another
registration statement covering the shares issuable upon the exercise thereof is
not kept effective or if such common stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the Warrants
reside.
For the
life of the Warrants, a holder thereof is given the opportunity to profit from a
rise in the market price of the common stock. In addition, the Company may find
it more difficult to raise equity capital if it should be needed for the
business of the Company while the Warrants are outstanding. At any
time when the holders of Warrants might be expected to exercise them, the
Company would, in all likelihood, be able to obtain additional equity capital on
terms more favorable than those provided in the Warrants.
Underwriters'
Warrants
If the
Offering is successful, the Company will be obligated to issue Underwriters'
Warrants for a nominal amount, which entitle the holder to purchase up to
_________ Units at a price of $____ per Unit. At the closing of this
Offering the Company will issue the Underwriters'
Warrants. Underwriters' Warrants will be exercisable, in whole or in
part, for a period of five years, commencing one year after the effective date
of this Offering. The Underwriters have been granted certain registration rights
with respect to such warrant and the underlying common stock. See
"Underwriting."
Promissory
Notes and Warrants
On
June 4 and June 12, 2008, the Company consummated an offering of
convertible promissory notes and common stock purchase warrants for aggregate
gross proceeds of $700,000. The notes matured one (1) year from the date of
issuance and bore interest at an annual rate of 18% through the maturity date
and at a rate of 24% thereafter.. Upon the closing of this Offering, the
promissory notes will be convertible into shares of common stock at a 50%
discount to the price per share of common stock sold in the
Offering. Since the Offering was not achieved within the one year
term of the promissory notes, each Selling Stockholder has the option to (1)
paid the principal and interest due under the promissory note, (2) convert the
note into shares of common stock at a conversion price of $0.228 per share or
(3) to convert the promissory note at a 50% discount to the price per share of
common stock sold in the Offering. Each investor also received warrants
exercisable for 4 years to purchase shares of our common stock at an exercise
price equal to the share price per share of common stock in the Offering or,
since the Offering did not occur within 12 months of the issuance of the Selling
Stockholder Promissory Notes and warrants, at $.228 per share. Under the
warrants, investors can purchase an amount of shares for an aggregate
consideration up the amount of their investment. Our obligations
under the promissory notes are secured by 7,630,814 shares of common stock
pledged by Mr. Pengcheng Chen, our Chief Executive Officer, and by
Mr. Zhang, our Chairman .We were unable to satisfy our obligations under
the Selling Stockholder Promissory Notes on due maturity date but the
Selling Stockholders have not, to date, sought the shares of common stock being
held in escrow.
52
Delaware
Anti-Takeover Law and Charter and Bylaw Provisions
We are
subject to Section 203 of the Delaware General Corporation Law. This provision
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
•
|
prior
to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
•
|
upon
consummation 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 time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
•
|
on
or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder.
|
Section
203 defines a business combination to include:
•
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
•
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
•
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
•
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
•
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our Company, including changes
a stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, will:
53
•
|
provide
our board of directors with the ability to alter its bylaws without
stockholder approval;
|
•
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business to be
brought before a meeting of stockholders;
and
|
•
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by them,
and to discourage some types of transactions that may involve an actual or
threatened change in control of our Company. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure our
Company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in our
management.
Transfer
Agent
Our
transfer agent is Olde Monmouth Stock
Transfer Co., Inc., 200 Memorial Parkway, Atlantic Highlands, NJ 07716, and
their contact number is (732)-872-2727.
Listing
Our
shares of common stock are currently quoted on the Over-The –Counter Bulletin
Board under the symbol “AKRK.” We intend to apply to have our common
stock approved for listing on the NASDAQ or AMEX under the trading symbol
“AKRK.”
SHARES
ELIGIBLE FOR FUTURE SALE
As
of February 1, 2010, we had 35,663,850 outstanding shares of common
stock (without giving effect to the Reverse Split) . Of such shares, 30,153,508
are considered “restricted” securities within the meaning of the Securities Act
of 1933 , including 16,113,553 shares owned by affiliates. Upon
completion of this offering, we will have outstanding an aggregate
of shares of common stock, assuming no exercise of the underwriter’s
over-allotment option. All of the restricted shares
will be freely tradable without restriction or further registration under the
Securities Act, except that any shares owned or shares purchased by our
“affiliates,” as that term is defined in Rule 144 of the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 and the
Lock-Up Agreements described below .
Shares covered by
this Prospectus
All of
the shares being registered in this offering may be sold without restriction
under the Securities Act. The shares being registered on behalf of
the Selling Stockholders are subject to the Lock-Up Agreements described
below.
Rule 144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the three
months preceding a sale and who has beneficially owned shares of our common
stock for at least six months, including the holding period of any prior owner,
except if the prior owner was one of our affiliates, would be entitled to sell
all of their shares, provided the availability of current public information
about the Company during the six months following satisfaction of the six-month
holding period requirement.
54
Affiliates
that have held restricted securities for at least six months to sell such
restricted securities in accordance with the traditional conditions of Rule 144,
including the public information requirement, the volume limitations, manner of
sale provisions and notice requirements. In particular, an affiliate who has
beneficially owned shares of our common stock for at least six months would be
entitled to sell within any three-month period a number of shares that does not
exceed 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this offering (excluding the
underwriter’s over-allotment option of up to Units).
No
prediction can be made as to the effect, if any, future sales of shares, or the
availability of shares for future sales, will have on the market price of our
common stock prevailing from time to time. The sale of substantial
amounts of our common stock in the public market, or the perception that such
sales could occur, could harm the prevailing market price of our common
stock. Any substantial sale of common stock pursuant to any resale
prospectus by the Selling Stockholders or Rule 144 may have an adverse effect on
the market price of our common stock by creating an excessive
supply.
Lock-Up Agreements and
Registration
The
Company's directors and officers and any other holder of more than five percent
(5%) of the outstanding shares of Common Stock (or securities exercisable for or
convertible into shares of common stock), at the effective date of this
Prospectus, have entered into customary "lock-up” agreements in favor
of the underwriter pursuant to which such persons and entities
agreed, for a period of eighteen (18) months after the Offering is completed,
that they shall neither publicly offer, issue, sell, contract to sell, encumber,
grant any option for the sale of or otherwise dispose of any securities of the
Company without the underwriter’s prior written consent, and any sale of such
securities shall be executed by the underwriter, except for the issuance of
shares of Common Stock upon the exercise of outstanding options,
warrants and options which may be issued pursuant to an Incentive Compensation
Plan reasonably acceptable to the underwriter. In addition, the
purchasers of the convertible promissory notes in the aggregate principal amount
of $700,000 and related warrants have entered into customary
“lock-up” agreements in favor of the underwriter pursuant to which
such persons and entities shall agree, for a period of ______ months after the
Offering is completed, that they shall neither publicly offer, issue, sell,
contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any securities of the Company without the underwriter's prior written
consent.
We have
been advised by ____________that it has no present intention and there are no
agreements or understandings, explicit or tacit, relating to the early release
of any locked-up shares. The underwriter may, however, consent to an early
release from the lock-up period if, in its opinion, the market for the common
stock would not be adversely impacted by sales. The release of any lock-up would
be considered on a case-by-case basis. Factors that the underwriter may consider
in deciding whether to release shares from the lock-up restriction include the
length of time before the lock-up expires, the number of shares involved, the
reason for the requested release, market conditions, the trading price of our
securities, historical trading volumes of our securities and whether the person
seeking the release is an officer, director or affiliate of us.
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement dated [ . ], the
Underwriter____________has agreed to purchase from us the number of shares of
common stock set forth below at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this
prospectus.
Underwriter
|
Number of
Shares
|
|||
[ .
]
|
||||
Total
|
[ .
]
|
The public
offering price will be determined by negotiations between us and the
underwriter. Among the factors considered in these negotiations will be
prevailing market conditions, the market capitalizations and the stages of
development of other companies that we and the underwriter believe to be
comparable to us, estimates of our business potential, our results of operations
in recent periods, the present state of our development and other factors deemed
relevant.
55
We have granted the underwriter an option exercisable during the 60-day period after the date of this prospectus to purchase on a pro rata basis, at the public offering price less underwriting discounts and commissions, up to an additional Units for the sole purpose of covering over-allotments, if any. To the extent that the underwriter exercises the option, the underwriter will be committed, subject to certain conditions, to purchase that number of additional Units.
Under the
terms and conditions of the underwriting agreement, the underwriter is committed
to purchase all of the Units offered by this prospectus other than the shares
subject to the over-allotment option, if any Units are purchased. We and the
Selling Stockholders have agreed to indemnify the underwriter against certain
civil liabilities under the Securities Act, or to contribute to payments the
underwriter may be required to make in respect of such liabilities.
The
underwriter initially proposes to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers at such offering price less a concession not to exceed
$[ ] per share. The underwriters may allow, and such
dealers may re-allow, a discount not to exceed $[ ] per
share to certain other dealers.
The
following tables provide information regarding the per share and total
underwriting discounts and commissions we will pay to the underwriter. These
amounts are shown assuming both no exercise and full exercise of the
underwriters’ over-allotment option to purchase up to_____additional
shares.
Commissions
and Discounts
The
following table summarizes the compensation to be paid to the underwriters by us
and the proceeds, before expenses, payable to us, assuming a $_______ offering
price. The information assumes either no exercise or full exercise by the
underwriters of the over-allotment option.
Total
|
||||||||||||
Per
Shares
|
Without
Over-Allotment
|
With
Over-Allotment
|
||||||||||
Public
offering price
|
$ | $ | $ | |||||||||
Underwriting
discount (1)
|
$ | $ | $ | |||||||||
Non-accountable
expense allowance (2)
|
$ | $ | $ | |||||||||
Proceeds,
before expenses, to us (3)
|
$ | $ | $ |
(1)
|
Underwriting
discount is $______ per shares.
|
(2)
|
The
non-accountable expense allowance of 2% is not payable with respect to the
shares sold upon exercise of the underwriters’ over-allotment
option.
|
(3)
|
We
estimate that the total expenses of this offering, excluding the
underwriters’ discount and the non-accountable expense allowance, will be
approximately $______.
|
In addition to the underwriting discounts and commissions to be paid by us, we have agreed to issue the underwriter warrants to purchase _____ Units at the price of $______ per Unit. The warrants are exercisable for a term of five years beginning one year after the date of this offering. We have also agreed to reimburse the underwriter for certain of its expenses incurred in connection with this offering. the underwriter may provide us with investment banking and financial advisory services in the future, for which it may receive customary compensation. In this regard, we have agreed for a period of two years from the date of completion of the offering, to appoint the underwriter to act as lead underwriter and sole placement agent in connection with any public or private offering of our equity or debt securities or other capital markets financing
56
We
estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately
$ .
Over-allotment
Option
In
connection with this offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price our common stock.
Specifically, the underwriters may over-allot this offering by selling more than
the number of shares of common stock offered by this prospectus. We have granted
the underwriters an option, exercisable for 45 days after the date of this
prospectus, to purchase up to __% of the units sold in the offering (_______
additional units) solely to cover over-allotments, if any, at the same price as
the initial shares of shares offered. Thus, creating a syndicate short position.
In addition, the underwriters may bid for and purchase common stock in the open
market to cover syndicate short positions or to stabilize the price of the
common stock. If the underwriters fully exercise the over-allotment option, the
total public offering price, underwriting discounts and proceeds (before
expenses) to us will be $______, $______, and $______, respectively. Finally,
the underwriters may reclaim selling concessions from dealers
if shares of our common stock sold by such dealers are repurchased in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the common
stock above independent market levels. These transactions may be effected in the
over-the-counter market or otherwise. The underwriter is not required to engage
in these activities and may end any of these activities at any
time.
The
Company has engaged the underwriter. or its representative as a financial
consultant for a period of 12 months commencing on the closing date of the
Offering for which it the Company will pay a fee of $60,000 at
closing.
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by Mclaughlin&Stern LLP, New York, NY. The law firm of JSBarkats, PLLC,
is acting as counsel for the underwriter. Legal matters as to PRC law will be
passed upon for us by Jian Neng Law Offices, XiAn, People’s Republic
of China. Mclaughlin&Stern LLP may rely upon Jian Neng Law Offices
with respect to matters governed by PRC law.
EXPERTS
The
consolidated financial statements of ASIA CORK, INC. as of December 31, 2008,
2007, and 2006 and for the years ended December 31, 2008, 2007, and have been
audited by MS Group CPA LLC Certified Public Accountants PC, an independent
registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the shares of common stock in this
offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedules that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedules that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedules that were filed with the registration
statement may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of the
website is www.sec.gov .
We file
periodic reports under the Securities Exchange Act of 1934, as amended,
including annual, quarterly and special reports, and other information with the
Securities and Exchange Commission. These periodic reports and other information
are available for inspection and copying at the regional offices, public
reference facilities and website of the Securities and Exchange Commission
referred to above.
57
ASIA
CORK, INC. AND SUBSIDIARIES
CONTENTS
|
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2 | ||
Consolidated
Financial Statements:
|
|||
Consolidated
Balance Sheets
|
F-3 | ||
Consolidated
Statements of Operations
|
F-4 | ||
Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
|
F-5 | ||
Consolidated
Statements of Cash Flows
|
F-6 | ||
Notes
to Consolidated Financial Statements
|
F-7
to F-18
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Asia Cork
Inc. (f/k/a Hankersen International Corp.) and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Asia Cork Inc. (f/k/a
Hankersen International Corp.) and Subsidiaries (the “Company”) as of
years ended December 31, 2008 and 2007, and the related consolidated statements
of operations, stockholders’ equity and comprehensive income, and cash flows for
each of the years in the two-year period ended December 31, 2008. The management
of Asia Cork Inc. (f/k/a Hankersen International Corp.) and Subsidiaries is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Asia Cork Inc. (f/k/a
Hankersen International Corp.) and Subsidiaries as of December 31, 2008 and
2007, and the results of its operations and its cash flows for each of the years
in the two-years period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has negative cash flow in
operating activities and difficulty in collecting outstanding accounts
receivable, and lacks of cash and equivalents to satisfy its current
obligations. These events raise substantial doubt about the Company’s ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The consolidated financial statements did not include
any adjustments that might result from the outcome of this
uncertainty.
MS
Group CPA LLC
|
|
MS
Group CPA LLC
|
|
Edison,
New Jersey
|
|
April
12, 2009
|
F-2
ASIA
CORK INC. AND SUBSIDIARIES
(F/K/A
HANKERSEN INTERNATIONAL CORP. AND SUBSIDIARIES)
CONSOLIDATED
BALANCE SHEETS
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 23,605 | $ | 367,396 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $23,787 and $12,210,
respectively
|
4,956,005 | 2,429,772 | ||||||
Inventories
|
2,756,011 | 920,140 | ||||||
Advance
to suppliers
|
2,562,357 | 2,375,174 | ||||||
Loan
to unrelated party
|
1,465,738 | - | ||||||
Deferred
income taxes assets
|
7,757 | - | ||||||
Prepayments
and other current assets
|
34,718 | 16,111 | ||||||
Total
Current Assets
|
11,806,191 | 6,108,593 | ||||||
Property
and Equipment - Net
|
4,813,629 | 1,754,830 | ||||||
Deposit
for Purchase of Fixed Assets
|
2,022,719 | 1,891,810 | ||||||
Deposit
for Purchase of Intangible Assets
|
- | 1,370,877 | ||||||
Deposit
for Acquisition
|
1,465,738 | 1,370,877 | ||||||
Construction
in Progress
|
- | 2,821,817 | ||||||
Investment
- At Cost
|
2,052,034 | 1,919,228 | ||||||
Intangible
Assets- Net
|
171,178 | 161,073 | ||||||
Deferred
Income Taxes Assets
|
16,586 | - | ||||||
Total
Assets
|
22,348,075 | 17,399,105 | ||||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
1,395,366 | 956,519 | ||||||
Loan
payable
|
439,722 | 534,642 | ||||||
Convertible
note, net
|
574,276 | - | ||||||
Customer
deposit
|
10,118 | - | ||||||
Taxes
payable
|
275,224 | 767,764 | ||||||
Due
to stockholders/officers
|
177,699 | 166,199 | ||||||
Other
current liabilities
|
33,027 | 15,039 | ||||||
Total
Current Liabilities
|
2,905,432 | 2,440,163 | ||||||
Total
Liabilities
|
2,905,432 | 2,440,163 | ||||||
Minority
Interest
|
1,802,022 | 1,522,318 | ||||||
Stockholders'
Equity
|
||||||||
Series
A preferred stock, $0.0001 par value, 5,000,000 shares
authorized,
|
||||||||
zero
shares issued and outstanding, respectively.
|
- | - | ||||||
Common
stock, $0.0001 par value, 200,000,000 shares authorized,
|
||||||||
35,663,850
and 35,413,850 issued and outstanding, respectively.
|
3,566 | 3,541 | ||||||
Additional
paid-in capital
|
4,485,446 | 4,396,772 | ||||||
Additional
paid-in capital stock warrant
|
279,386 | - | ||||||
Reserve
funds
|
2,236,716 | 1,741,715 | ||||||
Retained
earnings
|
7,966,783 | 5,729,630 | ||||||
Accumulated
other comprehensives income
|
2,668,724 | 1,564,966 | ||||||
Total
Stockholders' Equity
|
17,640,621 | 13,436,624 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 22,348,075 | $ | 17,399,105 | ||||
See
notes to consolidated financial statements.
|
See notes to consolidated financial
statements.
F-3
ASIA
CORK INC. AND SUBSIDIARIES
(F/K/A
HANKERSEN INTERNATIONAL CORP. AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
The Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Revenues
|
$ | 21,378,041 | $ | 16,050,938 | ||||
Cost
of Goods Sold
|
13,937,361 | 10,990,041 | ||||||
Gross
Profit
|
7,440,680 | 5,060,897 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
2,711,764 | 1,954,225 | ||||||
General
and administrative expense
|
759,227 | 513,116 | ||||||
Total
Operating Expenses
|
3,470,991 | 2,467,341 | ||||||
Income
From Operations
|
3,969,689 | 2,593,556 | ||||||
Other
Income (Expense)
|
||||||||
Interest
(expense), net
|
(275,105 | ) | (6,270 | ) | ||||
Other
income, net
|
74,091 | 23,988 | ||||||
Loss
on disposition of fix assets
|
(159,364 | ) | (342,127 | ) | ||||
Total
Other (Expense) Income
|
(360,378 | ) | (324,409 | ) | ||||
Income
Before Taxes and Minority Interest
|
3,609,311 | 2,269,147 | ||||||
Provision
for Income Taxes
|
597,453 | 348,871 | ||||||
Income
Before Minority Interest
|
3,011,858 | 1,920,276 | ||||||
Minority
Interest
|
279,704 | 158,235 | ||||||
Net
Income
|
$ | 2,732,154 | $ | 1,762,041 | ||||
Other
Comprehensive Income:
|
||||||||
Foreign
Currency Translation Gain
|
1,103,758 | 929,608 | ||||||
Comprehensive
Income
|
$ | 3,835,912 | $ | 2,691,649 | ||||
Net
Income Per Common Share
|
||||||||
-
Basic
|
$ | 0.08 | $ | 0.05 | ||||
-
Diluted:
|
$ | 0.08 | $ | 0.05 | ||||
Weighted
Common Shares Outstanding
|
||||||||
-
Basic
|
35,514,406 | 35,413,850 | ||||||
-
Diluted:
|
36,469,571 | 35,413,850 |
See notes
to consolidated financial statements.
F-4
ASIA
CORK INC. AND SUBSIDIARIES
(F/K/A
HANKERSEN INTERNATIONAL CORP. AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Common
Stock,
|
||||||||||||||||||||||||||||||||
No.
of Shares
|
Amount
|
Additional
Paid-in Capital
|
Additional
Paid-in Capital Stock Warrant
|
Reserve
Fund
|
Retained
Earnings/(Accumulated Deficit)
|
Other
Comprehensive Income
|
Total
Shareholders' Equity
|
|||||||||||||||||||||||||
Balance,
December 31, 2006
|
$ | 35,413,850 | $ | 3,541 | $ | 4,396,772 | $ | - | $ | 1,432,992 | $ | 4,276,312 | $ | 635,358 | $ | 10,744,975 | ||||||||||||||||
Net
income
|
- | - | - | - | - | 1,762,041 | - | 1,762,041 | ||||||||||||||||||||||||
Appropriation
of reserve funds
|
- | - | - | - | 308,723 | (308,723 | ) | - | - | |||||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | - | - | 929,608 | 929,608 | ||||||||||||||||||||||||
Balance,
December 31, 2007
|
$ | 35,413,850 | $ | 3,541 | $ | 4,396,772 | $ | - | $ | 1,741,715 | $ | 5,729,630 | $ | 1,564,966 | $ | 13,436,624 | ||||||||||||||||
Patent
rights donation
|
- | - | 4,199 | - | - | - | - | 4,199 | ||||||||||||||||||||||||
Issued
convertible note with stock warrant in June 2008
|
- | - | - | 279,386 | - | - | - | 279,386 | ||||||||||||||||||||||||
Issued
common stocks on July 31, 2008 for service received
|
150,000 | 15 | 43,485 | - | - | - | - | 43,500 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Issued
common stocks on August 14, 2008 for service received
|
100,000 | 10 | 40,990 | - | - | - | - | 41,000 | ||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 2,732,154 | - | 2,732,154 | ||||||||||||||||||||||||
Appropriation
of reserve funds
|
- | - | - | - | 495,001 | (495,001 | ) | - | - | |||||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | - | - | 1,103,758 | 1,103,758 | ||||||||||||||||||||||||
Balance,
December 31, 2008
|
$ | 35,663,850 | $ | 3,566 | $ | 4,485,446 | $ | 279,386 | $ | 2,236,716 | $ | 7,966,783 | $ | 2,668,724 | $ | 17,640,621 |
See notes
to consolidated financial statements.
F-5
ASIA
CORK INC. AND SUBSIDIARIES
(F/K/A
HANKERSEN INTERNATIONAL CORP. AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Year Ended December 31,
|
||||||||||
2008
|
2007
|
|||||||||
Cash
Flows From Operating Activities
|
||||||||||
Net
Income
|
$ | 2,732,154 | $ | 1,762,041 | ||||||
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||
(Used
in) Provided by Operating Activities
|
||||||||||
Depreciation
and amortization
|
286,352 | 248,581 | ||||||||
Bad
debt adjustment
|
10,539 | (1,496 | ) | |||||||
Loss
on disposition of fix assets
|
159,364 | 342,127 | ||||||||
Minority
interest
|
279,704 | 158,235 | ||||||||
Consulting
fees adjusted from deferred
|
21,320 | - | ||||||||
Interest
expenses for discount on convertible note
|
153,662 | - | ||||||||
Deferred
income taxes benefits
|
(23,905 | ) | - | |||||||
Issued
common stocks for legal fees
|
43,500 | - | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||
Accounts
receivable
|
(2,215,522 | ) | (291,558 | ) | ||||||
Inventories
|
(1,657,504 | ) | (161,894 | ) | ||||||
Advance
to suppliers
|
(21,350 | ) | (732,019 | ) | ||||||
Prepayments
and other current assets
|
3,320 | 25,905 | ||||||||
Accounts
payable and accrued expenses
|
348,540 | 287,326 | ||||||||
Customer
deposits
|
10,118 | - | ||||||||
Taxes
payable
|
(510,352 | ) | 433,419 | |||||||
Other
current liabilities
|
15,851 | 3,794 | ||||||||
Net
Cash (Used in) Provided by Operating Activities
|
(364,209 | ) | 2,074,461 | |||||||
Cash
Flows From Investing Activities
|
||||||||||
Proceeds
from withdraw deposit for purchase of intangible assets
|
1,370,877 | - | ||||||||
Payment
for the deposit for purchase of intangible assets
|
- | (1,370,877 | ) | |||||||
Proceeds
from return the deposit for purchase of fix assets
|
- | 25,628 | ||||||||
Payment
for deposit for acquisition
|
- | (1,370,877 | ) | |||||||
Payment
for purchase of equipment
|
(589 | ) | (5,945 | ) | ||||||
Payment
for unrelated parties
|
(1,465,738 | ) | - | |||||||
Payment
for construction in progress
|
(207,282 | ) | (1,253,703 | ) | ||||||
Proceeds
from repayment of unrelated party
|
- | 1,922,066 | ||||||||
Net
Cash Used in Investing Activities
|
(302,732 | ) | (2,053,708 | ) | ||||||
Cash
Flows From Financing Activities
|
||||||||||
Proceeds
from long-term debt
|
439,722 | 534,642 | ||||||||
Payments
to long-term debt
|
(571,638 | ) | (959,614 | ) | ||||||
Proceeds
from convertible note
|
700,000 | - | ||||||||
Payments
to stockholders/officers
|
- | (419,543 | ) | |||||||
Proceeds
from stockholders/officers
|
- | 455,559 | ||||||||
Net
Cash Provided by (Used in) Financing Activities
|
568,084 | (388,956 | ) | |||||||
Net
Decrease in Cash and Equivalents
|
(98,857 | ) | (368,203 | ) | ||||||
Effect
of Exchange Rate Changes on Cash
|
(244,934 | ) | 170,866 | |||||||
Cash
and Equivalents at Beginning of Period
|
367,396 | 564,733 | ||||||||
Cash
and Equivalents at End of Period
|
$ | 23,605 | $ | 367,396 | ||||||
SUPPLEMENT
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||
Interest
paid for the years ended December 31, 2008 and 2007,
respectively
|
$ | 52,418 | $ | 70,923 | ||||||
Income
taxes paid for the years ended December 31, 2008 and 2007,
respectively
|
$ | 794,835 | $ | 153,007 | ||||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND
|
||||||||||
FINANCING
ACTIVITIES
|
||||||||||
Construction
in process transferred out to property
|
$ | 3,385,406 | $ | - | ||||||
Shareholder
donated intangible assets into the Company without payment
|
$ | 4,199 | $ | - | ||||||
Issued
common stocks for legal fees and part of consulting fees
|
$ | 84,500 | $ | - |
See notes
to consolidated financial statements.
F-6
ASIA CORK INC. AND SUBSIDIARIES
(F/K/A
HANKERSEN INTERNATIONAL CORP. AND SUBSIDIARIES)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Asia Cork
Inc. (f/k/a Hankersen International Corp.) (the "Company") was incorporated on
August 1, 1996, under the laws of the State of Delaware. Until August 2005, the
Company had no operations and the sole purpose of the Company was to locate and
consummate a merger or acquisition with a private entity.
On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc., was merged into
its parent, the Company, in order to change the name of the Company, after
approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had
no material assets.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB
In August
2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of the Company ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. The Company acquired Hanxin International in
exchange for shares of common stock and shares of the Series A Preferred Stock
of the Company. The capitalizations are described in further detail in Note 18
to the accompanying consolidated financial statements.
Subsequent
to the merger and upon the conversion of the Series A Preferred Stock, the
former shareholders of Hanxin International will own 95% of the outstanding
shares of the Company's common stock. As a result of the ownership interests of
the former shareholders of Hanxin International, for financial statement
reporting purposes, the merger was treated as a reverse acquisition, with Hanxin
International deemed the accounting acquirer and Kushi deemed the accounting
acquiree. Historical information of the surviving company is that of Hanxin
International.
Hanxin
International has no other business activities but owns 100% of Xi'An Cork
Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian
Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An
and Hanxin are People's Republic of China (“PRC”) corporations. Most of the
Company’s activities are conducted through Hanxin.
During
the year ended December 31, 2005, Hanxin acquired 75% equity interest
of Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation engages
in cork trading businesses.
Hanxin is
engaged in developing, manufacturing and marketing of cork wood floor, wall and
decorating materials. Its products are sold to customers in China and oversea
customers in India, the United States of America, Germany and Japan through the
distributors or agents.
2.
Negative Cash Flow in Operating Activities during Transaction Period and
Management Plans
During
the fourth quarter of 2008, due to adverse market conditions for home and
commercial renovation and decoration, the Company’s accounts receivable
outstanding for over half year increased promptly to the amounts of $1,551,836
(equivalent to RMB10,587,400) and the cash and equivalents had dropped down
significantly to $23,605 as of December 31, 2008. In addition, the Company had
negative cash flow in operating activities for the year ended December 31, 2008.
These events raise substantial doubt about the Company’s ability to continue as
a going concern. The Company’s ability to continue as a going concern and its
future success is dependent upon its ability to collect the outstanding accounts
receivable, to borrow the money either from shareholders or outside credit
union, banks, or investors, and to raise capital in the near term to (1) satisfy
its current obligations, and (2) the successful wide scale development and
marketing of its high profit products.
F-7
The
Company presently has ongoing discussions and negotiations with a number of
additional financing alternatives. However, the Company has no definitive
agreements to provide funding at this time.
The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3.
|
BASIS
OF PRESENTATION
|
Principle
of consolidation
The
accompanying consolidated financial statements present the financial position,
results of operations and cash flows of the Company and all entities in which
the Company has a controlling voting interest. The consolidated financial
statements also include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such entities are
required to be consolidated in accordance with accounting principles generally
accepted in the United States (“US GAAP”). These consolidated financial
statements include the financial statements of Asia Cork Inc. and its
subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation.
The
accompanying consolidated financial statements are prepared in accordance with
US GAAP. This basis of accounting differs from that used in the statutory
accounts of some of the Company’s subsidiaries, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises with foreign investment in the PRC (“PRC GAAP”).
Necessary adjustments were made to the Subsidiary’s statutory accounts to
conform to US GAAP to be included in these consolidated financial
statements.
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Revenue
recognition
The
Company's revenues from the sale of products are recognized when the goods are
shipped, title passes, the sales price to the customer is fixed and
collectability is reasonably assured. Persuasive evidence of an arrangement is
demonstrated via purchase order from distributor, our customers, product
delivery is evidenced by warehouse shipping log as well as signed bill of lading
from the trucking company and no product return is allowed except defective or
damaged products, the sales price to the customer is fixed upon acceptance of
purchase order, there is no separate sales rebate, discounts, and volume
incentives.
Advertising
costs
Advertising
costs are booked as expenses as incurred. The Company incurred $1,539 and
$237,369 for the years ended December 31, 2008 and 2007,
respectively.
Shipping
and handling costs
Shipping
and handling costs are classified as cost of sales and recognized when the
related sale is recognized. The Company incurred $524 and $471 for the years
ended December 31, 2008 and 2007, respectively.
Cash
and equivalents
The
Company considers all highly liquid temporary cash investments with an original
maturity date of three months or less from when purchased, to be cash
equivalents.
Inventories
The
Company values inventories, consisting of finished goods, work in progress, raw
materials, packaging material, and other, at the lower of cost or market. Cost
is determined on the weighted average cost method.
F-8
Property
and equipment
Property
and equipment are recorded at cost. Expenditures for major additions and
betterments are capitalized. Maintenance and repairs are charged to operations
as incurred. Depreciation of property and equipment is computed by the
straight-line method over the assets estimated useful lives. Leasehold
improvements are amortized over the lesser of the lease term or the asset's
useful lives. Upon sale or retirement of plant and equipment, the related cost
and accumulated depreciation are removed from the accounts and any gain or loss
is reflected in the Company’s Consolidated Statements of
Operations.
Impairment
of long-lived assets
The
Company evaluates the recoverability of its other long-lived assets, including
amortizing intangible assets, if circumstances indicate impairment may have
occurred pursuant to SFAS No. 144. This analysis is performed by comparing the
respective carrying values of the assets to the current and expected future cash
flows, on an undiscounted basis, to be generated from such assets. If such
analysis indicates that the carrying value of these assets is not recoverable,
the carrying value of such assets is reduced to fair value through a charge to
the Company’s Consolidated Statements of Operation.
Intangible
assets
Intangible
assets include land use right. With the adoption of SFAS No. 142, intangible
assets with a definite life are amortized on a straight-line basis. The land use
right is being amortized over its estimated life of 40 years. Intangible assets
with a definite life are tested for impairment whenever events or circumstances
indicate that a carrying amount of an asset (asset group) may not be
recoverable. An impairment loss would be recognized when the carrying
amount of an asset exceeds the estimated undiscounted cash flows used in
determining the fair value of the asset. The amount of the impairment loss to be
recorded is calculated by the excess of the asset’s carrying value over its fair
value. Fair value is generally determined using a discounted cash flow analysis.
Costs related to internally develop intangible assets are expensed as
incurred.
Comprehensive
income (loss)
SFAS No.
130, “Reporting Comprehensive Income”, established standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as other
financial statements. The Company’s only current component of comprehensive
income is the foreign currency translation adjustment.
Concentration
of credit risk
The
Company's financial instruments consist primarily of cash, which is invested in
money market accounts, accounts receivable, and accounts payable. The Company
considers the book value of these instruments to be indicative of their
respective fair value. The Company places its temporary cash investments with
high credit quality institutions to limit its exposure. Almost all of the
Company's sales are credit sales which are primarily to customers whose ability
to pay is dependent upon the industry economics prevailing in their respective
areas; however, concentrations of credit risk with respect to trade accounts
receivable is limited due to generally short payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risk.
Fair
value of financial instruments
The
carrying amounts reported in the balance sheet for cash, accounts receivable,
inventories, advances to suppliers, prepayments and other current assets,
accounts payable, accrued expenses, loan payable, taxes payable, and other
current liabilities approximate fair value based on the short-term maturity of
these instruments. The Company's loans payable approximates the fair value of
such instruments based upon management's best estimate of interest rates that
would be available to the Company for similar financial arrangements on December
31, 2008.
Income
taxes
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is exempt
from income taxes.
F-9
The
Company follows Statement of Financial Accounting Standards No. 109 - Accounting
for Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
Basic
and diluted net income per share
The
Company accounts for net income per common share in accordance with SFAS 128,
“Earnings per Share” (“EPS”). SFAS 128 requires the disclosure of the
potential dilution effect of exercising or converting securities or other
contracts involving the issuance of common stock. Basic net income per share is
determined based on the weighted average number of common shares outstanding for
the period. Diluted net income per share is determined based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised into common stock.
Stock-based
compensation
The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. The fair value of the option issued is
used to measure the transaction, as this is more reliable than the fair value of
the services received. Fair value is measured as the value of the
Company’s common stock on the date that the commitment for performance by the
counterparty has been reached or the counterparty’s performance is
complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Estimates, by their nature, are based on judgment and available information.
Accordingly, actual results could differ from those estimates.
Segment
reporting
The
Company operates and manages its business as a single operating
segment.
New
accounting pronouncements
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No.162, “The Hierarchy of Generally
Accepted Accounting Principles”. SFAS 162 indicates the entity (not its auditor)
that is responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. Accordingly, the GAAP hierarchy
should reside in the accounting literature established by the FASB and is
issuing SFAS 162 to achieve that result. SFAS 162 also identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company is in the process of evaluating the
new disclosure requirements under SFAS 162.
F-10
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” (“SFAS 161”).
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format;(2) the
disclosure of derivative features that are credit risk-related; and
(3)cross-referencing within the footnotes. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 (that is, January 1, 2009, for entities with calendar year-ends)., with
early application encouraged. The Company is in the process of evaluating the
new disclosure requirements under SFAS 161.
In
December 2007, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
160, “Non-controlling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51” which clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. This statement also
changes the way the consolidated income statement is presented. It requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. In addition,
it requires disclosure, on the face of the consolidated statement of income, of
the amounts of consolidated net income attributable to the parent and to the
non-controlling interest. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years beginning on or after December 15,
2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
adoption is prohibited. The company is currently in the process of evaluating
the effect, if any, the adoption of SFAS No. 160 will have on its consolidated
results of operations, financial position, and financial
disclosure.
In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquire at the acquisition date, measured at their fair values as of that
date, with limited exceptions. This replaces SFAS 141’s cost-allocation process,
which required the cost of an acquisition to be allocated to the individual
assets acquired and liabilities assumed based on their estimated fair values.
SFAS 141R also requires the acquirer in a business combination achieved in
stages (sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquire, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS 141R). SFAS 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 (that is, January 1, 2009, for entities with calendar year-ends). An
entity may not apply it before that date. The Company is currently evaluating
the impact that adopting SFAS 141R will have on its financial
statements.
5.
|
INVENTORIES
|
Inventories
on December 31, 2008 and 2007 consisted of the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Raw
materials
|
$ | 2,073,501 | $ | 536,319 | ||||
Work
in process
|
210,526 | 103,395 | ||||||
Finished
goods
|
427,459 | 249,932 | ||||||
Packaging
and other
|
44,525 | 30,494 | ||||||
Total
|
$ | 2,756,011 | $ | 920,140 |
F-11
6.
|
LOAN
TO UNRELATED PARTY
|
There
were acquisition deposits RMB10 million prepared to purchase the land use right
in Shaanxi BaoJi District P.R. China from Shaanxi Shuta Wood Products Co., Ltd.
(“Shaanxi Shuta”), one of Hanxin’s major sales distributors in Shaanxi Province
P.R. China. For the year ended December 31, 2008 and 2007, Shaanxi Shuta had
purchased $705,813 (equivalent RMB4,903,704) and $302,203 (equivalent to
RMB2,298,014) merchandises from the Company’s PRC subsidiary, Hanxin,
respectively. However, Hanxin terminated the land purchase agreement on August
19, 2008. Pursuant to the Cancellation Agreement, the deposits had been refunded
back to the company in August and September 2008.
In year
2008, Shaanxi Shuta opened cork retail chain stores exclusively selling Hanxin’s
products but Hanxin could not achieve its 500,000 square meters floor and board
production plan in year 2008 and had delayed many purchase orders from Shaanxi
Shuta; thus Shaanxi Shuta had to readjust its year 2008 sales strategies and
incurred heavy losses. In order to avoid losing a very important distribution
channel and to assist Shaanxi Shuta to recover from this situation, Hanxin had
loaned RMB10 million (equivalent to $1,465,738) to the Shaanxi Shuta for one
year term starting from October 27, 2008. In 2009 this loan is renewed for
another two years until October 27, 2011. This loan is no interest bearing and
unsecured.
7.
|
PROPERTY
AND EQUIPMENT
|
As of
December 31, 2008 and 2007, property and equipment consisted of the
following:
December
31,
|
||||||||||||
Estimated
Life
|
2008
|
2007
|
||||||||||
Building
and improvement
|
27-35 | $ | 4,894,945 | $ | 1,507,241 | |||||||
Manufacturing
equipment
|
1-8 | 838,766 | 1,128,887 | |||||||||
Office
furniture and equipment
|
5 | 31,141 | 28,575 | |||||||||
Vehicle
|
2-8 | 12,527 | 11,716 | |||||||||
Machinery
improvement
|
3 | 80,616 | 75,398 | |||||||||
Subtotal
|
5,857,995 | 2,751,817 | ||||||||||
Less:
Accumulated depreciation
|
1,044,366 | 996,987 | ||||||||||
Total
|
$ | 4,813,629 | $ | 1,754,830 |
For the
years ended December 31, 2008 and 2007, depreciation expenses amounted to
$281,185 and $244,003, respectively. Loss on disposal of fixed assets for the
years ended December 31, 2008 and 2007 were $159,364 and $342,127,
respectively.
8.
|
DEPOSIT
FOR PURCHASE OF FIXED ASSETS
|
Hanxin
intended to purchase a factory’s facilities through an unrelated agent who will
do the negotiation for the Company, and both parties signed the Entrust Purchase
Agreement on November 10, 2005. Hanxin had paid deposits $2,022,719 (equivalent
to RMB 13,800,000) to the agent as of December 31, 2008, and the same deposit
was valued at $1,891,810 (equivalent to RMB 13,800,000) as of December 31, 2007.
The agency agreement has no firm commitment on the purchase but it states a
maximum price of RMB 50,000,000 that the Company is willing to pay for the
facilities.
9.
|
DEPOSIT
FOR PURCHASE OF INTANGIBLE ASSETS
|
Pursuant
to the terms of a Cancellation Agreement dated August 19, 2008, Hanxin and
Shaanxi Shuta terminated the Land Transfer Agreement by which the Company had
intended to purchase the right to use a parcel of land from Shaanxi Shuta in the
ShaanXi Baoji district of the PRC. The entire $1,472,776 (equivalent to RMB 10
million) deposit that had been previously paid to Shaanxi Shuta pursuant to the
Land Transfer Agreement was refunded to Hanxin in August 2008 and September
2008. However, Hanxin loaned the same amount, RMB10 million, back to Shaanxi
Shuta on October 27, 2008. More detail situation listed in the preceding Note
6.
F-12
10.
|
DEPOSIT FOR
ACQUISITION
|
Hanxin intended to acquire a private company located in Sichuan China
called Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan Hanxin ”), and signed
a strategic corporation agreement with Sichuan Hanxin on March 26, 2007. The
purchase price of Sichuan Hanxin shall not exceed $2,741,754 (RMB20 million)
based upon the agreement. As of December 31, 2008, Hanxin paid $1,465,738
(equivalent to RMB10 millions) deposit to Sichuan Hanxin. Sichuan Hanxin is a
manufacturer for cork products and is one of Hanxin’s current cork raw material
providers. Hanxin anticipates apply the whole deposited amount to the raw
materials payments if the acquisition does not occur before the end of year
2009.
11.
|
CONSTRUCTION IN
PROGRESS
|
Student dormitory construction and interior decoration were completed
in June 2008. All costs of approximately $2.4 million (equivalent to RMB
16,525,621) had been transferred to the property as of June 30, 2008. Although
the construction had been completed, Hanxin did not acquire the occupation
certificates and ownership certificates with respect to the dormitory. Hanxin
expects to receive these certificates before the end of year 2009. However,
there is no assurance to this matter.
The fifth workshop was completed in September 2008. All costs of
$963,182 (equivalent to RMB 6,571,311) had been transferred to the property as
of September 30, 2008. Commencing in October 2008, Hanxin started to install
production line facilities in the fifth workshop. Due to adverse market
conditions for home and commercial renovation and decoration, Hanxin’s revenue
had dropped down and accounts receivable outstanding for more than three months
was increased promptly in the fourth quarter 2008 as compared to the same period
of 2007. Simultaneously, Hanxin’s cash and equivalents balance, working capital,
and cash flow for operating activities of were also tensional in the fourth
quarter 2008. As a result, Hanxin had stopped purchasing new production
facilities for the fifth workshop after completed one of four production lines
installation as of December 31, 2008. Hanxin has not determined when the
additional production lines will be completed.
As of December 31, 2008 and 2007, the construction in progress
consisted of the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Student
dormintory construction
|
$ | - | $ | 2,204,922 | ||||
Fifth
workshop construction
|
- | 616,895 | ||||||
Total
construction in progress
|
$ | - | $ | 2,821,817 |
12.
|
INVESTMENT – AT
COST
|
On June 28, 2005, the Company purchased a 12% equity interest of
Shaanxi DeRong Technology Information Development Co. Ltd. (“DeRong”), a PRC
corporation, for $2,052,034 (equivalent to RMB 14,000,000). DeRong owns a cork
tree forest plantation in China. The investment is stated at cost.
13.
|
INTANGIBLE
ASSETS
|
On September 27, 2001, the Company purchased the right to use a
parcel of land for 40 years. The purchase price is being amortized over the term
of the right. In addition, during the quarter ended June 30, 2008, the Company
acquired ownership of three patent rights from its major stockholder and
Chairman, Mr. Fang She Zhang, with no payments. These three patent
rights are used as part of a vital technique for the production of the Company’s
products. The application and filing costs of these three patent rights were
$4,199 (equivalent to RMB28,800). On December 31, 2008 and 2007, intangible
assets, less accumulated amortization consisted of the following:
F-13
December
31,
|
||||||||
2008
|
2007
|
|||||||
Intangible
assets
|
$ | 208,332 | $ | 190,901 | ||||
Less:
Accumulated amortization
|
37,154 | 29,828 | ||||||
Total
|
$ | 171,178 | $ | 161,073 |
For the years ended December 31, 2008 and 2007, amortization expense
amounted to $5,167 and $4,578, respectively.
The amortization expenses for the next five years are as
follows:
For
the Year Ending December 31,
|
Amount
|
|||
2009
|
$ | 5,421 | ||
2010
|
5,421 | |||
2011
|
5,421 | |||
2012
|
5,421 | |||
2013
|
5,421 |
14.
|
LOANS
PAYABLE
|
Loans payable as of December 31, 2008 and 2007 consisted of the
following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
On
November 30, 2007, the Company obtained a short-term loan RMB3.9 million
(equivalent at that time to $534,642 ) from Xian Xitaoyuan Credit Bank by
pledging the Company's building in YuLerYuan with bank, The loan interest
is 8.37‰ per month. The Company had paid principal RMB3.9 million back to
bank on June 30, 2008. On the same day, the company
borrowed RMB3 million (equivalent to $439,722 ) from the same
bank again, but the new interest rate had been increased to
9.967‰ per month. The expiration date for this new short-term loan is June
30, 2009.
|
$ | 439,722 | $ | 534,642 | ||||
Total
Loan Payable
|
$ | 439,722 | $ | 534,642 |
15.
|
CONVERTIBLE NOTE AND
WARRANTS
|
On June 4 and June 12, 2008, the Company consummated an offering of
convertible promissory notes and common stock purchase warrants for aggregate
gross proceeds of $700,000. The notes mature one (1) year from the date of
issuance and bear interest at an annual rate of 18%, payable at maturity in USD.
Upon the successful closing of an equity or convertible debt financing for a
minimum of $2,000,000 ("Financing"), the promissory notes will be convertible
into shares of common stock at a 50% discount to the price per share of Common
Stock sold in the Financing. If a Financing is not achieved within the one year
term of the promissory notes, each investor has the option to be paid the
principal and interest due under the promissory note or convert the note into
shares of common stock at a conversion price of $0.228 per share.
The warrants are exercisable at any time after the consummation of
the Financing through the fourth anniversary of the consummation of the
Financing (the "Financing Expiration Date"). Each holder is entitled to purchase
the number of shares of common stock equal to the initial principal amount of
such investor's promissory note DIVIDED BY the lowest cash purchase price paid
for the Company's common stock (or the conversion price or exercise price if the
Financing consists of convertible securities or warrants, respectively) in the
Financing (the "Financing Based Conversion Price") at an exercise price equal to
the Financing Based Conversion Price. If the Financing did not occur within 12
months of the issuance of the warrant, the warrant is exercisable from and after
such date and through the fourth anniversary of the issuance date of the
warrant. In such event, the holder is entitled to purchase the number of shares
of common stock equal to 50% of the initial principal amount of the promissory
note DIVIDED BY $0.228 at an exercise price equal to $0.228, subject to certain
adjustments as set forth in the warrant. The interest payable regarding the
convertible notes has been accrued and recorded as of December 31,
2008. The different amount between the option price in declared date and
warrant conversion price $0.228 time total entitled warrant shares had been
charged directly to discount on convertible note, and the sum was add to
additional paid-in capital-stock warrant in amount of $279,386 as of December
31, 2008.
F-14
As of December 31, 2008, the Company’s obligations under the
promissory notes are secured by an aggregate of 7,630,814 shares of common stock
pledged by Mr. Pengcheng Chen, the Company’s Chief Executive Officer, and Mr.
Zhang (the “Escrow Shares”). In the event that subsequent to the issuance of the
Convertible Notes, the value of the Escrow Shares is less than 150% of the
outstanding principal amount of the promissory notes for 10 consecutive trading
days, then the holder of the promissory notes shall have the right to give the
Company notice (the “Investor Notice”) to deposit or cause to be deposited
additional Escrow Shares such that the value of the Escrow Shares based upon the
volume weighted average price per share for the 20 trading days preceding the
date of the Investor Notice, is equal to 150% of the outstanding principal
amount of the promissory notes. The Company shall deposit or cause to be
deposited such additional Escrow Shares within 30 days of the date of the
Investor Notice. To the extent the Escrow Shares are not sufficient to meet the
threshold of 150% of the outstanding principal amount of the promissory notes
within 30 days after the Investor Notice, the Company shall grant to Investors a
security interest on the Company’s tangible assets to the extent permitted under
applicable law.
Net of convertible note as of December 31, 2008 and 2007 consisted of
the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Convertible
note
|
$ | 700,000 | $ | - | ||||
Less:
Discount on convertible note
|
125,724 | - | ||||||
Convertible
note, net
|
$ | 574,276 | $ | - | ||||
16.
|
TAX
PAYABLE
|
The Company and its U. S. subsidiary will file consolidated Federal
income tax and state franchise tax annual report individually. Its PRC
subsidiaries file income tax returns under the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and local
income tax laws. The Company’s BVI subsidiary is exempt from income taxes.
Per PRC Income Tax Law, any new foreign owned corporation is exempt
from income tax for the first two years of existence, and then receives a 50%
exemption of income tax for the next three years if it is a non high-tech
corporation or 15% tax rate for corporation qualified by State Science and
Technology Commission as "High Tech Manufacturing Enterprise" located in State
"High Tech Zone" approved by China State Council. Hanxin is qualified as a High
Tech Manufacturing Enterprise. Based on this regulation, Hanxin was exempt from
income tax in year 2003 and 2004 and its income has been subject to a 15% tax
starting from January 1, 2005. CIE is not “High Tech Manufacturing Enterprise”
approved by China State Council, thus its income is subject to 33% tax rate.
Commencing from January, 2008, based on the new regulation in the PR, CIE’s
income is subject to 25% tax rate.
On December 31, 2008 and 2007, taxes payable consisted the
following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Value-added
tax
|
$ | 177,287 | $ | 393,969 | ||||
Corporate
income tax provision
|
74,888 | 235,465 | ||||||
Local
taxes and surcharges
|
13,491 | 83,330 | ||||||
Franchise
tax
|
9,558 | 55,000 | ||||||
Total
|
$ | 275,224 | $ | 767,764 |
The deferred income taxes assets results from loss on disposition of
fix assets that are no deductible.
The components of the provisions for income taxes were as
follows:
For
The Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Current
taxes:
|
||||||||
Current
income taxes in P.R. China
|
$ | 621,358 | $ | 348,871 | ||||
Deferred
income taxes benefits
|
23,905 | - | ||||||
Total
provision for income taxes
|
$ | 597,453 | $ | 348,871 | ||||
F-15
17.
|
DUE TO
STOCKHOLDERS/OFFICERS
|
Amounts due to a stockholder/officer are unsecured, non-interest
bearing and no set repayment date. As of December 31, 2008 and 2007, the total
net amounts due to the stockholder/officer were $177,699 and $166,199,
respectively, which represented the net amounts lent by shareholders/officers to
the Company.
18.
|
STOCKHOLDERS
EQUITY
|
On August 9, 2005, the Company acquired Hanxin International in
exchange for (i) 24,000,000 shares of the Company’s common stock and (ii) 1,000
shares of the Company’s Series A Preferred Stock,
In November 2005, the Company filed and circulated to its
shareholders the Information Statement which permitted the Company, among other
things, to (i) amend its Articles of Incorporation to increase its authorized
shares of common stock to 200,000,000 shares; (ii) approve one for six reverse
split as to all outstanding shares of common stock of the Company, effective as
to holders of record of shares of common stock on December 9, 2005, (iii)
approve a stock option, SAR and stock bonus plan for the directors, officers,
employees and consultants of the Company. A certificate of amendment officially
increasing the authorized shares of common stock and approving the reverse stock
split was filed with the State of Delaware on December 13, 2005.
On September 1, 2006, the 1,000 shares Series A preferred stock were
converted into 29,530,937 shares of the Company’s common stock. Subsequently,
the Company issued additional 118,123 shares in October 2006 to reflect an
under-issuance to a stockholder of the shares of common stock issued upon
conversion of the preferred stock.
In May 2008, the board of directors of the Company authorized, and on
July 31, 2008 the Company issued, 150,000 shares of the Company’s common stock
to its attorney for services rendered. In June 2008, the board of directors of
the Company authorized, and on August 14 2008 the Company issued, 100,000 shares
of the Company’s common stock to HAWK Associates, Inc (“Hawk”), its investor
relations firm for services rendered pursuant to the agreement. Accordingly the
Company has 35,663,850 shares of issued and outstanding common stock as of
December 31, 2008.
In June 2008, the Company was assigned ownership of three patent
rights from its major shareholder, Mr. Fang She Zhang. These patents were
assigned without any payment due to Mr. Zhang. The application and filing costs
of these three patents was RMB28,800 (equivalent to $4,199). In connection
therewith, the Company recorded $4,199 of intangible assets, and same amount of
additional paid in capital as of December 31, 2008.
F-16
19.
|
BASIC AND DILUTED EARNING PER
SHARE
|
The following table sets forth the computation of basic and diluted
net income per share:
For
The Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Basic:
|
||||||||
Numerator:
|
||||||||
Net
income for basic calculation
|
$ | 2,732,154 | $ | 1,762,041 | ||||
Denominator:
|
||||||||
Weighted
average common shares
|
35,514,406 | 35,413,850 | ||||||
Net
income per share — basic
|
$ | 0.08 | $ | 0.05 | ||||
Diluted:
|
||||||||
Numerator:
|
||||||||
Net
income for basic calculation
|
$ | 2,732,154 | $ | 1,762,041 | ||||
Effect
of dilutive securities issued
|
218,541 | - | ||||||
Net
income for diluted calculation
|
$ | 2,950,695 | $ | 1,762,041 | ||||
Denominator:
|
||||||||
Denominator
for basic calculation
|
35,514,406 | 35,413,850 | ||||||
Weighted
average effect of dilutive securities:
|
||||||||
Convertible
debt
|
955,165 | - | ||||||
Denominator
for diluted calculation
|
36,469,571 | 35,413,850 | ||||||
Net
income per share — diluted
|
$ | 0.08 | $ | 0.05 |
20.
|
LEASE
COMMITMENTS
|
The Company leases its office space and production land under
operating lease agreements that are expiring on December 31, 2009 and October,
2047 respectively. The following is a schedule of future minimum rental land
payments required under these operating leases as of December 31, 2008.
For
the Year Ending December 31,
|
Amount
|
|||||||
2009
|
$ | 69,089 | ||||||
2010
|
17,272 | |||||||
2011
|
17,272 | |||||||
2012
|
17,272 | |||||||
2013
|
17,272 | |||||||
Thereafter
|
584,376 | |||||||
Total minimum rental payments required | $ | 722,553 |
Rent and properties maintenance expenses amounted to $189,451 and $38,004
for the years ended December 31, 2008 and 2007, respectively.
The Company also leases three patent rights from its Chairman, Mr.
Fangshe Zhang, under operating lease agreements that expire on April 16, 2011.
The following is a schedule of future minimum rental payments required under
these operating leases as of December 31, 2008.
For
the Year Ending December 31,
|
Amount
|
|||||||
2009
|
$ | 345,444 | ||||||
2010
|
345,444 | |||||||
2011
|
101,714 | |||||||
Total minimum rental payments required | $ | 792,602 |
Patent lease expenses amounted to $345,444 and
$315,615 for the years ended December 31, 2008 and 2007,
respectively.
F-17
On June 15, 2008, the Company signed an agreement with Hawk to
provide investor relations consulting and advisory services. The term of this
agreement is effective through June 30, 2009. Hawk is paid a retainer fee of
$7,500 per month and the payments are due at the beginning of each month. Hawk
was also issued 100,000 restricted 144 shares of the Company’s common stock on
August 14, 2008.
21.
|
RESERVE FUND AND
DIVIDENDS
|
Under laws of the PRC, net income after taxation can only be
distributed as dividends after appropriation has been made for the following:
(i) cumulative prior years' losses, if any; (ii) allocations to the "Statutory
Surplus Reserve" of at least 10% of net income after taxes, as determined under
PRC accounting rules and regulations, until the fund amounts to 50% of the
Company's registered capital; (iii) allocations of 5-10% of income after tax, as
determined under PRC accounting rules and regulations, to the Company's
"Statutory Common Welfare Fund", which is established for the purpose of
providing employee facilities and other collective benefits to employees in
China; and (iv) allocations to any discretionary surplus reserve, if approved by
shareholders.
As of December 31, 2008 and 2007, the Company's PRC subsidiaries
established and segregated in retained earnings an aggregate amount of
$2,236,716 and $1,741,715 for the Statutory Surplus Reserve and the Statutory
Common Welfare Fund.
The Company has not declared or paid cash dividends or made
distributions in the past.
21.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Financial Risks:
The Company provides credit in the normal course of business. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other information.
Concentrations Risks:
For the years ended December 31, 2008 and 2007, none of the Company’s
customers accounted for more than 10% of its sales.
Major Suppliers:
The Following summaries purchases of raw materials from major
suppliers (each 10% or more of purchases):
Purchases
from
|
Number
of
|
Percentage
|
||||||||||
Year
Ended December 31,
|
Major
Suppliers
|
Suppliers
|
of
Total
|
|||||||||
2008
|
$ | 5,589,794 | 3 | 39.09 | % | |||||||
2007
|
$ | 2,761,972 | 2 | 27.50 | % |
Substantially all of the Company’s assets and operations were in the
PRC for the years ended December 31, 2008 and 2007. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environment in PRC, and by the
general state of the economy of PRC. The Company’s operations in PRC are subject
to special considerations and significant risks not typically associated with
companies in the United States. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by, among other
things, changes in the political, economic and social conditions in PRC, and by
changes in governmental policies with respect to laws and regulations, changes
in PRC's cork manufacture industry and regulatory rules and policies,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation.
F-18
ASIA CORK INC.
INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Page
|
|||
Condensed Consolidated Balance
Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
|
F-20 | ||
Condensed Consolidated Statements
of Operations (Unaudited) for the Three Months and Nine Months
ended September 30, 2009 and 2008
|
F-21 | ||
Condensed Consolidated Statements
of Comprehensive (Loss) Income (Unaudited) for the Nine Months ended
September 30, 2009 and 2008
|
F-22 | ||
Condensed Consolidated Statement
of Changes in Equity (Unaudited) for the Nine Months ended September 30,
2009
|
F-23 | ||
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months ended September 30, 2009 and 2008
|
F-24 | ||
Notes to Condensed Consolidated Financial Statements
|
F-25 – F-38 | ||
F-19
Asia
Cork Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Assets:
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 543,758 | $ | 23,605 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $277,100 and
$23,787, respectively
|
5,322,765 | 4,956,005 | ||||||
Inventories
|
7,308,113 | 2,756,011 | ||||||
Advance
to suppliers
|
802,061 | 2,562,357 | ||||||
Loan
to unrelated party
|
- | 1,465,738 | ||||||
Deferred
income tax assets
|
4,935 | 7,757 | ||||||
Prepayments
and other current assets
|
314,044 | 34,718 | ||||||
Total
Current Assets
|
14,295,676 | 11,806,191 | ||||||
Property
and Equipment - Net
|
5,403,222 | 4,813,629 | ||||||
Deposit
for Purchase of Fixed Assets
|
2,021,584 | 2,022,719 | ||||||
Deposit
for Acquisition
|
1,362,372 | 1,465,738 | ||||||
Loan
to Unrelated Party
|
1,464,916 | - | ||||||
Investment
- At Cost
|
2,050,882 | 2,052,034 | ||||||
Intangible
Assets- Net
|
167,019 | 171,178 | ||||||
Deferred
Income Tax Assets
|
14,064 | 16,586 | ||||||
Total
Assets
|
26,779,735 | 22,348,075 | ||||||
Liabilities
and Equity:
|
||||||||
Liabilities:
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
2,344,810 | 1,395,366 | ||||||
Loan
payable
|
215,343 | 439,722 | ||||||
Convertible
note, net
|
700,000 | 574,276 | ||||||
Customer
deposit
|
609,831 | 10,118 | ||||||
Taxes
payable
|
1,126,816 | 275,224 | ||||||
Due
to stockholders/officers
|
177,600 | 177,699 | ||||||
Other
current liabilities
|
28,777 | 33,027 | ||||||
Total
Current Liabilities
|
5,203,177 | 2,905,432 | ||||||
Total
Liabilities
|
5,203,177 | 2,905,432 | ||||||
Equity:
|
||||||||
Asia
Cork Inc. Stockholders' Equity:
|
||||||||
Common
stock, $0.0001 par value, 200,000,000 shares authorized,
|
||||||||
35,663,850
issued and outstanding
|
3,566 | 3,566 | ||||||
Additional
paid-in capital
|
4,485,446 | 4,485,446 | ||||||
Additional
paid-in capital-stock warrant
|
279,386 | 279,386 | ||||||
Reserve
funds
|
2,586,720 | 2,236,716 | ||||||
Retained
earnings
|
9,580,690 | 7,966,783 | ||||||
Accumulated
other comprehensive income
|
2,659,538 | 2,668,724 | ||||||
Total
Asia Cork Inc. Stockholders' Equity
|
19,595,346 | 17,640,621 | ||||||
Noncontrolling
Interest
|
1,981,212 | 1,802,022 | ||||||
Total
Equity
|
21,576,558 | 19,442,643 | ||||||
Total
Liabilities and Equity
|
$ | 26,779,735 | $ | 22,348,075 |
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-20
Asia Cork Inc. and
Subsidiaries
Condensed
Consolidated Statements of Operations (Unaudited)
For
Three Months Ended September 30,
|
For
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Revenues
|
$ | 10,151,002 | $ | 8,958,570 | $ | 17,056,777 | $ | 17,841,299 | ||||||||
Cost
of Goods Sold
|
6,481,710 | 5,810,298 | 11,032,415 | 11,666,418 | ||||||||||||
Gross
Profit
|
3,669,292 | 3,148,272 | 6,024,362 | 6,174,881 | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
1,555,095 | 1,146,051 | 2,470,208 | 2,255,551 | ||||||||||||
Bad
debt expenses
|
248,574 | 6,466 | 253,104 | 9,052 | ||||||||||||
General
and administrative expense
|
228,127 | 244,575 | 500,562 | 660,932 | ||||||||||||
Total
Operating Expenses
|
2,031,796 | 1,397,092 | 3,223,874 | 2,925,535 | ||||||||||||
Income
From Operations
|
1,637,496 | 1,751,180 | 2,800,488 | 3,249,346 | ||||||||||||
Other
Income (Expenses)
|
||||||||||||||||
Interest
expenses, net
|
(41,752 | ) | (113,771 | ) | (259,117 | ) | (160,128 | ) | ||||||||
Other
income , net
|
26,260 | 25,705 | 78,760 | 30,671 | ||||||||||||
Total
Other Expenses
|
(15,492 | ) | (88,066 | ) | (180,357 | ) | (129,457 | ) | ||||||||
Income
Before Taxes
|
1,622,004 | 1,663,114 | 2,620,131 | 3,119,889 | ||||||||||||
Provision
for Income Taxes
|
293,830 | 272,822 | 477,030 | 500,733 | ||||||||||||
Net
Income Before Noncontrolling Interest
|
1,328,174 | 1,390,292 | 2,143,101 | 2,619,156 | ||||||||||||
Less:
Net income attributable to the noncontrolling interest
|
105,714 | 119,887 | 179,190 | 214,922 | ||||||||||||
Net
Income Attributable to Asia Cork Inc.
|
$ | 1,222,460 | $ | 1,270,405 | $ | 1,963,911 | $ | 2,404,234 | ||||||||
Earnings
Per Share:
|
||||||||||||||||
-
Basic
|
$ | 0.03 | $ | 0.04 | $ | 0.06 | $ | 0.07 | ||||||||
-
Diluted:
|
$ | 0.03 | $ | 0.04 | $ | 0.06 | $ | 0.07 | ||||||||
Weighted
Common Shares Outstanding
|
||||||||||||||||
-
Basic
|
35,663,850 | 35,564,961 | 35,663,850 | 35,464,220 | ||||||||||||
-
Diluted:
|
38,734,025 | 38,795,991 | 38,734,025 | 36,985,851 | ||||||||||||
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-21
Asia Cork Inc. and
Subsidiaries
Condensed
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
For
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Net
Income Before Noncontrolling Interest
|
$ | 2,143,101 | $ | 2,619,156 | ||||
Other
Comprehensive (Loss) Income:
|
||||||||
Foreign
Currency Translation (Loss) Income
|
(9,186 | ) | 1,207,683 | |||||
Comprehensive
Income
|
$ | 2,133,915 | $ | 3,826,839 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-22
Asia Cork Inc. and
Subsidiaries
Condensed
Consolidated Statements of Changes in Equity (Unaudited)
For Nine Months Ended
September 30, 2009 and the Year Ended December 31, 2008
Asia
Cork Inc. Stockholders' Equity
|
|||||||||||||||||||||||||||||||||||
Retained
Earnings / (Accumulated Deficit)
|
Other
Comprehensive Income (Expense)
|
||||||||||||||||||||||||||||||||||
Common
Stock,
|
Additional
Paid-in Capital
|
Additional
Paid-in Capital Stock Warrant
|
Noncontrolling
Interest
|
||||||||||||||||||||||||||||||||
No.
of Shares
|
Amount
|
Reserve
Fund
|
Total
|
||||||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
35,413,850 | $ | 3,541 | $ | 4,396,772 | $ | - | $ | 1,741,715 | $ | 5,729,630 | $ | 1,564,966 | $ | 1,522,318 | $ | 14,958,942 | ||||||||||||||||||
Patent
rights donated by chairman
|
- | - | 4,199 | - | - | - | - | - | 4,199 | ||||||||||||||||||||||||||
Issued
convertible note with stock warrant in June, 2008
|
- | - | - | 279,386 | - | - | - | - | 279,386 | ||||||||||||||||||||||||||
Issued
new common stocks on July 31, 2008 for service
received
|
150,000 | 15 | 43,485 | - | - | - | - | - | 43,500 | ||||||||||||||||||||||||||
Issued
new common stocks on August 14, 2008 for service
received
|
100,000 | 10 | 40,990 | - | - | - | - | - | 41,000 | ||||||||||||||||||||||||||
Net
income for year ended December 31, 2008
|
- | - | - | - | - | 2,732,154 | - | 279,704 | 3,011,858 | ||||||||||||||||||||||||||
Appropriation
of Reserve funds
|
- | - | - | - | 495,001 | (495,001 | ) | - | - | - | |||||||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | - | - | 1,103,758 | - | 1,103,758 | ||||||||||||||||||||||||||
Balance,
December 31, 2008
|
35,663,850 | $ | 3,566 | $ | 4,485,446 | $ | 279,386 | $ | 2,236,716 | $ | 7,966,783 | $ | 2,668,724 | $ | 1,802,022 | $ | 19,442,643 | ||||||||||||||||||
Net
Income for nine months ended September 30, 2009
|
- | - | - | - | - | 1,963,911 | - | 179,190 | 2,143,101 | ||||||||||||||||||||||||||
Appropriation
of Reserve funds
|
- | - | - | - | 350,004 | (350,004 | ) | - | - | - | |||||||||||||||||||||||||
Foreign
currency translation loss
|
- | - | - | - | (9,186 | ) | (9,186 | ||||||||||||||||||||||||||||
Balance,
September 30, 2009
|
35,663,850 | $ | 3,566 | $ | 4,485,446 | $ | 279,386 | $ | 2,586,720 | $ | 9,580,690 | $ | 2,659,538 | $ | 1,981,212 | $ | 21,576,558 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-23
Asia Cork Inc. and
Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Unaudited)
For
Nine Months Ended September 30,
|
|||||
2009
|
2008
|
||||
(Unaudited)
|
(Unaudited)
|
||||
Cash
Flows From Operating Activities
|
|||||
Net
Income
|
$ 1,963,911
|
$ 2,404,234
|
|||
Adjustments
to Reconcile Net Income to Net Cash
|
|||||
Provided by (Used in) Operating Activities | |||||
Depreciation and amortization |
223,137
|
197,831
|
|||
Bad debt adjustment |
253,104
|
9,052
|
|||
Issued common stock to payment legal fee |
-
|
43,500
|
|||
Net income attributable to noncontrolling interest |
179,190
|
214,922
|
|||
Accrued due to shareholder expenses |
-
|
82,252
|
|||
Deferred income tax valuation allowance |
5,326
|
-
|
|||
Consulting fee adjusted from deferred |
19,680
|
11,480
|
|||
Interest expenses for discount on convertible note |
130,649
|
83,816
|
|||
Changes in operating assets and liabilities: | |||||
Accounts receivable |
(623,217)
|
(1,733,401)
|
|||
Inventories |
(4,556,205)
|
(3,000,259)
|
|||
Advance to suppliers |
1,759,846
|
(104,695)
|
|||
Prepayments and other current assets |
(299,182)
|
(78,330)
|
|||
Accounts payable and accrued expenses |
950,760
|
531,939
|
|||
Customer deposits |
600,055
|
196,617
|
|||
Taxes payable |
852,225
|
(140,584)
|
|||
Other current liabilities |
(4,234)
|
4,346
|
|||
Net
Cash Provided by (Used in) Operating Activities
|
1,455,045
|
(1,277,280)
|
|||
Cash
Flows From Investing Activities
|
|||||
Proceeds from withdraw deposit for purchase of intangible assets |
-
|
1,370,877
|
|||
Proceeds from withdraw deposit for acquisition |
102,601
|
-
|
|||
Payment for purchase of equipment |
(811,563)
|
-
|
|||
Payment for construction in progress |
-
|
(208,277)
|
|||
Net
Cash (Used in) Provided by Investing Activities
|
(708,962)
|
1,162,600
|
|||
Cash
Flows From Financing Activities
|
|||||
Proceeds from the loan |
215,343
|
441,833
|
|||
Repayments for the loan |
(439,475)
|
(574,383)
|
|||
Proceeds from convertible note |
-
|
700,000
|
|||
Net
Cash (Used in) Provided by Financing Activities
|
(224,132)
|
567,450
|
|||
Net
Increase in Cash and Equivalents
|
521,951
|
452,770
|
|||
Effect
of Exchange Rate Changes on Cash
|
(1,798)
|
(263,091)
|
|||
Cash
and Equivalents at Beginning of Period
|
23,605
|
367,396
|
|||
Cash
and Equivalents at End of Period
|
$ 543,758
|
$ 557,075
|
|||
SUPPLEMENT
DISCLOSURES OF CASH FLOW INFORMATION
|
|||||
Interest paid |
$ 27,843
|
$ 43,996
|
|||
Income taxes paid |
$ 134,505
|
$ 719,287
|
|||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND
|
|||||
FINANCING ACTIVITIES | |||||
Construction in process transferred out to property |
$ -
|
$ 3,401,660
|
|||
Shareholder donated intangible assets into the Company without payment |
$ -
|
$ 4,199
|
|||
Issued common stock for legal fees and part of consulting fees |
$ -
|
$ 84,500
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-24
Asia
Cork Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (Unaudited)
1.
|
BASIS
OF PRESENTATION
|
a)
|
Interim
financial statements:
|
The
unaudited condensed consolidated financial statements of Asia Cork Inc and
subsidiaries (the "Company") have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and
pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for annual financial
statements. However, the information included in these interim financial
statements reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for the fair
presentation of the consolidated financial position and the consolidated results
of operations. Results shown for interim periods are not necessarily indicative
of the results to be obtained for a full year. The consolidated balance sheet
information as of December 31, 2008 was derived from the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K. These
interim financial statements should be read in conjunction with that
report.
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.
b)
|
Description
of business and reverse merger:
|
Asia Cork
Inc. (f/k/a Hankersen International Corp.) (“Asia Cork") was incorporated on
August 1, 1996, under the laws of the State of Delaware. Until August 2005, Asia
Corky had no operations and the sole purpose of Asia Cork was to locate and
consummate a merger or acquisition with a private entity.
On July
11, 2008, Asia Cork’s wholly owned subsidiary, Asia Cork Inc., was merged into
its parent, Asia Cork, in order to change the name of Asia Cork, after approval
by the Board of Directors of Asia Cork pursuant to the Delaware General
Corporation Law. Asia Cork is the surviving company of the merger and, except
for the adoption of the new name its Certificate of Incorporation is otherwise
unchanged. The wholly-owned subsidiary was formed in July 2008 and had no
material assets.
As
permitted by Delaware General Corporation Law, Asia Cork assumed the name of its
wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. Asia Cork’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB.
Asia Cork
and all its subsidiaries listed below will be called “the Company” in the
accompanying condensed consolidated financial statements.
F-25
In August
2005, Asia Cork, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of Asia Cork ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. Asia Cork acquired Hanxin International in exchange
for shares of common stock and shares of the Series A Preferred Stock of Asia
Cork. The capitalizations are described in further detail in Note 14 to the
accompanying condensed consolidated financial statements.
Subsequent
to the merger and upon the conversion of the Series A Preferred Stock, the
former shareholders of Hanxin International will own 95% of the outstanding
shares of Asia Cork's common stock. As a result of the ownership interests of
the former shareholders of Hanxin International, for financial statement
reporting purposes, the merger was treated as a reverse acquisition, with Hanxin
International deemed the accounting acquirer and Kushi deemed the accounting
acquiree. Historical information of the surviving company is that of Hanxin
International.
Hanxin
International has no other business activities but owns 100% of Xi'An Cork
Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian
Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An
and Hanxin are People's Republic of China (“PRC”) corporations. Most of the
Company’s activities are conducted through Hanxin.
During
the year ended December 31, 2005, Hanxin acquired 75% equity interest of Cork
Import and Export Co. Ltd. (“CIE”), a PRC corporation engages in cork trading
businesses.
Hanxin is
engaged in developing, manufacturing and marketing of cork wood floor, wall and
decorating materials. Its products are sold to customers in China and oversea
customers in India, the United States of America, Germany and Japan through the
distributors or agents.
c)
|
Use
of estimates:
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Significant estimates in 2009 and 2008 include the estimated useful lives and
fair values of the assets. Actual results could differ from those
estimates.
F-26
d)
|
Revenue
recognition:
|
The
Company's revenues from the sale of products are recognized when the goods are
shipped, title passes, the sales price to the customer is fixed and
collectability is reasonably assured. Persuasive evidence of an arrangement is
demonstrated via purchase order from distributor, our customers, product
delivery is evidenced by warehouse shipping log as well as signed bill of
lading, or shipping documents from the trucking company and no product return is
allowed except defective or damaged products, the sales price to the customer is
fixed upon acceptance of purchase order, there is no separate sales rebate,
discounts, and volume incentives.
e)
|
Income
taxes
|
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is exempt
from income taxes.
The
Company follows ASC740 – “Accounting for Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
f)
|
Stock-based
compensation
|
The
Company measures compensation expense for its non-employee stock-based
compensation under the FASB ASC 505-50, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. The fair value of the option issued is
used to measure the transaction, as this is more reliable than the fair value of
the services received. Fair value is measured as the value of the
Company’s common stock on the date that the commitment for performance by the
counterparty has been reached or the counterparty’s performance is
complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.
g)
|
Basic
and diluted net income per share
|
The
Company accounts for net income per common share in accordance with the FASB
issued ASC 260, “Earnings per Share” (“EPS”). ASC 260 requires the
disclosure of the potential dilution effect of exercising or converting
securities or other contracts involving the issuance of common stock. Basic net
income per share is determined based on the weighted average number of common
shares outstanding for the period. Diluted net income per share is
determined based
h)
|
Foreign
currency translation
|
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
F-27
i)
|
Recent
accounting pronouncements:
|
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of ASC 105 is not expected to have a material impact on the
Company’s results of operations or financial position.
In
June 2009, the FASB issued ASC 810, Amendments to FASB Interpretation
No. 46(R), which improves financial reporting by enterprises involved with
variable interest entities. ASC 810 addresses (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) concerns
about the application of certain key provisions of FIN 46(R), including those in
which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. ASC 810 shall be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Adoption of ASC 810 is not expected to have a
material impact on the Company’s results of operations or financial
position.
In
May 2009, the FASB issued ASC 855, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of ASC 855 to
interim or annual financial periods ending after June 15, 2009. Adoption of
ASC 855 did not have a material impact on the Company’s results of operations or
financial position.
2.
|
ACCOUNT
RECEIVABLE
|
During
the fourth quarter of 2008, due to adverse market conditions for home and
commercial renovation and decoration, the Company’s accounts receivable as at
December 31, 2008 of a total of $4,979,792 included accounts receivable
outstanding for over six months of $1,551,836 (equivalent to RMB10,587,400).
Commencing from April 2009, market conditions gradually
improved. Total sales for credit (other than cash sales) and accounts
receivable outstanding increased significantly during the second and third
quarters of 2009. As of September 30, 2009, the accounts receivable outstanding
was valued at $5,599,865 (equivalent to RMB 38,226,526), nearly none of which
was outstanding more than six months. However, for conservative concern, Hanxin
adopted a bad debt allowance at 5% of all outstanding account receivable
commencing from the third quarter of 2009. Accordingly, the bad debt
allowance was $277,100, and the net amount of accounts receivable was $5,322,765
as of September 30, 2009.
F-28
3.
|
INVENTORIES
|
Inventories
as of September 30, 2009 and December 31, 2008, consisted of the
following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Raw
materials
|
$ | 6,175,564 | $ | 2,073,501 | ||||
Work
in progress
|
182,612 | 210,526 | ||||||
Finished
goods
|
664,593 | 427,459 | ||||||
Packaging
and other
|
285,344 | 44,525 | ||||||
Total
|
$ | 7,308,113 | $ | 2,756,011 |
4.
|
LOAN
TO UNRELATED PARTY
|
Hanxin
had prepaid RMB10 million as deposits to purchase the land use right from one of
its major sales distributors in Shaanxi Province, Shaanxi Shuta Wood Products
Co., Ltd. (“Shaanxi Shuta”). However, Hanxin terminated the agreement in August
2008 and had all deposits refunded in August and September 2008.
In 2008,
Shaanxi Shuta opened cork retail chain stories dedicated to sell Hanxin’s
products exclusively. Shaanxi Shuta incurred heavy losses because Hanxin could
not achieve its 500,000 square meters floor and board production plan in 2008
and had delayed many purchase orders. In order to avoid losing a very important
distribution channel and to assist Shaanxi Shuta to recover from this situation,
Hanxin loaned RMB10 million (equivalent to $1,464,916) to Shaanxi Shuta for one
year starting from October 27, 2008. This loan is non-interest bearing and
unsecured. On October 28, 2009, Hanxin signed another loan agreement with
Shaanxi Shuta and loaned the same amount of RMB10 million to Shaanxi Shuta again
for the term from October 27, 2009 to October 27, 2011. This loan is also
non-interest bearing and unsecured.
On
October 20, 2009, Hanxin also signed a forgiveness memo with Shaanxi Shuta to
express its sincerity to acquire 7,000 Mu (equivalent to 4,669,000 square
meters) land use right located in Baoji District Shaanxi Providence from Shaanxi
Shuta within two years starting from October 20, 2009. In consider of the
expenditure of Shaanxi Shuta in acquired the land use right for Hanxin, Hanxin
agree to purchase this land use right within two years in the same amount of
RMB37.8 million listed in prior agreement. In the event Hanxin does not purchase
the land by October 2011, Hanxin will be liable to pay Shaanxi Shuta
all upfront operation costs approximately RMB10 million (equivalent to
$1,464.916) that Shaanxi Shuta had paid to acquire the land use right from the
Baoji District government. The parties anticipate that should Hanxin does not
purchase the land by October 20, 2011, Shuta will not repay the
RMB10 million loan pursuant to Loan Agreement dated October 28, 2009 and
the parties will have no further obligation to each other regarding the loan or
the land purchase.
F-29
5.
|
PROPERTY
AND EQUIPMENT
|
As of
September 30, 2009 and December 31, 2008, property and equipment consisted of
the following:
September
30, 2009
|
December
31, 2008
|
|||||||||||
Estimated
Life
|
(Unaudited)
|
(Audited)
|
||||||||||
Building
and improvement
|
27-35 | $ | 4,892,199 | $ | 4,894,945 | |||||||
Manufacturing
equipment
|
1-8 | 1,649,859 | 838,766 | |||||||||
Office
furniture and equipment
|
5 | 31,124 | 31,141 | |||||||||
Vehicle
|
2-8 | 12,520 | 12,527 | |||||||||
Machinery
improvement
|
3 | 80,570 | 80,616 | |||||||||
Subtotal
|
6,666,272 | 5,857,995 | ||||||||||
Less:
Accumulated depreciation
|
1,263,050 | 1,044,366 | ||||||||||
Total
|
$ | 5,403,222 | $ | 4,813,629 | ||||||||
For the nine months ended September 30, 2009 and 2008, depreciation expenses amounted to $219,077 and $194,015, respectively.
6.
|
DEPOSIT
FOR PURCHASE OF FIXED ASSETS
|
Hanxin
intended to purchase a factory’s fixed assets through an unrelated agent who
will do the negotiation for the Company, and both parties signed the Entrust
Purchase Agreement on November 10, 2005. Hanxin had paid deposits $2,021,584
(equivalent to RMB 13,800,000) to the agent as of September 30, 2009, and the
same deposit was valued at $2,022,719 (equivalent to RMB 13,800,000) as of
December 31, 2008. The agency agreement has no firm commitment on the purchase
but it states a maximum price of RMB 50,000,000 that the Company is willing to
pay for the fixed assets. However, due to the dissension within the factory’s
creditors, the agent could not close this purchase agreement on time. As a
result, Hanxin had a supplementary agreement with this agent on September 27,
2009 to postpone the term. Pursuant to the supplementary agreement, the deposit
which Hanxin had paid to the agent is fully refundable if the purchase does not
go through by June 30, 2010.
7.
|
DEPOSIT
FOR ACQUISITION
|
Hanxin
intended to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan Hanxin
”), one of its cork raw material providers located in Sichuan Province China,
and signed a strategic cooperation agreement with Sichuan Hanxin on
March 26, 2007. The purchase price of Sichuan Hanxin shall not exceed
$2,927,962 (RMB20 million) based upon the agreement. As of September 30, 2009,
Hanxin had paid a $1,362,372 (equivalent to RMB9.3 millions) deposit to Sichuan
Hanxin . Hanxin anticipates applying the whole deposited amount to payments for
raw materials if the acquisition does not occur before the end of year
2009.
On
September 20, 2009, Hanxin entered into an agreement (“Agreement”) with the
two shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The Agreement
grants Hanxin an option to acquire 100% of the shares of Sichuan Hanxin by
September 20, 2010. The acquisition price shall be the 120%~150% of the net
asset value as shown in the audited financial statements as of December 31, 2009
of Sichuan Hanxin as determined by an audit firm Hanxin designate. The amount of
the premium over the net asset value is subject to agreement by the parties, but
cannot exceed 150%. Exercise of the option is subject to satisfactory of
financing situation, due diligence, and requisite corporate approvals. In the
event that any of the closing condition is not satisfied by September 20, 2010,
the Agreement will terminate except that a party whose fault causes the failure
to fulfill conditions shall be liable to pay a penalty of RMB 10 million
(equivalent to $1,464,916). According to the Agreement, Hanxin shall pay 30% of
the acquisition price within 10 days from the date of fulfillment of all closing
conditions, 30% within 60 days from the fulfillment date, and 40% within 10 days
from completing the transfer of all assets and shares of Sichuan
Hanxin. As of September 30, 2009, Hanxin had paid a deposit of
$1,362,372 (equivalent to RMB9.3 millions) to Sichuan Hanxin. Hanxin
anticipates applying the whole deposited amount to payments for raw materials if
the acquisition does not occur.
F-30
8.
|
INVESTMENT
– AT COST
|
On June
28, 2005, the Company purchased a 12% equity interest of Shaanxi DeRong
Technology Information Development Co. Ltd. (“DeRong”), a PRC corporation, for
$2,050,882 (equivalent to RMB 14 million). DeRong owns a cork tree forest
plantation in China. The investment is for long term and is stated at
cost.
9.
|
INTANGIBLE
ASSETS
|
The
Company purchased the right to use a parcel of land for 40 years on September
27, 2001. The purchase price is being amortized over the term of the right. In
addition, the company was assigned ownership of three patent rights from its
major stockholder and Chairman, Mr. Fangshe Zhang, during the quarter ended June
30, 2008. These patents were assigned without any payment due to Mr. Zhang.
These three patent rights are used as part of a vital technique for the
production of the Company’s products. The application and filing costs of these
three patent rights were $4,199 (equivalent to RMB28,800). As of September 30,
2009 and December 31, 2008, intangible assets, less accumulated amortization
consisted of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Intangible
assets
|
$ | 208,215 | $ | 208,332 | ||||
Less:
Accumulated amortization
|
41,196 | 37,154 | ||||||
Total
|
$ | 167,019 | $ | 171,178 |
For the
nine months ended September 30, 2009 and 2008, amortization expense amounted to
$4,060 and $3,816 respectively.
The
amortization expenses for the next five years are as follows:
2010
|
$ | 5,414 | ||
2011
|
5,414 | |||
2012
|
5,414 | |||
2013
|
5,414 | |||
2014
|
5,414 |
F-31
10.
LOAN PAYABLE
Loan
payable as of September 30, 2009 and December 31, 2008 consisted of the
following:
September
30, 2009
|
December
31, 2008
|
||||
(Unaudited)
|
(Audited)
|
||||
On
November 30, 2007, the Company obtained a short-term loan RMB3.9 million
(equivalent at that time to $534,642 ) from Xian Xitaoyuan Credit Bank by
pledging the Company's building in YuLerYuan with bank, The loan interest
is 8.37‰ per month. The Company had paid principal RMB3.9 million back to
bank on June 30, 2008. On the same day, the company
borrowed RMB3 million (equivalent to $439,722 ) from the same
bank with new interest rate 9.967‰ per month and new due date on June 30,
2009 . This RMB3 million loan had been fully paid off on June 29,
2009.
|
$ | - | $ | 439,722 | |
Commencing
from September 24, 2009, the Company borrowed certain
short-term loans from Mr. Yang Liu, an unrelated party. These short-term
loans were in amounts of RMB1.47 million (equivalent to $215,343 ) as of
September 30, 2009. The interest rate of these loans is 7.4% per year, and
all due on September 24, 2010
|
215,343 | - | |||
Total
Loan Payable
|
$ | 215,343 | $ | 439,722 |
11. CONVERTIBLE NOTES AND WARRANTS
On June 4
and June 12, 2008, the Company consummated an offering of convertible promissory
notes and common stock purchase warrants for aggregate gross proceeds of
$700,000. The notes mature one (1) year from the date of issuance and bear
interest at an annual rate of 18%, payable at maturity in USD. Upon the
successful closing of an equity or convertible debt financing for a minimum of
$2,000,000 ("Financing"), the promissory notes will be convertible into shares
of common stock at a 50% discount to the price per share of Common Stock sold in
the Financing. Since the Financing was not achieved within the one year term of
the promissory notes, each investor has the option to be paid the principal and
interest due under the promissory note or convert the note into shares of common
stock at a conversion price of $0.228 per share.
The
warrants are exercisable at any time after the consummation of the Financing
through the fourth anniversary of the consummation of the Financing (the
"Financing Expiration Date"). Each holder is entitled to purchase the number of
shares of common stock equal to the initial principal amount of such investor's
promissory note DIVIDED BY the lowest cash purchase price paid for the Company's
common stock (or the conversion price or exercise price if the Financing
consists of convertible securities or warrants, respectively) in the Financing
(the "Financing Based Conversion Price") at an exercise price equal to the
Financing Based Conversion Price. Since the Financing did not occur within 12
months of the issuance of the warrant, the warrant is exercisable from and after
such date and through the fourth anniversary of the issuance date of the
warrant. In such event, the holder is entitled to purchase the number of shares
of common stock equal to 50% of the initial principal amount of the promissory
note DIVIDED BY $0.228 at an exercise price equal to $0.228, subject to certain
adjustments as set forth in the warrant.
F-32
Since the
notes were not paid at maturity in June 2009, the annual interest rate payable
since the maturity date increased to 24%.. The interest payable regarding the
convertible notes has been accrued and recorded as of September 30, 2009.
However, the extension of due date for notes is still under negotiation as of
November 11 2009, but there can be no assurance that the holders of the
convertible notes will agree to extend the due date or the terms of such
extension. The different amount between the option price in declared date and
warrant conversion price $0.228 with total entitled warrant shares had been
charged directly to discount on convertible note , and the sum was add to
additional paid-in capital-stock option in amount of $279,386 as of September
30, 2009 and December 31, 2008, respectively.
The
Company’s obligations under the promissory notes are secured by an aggregate of
7,630,814 shares of common stock pledged by Mr. Pengcheng Chen, the Company’s
Chief Executive Officer, Mr. Fangshe Zhang, the Company’s Chairman (the “Escrow
Shares”). In the event that subsequent to the issuance of the Convertible Notes,
the value of the Escrow Shares is less than 150% of the outstanding principal
amount of the promissory notes for 10 consecutive trading days, then the holder
of the promissory notes shall have the right to give the Company notice (the
“Investor Notice”) to deposit or cause to be deposited additional Escrow Shares
such that the value of the Escrow Shares based upon the volume weighted average
price per share for the 20 trading days preceding the date of the Investor
Notice, is equal to 150% of the outstanding principal amount of the promissory
notes. The Company agreed to deposit or cause to be deposited such additional
Escrow Shares within 30 days of the date of the Investor Notice. To the extent
the Escrow Shares are not sufficient to meet the threshold of 150% of the
outstanding principal amount of the promissory notes within 30 days after the
Investor Notice, the Company shall grant to Investors a security interest on the
Company’s tangible assets to the extent permitted under applicable
law.
Net of
convertible note as of September 30, 2009 and December 31, 2008 consisted of the
following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Convertible
note
|
$ | 700,000 | $ | 700,000 | ||||
Less:
Discount on convertible note
|
- | 125,724 | ||||||
Convertible
note, net
|
$ | 700,000 | $ | 574,276 |
12.
TAX
PAYABLE
Asia Cork
and its U. S. subsidiary will file consolidated Federal income tax and
individually file state franchise tax annual report with the State of Delaware.
Its PRC subsidiaries file income tax returns under the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and local
income tax laws. The Company’s BVI subsidiary is exempt from income
taxes.
F-33
Per PRC
Income Tax Law, any new foreign owned corporation is exempt from income tax for
the first two years of existence, and then receives a 50% exemption of income
tax for the next three years if it is a non high-tech corporation or 15% tax
rate for corporation qualified by State Science and Technology Commission as
"High Tech Manufacturing Enterprise" located in State "High Tech Zone" approved
by China State Council. Based on these regulations, Hanxin was exempt from
income tax in year 2003 and 2004 and its income has been subject to a 15% tax
starting from January 1, 2005 to December 31, 2007. Since Hanxin is qualified as
a High Tech Manufacturing Enterprise and located in State “High Tech Zone”, it
is also qualified for 15% income tax rate for year 2008 and the year after.
However, CIE is not a “High Tech Manufacturing Enterprise”, thus its income is
subject to 33% tax rate. Commencing from January 2008, based on the new
regulation in the PRC, CIE’s income is subject to 25% tax rate.
On
September 30, 2009 and December 31, 2008, taxes payable consisted the
following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Value-added
tax
|
$ | 633,207 | $ | 177,287 | ||||
Corporate
income tax provision
|
412,327 | 74,888 | ||||||
Local
taxes and surcharges
|
52,974 | 13,491 | ||||||
Franchise
tax
|
28,308 | 9,558 | ||||||
Total
|
$ | 1,126,816 | $ | 275,224 | ||||
The deferred income tax assets results from loss on disposition of fixed assets that are not deductible.
The
components of the provisions for income taxes were as follows:
For
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
taxes:
|
||||||||
Current
income taxes in P.R. China
|
$ | 471,704 | $ | 500,733 | ||||
Deferred
taxes valuation allowance
|
5,326 | - | ||||||
Total
provision for income taxes
|
$ | 477,030 | $ | 500,733 | ||||
Testing
|
- |
13.
DUE
TO STOCKHOLDERS/OFFICERS
Amounts
due to stockholders/officers are unsecured, non-interest bearing, and have no
set repayment date. As of September 30, 2009 and December 31, 2008, the total
net amounts due to the stockholders/officers were $177,600 and $177,699,
respectively, which represented the net amounts lent by stockholders/officers to
the Company.
14. STOCKHOLDERS
EQUITY
On August
9, 2005, the Company acquired Hanxin International in exchange for (i)
24,000,000 shares of the Company’s common stock and (ii) 1,000 shares of the
Company’s Series A Preferred Stock, which were converted into 177,185,642 shares
of the Company’s common stock, without taking into effect of a reverse stock
split as described below.
F-34
In
November 2005, the Company filed and circulated to its shareholders the
Information Statement which permitted the Company, among other things, to (i)
amend its Articles of Incorporation to increase its authorized shares of common
stock to 200,000,000 shares; (ii) approve one for six reverse split as to all
outstanding shares of common stock of the Company, effective as to holders of
record of shares of common stock on December 9, 2005, (iii) approve a stock
option, SAR and stock bonus plan for the directors, officers, employees and
consultants of the Company. A certificate of amendment officially increasing the
authorized shares of common stock and approving the reverse stock split was
filed with the State of Delaware on December 13, 2005.
On
September 1, 2006, the 1,000 shares Series A preferred stock were converted into
29,530,937 shares of the Company’s common stock. Subsequently, the Company
issued additional 118,123 shares in October 2006 to reflect an under-issuance to
a stockholder of the shares of common stock issuable upon conversion of the
preferred stock As a result the total amount of issued and outstanding shares of
the Company’s common stock was 35,413,850 as of September 30, 2008.
In May
2008, the board of directors of the Company authorized, and on July 31, 2008 the
Company issued, 150,000 shares of the Company’s common stock to its attorney for
services rendered. In June 2008, the board of directors of the Company
authorized, and on August 14 2008 the Company issued, 100,000 shares of the
Company’s common stock to HAWK Associates, Inc (“Hawk”), its investor relations
firm for services rendered pursuant to the agreement. Accordingly,
the Company has 35,663,850 shares of issued and outstanding common stock as of
November 13, 2009.
In June
2008, the Company was assigned ownership of three patent rights from its major
shareholder, Mr. Fangshe Zhang. These patents were assigned without
any payment due to Mr. Zhang. The application and filing costs of these three
patents were RMB28,800 (equivalent to $4,199). In connection therewith, the
Company recorded $4,199 of intangible assets, and same amount of additional paid
in capital as of September 30, 2008.
On June 4
and June 12, 2008, the Company consummated an offering of convertible promissory
notes and common stock purchase warrants for aggregate gross proceeds of
$700,000. The notes mature one (1) year from the date of issuance and bear
interest at an annual rate of 18%, payable at maturity in USD. Since the notes
were not paid at maturity, the annual interest rate increased to 24%. Upon the
successful closing of an equity or convertible debt financing for a minimum of
$2,000,000 ("Financing"), the promissory notes will be convertible into shares
of common stock at a 50% discount to the price per share of Common Stock sold in
the Financing. Since the Financing did not occur within 12 months of the
issuance of the warrant, the warrant is exercisable from and after such date and
through the fourth anniversary of the issuance date of the warrant. In such
event, the holder is entitled to purchase the number of shares of common stock
equal to 50% of the initial principal amount of the promissory note DIVIDED BY
$0.228 at an exercise price equal to $0.228, subject to certain adjustments as
set forth in the warrant. In connection therewith, the Company recorded $279,386
of additional paid in capital-stock option as of September 30, 2009 and as of
December 31, 2008.
F-35
15.
BASIC
AND DILUTED EARNING PER SHARE
The
following table sets forth the computation of basic and diluted net income per
share:
For
Three Months Ended September 30,
|
For
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Unaudited
|
Unaudited
|
Unaudited
|
Unaudited
|
|||||||||||||
Basic:
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Net
income for basic calculation
|
$ | 1,222,460 | $ | 1,270,405 | $ | 1,963,911 | $ | 2,404,234 | ||||||||
Denominator:
|
||||||||||||||||
Weighted
average common shares
|
35,663,850 | 35,564,961 | 35,663,850 | 35,464,220 | ||||||||||||
Net
income per share — basic
|
$ | 0.03 | $ | 0.04 | $ | 0.06 | $ | 0.07 | ||||||||
Diluted:
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Net
income for basic calculation
|
$ | 1,222,460 | $ | 1,270,405 | $ | 1,963,911 | $ | 2,404,234 | ||||||||
Effect
of dilutive securities issued
|
37,910 | 98,594 | 222,521 | 119,402 | ||||||||||||
Net
income for diluted calculation
|
$ | 1,260,370 | $ | 1,368,999 | $ | 2,186,432 | $ | 2,523,636 | ||||||||
Denominator:
|
||||||||||||||||
Denominator
for basic calculation
|
35,663,850 | 35,564,961 | 35,663,850 | 35,464,220 | ||||||||||||
Weighted
average effect of dilutive securities:
|
||||||||||||||||
Warrants
|
- | 160,855 | - | 248,077 | ||||||||||||
Convertible
debt
|
3,070,175 | 3,070,175 | 3,070,175 | 1,273,554 | ||||||||||||
Denominator
for diluted calculation
|
38,734,025 | 38,795,991 | 38,734,025 | 36,985,851 | ||||||||||||
Net
income per share — diluted
|
$ | 0.03 | $ | 0.04 | $ | 0.06 | $ | 0.07 |
16.
COMMITMENTS
The
Company leases its office space and production land under operating lease
agreements that are expiring on December 31, 2009, October 2, 2010, and October
2047 respectively. The following is a schedule of future minimum rental land
payments required under these operating leases as of September 30,
2009.
Minimum
rental and property maintenance payments as of September 30,
2009
For
Nine Months Ending September 30,
|
Amount
|
|||
2010
|
$ | 95,081 | ||
2011
|
17,579 | |||
2012
|
17,579 | |||
2013
|
17,579 | |||
2014
|
17,579 | |||
Thereafter
|
581,572 | |||
Total
minimum rental payments required
|
$ | 746,969 |
F-36
Rent and
properties maintenance expenses amounted to $87,480 and $137,048 for the nine
months ended September 30, 2009 and 2008, respectively.
The
Company also leases three patent rights from its Chairman, Mr. Fangshe Zhang,
under operating lease agreements that expire on April 16, 2011. The following is
a schedule of future minimum rental payments required under these operating
leases as of September 30, 2009.
Minimum
rental payments required under operating lease of patent rights.
For
Nine Months Ending September 30,
|
Amount
|
|||
2010
|
$ | 351,580 | ||
2011
|
191,416 | |||
Total
minimum rental payments required
|
$ | 542,996 |
Patent
lease expenses amounted to $263,685 and $257,726 for the nine months ended
September 30, 2009 and 2008, respectively.
17.
CONCENTRATIONS
OF BUSINESS AND CREDIT RISK
Financial
Risks:
The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
Concentrations
Risks:
For the
nine months ended September 30, 2009 and 2008, none of the Company’s customers
accounted for more than 10% of its sales.
Major
Suppliers:
The
Following summaries purchases of raw materials from major suppliers (each 10% or
more of purchases):
Purchased
from
|
Number
of
|
Percentage
of
|
||||||||||
For
Nine Months Ended September 30,
|
Major
Suppliers
|
Suppliers
|
Total
Purchased
|
|||||||||
2009
|
$ | 3,308,935 | 2 | 23.29 | % | |||||||
2008
|
$ | 5,328,507 | 3 | 38.87 | % |
Geographical Risks:
Substantially
all of the Company’s assets and operations were in the PRC for the nine months
ended September 30, 2009 and 2008. Accordingly, the Company’s business,
financial condition and results of operations may be influenced by the
political, economic and legal environment in PRC, and by the general state of
the economy of PRC. The Company’s operations in PRC are subject to special
considerations and significant risks not typically associated with companies in
the United States. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by, among other things, changes in
the political, economic and social conditions in PRC, and by changes in
governmental policies with respect to laws and regulations, changes in PRC's
cork manufacture industry and regulatory rules and policies, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation.
F-37
18.
|
OTHER
|
On August
4, 2009, the Company signed an exclusive financial advisor agreement with the
Underwriter to have it act as the Lead or Managing or Co-Underwriter or
Investment Banker in connection with the proposed public offering (the
“Offering”) consisting of one share of Common Stock and one Common Stock
Purchase Warrant (the “Units”), of the Company its successors, subsidiaries,
affiliates or assigns. The term for this agreement is beginning on August 4,
2009, and ending on May 31 2010 (the “Engagement Period”), which period may be
extended by mutual consent.
19. SUBSEQUENT
EVENT
On
October 28, 2009, Hanxin signed another loan agreement with Shaanxi Shuta and
loaned the same amount of RMB10 million to Shaanxi Shuta for the term from
October 27, 2009 to October 27, 2011. This loan is also non-interest bearing and
unsecured.
On
October 20, 2009, Hanxin also signed a forgiveness memo with Shaanxi Shuta to
express its sincerity to acquire 7,000 Mu (equivalent to 4,669,000 square
meters) land use right located in Baoji District Shaanxi Providence from Shaanxi
Shuta within two years starting from October 20, 2009. In consider of the
expenditure of Shaanxi Shuta in acquired the land use right for Hanxin, Hanxin
agree to purchase this land use right within two years in the same amount of
RMB37.8 million listed in prior agreement. In the event that Hanxin does not
purchase the land by October 20, 2011, Hanxin will be liable to pay Shaanxi
Shuta all upfront operation costs approximately RMB10 million (equivalent to
$1,464,916) that Shaanxi Shuta had paid to acquire the land use right from the
Baoji District government.
F-38
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered.
Securities and Exchange
Commission registration fee (1)
|
$
|
1,275
|
||
FINRA Filing Fee
(1)
|
4,500
|
|||
NASDAQ Listing Fee
(1)
|
50,000
|
|||
AMEX
Listing Fee (1)
|
50,000
|
(1)
|
||
Transfer
Agent Fees
|
5,000
|
|||
Accounting
fees and expenses
|
62,000
|
|||
Legal
fees and expenses
|
150,000
|
|||
Blue
Sky/Underwriter’s counsel fees and expenses
|
10,000
|
|||
Miscellaneous
(2)
|
192,225
|
|||
Total
|
$
|
475,000
|
|
(1)
|
All
amounts are estimates other than the Commission’s registration fee, FINRA
filing fee and NASDAQ listing fee.
|
(2)
|
Includes
non-accountable expense allowance payable to the underwriter of two
percent of the gross proceeds of the
Offering.
|
58
ITEM 14.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our board of directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our board of directors by a majority vote of a
quorum of disinterested board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
59
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of this prospectus, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
•
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
•
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
•
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
60
Shares
of Common Stock
ASIA
CORK, INC.
PROSPECTUS
Until [ .
], 2010, all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers’ obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
[
], 2010
|
|
61
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. |
[RESALE
PROSPECTUS ALTERNATE PAGE]
PROSPECTUS
|
SUBJECT
TO COMPLETION, PRELIMINARY PROSPECTUS
DATED FEBRUARY 12 ,
2009
|
[ ] Shares
of Common Stock
ASIA
CORK, INC.
This
prospectus relates to the resale by the investors (the “Selling Stockholders””)
of up
to shares
(the “Shares”) of common stock, $.0001 par value per share Asia Cork, Inc., a
Delaware corporation (the “Company”). The Shares are sometimes collectively
referred to as the “Selling Stockholders Securities”. .No underwriting
agreements have been entered into by the Selling Stockholders with respect to
the Securities offered hereby. We will not receive any proceeds from the sales
by the selling stockholders, but we will receive funds from the conversion of
promissory notes held by selling stockholders, if exercised.
Concurrently
with this Offering (the “Selling Stockholders’ Offering”), the Company offered,
by separate Prospectus (the “Concurrent
Offering”), Units, each Unit
consisting of one share of the Company’s common stock and
one warrant to ____________, the Underwriter, to purchase one share
of common stock and issued warrants to the Underwriter to purchase _______
Units. The concurrent Offering and the Selling Stockholders Offering are
collectively referred to as the “Offerings”
Our
shares of common stock are currently quoted on the Over-The-Counter Bulletin
Board under the symbol AKRK. We intend to apply for the listing of our common
stock on either the NASDAQ Stock Market LLC (“NASDAQ”) ”) or the American Stock
Exchange, (“AMEX”).
The
purchasers of the convertible promissory notes and related warrants must enter
into customary “lock-up” agreements in favor of the Underwriter pursuant to
which such persons and entities shall agree, for a period of nine (9) months
after the Offering is completed, that they shall neither publicly offer, issue,
sell, contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriter's prior written
consent. {Selling stockholders holding an aggregate of ____shares of common
stock underlying the Selling Stockholders’ promissory notes and warrants have
agreed not to sell any of these shares until __days after the date of this
prospectus when ____of their shares will be released from the lock-up
restrictions. [ TERMS OF LOCKUP ARE UNDER NEGOTIATION
62
The
Selling Stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions or a combination of such methods of sale directly or
through brokers.
The
Selling Stockholders and any participating broker-dealers may be deemed to be
“underwriters” within the meaning of the Securities Act of 1933, as amended (the
“Securities Act”) and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
Securities Act. The Selling Stockholders have informed us that they do not have
any agreement or understanding, directly or indirectly, with any person to
distribute their common stock.
The
purchase of the securities involves a high degree of risk. See section entitled
“Risk Factors” beginning on page 4.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The
Date of this Prospectus is: February 12, 2010
63
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE
OF CONTENTS
Page
|
|||
Prospectus
Summary
|
|||
Risk
Factors
|
|||
Cautionary
Statement Regarding Forward-Looking Statements
|
|||
Use
of Proceeds
|
|||
Dividend
Policy
|
|||
Market
for Common Equity and Related Stockholder Matters
|
|||
Accounting
for the Share and Exchange
|
|||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|||
Description
of Business
|
|||
Management
|
|||
Certain
Relationships and Related Transactions
|
|||
Security
Ownership of Certain Beneficial Owners and Management
|
|||
Description
of Securities
|
|||
Shares
Eligible for Future Sale
|
|||
Selling
Stockholders
|
|||
Plan
of Distribution
|
|||
Legal
Matters
|
|||
Experts
|
|||
Additional
Information
|
|||
Financial
Statements
|
|||
Part
II Information Not Required in the Prospectus
|
|||
Signatures
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that date.
64
[RESALE
PROSPECTUS ALTERNATE PAGE]
THE
OFFERING
Common
stock offered by selling
Stockholders
|
___________
shares(1)
|
Common
stock outstanding
|
___________
shares(2)
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the common stock by the
selling stockholders
|
(1)
|
Includes_______shares
of common stock that are issuable upon the exercise of outstanding
warrants and__________shares of common stock that are issuable upon the
conversion of outstanding Promissory
Notes.
|
(2)
|
The
number of shares of our common stock outstanding as of ______, 2010
(after giving effect to the conversion of the Selling Stockholders
promissory notes), excludes (i) up to _____shares of our common stock
(excluding an underwriter’s option to purchase an additional (15%) of the
total number of shares to be offered by the Company to cover
over-allotments) to be offered by us in a public offering concurrently
herewith,(ii) up to_________shares of our common stock underlying warrants
to be received by the underwriter in connection with the public offering
and up to__________shares of common stick underlying warrants issued to
the Selling Stockholders..
|
[{Selling
stockholders holding an aggregate of _________ shares of common stock
underlying the Selling Stockholders’ promissory notes and warrants have agreed
not to sell any of these shares until ______days after the date of this
prospectus when ________of their shares will be released from the lock-up
restrictions]
65
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of common stock by the
Selling Stockholders.
66
RESALE PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
The
following table provides, as of the date of this prospectus, information
regarding the beneficial ownership of our common stock held by each of the
selling stockholders, including:
•
|
the
number of shares owned by each stockholder prior to this
offering;
|
|
•
|
the
percentage owned by each stockholder prior to completion of the
offering;
|
|
•
|
the
total number of shares that are to be offered for each
stockholder;
|
|
•
|
the
total number of shares that will be owned by each stockholder upon
completion of the offering; and
|
|
•
|
the
percentage owned by each stockholder upon completion of the
offering.
|
Name of Selling
Shareholder
|
Number of
Shares of
Common
Stock
Beneficially
Owned Prior
to Offering
|
Percentage of
Shares of
Common
Stock
Beneficially
Owned Prior
to the
Offering (1)
|
Number of
Shares of
Common
Stock
Registered
for Sale
Hereby
|
Number of
Shares of
Common
Stock
Beneficially
Owned After
Completion
of the
Offering (21
|
Percentage of
Shares of
Common Stock
Beneficially
Owned After
Completion
of the
Offering (2)
|
||||||||||
ANCORA GREATER | |||||||||||||||
CHINA FUND, L.P. (3) | |||||||||||||||
IDAHO CORK, LLC(4) | |||||||||||||||
PIPE EQUITY | |||||||||||||||
PARTNERS, LLC (5) | |||||||||||||||
SILVER ROCK II, LTD. (6) | |||||||||||||||
BRILL SECURITIES INC. (7) |
(1) Based
on ___________shares of common stock outstanding as of the date of this
prospectus (without giving effect to the Reverse Split). The number of shares of
our common stock outstanding excludes up to __________ shares of our
common stock to be offered by us in a public offering concurrently herewith
(excluding the underwriter’s over-allotment of ________shares of common
stock)
(2) Represents
the amount of shares that will be held by the selling stockholders after
completion of this offering based on the assumption that all shares registered
for sale hereby will be sold. However, the selling stockholders may offer all,
some or none of the shares pursuant to this prospectus, and to our knowledge
there are currently no agreements, arrangements or understandings with respect
to the sale of any of the shares that may be held by the selling stockholders
after completion of this offering.
(3) Includes
__________ shares issuable upon conversion of a promissory note and _______
shares issuable upon exercise of warrants
(4) Includes
__________ shares issuable upon conversion of a promissory note and _______
shares issuable upon exercise of warrants .
(5) Includes
__________ shares issuable upon conversion of a promissory note and _______
shares issuable upon exercise of warrants .
(6) Includes
__________ shares issuable upon conversion of a promissory note and _______
shares issuable upon exercise of warrants.
(7) Includes
__________ shares issuable upon exercise
of warrants
We will
not receive any of the proceeds from the sale of any shares by the selling
stockholders. We have agreed to bear expenses incurred by the selling
stockholders that relate to the registration of the shares being offered and
sold by the selling stockholders that relate to the registration of the shares
being offered and sold by the selling stockholders, including the SEC
registration fee and legal, accounting, printing and other expenses of this
offering.
67
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
selling stockholders of our common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. If there is no public market established for our
securities, the Selling Stockholders will sell at a fixed price that is equal to
the price at which we sell shares in our public offering pursuant to the
registration statement of which this prospectus is a part. Once, and if, our
common stock beings to be traded or quoted on any stock exchange, market or
trading facility, all of the selling stockholders may, subject to the lock up
arrangement, sell their shares from time to time at the market price prevailing
on the exchange, market or trading facility, or at prices related to such
prevailing market prices, or in negotiated transactions or a combination of such
methods of sale.
[In
addition, the Selling Stockholders have agreed to enter into
customary “lock-up” agreements in favor of the Underwriter pursuant
to which such persons and entities shall agree, for a period of _____ months
after the Offering is completed, that they shall neither publicly offer, issue,
sell, contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriter 's prior
written consent. {Selling stockholders holding an aggregate of ______shares
of common stock underlying the Selling Stockholders’ promissory notes and
warrants have agreed not to sell any of these shares until __days after the date
of this prospectus when _______of their shares will be released from the
lock-up restrictions.
The
selling stockholders may use any one or more of the following methods when
selling shares:
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
•
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
•
|
privately
negotiated transactions;
|
•
|
settlement
of short sales entered into after the date of this
prospectus;
|
•
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
•
|
a
combination of any such methods of
sale;
|
•
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
•
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating to
its sales of shares to exceed what is customary in the types of transactions
involved. The maximum commission or discount to be received by any FINRA member
or independent broker-dealer, however, will not be greater
than percent ( %) for
the sale of any securities being registered hereunder pursuant to Rule 415 of
the Securities Act.
68
________________,
underwriter of up to_______shares of our common stock (excluding an
underwriter’s option to purchase an additional______shares to cover
over-allotments) to be offered by us in a public offering concurrently herewith,
may dispose of shares on behalf of its account holders who are also selling
stockholders. The maximum commission or discount to be received by __________
will not be greater
than percent
( %) for the sale of any securities being
registered hereunder. Additionally, any securities acquired by any participating
FINRA members during the 180-day period preceding the date of the filing of the
prospectus with the Commission will be subject to lock-up restrictions under
FINRA Rule 5110(g), unless an exemption is available under FINRA Rule
5110(g)(2). FINRA Rule 5110(g) provides that such securities shall not be sold
during our public offering or sold, transferred, assigned, pledged or
hypothecated, or be the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the date
of effectiveness of sales of our public offering.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under this prospectus. Each selling stockholder has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144 under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two (2)
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
69
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by Mclaughlin&Stern LLP, New York, New York. Legal matters as to PRC law
will be passed upon for us by Han Kun Law Offices, Beijing, People’s Republic of
China. Mclaughlin&Stern LLP may rely upon Han Kun Law Offices with respect
to matters governed by PRC law.
EXPERTS
The
consolidated financial statements of Asia Cork, Inc. as of December 31, 2008,
2007, and 2006 and for the years ended December 31, 2008, 2007, and 2006 have
been audited by MS Group CPA LLC , an independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the shares of common stock in this
offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedules that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedules that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedules that were filed with the registration
statement may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of the
website is www.sec.gov .
We file
periodic reports under the Securities Exchange Act of 1934, as amended,
including annual, quarterly and special reports, and other information with the
Securities and Exchange Commission. These periodic reports, and other
information, are available for inspection and copying at the regional offices,
public reference facilities and website of the Securities and Exchange
Commission referred to above.
70
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER
EXPENSES OF ISSUANCE DISTRIBUTION
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered.
Securities and Exchange
Commission registration fee (1)
|
$
|
1,275
|
||
FINRA Filing Fee
(1)
|
4,500
|
|||
NASDAQ Listing Fee
(1)
|
50,000
|
(1)
|
||
AMEX
Listing Fee (1)
|
50,000
|
(1)
|
||
Transfer
Agent Fees
|
5,000
|
(1)
|
||
Accounting
fees and expenses
|
62,000
|
(1)
|
||
Legal
fees and expenses
|
150,000
|
(1)
|
||
Blue
Sky/Underwriter’s counsel fees and expenses
|
10,000
|
(1)
|
||
Miscellaneous
|
192,275
|
(1) (2)
|
||
Total
|
$
|
475,000
|
(1)
|
(1)
|
All
amounts are estimates other than the Commission’s registration fee, FINRA
filing fee,NASDAQ and AMEX listing
fee.
|
(2)
|
Includes
non-accountable expense allowance payable to the underwriter of two
percent of the gross proceeds of the
Offering.
|
71
ITEM 14.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our board of directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our board of directors by a majority vote of a
quorum of disinterested board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
72
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of this prospectus, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
•
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
•
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
•
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
ITEM 15. RECENT
SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Index:
Exhibit
No.
|
Exhibit
Description
|
|
1.1 |
Form
of Underwriting Agreement.(to be filed by Amendment)
|
|
2.1 |
Spin
- Off Agreement, dated September 19, 1996, between us and Kushi
Macrobiotics Corp.(Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.1.)
|
|
2.2 |
Amended
and Restated Agreement and Plan of Merger by and among Kushi Macrobiotics
Corp. and American Phoenix Group, Inc. and the Registrant dated
August 12, 1996 (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.2 .)
|
|
2.3 |
Agreement
and Plan of Merger, dated as of July 11, 2005, by and among Kushi
Natural Foods Corporation, Kushi Sub, Inc., Hanxin (Cork) International
Holding Co., Ltd., Xi’An Cork Investments Consultative Management Co. and
Xian Hanxin Science and Technology Co., Ltd. (Filed with the Commission on
Form 8-K dated August 10, 2005 as Exhibit 2.1.)
|
|
2.4 |
Amendment
to Agreement and Plan of Merger dated as of September 30, 2005.
(Filed with the Commission on Form 8-K/A dated January 18, 2006 as Exhibit
2.2.)
|
|
2.5 |
Agreement
of Merger between Hankersen International Corp. and Asia Cork Inc. dated
as of July 10, 2008. (Filed with the Commission on Form 8-K dated July 18,
2008 as Exhibit 1.1.)
|
|
2.6 |
Certificate
of Merger filed with the Secretary of State of Delaware effective July 10,
2008. (Filed with the Commission on Form 8-K dated July 18, 2008 as
Exhibit 1.2.)
|
|
3(a) |
Articles
of Incorporation (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 3 (A).)
|
|
3(b) |
Bylaws
(Filed with the Commission on Form 10-SB Registration Statement dated
March 27, 2000 as Exhibit 3 (B).)
|
|
4(b) |
Specimen
Stock Certificate.(Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 4.)
|
|
5.1 |
Opinion
of Mclaughlin&Stern LLP. (To be filed by Amendment)
|
|
6 |
Information
Statement filed with the Securities and Exchange Commission on
August 26, 2004. (Filed with the Commission on Schedule 14-C
Information Statement dated October 18, 2005 (Preliminary) and November 8,
2005(Definitive))
|
|
10.1 |
Form
of Convertible Promissory Note issued by the Registrant dated June 4, 2008
and June 12, 2008. (Filed with the Commission on Form 8-K dated June 20,
2008 as Exhibit 1.1.)
|
|
10.2 |
Form
of Warrant to Purchase Common Stock issued by the Registrant dated as of
June 4, 2008 and June 12, 2008. (Filed with the Commission on
Form 8-K dated June 20, 2008 as Exhibit 1.2.)
|
|
10.3 |
Securities
Purchase Agreement between the Registrant and the Investors dated as of
May 29, 2008. (Filed with the Commission on Form 8-K dated June 20, 2008
as Exhibit 1.3.)
|
|
10.4 |
Addendum
1 to the Securities Purchase Agreement between the Registrant and certain
Investors dated as of June 12, 2008. (Filed with the Commission
on Form 8-K dated June 20, 2008 as Exhibit 1.4.)
|
|
10.5 |
Escrow
Agreement between the Registrant and the Escrow Agent dated as of May
2008. (Filed with the Commission on Form 8-K dated June 20, 2008 as
Exhibit 1.5.)
|
|
10.6(a) |
Patent
Transfer Agreement dated August 11, 2008 between the Registrant and
Fangshe Zhang.
|
|
10.6(b) |
Patent
Lease Agreement dated April 15, 2006 between the Registrant and Fangshe
Zhang.
|
|
10.6(c) | Patent License Agreement dated August 11, 2008 between the Registrant and Fangshe Zhang. (To be Filed By Amendment) | |
10.7 |
Cancellation
Agreement dated August 19, 2008 between Shaanxi Shuta Wood Products Co.,
Ltd. and the Registrant. (Filed with the Commission on Form 8-K dated
October 8, 2008 as Exhibit 1.1.)
|
|
10.8 |
Loan
Agreement dated as of October 27, 2008 between the Registrant and
Shaanxi Shuta Wood Products Co., Ltd (Filed with the Commission
on Form 10-K dated April 16, 2009 as Exhibit 10.1.)
|
|
10.9 |
Strategic
Cooperation Agreement with Sichuan Hanxin Cork Merchandises Co., Ltd.
Dated March 26, 2007
|
|
10.10 |
Strategic
Merger Agreement with Sichuan Hanxin Cork Merchandises Co., Ltd. Dated
September 20, 2009
|
|
10.11 |
Cork
Floor Production Cooperation Agreement dated October 15, 2009 between the
Registrant and Sichuan Hanxin Cork Merchandises Co.,
Ltd.
|
|
10.12 |
Loan
Agreement dated as of October 28, 2009 between the Registrant and
Shaanxi Shuta Wood Products Co. Ltd,
|
|
10.13 |
Memo
on Land Purchase Agreement date October 20, 2009 between the Registrant
and Shaanxi Shuta Wood Products Co., Ltd.
|
|
10.14 |
Employment
Contract dated October 9, 2009 between the Registrant and Pengcheng
Chen
|
|
10.15 |
Employment
Contract dated April 1, 2009 between the Registrant and Yi
Tong
|
|
10.16 |
Employment
Contract dated October 9, 2009 between the Registrant and Tianbao
Guo
|
|
10.17 | Employment Contract dated October 9, 2009 between the Registrant and Shengli Liu | |
14.1 | Charter for the Audit Committee (Filed with the Commission on Form 8-K dated December 24, 2009 as Exhibit 99.1) | |
14.2 | Charter for the Compensation Committee (Filed with the Commission on Form 8-K dated December 24, 2009 as Exhibit 99.3) | |
14.3 |
Charter
for the Corporate Governance and Nominating Committee (Filed
with the Commission on Form 8-K dated December 24, 2009 as Exhibit
99.2)
|
|
14.4 | Code of Ethics | |
23.1 |
Consent
of MS Group CPA LLC, Certified Public Accountants, P.C.
|
|
23.2 |
Consent
of Mclaughlin&Stern LLP (to be filed by amendment).
|
|
24.1 |
Power
of Attorney (included on signature
page).
|
73
ITEM 17.
UNDERTAKINGS
The
undersigned registrant hereby undertakes with respect to the securities being
offered and sold in this offering:
The
undersigned Registrant hereby undertakes that to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
i. To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate offering price set forth
in the “Calculation of Registration Fee” table in the effective registration
statement;
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change in
such information in registration statement.
That, for
the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
To remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
For
determining liability of the undersigned registrant under the Securities Act to
any purchaser in the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless of
the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to the
purchaser:
i. in any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
ii. any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
iii. the
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
iv. any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by the registrant of expenses incurred and paid by a director, officer
or controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered hereby, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
74
The
undersigned Registrant hereby undertakes that it will:
(i) for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as
part of this registration statement as of the time the Commission declared it
effective.
(ii) for
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that:
(i) if
the undersigned registrant is relying on Rule 430B:
(a) each
prospectus filed by the undersigned registrant pursuant to Rule 424(b)(3) shall
be deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(b) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating to the
securities in the registration statement to which that prospectus relates, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such effective date; or
(ii) if
the undersigned registrant is subject to Rule 430C:
(a) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
75
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Xi’An, the People’s
Republic of China, on the 12th day of February ,
2010.
ASIA CORK, INC. | |||
|
By:
|
/s/Pengcheng Chen | |
Name: Pengcheng Chen | |||
Title: Chief Executive Officer | |||
76
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Pengcheng Chen, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign (1)
any and all amendments to this Form S-1 (including post-effective amendments)
and (2) any registration statement or post-effective amendment thereto to be
filed with the Securities and Exchange Commission pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission and any other regulatory authority, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature
|
Title
|
Date
|
||
/s/
Fangshe Zhang
|
|
|
||
Fangshe
Zhang
/s/ Pengcheng Chen
|
Chairman
of the Board
|
February
12, 2010
|
||
Pengcheng
Chen
/s/Yi Tong
|
Chief
Executive Officer and Director
|
February
12, 2010
|
||
Yi
Tong
/s/ Shengli Liu
|
|
Chief
Financial Officer
|
|
February
12,2010
|
Shengli
Liu
/s/ Tianbao Guo
|
Chief
Operating Officer and Director
|
February
12, 2010
|
||
Tianbao
Guo
/s/ Gengshi Bai
|
Chief
Technical Officer
|
February
12, 2010
|
||
Gengshe
Bai
/s/ Genhu Yang
|
Director
|
February
12, 2010
|
||
Genhu
Yang
/s/ Xiaodong Wen
|
Director
|
February
12, 2010
|
||
Xiaodong
Wen
/s/
Tao Wang
|
Director
|
February
12, 2010
|
||
Tao
Wang
|
Director
|
February
12, 2010
|
77
EXHIBIT
INDEX
Exhibit
No.
|
Exhibit
Description
|
|
1.1 |
Form
of Underwriting Agreement.(to be filed by Amendment)
|
|
2.1 |
Spin
- Off Agreement, dated September 19, 1996, between us and Kushi
Macrobiotics Corp.(Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.1.)
|
|
2.2 |
Amended
and Restated Agreement and Plan of Merger by and among Kushi Macrobiotics
Corp. and American Phoenix Group, Inc. and the Registrant dated
August 12, 1996 (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.2 .)
|
|
2.3 |
Agreement
and Plan of Merger, dated as of July 11, 2005, by and among Kushi
Natural Foods Corporation, Kushi Sub, Inc., Hanxin (Cork) International
Holding Co., Ltd., Xi’An Cork Investments Consultative Management Co. and
Xian Hanxin Science and Technology Co., Ltd. (Filed with the Commission on
Form 8-K dated August 10, 2005 as Exhibit 2.1.)
|
|
2.4 |
Amendment
to Agreement and Plan of Merger dated as of September 30, 2005.
(Filed with the Commission on Form 8-K/A dated January 18, 2006 as Exhibit
2.2.)
|
|
2.5 |
Agreement
of Merger between Hankersen International Corp. and Asia Cork Inc. dated
as of July 10, 2008. (Filed with the Commission on Form 8-K dated July 18,
2008 as Exhibit 1.1.)
|
|
2.6 |
Certificate
of Merger filed with the Secretary of State of Delaware effective July 10,
2008. (Filed with the Commission on Form 8-K dated July 18, 2008 as
Exhibit 1.2.)
|
|
3(a) |
Articles
of Incorporation (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 3 (A).)
|
|
3(b) |
Bylaws
(Filed with the Commission on Form 10-SB Registration Statement dated
March 27, 2000 as Exhibit 3 (B).)
|
|
4(b) |
Specimen
Stock Certificate.(Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 4.)
|
|
5.1 |
Opinion
of Mclaughlin&Stern LLP. (To be filed by Amendment)
|
|
6 |
Information
Statement filed with the Securities and Exchange Commission on
August 26, 2004. (Filed with the Commission on Schedule 14-C
Information Statement dated October 18, 2005 (Preliminary) and November 8,
2005(Definitive))
|
|
10.1 |
Form
of Convertible Promissory Note issued by the Registrant dated June 4, 2008
and June 12, 2008. (Filed with the Commission on Form 8-K dated June 20,
2008 as Exhibit 1.1.)
|
|
10.2 |
Form
of Warrant to Purchase Common Stock issued by the Registrant dated as of
June 4, 2008 and June 12, 2008. (Filed with the Commission on
Form 8-K dated June 20, 2008 as Exhibit 1.2.)
|
|
10.3 |
Securities
Purchase Agreement between the Registrant and the Investors dated as of
May 29, 2008. (Filed with the Commission on Form 8-K dated June 20, 2008
as Exhibit 1.3.)
|
|
10.4 |
Addendum
1 to the Securities Purchase Agreement between the Registrant and certain
Investors dated as of June 12, 2008. (Filed with the Commission
on Form 8-K dated June 20, 2008 as Exhibit 1.4.)
|
|
10.5 |
Escrow
Agreement between the Registrant and the Escrow Agent dated as of May
2008. (Filed with the Commission on Form 8-K dated June 20, 2008 as
Exhibit 1.5.)
|
|
10.6(a) |
Patent
Transfer Agreement dated August 11, 2008 between the Registrant and
Fangshe Zhang.
|
|
10.6(b) |
Patent
Lease Agreement dated April 15, 2006 between the Registrant and Fangshe
Zhang.
|
|
10.6(c) | Patent License Agreement dated August 11, 2008 between the Registrant and Fangshe Zhang. (To be Filed By Amendment) | |
10.7 |
Cancellation
Agreement dated August 19, 2008 between Shaanxi Shuta Wood Products Co.,
Ltd. and the Registrant. (Filed with the Commission on Form 8-K dated
October 8, 2008 as Exhibit 1.1.)
|
|
10.8 |
Loan
Agreement dated as of October 27, 2008 between the Registrant and
Shaanxi Shuta Wood Products Co., Ltd (Filed with the Commission
on Form 10-K dated April 16, 2009 as Exhibit 10.1.)
|
|
10.9 |
Strategic
Cooperation Agreement with Sichuan Hanxin Cork Merchandises Co., Ltd.
Dated March 26, 2007
|
|
10.10 |
Strategic
Merger Agreement with Sichuan Hanxin Cork Merchandises Co., Ltd. Dated
September 20, 2009
|
|
10.11 |
Cork
Floor Production Cooperation Agreement dated October 15, 2009 between the
Registrant and Sichuan Hanxin Cork Merchandises Co.,
Ltd.
|
|
10.12 |
Loan
Agreement dated as of October 28, 2009 between the Registrant and
Shaanxi Shuta Wood Products Co. Ltd,
|
|
10.13 |
Memo
on Land Purchase Agreement date October 20, 2009 between the Registrant
and Shaanxi Shuta Wood Products Co., Ltd.
|
|
10.14 |
Employment
Contract dated October 9, 2009 between the Registrant and Pengcheng
Chen
|
|
10.15 |
Employment
Contract dated April 1, 2009 between the Registrant and Yi
Tong
|
|
10.16 |
Employment
Contract dated October 9, 2009 between the Registrant and Tianbao
Guo
|
|
10.17 | Employment Contract dated October 9, 2009 between the Registrant and Shengli Liu | |
14.1 | Charter for the Audit Committee (Filed with the Commission on Form 8-K dated December 24, 2009 as Exhibit 99.1) | |
14.2 | Charter for the Compensation Committee (Filed with the Commission on Form 8-K dated December 24, 2009 as Exhibit 99.3) | |
14.3 |
Charter
for the Corporate Governance and Nominating Committee (Filed
with the Commission on Form 8-K dated December 24, 2009 as Exhibit
99.2
|
|
14.4 | Code of Ethics | |
23.1 |
Consent
of MS Group CPA LLC, Certified Public Accountants, P.C.
|
|
23.2 |
Consent
of Mclaughlin&Stern LLP (to be filed by amendment).
|
|
24.1 |
Power
of Attorney (included on signature
page).
|
78