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EX-10.3 - EXHIBIT 10.3 - China Environmental Protection Inc. | tod_ex10x3.htm |
EX-10.6 - EXHIBIT 10.6 - China Environmental Protection Inc. | tod_ex10x6.htm |
EX-10.8 - EXHIBIT 10.8 - China Environmental Protection Inc. | tod_ex10x8.htm |
EX-10.2 - EXHIBIT 10.2 - China Environmental Protection Inc. | tod_ex10x2.htm |
EX-10.4 - EXHIBIT 10.4 - China Environmental Protection Inc. | tod_ex10x4.htm |
EX-10.5 - EXHIBIT 10.5 - China Environmental Protection Inc. | tod_ex10x5.htm |
EX-10.9 - EXHIBIT 10.9 - China Environmental Protection Inc. | tod_ex10x9.htm |
EX-10.7 - EXHIBIT 10.7 - China Environmental Protection Inc. | tod_ex10x7.htm |
EX-16.1 - EXHIBIT 16.1 - China Environmental Protection Inc. | tod_ex16x1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report: February 12, 2010
T.O.D.
TASTE ON DEMAND INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
333-148928
|
75-3255056
|
(State
or Other
Jurisdiction
of
Incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
Jiangsu
Zhenyu Environmental Protection Technology Co. Ltd.
West
Garden, Gaocheng Town, Yixing City, Jiangsu Province, P.R. China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
214214
(Zip
Code)
[+86-510-87838598]
(Registrant's telephone
number, including area code)
55 Hakeshet Street,
Reuth, Israel 91708
(Former
Name or Former Address if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
|
o
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
o
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
o
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
|
|
o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
|
Forward
Looking Statements
Some
of the statements contained in this Form 8-K that are not historical facts are
"forward-looking statements" which can be identified by the use of terminology
such as "estimates," "projects," "plans," "believes," "expects," "anticipates,"
"intends," or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Form 8-K, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation: our ability to
attract and retain management, and to integrate and maintain technical
information and management information systems; our ability to raise capital
when needed and on acceptable terms and conditions; the intensity of
competition; and general economic conditions. Please see Risk Factors for
discussion in detail. All written and oral forward-looking statements made in
connection with this Form 8-K that are attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary
statements. Given the uncertainties that surround such statements, you are
cautioned not to place undue reliance on such forward-looking
statements.
Item
1.01 Entry into a Material Definitive
Agreement
As reported on T.O.D. Taste On Demand
Inc.’s (the “Company”) Current Report on Form 8-K filed with the Securities and
Exchange Commission (the “Commission”) on February 9, 2010, the Company entered
into an agreement (the “Merger Agreement”) with Dragon Path International
Limited, a British Virgin Islands corporation (“Dragon Path”), and the sole
shareholder of Dragon Path. The merger was closed on February 12,
2010. Pursuant to the terms of the Merger Agreement, the Company acquired all of
the outstanding capital stock of Dragon Path through the merger with China
Environmental Protection Inc., a Nevada corporation (the “Merger Sub”) wholly
owned by the Company. Dragon Path is a holding company whose only asset, held
through a subsidiary, is 100% of the registered capital of Yixing Dragon Path
Environment Technology Limited (“Yixing Dragon Path”), a limited liability
company organized under the laws of the People’s Republic of China (“China” or
“PRC”). Substantially all of Dragon Path's operations are conducted in China
through Yixing Dragon Path, and through contractual arrangements with Yixing
Dragon Path’s consolidated affiliated entity in China, Jiangsu Zhenyu
Environmental Protection Technology Co. Ltd. (“Zhenyu”). Zhenyu is engaged in
design, manufacture, and installation of water and waster water treatment
equipment for environmental protection purposes, as well as providing
high-quality after-sales services.
In
connection with the acquisition, the following transactions took
place:
§
|
The
Merger Sub issued 100 shares of the common stock of the Merger Sub which
constituted no more than 10% ownership interest in the Merger Sub in
exchange for all the shares of the capital stock of Dragon Path (the
“Share Exchange” or “Merger”). The 100 shares of the common stock of the
Merger Sub were converted into approximately 16,150,000 shares of the
common stock of the Company (the “Merger Consideration”) so that upon
completion of the Merger, the sole shareholder of Dragon Path and his
designees own approximately 95% of the common stock of the
Company.
|
§
|
Before
the closing of the Merger, the Company affected a 4.61896118 for 1 reverse
split of the outstanding common stock of the Company, so that after such
split but before the issuance of the Merger Consideration there were
approximately issued and outstanding 850,000 shares of common stock of the
Company.
|
§
|
Before
the closing of the Merger, on February 11, 2010, the
Company contributed all of the assets of
the Company's business to T.O.D. (2010)
Inc. a Nevada corporation ("Spin-Off Sub")
which is wholly-owned by the Company, in preparation for a
distribution of the stock of such subsidiary to the shareholders of the
Company. The restricted shares of Spin-Off Sub will be distributed to the
shareholders of the Company as of February 11,
2010.
|
§
|
All
officers of the Company before the Merger, including David Katzir, the
Company’s Chief Executive Officer and President, resigned upon the
effectiveness of the Merger.
|
§
|
Boping
Li, Chairman, Chief Executive Officer and President of Zhenyu, was elected
to serve on our Board of Directors as
Chairman of the Board, and as President and Chief Executive Officer of the
Company.
|
§
|
Upon
the effectiveness of the Merger, Mr. Asael Karfiol resigned as a director
of the Company. Mr. Yuqiang Wu will become a director of the
Company and Mr. David Katzir will resign as a director of the Company ten
days after the notice pursuant to Rule 14f-1 is mailed to the shareholders
of record.
|
§
|
Ping
Ye was appointed as Chief Financial Officer of the
Company.
|
§
|
As
part of the Merger, the Company’s name was changed from “T.O.D. Taste on
Demand, Inc.” to the Merger Sub’s name “China Environmental Protection
Inc.” The Company is communicating with FINRA for the name change and
trading symbol change on the OTC Bulletin
Board.
|
2
As a result of these transactions,
persons affiliated with Zhenyu now own securities that in the aggregate
represent approximately 95% of the equity in the Company. In addition, persons
affiliated with Zhenyu will control the Board of Directors of the Company ten
days after the notice pursuant to Rule 14f-1 is mailed to the shareholders of
record.
New
Management
Upon the
completion of the Merger, the new executive officers and directors of the
Company will be:
Name
|
Age
|
Positions with the
Company
|
Boping
Li
|
48
|
Chairman,
President and Chief Executive Officer
|
Ping
Ye
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39
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Chief
Financial Officer
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Yuqiang
Wu
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33
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Director
|
All
directors hold office until the next annual meeting of our shareholders and
until their successors have been elected and qualify. Officers serve
at the pleasure of the Board of Directors.
Boping Li, 48, Founder,
Chairman and Chief Executive Officer of Zhenyu. Mr. Li served as Chairman
and Chief Executive Officer of Zhenyu since September 1992. Prior to that,
he was Vice Manager of Yixing Gaocheng Fiber Glass Equipment Factory from
October 1987 to August 1992. Prior to that, he was Production Director of Yixing
Gaocheng Glass Factory from May 1981 to September 1987. Mr. Li graduated from
Nanjing University of Science and Technology with a bachelor degree in
business administration.
Ping Ye, 39, is a US Certified
Public Accountant (CPA) with over sixteen years’ experience working in public
and private sectors, including the banking industry in China and the public
accounting firm of Arthur Andersen in the US, supervising and performing audits
from March 1998 to January 2001. Ms. Ye also worked for American International
Group Inc. (AIG), the Museum of Fine Arts in Boston from September 2001
to February 2005 and MIT from May 2005 to January 2007. Most
recently, Ms. Ye served as Vice-President of Finance and Accounting for USI
Insurance Services, a Goldman Sachs private equity holding from January 2007 to
July 2009.
Ms. Ye
earned a Bachelors of Business Administration summa cum laude majoring in
Accounting from Baruch College, City University of New York. She also holds an
MBA from the Wharton School, University of Pennsylvania.
Yuqiang Wu, 33, Vice President
of Zhenyu and Director of Jiangsu Jinyu Environmental Engineering Co. Ltd. Mr.
Wu joined the Company in August 2005. Prior to that, he served as Vice President
and Finance Director of Yixing Gaojinhechuang Co. Ltd from August 2000 to July
2005. Prior to that, he served as Finance Director of Yixing Circulating Water
Equipment Company from August 1999 to July 2000. He graduated from Metallurgic
College of Jiangsu University of Science & Technology majored in financial
accounting.
Security Ownership of
Certain Beneficial Owners and Management
Upon
completion of the Merger, there were 17,000,000 shares of the Company’s common
stock issued and outstanding. The following table sets forth
information known to us with respect to the beneficial ownership of our common
stock as of February 12, 2010 by the following:
▪
|
each
shareholder who beneficially owns more than 5% of our
common;
|
▪
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each
of our named executive officers;
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▪
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Each
of our directors; and
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▪
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Executive
officers and directors as a group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC, which deem a
person to beneficially own any shares the person has or shares voting or
dispositive power over and any additional shares obtainable within 60 days
through the exercise of options, warrants or other purchase rights. Shares of
our common stock subject to options, warrants or other rights to purchase that
are currently exercisable or are exercisable within 60 days of February 12, 2010
(including shares subject to restrictions that lapse within 60 days of February
12, 2010) are deemed outstanding for purposes of computing the percentage
ownership of the person holding such shares, options, warrants or other rights,
but are not deemed outstanding for purposes of computing the percentage
ownership of any other person. Unless otherwise indicated, each person possesses
sole voting and investment power with respect to the shares identified as
beneficially owned.
3
Name and
Address of Beneficial Owner(1)
|
Amount
and Nature
of
Beneficial
Ownership
|
Percentage
of
Class
|
||||||
Boping
Li
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0
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(2)
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--
|
|||||
Ping Ye
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0
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--
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||||||
Yuqiang
Wu
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0
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--
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||||||
David
Katzir(3)
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22,924
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Less
than one percent
|
||||||
All such directors
and executive officers as a group (4
persons)
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22,924 | Less than one percent |
|
|||||
Five
Percent Shareholders (other than directors and named executive
officers)
|
||||||||
Weihua
Zhao (4)
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11,020,000
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64.82
|
%
|
|||||
(1)
|
All
shares are owned of record and beneficially except as otherwise noted.
Except as otherwise noted, each shareholder’s address is c/o Jiangsu
Zhenyu Environmental Protection Technology Co. Ltd, West Garden, Gaocheng
Town, Yixing City, Jiangsu Province, P.R. China,
214214.
|
(2)
|
Mr.
Boping Li, his wife Ms. Qinfen Ding and Mr. Weihua Zhao, the sole
shareholder of Crown Orient International Limited, a BVI corporation and
our principal shareholder, have entered into an agreement dated January
27, 2010, pursuant to which Mr. Li and Ms. Ding may purchase shares of the
common stock of Crown Orient International Limited from Mr. Zhao for a
nominal price if the merged company achieves certain revenue
thresholds.
|
(3)
|
The
address of this stockholder is c/o T.O.D. (2010) Inc., 55 Hakeshet Street,
Reuth, Israel 91708.
|
(4)
|
Beneficially
owns the shares indicated, which are owned of record by Crown Orient
International Limited, a BVI corporation and our principal
shareholder.
|
INFORMATION REGARDING THE ACQUIRED
COMPANIES
Dragon Path International
Limited
Dragon Path International Limited
(“Dragon Path”) was organized under the laws of the British Virgin Islands on
November 5, 2009. Mr. Weihua Zhao, a New Zealand citizen, is the sole
shareholder of Dragon Path.
Yixing Dragon Path
Environment Technology Limited
Yixing Dragon Path Environment
Technology Limited (“Yixing Dragon Path”) was incorporated as a limited
liability company on January 26, 2010 under PRC law. It is currently 100% owned
by Dragon Path, and by virtue of such ownership Yixing Dragon Path is a “wholly
foreign owned enterprise” (“WFOE”) under PRC law. Our business is currently
conducted through contractual arrangements with Zhenyu, our consolidated
affiliated entity in China. These contractual arrangements enable us
to:
§
|
exercise
effective control over Zhenyu;
|
§
|
receive
a substantial portion of the economic benefits from Zhenyu;
and
|
§
|
have
an exclusive option to purchase all or part of the equity interests in
Zhenyu when and to the extent permitted by PRC
law.
|
Jiangsu Zhenyu Environmental
Protection Technology Co. Ltd.
We are a
prominent China-based water treatment equipment supplier and project contractor.
Holding six national patents and through sixteen years of development, we have
relatively strong market share in waste
water treatment sector in China and are ranked among top six of Yixing City’s
best environmental protection enterprises based on Yixing Municipal Government’s
ranking of 2009 outstanding environment protection enterprises (Yizhengfa
Document No.[2010]18). Yixing is the country’s production base for environment
protection equipment. We are headquartered in Yixing, Jiangsu, with
total building areas of 7,800 square meters. We have six offices located in
different parts of China to engage in product sales and engineering project
construction activities. We have 171 employees in total.
Our major
customers include customers conducting business in petroleum and chemical
industry, electricity industry, as well as many municipal waste water treatment
plants. Our products address the key steps in the water treatment process, such
as filtration, water softening, water-sediment separation, aeration,
disinfection and reverse osmosis. Our major products include ZFP-1380 Rotating
Disc Aeration equipment, ZYXG Series of Sludge Suction Scraper, ZYSR Series of
Surface Scraper and other water treatment environmental protection
equipment.
We have
established cooperative relationship with major universities and other
industrial design institutions to conduct our R&D activities. We continually
expand our market by introducing new products that diversify our revenue base,
staying current with technological developments in the water treatment equipment
industry, and effectively maintaining our competitive advantage.
We have
experienced significant growth in our financial results. In the
fiscal year ended September 30, 2009, we have generated RMB 178.9 million (USD
26.0 million) in consolidated revenue and RMB 41.0 million (USD 6.01 million) of
net profit attributable to the Company, which represent over 199.75% and 278.63%
increase over the fiscal year 2008 results, respectively.
4
Our Industry
The water
treatment industry in China has experienced and is expected to continue to
experience rapid growth. China faces severe water shortages and natural water
resource pollution due to rapid growth in population, urbanization and
industrialization. To address those issues, the Chinese government has enacted
environmental standards and invested significantly in water treatment projects
to promote sustainable economic growth and to provide its population with
affordable, purified water.
According to
the poll conducted by Freedonia, the global market demand for waste water
treatment equipment will consistently grow at an annual rate of 6.4% for the
next few years. The global sales volume will reach $39.9 billion by the year of
2011. In the Chinese market, the same demand will increase at an annual growth
rate of 15.5% before 2012.
During the
past 5 years, the market demand trend for waste water treatment equipment in
China has been kept steadily increasing, primarily due to increased level of
industrialization, urbanization, and awareness of environment protection among
general public. According to the relevant data provided by Frost & Sullivan,
more than 3,000 waste water treatment plants have been built and put into use in
China from 2001 to 2005.
China
Environmental Protection Industry Association predicts that sales of waste water
treatment equipment will increase from $2.1 billion in 2004 to $3.8 billion in
2010, with compound annual growth rate of 10.1%. In the meantime, revenue
generated from waste water treatment related industry will increase from $3
billion in 2004 to $14.6 billion in 2010, with compound annual growth rate of
30.0%. The newly published laws and regulations relating to
environment protection in China, as well as general public’s concerns on
industrial pollution, have also educated enterprises and general public,
enabling them to become aware of the importance and benefits of waste water
treatment.
China ranks
88th in the world in terms of per capita water resource, with 2,200 cubic
meters per person in China compared to the world average of 8,800 cubic meters
per person. Meanwhile, China faces poor water management issue. The water
utilization rate, for a number of rivers in China, including the Huai River,
Liao River and Yellow River, was as high as 60% in 2007 in comparison with the
30% to 40% international standards with the intention of conserving water
resources. Moreover, 49% of China’s seven major water bodies were designated as
Type IV and V water bodies, which indicates that they are polluted and
unsuitable for humans (a designation of Type I, II or III is
required for drinking water, National Surface Water Quality Monthly
Report of February 2008 issued by the China National Environmental Monitoring
Center).
China has
enacted numerous water reforms to address the country’s water shortage and water
pollution problems. We believe stricter water quality regulations for existing
infrastructure will continue to drive incremental spending in water treatment
methods. According to the Ministry of Water Resources, the average
water tariff of waterworks increased 505% from RMB0.0280 per cubic meter in 2000
to RMB0.1442 per cubic meter in 2007.
China’s water
shortage and pollution control strategies are driving increased water treatment
investment by the Chinese government and private investors. For example,
approximately 3,000 wastewater plants were built in China between 2001 and 2005
according to Frost & Sullivan. In addition, major water supply projects
in China, such as the South-to-North Water Diversion Project providing for a
network of water transfer canals from the relatively water rich south to the
north, will cost approximately $22 billion before 2013.
The Chinese
government’s National Environmental Protection 11th Five-Year Plan
(2006-2010), or the Five-Year Plan, establishes explicit objectives for water
resource protection, drinking water quality improvement and water treatment
development. For example, the plan requires all urban municipalities to build
wastewater treatment facilities with wastewater treatment rate of no less than
70% and a nationwide urban wastewater treatment capacity of 100 million
tons per day. To accomplish those goals, planned investment of urban wastewater
infrastructure (including the cost of wastewater treatment, sewers, sludge
treatment and wastewater recycling) in China is expected to be
RMB332 billion between 2006 and 2010 according to the National Urban
Wastewater Treatment and Recycling Facilities Construction 11th Five-Year
Plan.
The Chinese
government has also implemented market reforms and encouraged private sector
participation to improve operational efficiencies at municipal wastewater
treatment facilities. As a result of such reforms, two market-based management
models—build-operate-transfer, or BOT, and transfer-operate-transfer, or
TOT—have been developed in an effort to expand available sources of capital and
improve operational efficiencies within the water sector.
Market Size and Growth
Potential
With China’s
ongoing industrialization and urbanization, we expect a strong demand for water
treatment equipment in China in the coming years. The global demand for water
treatment products is projected to grow nearly 6.4% per year to
$39.9 billion in 2011, and the demand for water treatment products in China
is estimated to increase nearly 15.5% per year through 2012 (Freedonia
Group).
5
The sources
of demand and resulting customers in the Chinese market for water treatment
equipment can be classified into the following four broad categories: the
circulating water treatment industry, the industrial water purification
industry, the wastewater treatment industry and the waste water treatment
industry. According to The China Association of Environmental Protection
Industry, or CAEPI, the market for these industries will have double digit
annual growth rate ranging from 12% to 25% until year
2010.
The size of
the circulating water treatment industry in China is estimated at
$2.2 billion in 2010. Many industrial sectors, such as food and beverages,
electronics, pharmaceuticals and chemical/petroleum processors, require treated
circulating water in their products or as part of their manufacturing processes.
The use of untreated circulating water in manufacturing processes can result in
inconsistent product quality and substantial equipment degradation, which can
lead to high maintenance or replacement costs.
The size of
the industrial water purification sector, is estimated at $14.4 billion in
2010. The pharmaceutical, chemical, food and beverage, food processing and
electronics industries all require highly purified water in their manufacturing
processes and significantly affects the business outlook of those industries in
China.
Chinese
regulations regarding the disposal of aqueous industrial waste, combined with
public concern for industrial pollution, have led to increased awareness on the
part of businesses and public utilities as to the benefits of wastewater
treatment and waste minimization. In response to higher water prices and rising
wastewater discharge fees, industrial manufacturers have also become aware of
the cost-effectiveness of recycling their wastewater. As a result of these
factors, industrial manufacturers increasingly require complex systems and
equipment to treat and recycle process water and wastewater.
According to
the Organization for Economic Co-operation and Development’s Environmental
Performance Reviews on China, the size of the municipal waste water treatment
industry in China is estimated at $15 billion in 2010. Water in nearly half
of China’s major cities fails to meet the national standards for drinking water.
Defects in chemical treatment of tap water and aging municipal water supply
systems have caused additional pollution. Traditional processes of using
chemicals for water treatment have only limited capability in removing organic
matters in water and may result in the concentration of harmful substances such
as ammonia nitrogen and bio-assimilating organic carbon and odor in the treated
water. Improving the quality of drinking water has become an urgent task in
China.
Our Strengths, Strategies, Risks and
Uncertainties
Under the
current circumstances, we believe the following strengths allow us to compete
effectively in the water treatment equipment and project construction industry
in China:
§
|
With
more than 16 years and rich experience in the industry, we are one of the
first few water treatment companies in China with strong customer
recognition and industry
reputation.
|
§
|
We
have established good cooperative relationship with major universities and
other industrial design institutions for our R& D activities.
With six national patents on our key products, we will continue to
make significant efforts on R&D development. From raw
materials to finished goods, from product design to engineering
installation, we rely on our own ability, rather than outsourcing to cut
costs.
|
§
|
Our
standardized and scalable business model focuses on standardized water
treatment equipment as well as engineering process designed for high asset
turnover.
|
Our
strategies are to capitalize on our competitive strengths, to expand our current
market penetration and to benefit from the anticipated rapid growth in China’s
water treatment industry. Our goal is to become the leading player in the
environmental protection industry in China focusing on water treatment by
implementing the following strategies:
§
|
Business
Transition –We are making business transition from traditional equipment
manufacturing to the design, manufacture, installation of both equipment
and engineering projects for waste water treatment, as well as provide
after-sales services to customers.
|
§
|
Market
Share Expansion – We are expanding our market share through strengthened
marketing campaign aiming at targeted markets: including more than 50 new
municipal waste water treatment plants in Hebei province, 60 new municipal
waste water treatment plants in Hubei province, and construction of
facilities of municipal waste water interception pipelines for 113
municipal waste water treatment plants in Hunan
province.
|
§
|
Cost
Control – We strive to increase our innovative ability in order to
maintain strict cost control.
|
6
Our ability
to realize our business objectives and execute our strategies is subject to
risks and uncertainties, including the following:
§
|
We
need to timely make new product enhancements and new products, otherwise
we may be unable to grow our revenue as expected and may incur expenses
relating to the development or acquisition of new products and
technologies;
|
§
|
Competition
from present and future competitors in China’s growing water treatment
market; and
|
§
|
Our
business is capital intensive and our growth strategy may require
additional capital which may not be available on favorable terms or at
all
|
These risks
and uncertainties, along with others, are also described in the Risk Factors
section of this Current Report on Form 8-K.
Risk
Factors
An investment
in our common stock or other securities involves a number of
risks. You should carefully consider each of the risks described
below before deciding to invest in our common stock. If any of the
following risks develops into actual events, our business, financial condition
or results of operations could be negatively affected, the market price of our
common stock or other securities could decline and you may lose all or part of
your investment.
The risk
factors presented below are all of the ones that we currently consider material.
However, they are not the only ones facing our Company. Additional
risks not presently known to us, or which we currently consider immaterial, may
also adversely affect us. There may be risks that a particular
investor views differently from us, and our analysis might be
wrong. If any of the risks that we face actually occur, our business,
financial condition and operating results could be materially adversely affected
and could differ materially from any possible results suggested by any
forward-looking statements that we have made or might make. In such
case, the trading price of our common stock could decline, and you could lose
part or all of your investment.
Risks
Relating to Our Business and Industry
If the market for
water treatment equipment does not grow at the rate we expect or at all, our
sales and profitability may be materially and adversely
affected.
We derive
all of our revenue from sales of our products in China. Our business’
development depends, in large part, on continued growth in the demand for
quality water treatment equipment in China. Although this market has grown
rapidly, the growth may not continue at the same rate. The Freedonia Group, a
market research firm, projects demand for water treatment products in China will
increase nearly 15.5% per year through 2012. However, developments in our
industry are, to a large extent, outside of our control and any reduced demand
for water treatment equipment, any downturn or other adverse changes in China’s
economy could materially and adversely harm our sales and
profitability.
If we fail to
meet evolving customer demands and requirements for water treatment equipment,
including through product enhancements or new product introductions, or if our
products do not compete effectively, our financial results may be materially and
adversely affected.
The
market for water treatment equipment is characterized by changing technologies,
periodic new product introductions and evolving customer and industry
requirements, including solution requirements for different contaminants or
varying volumes of water. Our competitors are continuously searching for more
cost effective and efficient water treatment methods and technologies which, if
successful, could render our products obsolete in whole or in part. Our research
and development efforts will focus on developing new processes, applications and
technologies to enhance our existing products. If we fail to timely develop new
product enhancements and new products or if our products are rendered obsolete,
we may be unable to grow our revenue as expected and may incur expenses relating
to the development or acquisition of new products and technologies that are not
fully offset by the revenue they generate, which could materially and adversely
affect our financial results.
If we fail to
maintain or improve our market position or respond successfully to changes in
the competitive landscape, our business, financial condition and results of
operations may be materially and adversely affected.
We operate in a highly competitive
industry characterized by rapid technological development and evolving industry
standards. Our competitors include a number of global and China-based companies
that produce and sell products similar to ours. Some of our international
competitors have stronger brand names, greater access to capital, longer
operating histories, longer or more established relationships with their
customers, stronger research and development capabilities and greater marketing
and other resources than we do. Some of our domestic competitors have stronger
distribution networks and end-user customer bases, better access to government
authorities and stronger industry-based backgrounds than us. Due to the evolving
markets in which we compete, additional competitors with significant market
presence and financial resources may enter those markets, and thereby intensify
competition. These competitors may be able to reduce our market share by
adopting more aggressive pricing policies than we can or by developing
technology and services that gain wider market acceptance than our products.
Existing and potential competitors may also develop relationships with our
distributors in a manner that could significantly harm our ability to sell,
market and develop our products. As a result of these competitive pressures and
expected increases in competition, we may price our products lower than our
competitors to maintain market share. Any lower pricing may negatively affect
our profit margins. If we fail to maintain or improve our market position or
fail to respond successfully to changes in the competitive landscape, our
business, financial condition and results of operations may be materially and
adversely affected.
7
Our business is
capital intensive and our growth strategy may require additional capital which
may not be available on favorable terms or at
all.
We may
require additional cash resources due to changed business conditions,
implementation of our strategy to expand our manufacturing capacity or potential
investments or acquisitions we may pursue. To meet our capital needs, we may
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution of
your holdings. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial
covenants that would restrict our operations. Financing may not be available in
amounts or on terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could limit our ability to
expand our business operations and could harm our overall business
prospects.
Our failure to
adequately protect, or uncertainty regarding the validity, enforceability or
scope of, our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be
costly.
We strive to
strengthen and differentiate our product portfolio by developing new and
innovative products and product improvements. As a result, we regard our
intellectual property as critical to our success. Implementation and enforcement
of intellectual property-related laws in China has historically been lacking due
primarily to ambiguities in Chinese intellectual property law. Accordingly,
protection of intellectual property and proprietary rights in China may not be
as effective as in the United States or other countries. Currently, we
hold six Chinese patents. We will continue to rely on a combination of
patents, trade secrets, trademarks and copyrights to protect our intellectual
property, but this protection may be inadequate. For example, our pending or
future patent applications may not be approved or, if allowed, they may not be
of sufficient strength or scope to protect our intellectual property. As a
result, third parties may use the technologies and proprietary processes that we
have developed and compete with us, which may negatively affect any competitive
advantage we enjoy, dilute our brand and materially and adversely affect our
results of operations. In addition, policing the unauthorized use of our
proprietary technology can be difficult and expensive. Litigation may be
necessary to enforce our intellectual property rights and due to the relative
unpredictability of China’s legal system and potential difficulties of enforcing
a court’s judgment in China, there is no guarantee litigation would result in an
outcome favorable to us. Furthermore, any such litigation may be costly and may
divert our management’s attention away from our core business. An adverse
determination in any lawsuit involving our intellectual property is likely to
jeopardize our business prospects and reputation. We have no insurance coverage
against litigation costs so we would be forced to bear all litigation costs if
we cannot recover them from other parties. All of the foregoing factors could
harm our business, financial condition and results of
operations.
Third party use of
our trademarks and the “Zhenyu” name may dilute their value and materially and
adversely affect our reputation, goodwill and brand.
Due to
ambiguities in Chinese intellectual property law, the cost of enforcement and
our prior lack of enforcement, we may be unable to prevent third parties from
using the Zhenyu trademark and our name, Zhenyu.
We may be exposed to
infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant
liability to third parties.
Our success
largely depends on our ability to use and develop our technology, know-how and
product designs without infringing upon the intellectual property rights of
third parties. We may be subject to litigation involving claims of patent
infringement or violation of other intellectual property rights of third
parties. The holders of patents and other intellectual property rights
potentially relevant to our product offerings may be unknown to us or may
otherwise make it difficult for us to acquire a license on commercially
acceptable terms.
There may
also be technologies licensed to and relied on by us that are subject to
infringement or other corresponding allegations or claims by third parties which
may damage our ability to rely on such technologies. In addition, although we
endeavor to ensure that companies that work with us possess appropriate
intellectual property rights or licenses, we cannot fully avoid the risks of
intellectual property rights infringement created by suppliers of components
used in our products or by companies we work with in cooperative research and
development activities. Our current or potential competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, may have obtained or may obtain patents that will prevent, limit
or interfere with our ability to make, use or sell our products in China or
other countries. The defense of intellectual property claims, including patent
infringement suits, and related legal and administrative proceedings can be both
costly and time consuming, and may significantly divert the efforts and
resources of our technical and management personnel. Furthermore, an adverse
determination in any such litigation or proceeding to which we may become a
party could cause us to:
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pay damage
awards;
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▪
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seek
licenses from third parties;
|
▪
|
pay
additional ongoing royalties, which could decrease our profit
margins;
|
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redesign
our products; or
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be
restricted by injunctions.
|
8
These factors
could effectively prevent us from pursuing some or all of our business and
result in our end-user customers or potential end-user customers deferring,
canceling or limiting their purchase or use of our products, which may have a
material adverse effect on our business, financial condition and results of
operations.
We may undertake
acquisitions, which may have a material adverse effect on our ability to manage
our business, and may end up being unsuccessful.
Our growth
strategy may involve the acquisition of new technologies, businesses, products
or services or the creation of strategic alliances in areas in which we do not
currently operate. These acquisitions could require that our management develop
expertise in new areas, manage new business relationships and attract new types
of customers. Furthermore, acquisitions may require significant attention from
our management, and the diversion of our management’s attention and resources
could have a material adverse effect on our ability to manage our business. We
may also experience difficulties integrating acquisitions into our existing
business and operations. Future acquisitions may also expose us to potential
risks, including risks associated with:
▪
|
the
integration of new operations, services and personnel;
|
|
▪
|
unforeseen
or hidden liabilities;
|
|
▪
|
the
diversion of resources from our existing businesses and
technologies;
|
|
▪
|
our
inability to generate sufficient revenue to offset the costs of
acquisitions; and
|
|
▪
|
potential
loss of, or harm to, relationships with employees or customers, any of
which may have a material adverse effect on our ability to manage our
business.
|
Failure to manage
our growth could strain our management, operational and other resources, which
may materially and adversely affect our business, financial condition and
results of operations.
Our
growth strategy includes increasing market penetration of our existing products,
developing new products, expanding our product offerings and providing a
comprehensive integrated set of products. Pursuing these strategies has resulted
in, and will continue to result in, substantial demands on management resources.
In particular, the management of our growth will require, among other
things:
▪
|
continued
enhancement of our research and development
capabilities
|
▪
|
continued
growth of our manufacturing
capacity;
|
▪
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stringent
cost controls and sufficient
liquidity;
|
▪
|
strengthening
of financial and management
controls;
|
▪
|
increased
marketing, sales and sales support activities;
and
|
▪
|
hiring
and training of new personnel
|
We may
not be able to effectively manage any expansion in one or more of these areas,
and any failure to do so could harm our ability to maintain or increase revenue
and operating results. In addition, our growth may require us to make
significant capital expenditures or to incur other significant expenses. If we
are not able to manage our growth successfully, our business, financial
condition and results of operations may be materially and adversely
affected.
The slowdown of
China’s economy caused in part by the recent challenging global economic
conditions may adversely affect our business, results of operations and
financial condition.
China’s
economy has experienced a slowdown after the second quarter of 2007, when the
quarterly growth rate of China’s gross domestic product reached 11.9%. A number
of factors have contributed to this slowdown, including appreciation of the
Renminbi, which has adversely affected China’s exports, and tightening
macroeconomic measures and monetary policies adopted by the Chinese government
aimed at preventing overheating of China’s economy and controlling China’s high
level of inflation. The slowdown has been further exacerbated by the challenging
global economic conditions in the financial services and credit markets, which
in recent months has resulted in extreme volatility and dislocation of the
global capital and credit markets.
On
November 5, 2008, the State Council of China announced an economic stimulus
plan in the amount of $585 billion to stimulate economic growth and bolster
domestic demand. The economic stimulus plan includes, among others, increased
spending on basic infrastructure construction projects for water, electricity,
gas and heat to improve the standard of living in China and protect the
environment. Although the economic stimulus plan could generate increased demand
for our water treatment equipment, we cannot assure you that the economic
stimulus plan or various macroeconomic measures and monetary policies adopted by
the Chinese government to guide economic growth and the allocation of resources
will be effective in sustaining the growth of the Chinese economy. The slowdown
of the Chinese economy could lead to a decrease in business and construction
activity nationwide, which could reduce demand for our products and adversely
affect our business, results of operations and financial condition.
9
If we fail to
accurately project demand for our products, we may encounter problems of
inadequate supply or oversupply, which would materially and adversely affect our
business, financial condition and results of operations, as well as damage our
reputation and brand.
We
project demand for our products based on rolling projections and our
understanding of industrial policies and government plans for future residential
developments that may affect demand for water treatment equipment. The varying
sales and purchasing cycles, however, make it difficult for us to accurately
forecast future demand for our products.
If we
overestimate demand, we may purchase more raw materials or components than
required. If we underestimate demand, our third party suppliers may have
inadequate raw material or product component inventories, which could interrupt
our manufacturing and delay shipments, and could result in lost sales. In
particular, we are seeking to reduce our procurement and inventory costs by
matching our inventories closely with our projected manufacturing needs and by
deferring our purchase of raw materials and components from time to time in
anticipation of supplier price reductions. As we seek to balance reduced
inventory costs and production flexibility, we may fail to accurately forecast
demand and coordinate our procurement and production to meet demand on a timely
basis. Our inability to accurately predict and to timely meet our demand would
materially and adversely affect our business, financial conditions and results
of operations as well as damage our reputation and brand.
If we cannot
obtain sufficient raw materials and components that meet our production
standards at a reasonable cost or at all, our ability to produce and market our
products, and thus our business, could suffer.
For the
fiscal year 2009, 54.96% of our raw materials were purchased from our top two
vendors. If any supplier is unwilling or unable to provide us with high-quality
raw materials and components in required quantities and at acceptable costs, we
may not be able to find alternative sources on satisfactory terms in a timely
manner, or at all. In addition, some of our suppliers may fail to meet
qualifications and standards required by our customers now or in the future,
which could impact our ability to source raw materials and components. Our
inability to find or develop alternative supply sources could result in delays
or reductions in manufacturing and product shipments. We may be required to
redesign our products to conform to the materials and components provided by
these alternative suppliers. Moreover, these suppliers may delay shipments or
supply us with inferior quality raw materials and components that may adversely
impact the performance of our products. The costs of raw materials could
increase and we may not be able to pass these price increases on to our
customers. If any of these events occur, our ability to produce and market our
products, and thus our business could suffer.
Any interruption
in our manufacturing operations or production and distribution processes could
impair our financial performance and negatively affect our
brand.
Our
manufacturing operations involve the coordination of raw materials and
components (some sourced from third parties), internal production processes and
external distribution processes. While these operations are modified on a
regular basis in an effort to improve manufacturing and distribution efficiency
and flexibility, we may experience difficulties in coordinating the various
aspects of our manufacturing processes, thereby causing downtime and delays. We
manufacture, assemble and store almost all of our products, as well as conduct
some of our primary research and development activities, at a principal facility
located in the Langfang Economic & Technical Development Zone near
Beijing, China. We do not maintain back-up facilities, so we depend on this
facility for the continued operation of our business. A natural disaster or
other unanticipated catastrophic event, including power interruptions, water
shortage, storms, fires, earthquakes, terrorist attacks and wars, could
significantly impair our ability to manufacture our products and operate our
business, as well as delay our research and development activities. Our facility
and certain equipment located in this facility would be difficult to replace and
could require substantial replacement lead-time. Catastrophic events may also
destroy any inventory located in our facility. The occurrence of such an event
could materially and adversely affect our business. In addition, any stoppage in
production, even if temporary, or delay in delivery to our customers could
severely affect our business or reputation. We currently do not have business
interruption insurance to offset these potential losses and any interruption in
our manufacturing operations or production and distribution processes could
impair our financial performance and negatively affect our brand.
Our insurance
coverage may be inadequate to protect us against losses.
Although
we maintain property insurance coverage for our facilities , we do not have any
business liability, loss of data or business interruption insurance coverage for
our operations in China. If any claims for injury are brought against us, or if
we experience any business disruption, litigation or natural disaster, we might
incur substantial costs and diversion of resources.
Problems with
product quality or product performance could result in a decrease in customers
and revenue, unexpected expenses and loss of market share.
Our
operating results depend, in part, on our ability to deliver quality products on
a timely and cost effective basis. As our products become more advanced, it may
become more difficult to maintain our quality standards. If we experience
deterioration in the performance or quality of any of our products, including as
a result of the expansion of our manufacturing capabilities, it could result in
delays in delivery, cancellations of orders or customer returns and complaints,
loss of goodwill and harm to our brand and reputation. Furthermore, our products
are manufactured using raw materials and components that have been produced by
third parties, and when a problem occurs, it may be difficult to identify the
source of the problem. These problems may lead to a decrease in customers and
revenue, harm to our brand, unexpected expenses, loss of market share, the
incurrence of significant repair costs, diversion of the attention of our
personnel from our product development efforts or customer relation problems,
any one of which may materially and adversely affect our business, financial
condition and results of operations.
10
Our products may
become subject to recall in the event of defects or other performance related
issues.
Our
products may become subject to recall and we may be at risk for product recall
costs which are costs incurred when, either voluntarily or involuntarily, a
product is recalled through a formal campaign to solicit the return of specific
products due to a known or suspected performance defect. Costs typically include
the cost of the product, part or component being replaced, the cost of the
recall borne by our customers and labor to remove and replace the defective part
or component. Our products have not been the subject of an open recall. If a
recall decision is made, we will need to estimate the cost of the recall and
record a charge to earnings in that period. In making this estimate, judgment is
required as to the quantity or volume to be recalled, the total cost of the
recall campaign, the ultimate negotiated sharing of the cost between us and the
customer and, in some cases, the extent to which the supplier of the part or
component will share in the recall cost. As a result, these estimates are
subject to change. Excessive recall costs or our failure to adequately estimate
these costs may negatively affect our operating results.
Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.
We are
subject to environmental, health and safety laws and regulations that affect our
operations, facilities and products in China. Any failure to comply with any
present or future environmental, health and safety laws and regulations could
result in the assessment of damages or imposition of fines against us,
suspension of production, cessation of our operations or even criminal
sanctions. New laws and regulations could also require us to acquire costly
equipment or to incur other significant expenses. Our failure to control the use
of, or adequately restrict the discharge of, hazardous substances could subject
us to potentially significant monetary damages and fines or suspension of our
business operations, which may harm our results of operations.
If we are
deemed to have materially violated the regulation regarding the discharge of
pollutants, the governmental authorities may order us to rectify the situation
of noncompliance within a time limit. If more stringent regulations are adopted
in the future, the related compliance costs could be substantial. Any failure by
us to control the use of or to adequately restrict the discharge of hazardous
substances could subject us to potentially significant monetary damages and
fines or suspensions in our business operations.
We depend heavily
on key personnel, and the loss of key employees and senior management could harm
our business.
Our
future success depends in significant part upon the continued contributions of
our key technical and senior management personnel, Mr. Boping Li, our
founder and chief executive officer, for example. It also depends in significant
part upon our ability to attract and retain additional qualified management,
technical, sales and marketing and support personnel for our operations.
Competition for such personnel is intense and we may fail to retain our key
personnel or fail to attract, assimilate or retain other high-qualified
personnel in the future. If we lose a key employee, if a key employee fails to
perform in his or her current position or if we are not able to attract and
retain skilled employees as needed, our business could suffer. Turnover in our
senior management could significantly deplete institutional knowledge held by
our existing senior management team and impair our operations, which could harm
our business.
In
addition, if any of these key personnel joins a competitor or forms a competing
company, we may lose some of our end-user customers. In such cases, our
profitability and financial performance may be adversely affected. We have
entered into confidentiality and non-competition agreements with all of these
key personnel. However, if any disputes arise between these key personnel and
us, it is not clear, in light of uncertainties associated with the Chinese legal
system, what the court decisions will be and the extent to which these court
decisions could be enforced in China, where all of these key personnel reside
and hold some of their assets. See “—Risks Related to Doing Business in
China—China’s legal and judicial system may not adequately protect our business
and operations and the rights of foreign investors.”
The newly enacted
Chinese enterprise income tax law will affect tax exemptions on the dividends we
receive and increase the enterprise income tax rate applicable to
us.
We
conduct substantially all of our business through our wholly owned Chinese
subsidiaries and we derive all of our income from these subsidiaries. Prior to
January 1, 2008, dividends derived by foreign legal persons from business
operations in China were not subject to the Chinese enterprise income tax.
However, such tax exemption ceased after January 1, 2008 with the
effectiveness of the new EIT law.
We will incur
increased costs as a result of being a public company.
Upon
completion of this offering, we will become a public company and expect to incur
significant legal, accounting and other expenses that we did not incur as a
private company. Moreover, the Sarbanes-Oxley Act of 2002, as well as new rules
subsequently implemented by the Securities and Exchange Commission and the New
York Stock Exchange, have imposed additional requirements on corporate
governance practices of public companies. We expect these new rules and
regulations to increase our legal and financial compliance costs and to make
some corporate activities more time-consuming and costly. For example, as a
result of becoming a public company, we will need to add independent directors
to our board and adopt policies regarding internal controls and disclosure
controls and procedures. In addition, we will incur additional costs associated
with our public company reporting requirements. It may also be difficult for us
to attract and retain qualified persons to serve on our board of directors due
to increased risks of liability to our directors under the new rules and
regulations. We are currently evaluating and monitoring developments with
respect to these new rules and regulations, and we cannot predict or estimate
with any degree of certainty the amount or timing of additional costs we may
incur.
11
Although
our results of operations, cash flows and financial condition reflected in our
combined and consolidated financial statements include all of the expenses
allocable to our business, because of the additional administrative and
financial obligations associated with operating as a publicly traded company,
they may not be indicative of the results of operations that we would have
achieved had we operated as a public entity for all periods presented or of
future results that we may achieve as a publicly traded company with our current
holding company structure. Such variations may be material to our
business.
Risks
Relating to Doing Business in China
Our business operations are
primarily conducted in China. Because China’s economy and its laws,
regulations and policies are different from those typically found in the west
and are continually changing, we will face risks including those summarized
below.
Adverse changes
in political and economic policies of the Chinese government could impede the
overall economic growth of China, which could reduce the demand for our products
and have a material adverse effect on our business and
prospects.
We
conduct all of our operations and generate all of our sales in China.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The Chinese economy differs from the economies of most
developed countries in many respects, including:
•
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the
higher level of government involvement;
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|
•
|
the
early stage of development of the market-oriented sector of the
economy;
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|
•
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the
rapid growth rate;
|
|
•
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the
higher level of control over foreign exchange; and
|
|
•
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the
allocation of resources.
|
As the
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy, the Chinese government has implemented various measures
to encourage economic growth and guide the allocation of resources. While the
Chinese economy has grown significantly in the past 30 years, the growth
has been uneven geographically among various sectors of the economy, and during
different periods. We cannot assure you that the Chinese economy will continue
to grow, or that if there is growth, such growth will be steady and uniform, or
that if there is a slowdown, such slowdown will not have a negative effect on
our business. For example, the Chinese economy experienced high inflation in the
second half of 2007 and the first half of 2008. China’s consumer price index
soared 7.9% during the six months ended June 30, 2008 as compared to the
same period in 2007. To combat inflation and prevent the economy from
overheating, the Chinese government adopted a number of tightening macroeconomic
measures and monetary policies, including increasing interest rates, raising
statutory reserve rates for banks and controlling bank lending to certain
industries or economic sectors. However, due in part to the challenging global
economic conditions facing the financial services and credit markets and other
factors, the growth rate of China’s gross domestic product has decreased to 6.8%
in the fourth quarter of 2008, down from 11.9% in the second quarter of 2007. As
a result, beginning in September 2008, among other measures, the Chinese
government began to loosen macroeconomic measures and monetary policies by
reducing interest rates and decreasing the statutory reserve rates for banks. In
addition, on November 5, 2008, the State Council of China announced an
economic stimulus plan in the amount of $585 billion to stimulate economic
growth and bolster domestic demand. The economic stimulus plan includes, among
others, increased spending on basic infrastructure construction projects for
water, electricity, gas and heat to improve the standard of living in China and
protect the environment. Although the economic stimulus plan could generate
increased demand for our water treatment equipment, we cannot assure you that
the economic stimulus plan or various macroeconomic measures and monetary
policies adopted by the Chinese government to guide economic growth and the
allocation of resources will be effective in sustaining the growth of the
Chinese economy.
12
The Chinese
government will continue to exercise significant control over economic growth in
China through the allocation of resources, controlling payment of foreign
currency denominated obligations, setting monetary policy and imposing policies
that impact particular industries or companies in different ways. Any adverse
change in the economic conditions or government policies in China could have a
material adverse effect on the overall economic growth and the level of water
treatment investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects. Our ability to operate in China may also
be harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land-use-rights,
property and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we
operate may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts on our part
to ensure our compliance with such regulations or interpretations. Accordingly,
government actions in the future, including any decision not to continue to
support China’s 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.
If the PRC
government finds that the agreements that establish the structure for operating
our China business do not comply with PRC governmental restrictions on foreign
investment, we could be subject to severe penalties.
Our
businesses are currently primarily provided through contractual arrangements
between Yixing Dragon Path, our WFOE operating subsidiary and
Zhenyu. If we, our existing or future PRC operating subsidiaries and
affiliates are found to be in violation of any existing or future PRC laws or
regulations or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities, including the State
Administration for Industry and Commerce, would have broad discretion in dealing
with such violations, including:
•
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revoking
the business and operating licenses of our PRC subsidiaries and
affiliates;
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||
•
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discontinuing
or restricting our PRC subsidiaries’ and affiliates’
operations;
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•
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imposing
conditions or requirements with which we or our PRC subsidiaries and
affiliates may not be able to comply;
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•
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requiring
us or our PRC subsidiaries and affiliates to restructure the relevant
ownership structure or operations; or
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•
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restricting
or prohibiting our use of the proceeds of this offering to finance our
business and operations in China.
|
The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.
We rely on
contractual arrangements with Zhenyu and its shareholders for a substantial
portion of our China operations, which may not be as effective in providing
operational control as direct ownership.
We rely on
contractual arrangements with Zhenyu and its shareholders to operate our
business. For a description of these contractual arrangements, see “Corporate
Structure and Contractual Arrangements” and “Related Party Transactions”. These
contractual arrangements may not be as effective in providing us with control
over Zhenyu as direct ownership. If we had direct ownership of Zhenyu, we would
be able to exercise our rights as a shareholder to effect changes in the board
of directors of Zhenyu which in turn could effect changes, subject to any
applicable fiduciary obligations, at the management level. However, under the
current contractual arrangements, as a legal matter, if Zhenyu or any of its
shareholders fails to perform respective obligations under these contractual
arrangements, we may have to incur substantial costs and resources to enforce
such arrangements, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot
assure you to be effective. For example, if the shareholders of Zhenyu were to
refuse to transfer their equity interest in Zhenyu to us or our designee when we
exercise the purchase option pursuant to these contractual arrangements, or if
they were otherwise to act in bad faith toward us, then we may have to take
legal action to compel them to fulfill their contractual
obligations.
Many of these
contractual arrangements are governed by PRC law and provide for the resolution
of disputes through either arbitration or litigation in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes
would be resolved in accordance with PRC legal procedures. The legal environment
in the PRC is not as developed as in other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our
ability to enforce these contractual arrangements. In the event we are unable to
enforce these contractual arrangements, we may not be able to exert effective
control over our operating entities, and our ability to conduct our business may
be negatively affected.
Contractual
arrangements we have entered into among our subsidiary and affiliated entity may
be subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our tax exemption, or both, could
substantially increase our taxes owed, and reduce our net income and the value
of your investment.
Under
PRC law, arrangements and transactions among related parties may be subject
to audit or challenge by the PRC tax authorities. If any of the transactions we
have entered into among our subsidiaries and affiliated entities are found not
to be on an arm’s-length basis, or to result in an unreasonable reduction in tax
under PRC law, the PRC tax authorities have the authority to disallow our tax
savings, adjust the profits and losses of our respective PRC entities and assess
late payment interest and penalties.
As a result
of this risk, you should evaluate our results of operations and financial
condition without regard to these tax savings.
13
The PRC legal
system embodies uncertainties which could limit the legal protections available
to you and us.
The PRC legal
system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a comprehensive system of
laws and regulations governing economic matters in general. The overall effect
of legislation over the past 26 years has significantly enhanced the
protections afforded to various forms of foreign investment in China. Our PRC
operating subsidiary, Yixing Dragon Path, is a wholly foreign-owned enterprise
which is an enterprise incorporated in China and wholly-owned by foreign
investors. Yixing Dragon Path is subject to laws and regulations applicable to
foreign investment in China in general and laws and regulations applicable to
wholly foreign-owned enterprises in particular. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For example, we may have to resort to
administrative and court proceedings to enforce the legal protection that we
enjoy either by law or contract. However, since PRC administrative and court
authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal
protection we enjoy than in more developed legal systems. For example, these
uncertainties may impede our ability to enforce the contracts we have entered
into with Zhenyu. In addition, such uncertainties, including the inability to
enforce our contracts, could materially and adversely affect our business and
operation. In addition, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries. Accordingly, we cannot predict the effect of future developments in
the PRC legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of
local regulations by national laws. These uncertainties could limit the legal
protections available to us, including our ability to enforce our agreements
with Zhenyu, and other foreign investors, including you.
Recent
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity, and a
failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
The PRC
National Development and Reform Commission, or NDRC, and SAFE recently
promulgated regulations that require PRC residents and PRC corporate entities to
register with and obtain approvals from relevant PRC government authorities in
connection with their direct or indirect offshore investment activities. These
regulations apply to our shareholders who are PRC residents and may apply to any
offshore acquisitions that we make in the future.
Under the
SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in offshore companies will be required to register those
investments. In addition, any PRC resident who is a direct or indirect
shareholder of an offshore company is required to file with the local branch of
SAFE, with respect to that offshore company, any material change involving
capital variation, such as an increase or decrease in capital, transfer or swap
of shares, merger, division, long term equity or debt investment or creation of
any security interest over the assets located in China. If any PRC shareholder
fails to make the required SAFE registration, the PRC subsidiaries of that
offshore parent company may be prohibited from distributing their profits and
the proceeds from any reduction in capital, share transfer or liquidation, to
their offshore parent company, and the offshore parent company may also be
prohibited from injecting additional capital into their PRC subsidiaries.
Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions.
We cannot
assure you that all of our shareholders who are PRC residents will comply with
our request to make or obtain any registrations or approvals required under
these regulations or other related legislation. Furthermore, as the regulations
are relatively new, the PRC government has yet to publish implementing rules,
and much uncertainty remains concerning the reconciliation of the new
regulations with other approval requirements. It is unclear how these
regulations, and any future legislation concerning offshore or cross-border
transactions, will be interpreted, amended and implemented by the relevant
government authorities. The failure or inability of our PRC resident
shareholders to comply with these regulations may subject us to fines and legal
sanctions, restrict our overseas or cross-border investment activities, limit
our ability to inject additional capital into our PRC subsidiaries and the
ability of our PRC subsidiaries to make distributions or pay dividends, or
materially and adversely affect our ownership structure. If any of the foregoing
events occur, our acquisition strategy and business operations and our ability
to distribute profits to you could be materially and adversely
affected.
The PRC tax
authorities may require us to pay additional taxes in connection with our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China.
Our
operations and transactions are subject to review by the PRC tax authorities
pursuant to relevant PRC laws and regulations. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For example, in the case of some of our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China, we cannot assure you that the PRC tax authorities
will not require us to pay additional taxes in relation to such acquisitions. In
the event that the sellers failed to pay any taxes required under PRC law in
connection with these transactions, the PRC tax authorities might require us to
pay the tax, together with late-payment interest and penalties.
14
If any of our
PRC affiliates becomes the subject of a bankruptcy or liquidation proceeding, we
may lose the ability to use and enjoy those assets, which could reduce the size
of our advertising network and materially and adversely affect our business,
ability to generate revenue and the market price of our stock.
Substantially
all of our operations are conducted in China through contractual arrangements
with Zhenyu and its shareholders. As part of these arrangements, Zhenyu holds
certain of the assets that are important to the operation of our business. If it
goes bankrupt and all or part of its assets become subject to liens or rights of
third-party creditors, we may be unable to continue some or all of our business
activities, which could materially and adversely affect our business, financial
condition and results of operations. If Zhenyu undergoes a voluntary or
involuntary liquidation proceeding, its shareholders or unrelated third-party
creditors may claim rights to some or all of these assets, thereby hindering our
ability to operate our business, which could materially and adversely affect our
business, our ability to generate revenue and the market price of our
stock.
All of our assets are
located in China. So any dividends or proceeds from liquidation are subject to
the approval of the relevant Chinese government agencies.
Our assets
are located inside China. Under the laws governing FIEs in China, dividend
distribution and liquidation are allowed but subject to special procedures under
the relevant laws and rules. Any dividend payment will be subject to the
decision of the board of directors and subject to foreign exchange rules
governing such repatriation. Any liquidation is subject to both the relevant
government agency’s approval and supervision as well the foreign exchange
control. This may generate additional risk for our investors in case of dividend
payment or liquidation.
Because our funds are
held in banks which do not provide insurance, the failure of any bank in which
we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the People’s Republic of China do not provide
insurance for funds held on deposit. As a result, in the event of a bank
failure, we may not have access to funds on deposit. Depending upon the amount
of money we maintain in a bank that fails, our inability to have access to our
cash could impair our operations, and, if we are not able to access funds to pay
our suppliers, employees and other creditors, we may be unable to continue in
business.
Anti-inflation
measures may be ineffective or harm our ability to do business in
China.
In recent
years, the PRC government has instituted anti-inflationary measures to curb the
risk of an overheated economy characterized by debilitating inflation. These
measures have included devaluations of the renminbi, restrictions on the
availability of domestic credit, and limited re-centralization of the approval
process for some international transactions. These austerity measures may not
succeed in slowing down the economy’s excessive expansion or control inflation,
or they may slow the economy below a healthy growth rate and lead to economic
stagnation or recession; in the worst-case scenario, the measures could slow the
economy without curbing inflation. The PRC government could adopt additional
measures to further combat inflation, including the establishment of price
freezes or moratoriums certain projects or transactions. Such measures could
harm the economy generally and hurt our business by limiting the income of our
customers available to purchase our merchandise, by forcing us to lower our
profit margins, and by limiting our ability to obtain credit or other financing
to pursue our expansion plans or maintain our business.
Governmental control
of currency conversions may affect the value of your
investment.
All of our
revenue is earned in renminbi, and any future restrictions on currency
conversions may limit our ability to use revenue generated in renminbi to make
dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like us
may buy, sell or remit foreign currencies only after providing valid commercial
documents at a PRC banks specifically authorized to conduct foreign-exchange
business.
In addition,
conversion of renminbi for capital account items, including direct investment
and loans, is subject to governmental approval in the PRC, and companies are
required to open and maintain separate foreign-exchange accounts for capital
account items. There is no guarantee that PRC regulatory authorities will not
impose additional restrictions on the convertibility of the renminbi. Such
restrictions could prevent us from distributing dividends and thereby reduce the
value of our stock.
The fluctuation of
the exchange rate of the renminbi against the dollar could reduce the value of
your investment.
The value of
our common stock will be affected by the foreign exchange rate between U.S.
dollars and renminbi. For example, to the extent that we need to convert U.S.
dollars we receive from an offering of our securities into renminbi for our
operations, appreciation of the renminbi against the U.S. Dollar could reduce
the value in renminbi of our funds. Conversely, if we decide to convert our
renminbi into U.S. dollars for the purpose of declaring dividends on our common
stock or for other business purposes and the U.S. dollar appreciates against the
renminbi, the U.S. dollar equivalent of our earnings from The Company, our
subsidiary in China, would be reduced. In addition, the depreciation of
significant U.S. Dollar-denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
15
On July 21,
2005, the PRC government changed its decade-old 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 certain
foreign currencies. This change in policy has resulted in an appreciation of the
renminbi against the U.S. dollar of approximately 12% as of the date of this
report. 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 a further andmoresignificant appreciation of the renminbi against the
U.S. Dollar.
We receive
all of our revenues in renminbi. The PRC government imposes controls on the
convertibility of renminbi into foreign currencies and, in certain cases, the
remittance of currency out of the China. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from
the transaction, can be made in foreign currencies without prior approval from
the PRC State Administration of Foreign Exchange (“SAFE”) by complying with
certain procedural requirements. However, approval from appropriate governmental
authorities is required where renminbi are to be converted into foreign currency
and remitted out of the PRC to pay capital expenses, such as the repayment of
bank loans denominated in foreign currencies.
The PRC
government could also restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain expenses as they come due.
Recently-modified
SAFE regulations may restrict our ability to remit profits out of China as
dividends.
SAFE
Regulations regarding offshore financing activities by PRC residents have
recently undergone a number of changes which may increase the administrative
burdens we face. The failure of our stockholders who are PRC residents to make
any required applications and filings pursuant to these regulations may prevent
us from being able to distribute profits and could expose us and our
PRC-resident stockholders to liability under PRC law.
SAFE issued a
public notice (the “October Notice”), effective as of November 1, 2005, and
implementation rules in May 2007, which require registration with SAFE by the
PRC-resident stockholders of any foreign holding company of a PRC entity. These
regulations apply to our stockholders who are PRC residents. In the absence of
such registration, the PRC entity cannot remit any of its profits out of the PRC
as dividends or otherwise.
In the event
that our PRC-resident stockholders have not followed the procedures required
under the October Notice and its implementation rules, we could lose the ability
to remit monies outside of the PRC and would therefore be unable to pay
dividends or make other distributions, and we could face liability for evasion
of foreign-exchange regulations. Such consequences could affect our good
standing under PRC regulations and our ability to operate in the PRC, and could
therefore diminish the value of your investment.
China’s legal and
judicial system may not adequately protect our business and operations and the
rights of foreign investors.
China’s legal
and judicial system may negatively impact foreign investors. In 1982, the
National People’s Congress amended the Constitution of China to authorize
foreign investment and guarantee the “lawful rights and interests” of foreign
investors in the China. However, the China’s system of laws is not yet
comprehensive. The legal and judicial systems in the China are still
rudimentary, and enforcement of existing laws is inconsistent. Many judges in
the China lack the depth of legal training and experience that would be expected
of a judge in a more developed country. Because the China judiciary is
relatively inexperienced in enforcing the laws that do exist, anticipation of
judicial decision-making is more uncertain than would be expected in a more
developed country. It may be impossible to obtain swift and equitable
enforcement of laws that do exist, or to obtain enforcement of the judgment of
one court by a court of another jurisdiction. The China’s legal system is based
on civil law, or written statutes; a decision by one judge does not set a legal
precedent that must be followed by judges in other cases. In addition, the
interpretation of Chinese laws may vary to reflect domestic political
changes.
As a matter
of substantive law, the foreign-invested enterprise laws provide significant
protection from government interference. In addition, these laws guarantee the
full enjoyment of the benefits of corporate articles and contracts to
foreign-invested enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting laws mandate accounting practices that are not consistent with
U.S. generally accepted accounting principles. PRC accounting laws require that
an annual “statutory audit” be performed in accordance with PRC accounting
standards and that the books of account of foreign-invested enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the PRC
Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise
to submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. Our subsidiary,
Yixing Dragon Path is a wholly foreign-owned enterprise and is subject to these
regulations.
As a matter
of enforcement, although the enforcement of substantive rights may appear less
clear than in the U.S., foreign-invested enterprises and wholly foreign-owned
enterprises are PRC-registered companies, which enjoy the same status as other
PRC-registered companies in business-to-business dispute resolution. Because the
Articles of Association of the Company do not specify a method for the
resolution of business disputes, the Company and other parties involved in any
business dispute are free to proceed either in the Chinese courts or, if they
are in agreement, through arbitration. Under PRC law, any award rendered by an
arbitration tribunal is enforceable in accordance with the United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Therefore, PRC laws relating to business-to-business dispute resolution should
not work to the disadvantage of foreign-invested enterprises such as the
Company.
16
However, the
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. 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 and the enforcement
and performance of our arrangements with suppliers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. We
and any future subsidiaries are considered foreign persons or foreign-invested
enterprises under PRC laws, and as a result, we are required to comply with PRC
laws and regulations. These laws and regulations are sometimes vague and may be
subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have on
our business.
In addition,
some of our present and future executive officers and directors, most notably
Mr. Boping Li, may be residents of the PRC and not of the United States, and
substantially all the assets of these persons are located outside the United
States. As a result, it could be difficult for investors to effect service of
process in the United States, or to enforce a judgment obtained in the United
States against us or any of these persons.
Risks
related to an investment in our common stock
Our Chief Executive
Officer has a large degree of control on us through his position and stock
ownership and his interests may differ from other
stockholders.
Our Chairman,
President and Chief Executive Officer, Boping Li and his wife have option on
Crown Orient International Limited, our principal shareholder. As a
result, he will be able to influence the outcome of stockholder votes on various
matters, including the election of directors and extraordinary corporate
transactions such as business combinations. Boping Li’s interests may differ
from that of other stockholders.
There is
currently a very limited trading market for our common stock.
The market
for our common stock is limited and we cannot assure you that a larger market
will ever be developed or maintained. Currently, our common stock is traded on
the Over-The-Counter Bulletin Board. Securities traded on the OTC Bulletin Board
typically have low trading volumes. Market fluctuations and volatility, as well
as general economic, market and political conditions, could reduce our market
price. As a result, this may make it difficult or impossible for our
shareholders to sell our common stock.
We do not intend to
pay cash dividends in the foreseeable future.
We currently
intend to retain all future earnings for use in the operation and expansion of
our business. We do not intend to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate. Should we decide in
the future to do so, as a holding company, our ability to pay dividends and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiaries based in the PRC. Our operating subsidiaries, from
time to time, may be subject to restrictions on its ability to make
distributions to us, including restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions. See
“Risks related to doing business in China” above.
Our common stock is
subject to the Penny Stock Regulations.
Our common
stock is, and will continue to be subject to the SEC’s “penny stock” rules to
the extent that the price remains less than $5.00. Those rules, which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale, may further limit your ability to sell your shares.
The SEC has
adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny
stock and subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser’s prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer’s presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the “penny stock” rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell their
common stock in the secondary market.
17
Our common stock is
illiquid and subject to price volatility unrelated to our
operations.
The market
price of our common stock could fluctuate substantially due to a variety of
factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A large
number of shares of common stock will be issuable for future sale which will
dilute the ownership percentage of our current holders of common stock. The
availability for public resale of those shares may depress our stock
price.
Also as a
result, there will be a significant number of new shares of common stock on the
market in addition to the current public float. Sales of substantial amounts of
common stock, or the perception that such sales could occur, and the existence
of warrants to purchase shares of common stock at prices that may be below the
then current market price of the common stock, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.
Enforcement against
us or our directors and officers may be difficult.
Because our
principal assets are located outside of the U.S. and a majority of our directors
and officers, both present and future, reside outside of the U.S., it may
be difficult for you to enforce your rights based on U.S. federal securities
laws against us and our officers and directors or to enforce a U.S. court
judgment against us or them in the PRC.
In addition,
our operating company is located in the PRC and substantially all of its assets
are located outside of the U.S. It may therefore be difficult for investors in
the U.S. to enforce their legal rights based on the civil liability provisions
of the U.S. Federal securities laws against us in the courts of either the U.S.
or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce
such judgments in PRC courts. Further, it is unclear if extradition treaties now
in effect between the U.S. and the PRC would permit effective enforcement
against us or our officers and directors of criminal penalties under the U.S.
Federal securities laws or otherwise.
MANAGEMENT’S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our consolidated financial statements
and the related notes included elsewhere in this document. The following
discussion contains forward-looking statements. Jiangsu Zhenyu Environmental
Protection Technology Co. Ltd. is referred to herein as “we”, “us”,
“our”, or the “Company.” The words or phrases “would be,” “will allow,” “expect
to”, “intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” or similar expressions are intended to identify
forward-looking statements. Such statements include, among others, those
statements concerning our expected financial performance, our corporate strategy
and operational plans. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of risks and
uncertainties, including, among others: (a) those risks and uncertainties
related to general economic conditions in China, including regulatory factors
that may affect such economic conditions; (b) whether we are able to manage our
planned growth efficiently and operate profitable operations, including whether
our management will be able to identify, hire, train, retain, motivate and
manage required personnel or that management will be able to successfully manage
and exploit existing and potential market opportunities; (c) whether we are able
to generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under “Liquidity and Capital
Resources”. Unless otherwise required by applicable law, we do not undertake,
and we specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or any
other circumstances after the date of such statement unless required by law. For
additional information regarding these risks and uncertainties, see “Risk
Factors”. Our consolidated financial statements have been prepared in accordance
with U.S. GAAP. In addition, our consolidated financial statements and the
financial data included in this document reflect the Merger and have been
prepared as if our current corporate structure had been in place throughout the
relevant periods.
Overview
We are a
prominent China-based water treatment equipment supplier and project contractor.
Holding six national patents and through sixteen years of development, we
have relatively strong market share in waste
water treatment sector in China and are ranked among top six of Yixing City’s
best environmental protection enterprises based on Yixing Municipal Government’s
ranking of 2009 outstanding environment protection enterprises (Yizhengfa
Document No.[2010]18). Yixing is the country’s production base for environment
protection equipment. We are headquartered in Yixing, Jiangsu, with
total building areas of 7,800 square meters. We have 171 employees in
total.
18
We conduct
our business based on two models: (i) Equipment sales from customer orders; (ii)
Project installation which includes the design, manufacturing and installation
of waste water treatment equipment. We acquire our product orders and projects
through a transparent auction bid process. In terms of pricing strategy, we have
a flexible pricing policy to target different market segments and different
customers.
Our key
products include ZFP-1380 Rotating Disc Aeration equipment, ZYXG Series of
Sludge Suction Scraper, ZYSR Series of Surface Scraper and other water treatment
Environmental protection equipment. These products can be divided into four
categories:
i.
|
Circulating
water treatment equipment
|
ii.
|
Water
purification equipment
|
iii.
|
Waste
water treatment equipment
|
iv.
|
Municipal
waste water treatment
equipment
|
The following
table summarizes our four product lines:
Circulating
Water Treatment
|
Water
Purification
|
Waste
Water Treatment
|
Municipal
Waste Water Treatment
|
|||||
Production
Commencing Time
|
1993
|
1994
|
1996
|
2000
|
||||
Name
Of Major Product Under Each Product Line
|
Cooling
tower,
Mechanical
accelerated clarification basin,
Lime
storage silo
|
Gravel
filter, Automatic filter and Equipment for dealing with municipal
sewage
Reverse
Osmosis System and devices
Ultra
Filtration Device
|
Equipment
for dealing with sewage with waste coal, dealing with sewage with waste
oil
|
Mechanical
Grid, Grid of rotating drum, Whirlwind sand-settling machine,
Peripheral-driven sludge scraper, Oxidation rotating disc aeration
equipment, Rotatory decanter, etc.
|
||||
Product
Usage Example
|
Cooling Tower: used to
cool high temperature water for recycling and reusing, often applied to
enterprises in smelting industry
Mechanical accelerated
clarification basin: stratify (or separate) the clear water out of
the sewage for recycling and reusing through increasing the coagulation of
sewage and water treatment
|
Gravel filter and automatic
filter: remove the large grain-shaped impurities, such as gravel,
suspended solids, organic materials, etc.
Reverse osmosis system and
devices and Ultra filtration device: with the aid of reverse
osmosis films, split heavy metal, pesticides, bacteria and suspended
solids out of the waste water in order to purify the water
|
Integrated
processing and treatment of the sewage and waste water from electricity
plants
|
Integrated
processing and treatment of industrial sewage, municipal sewage (through
our oxidation ditch treatment process and SBR techniques) to
lower (or) remove the suspended solids in sewage, lower BOD and COD, and
make the water meet the national standards
|
||||
Applied
Industry
|
Applied
to electricity industry, crude oil and chemical industry, steel smelting
industry
|
Applied
to electricity, petroleum and chemical, steel and smelting industries as
well as to municipal waste water treatment
|
Applied
to electricity industry
|
Applied
to treatment of industrial waste and municipal waste
water
|
The major characteristics and competitive advantages of our core products include:
•
|
ZFP-1380
Rotating Disc Aeration equipment- High efficiency in adding oxygen, low
energy consumption rate, easy to maintain and long useful
life.
|
19
•
|
ZYSR
Rotatory Decanter- Smart LCD control, high efficiency in prevention of
slag, large volume of water decanting, long stroke, reliable seal and
lower power consumption.
|
•
|
ZYXG
Peripheral- Driven Sludge Suction Scraper-max width of the bridge reaches
60 meters, supported by a center pedestal and with stable mechanical
properties.
|
•
|
ZYTS
Air Sand Bailer- Absorb gravel sands thoroughly with no
jam.
|
During the
fiscal year ended September 30, 2009, we generated net revenues of US$ 26million
and achieved a net income of US$ 6.018million, which represents a growth of
199.75% and 278.63% compared to the previous fiscal year,
respectively.
Factors
Affecting Our Results of Operations
We believe
that the following factors will continue to affect our financial
performance:
Increasing Demand
for Water Treatment Equipment
The rapid
growth in the water treatment equipment industry in China positively affects our
financial result. The growth was driven by several key factors, including growth
in population, industrialization and urbanization, and Chinese government’s
economic stimulus plan released at the end of 2008. According to the Freedonia
Group, the demand for water treatment products in China is estimated to increase
nearly 15.5% per year through 2012. As the Chinese government imposes stricter
environmental and water quality standards to promote sustainable economic
growth, we anticipate that water treatment will become a priority issue for
municipalities, industries and commercial businesses.
On
November 5, 2008, the State Council of China announced an economic stimulus
plan in the amount of $585 billion to stimulate economic growth and bolster
domestic demand. The economic stimulus plan includes, among others, increased
spending on basic infrastructure construction projects for water, electricity,
gas and heat to improve the standard of living in China and protect the
environment. Because of the economic stimulus plan and the projected increase in
demand for affordable purified water as China continues to industrialize and
modernize, we believe that the water treatment industry, and in turn the demand
for our products and related project engineering, will continue to experience
strong growth for the foreseeable future.
Fluctuations in
Raw Material and Components Costs
Major raw
materials used in our production process include steel, polyresen, industrial
chemicals, standardized mechanical parts, and electrical elements. 98% of our
raw materials and parts were purchased locally. For parts that have to be
imported, we choose to cooperate with the local agents of such foreign companies
as SEW, Ruode, and Siemens. Some raw materials and components, especially steel,
have been susceptible to fluctuations in price and availability. Significant
increases in raw materials and components prices will have a direct and negative
impact on our gross profits.
Corporate
Structure and Contractual Arrangements
Dragon Path
owns 100% of Yixing Dragon Path. Yixing Dragon Path is a wholly foreign owned
enterprises, or “WFOE,” under the laws of the PRC, by virtue of its status as a
wholly-owned subsidiary of a non-PRC company, Dragon Path. In connection with
the Merger, Yixing Dragon Path entered into and consummated a series of
contractual arrangements with Zhenyu, pursuant to which:
§
|
we
are able to exert effective control over
Zhenyu;
|
§
|
a
substantial portion of the economic benefits of Zhenyu will be transferred
to us; and
|
§
|
Yixing
Dragon Path or its designee has an exclusive option to purchase all or
part of the equity interests in Zhenyu, when and to the extent permitted
by PRC law.
|
20
Our structure
is set forth in the diagram below:
▪
|
Agreements
that Transfer Economic Benefits to
Us
|
Pursuant to a
consulting services agreement with Zhenyu, Yixing Dragon Path provides
management and consulting services to Zhenyu in exchange for service fees. The
service fees, payable in RMB each quarter, equal to all of Zhenyu’s net income
for such quarter based on Zhenyu’s quarterly financial statements.
▪
|
Agreements
that Provide Effective Control over
Zhenyu
|
We have
entered into the following agreements with Zhenyu and its shareholders that
provide us with effective control over Zhenyu:
§
|
an
operating agreement, pursuant to which Yixing Dragon Path has the right to
recommend director candidates and appoint senior executives of Zhenyu,
approve any transactions that may materially affect the assets,
liabilities, rights or operations of Zhenyu, and guarantee the contractual
performance by Zhenyu of any agreements with third parties, in exchange
for a pledge by Zhenyu of its accounts receivable and
assets;
|
§
|
a
voting rights proxy agreement, pursuant to which the shareholder of Zhenyu
have irrevocably granted and entrusted Yixing Dragon Path with all of
their voting rights as Zhenyu’s
shareholders;
|
§
|
an
option agreement, pursuant to
which:
|
21
§
|
Yixing
Dragon Path or its designee has an exclusive option to purchase all or
part of the equity interests in Zhenyu, when and to the extent permitted
by PRC law. The purchase price of the equity interest shall be equal to
the capital paid in by the transferors, adjusted pro rata for purchase of
less than all of the equity interest, unless applicable PRC laws and
regulations require an appraisal of the equity interest or stipulate other
restrictions regarding the purchase price of the equity interest;
and
|
§
|
an
equity pledge agreement pursuant to which each of shareholders of Zhenyu
has pledged his or her equity interest in Zhenyu to Yixing Dragon Path to
secure their obligations under the consulting services
agreement.
|
See “Related
Party Transactions” for further information on our contractual arrangements with
these parties.
In the
opinion of AllBright Law Offices, our PRC legal counsel:
§
|
the
ownership structures of Yixing Dragon Path, Zhenyu and its subsidiary are
in compliance with existing PRC laws and
regulations;
|
§
|
the
contractual arrangements among Yixing Dragon Path, Zhenyu as well as its
shareholders are valid, binding and enforceable, and will not result in
any violation of PRC laws or regulations currently in effect;
and
|
However, in
spite of the above, there are substantial uncertainties regarding the
interpretation and application of current and future PRC laws and regulations.
Accordingly, there can be no assurance that any future interpretations of
Chinese laws and regulations by relevant authorities, administrative
pronouncements, or court decisions, or future positions taken by these
authorities, would not adversely impact or affect the above opinion of our PRC
legal counsel. If the PRC government finds that the agreements that establish
the structure for operating our PRC business do not comply with PRC government
restrictions on foreign investment, we could be subject to severe penalties. See
“Risk Factors — If the PRC government finds that the agreements that
establish the structure for operating our China business do not comply with PRC
governmental restrictions on foreign investment, we could be subject to severe
penalties”, “— China’s legal and judicial system may not adequately protect
our business and operations and the rights of foreign investors” and “— The
PRC legal system embodies uncertainties which could limit the legal protections
available to you and us”.
Subsidiaries
of Zhenyu
We own 75%
and Dragon Path owns 25% of Jiangsu Jinyu Environmental Engineering Co., Ltd, a
joint venture between Zhenyu and Dragon Path, which engages in the design,
manufacture and installation of environmental protection equipment and
engineering projects (or systems) for waste water treatment, as well as provides
after-sales services to customers.
Intellectual
Property
We believe
that our patents, trademarks, trade secrets and other intellectual property
rights are critical to our business. We rely on trademark and copyright laws,
trade secret protection, non-competition and confidentiality and/or licensing
agreements with our executive officers, clients, research and development
personnel and others to protect our intellectual property rights. We do not
possess any licenses to use third-party intellectual property rights nor do we
license to third-parties any intellectual property rights we own.
a)
|
Patents
|
We now
owns six national patents, five of them are functional innovations and one
is related to exterior design. In 2009, we submitted applications for three new
patents for approval and the applications are currently pending.
The following
table summarizes the basic information of our patents:
Name
of the patent
|
Innovator
|
Application
number
|
Date
of application
|
Date
of public
|
Patent
number
|
Effective
period
|
|||||
Oxidation
Rotating Disc
|
Boping
Li &
Jieping
Wang
|
150178
|
9/25/1999
|
5/18/2000
|
ZL99325340.7
|
10
years
|
|||||
Improved
Oxidation Rotating Disc
|
Boping
Li &
Jieping
Wang
|
394958
|
10/4/1999
|
7/7/2000
|
ZL99229570.X
|
10
years
|
|||||
Improved
Oxidation Rotating Disc
|
Boping
Li &
Jieping
Wang
|
415406
|
2/16/2000
|
11/25/2000
|
ZL00219414.7
|
10
years
|
|||||
Improved
Oxidation Rotating Disc
|
Boping
Li &
Jieping
Wang
|
427729
|
5/16/2000
|
3/1/2001
|
ZL00220296.4
|
10
years
|
|||||
Improved
Rotating Disc and Bearing
|
Boping
Li &
Jieping
Wang
|
729298
|
4/30/2003
|
9/28/2005
|
ZL03221600.9
|
10
years
|
|||||
Improved
Water Decanter
|
Boping
Li &
Jieping
Wang
|
616921
|
4/30/2003
|
5/12/2004
|
ZL03221599.1
|
10
years
|
In
addition, we are currently in the process of acquiring two other patents from a
major institution. Patent transfer agreements are
pending.
22
b)
|
Trademark
|
Our “Zhenyu”
trademark (No.5213411) has been approved by the national authority. We also have
filed two other trademark applications which are now under review by the
National Trademark Bureau.
Sales
and Marketing
We sell our
products and services primarily through direct sales. Our sales strategy is to
appoint our sales representatives to market our products to targeted customers
on a one-on-one basis.
In addition
to the above sales strategy, we also have refined our strategies to target
certain specific industries. For example, we have appointed sales
representative in Jinmen, Hubei Province in order to promote our
sales to the local branch of a leading petrochemical company. We also have
appointed sales representative in Beijing in order to manage our projects with
one of our important customers in Beijing and to promote our services to other
companies in the electricity industry. In 2009, we newly appointed sales
representatives in Xinjiang and Inner Mongolia in order to promote our equipment
sales and engineering construction projects with targeted customers in the crude
oil and electricity industry. We believe that this strategy will help us broaden
the market coverage of our products and services.
Major
Customers
Our major
customers and product application include:
i.
|
Crude
Oil and Chemical Industry- Our products for this industry include
large-scale circulating water cooling tower equipment, filtering and
purification equipment, devices for adding chemical reagents,
deodorization project. We entered into the crude oil industry through our
cooperative water treatment project with a leading China petrochemical
company. Our success and reputation gained from this project enabled us to
expand our business in this
industry.
|
ii.
|
Municipal
Waste Water Treatment- One of our sewage treatment projects in Henan has
helped us successfully win the bid on several other
projects.
|
iii.
|
Electricity
and Smelting Industry- Our products and services in these areas include
chemistry water treatment equipment, boiler water supply equipment,
condensate treatment equipment and industrial waste water recycling and
reusing equipment. Our successful project with a China leading electricity
power company helped us maintain long-term cooperative relationship with
the “Big Four” state-owned electricity companies, namely China Huaneng
Group, China Power Investment Corporation, China Guodian Corporation, and
China Datang Corporation.
|
iv.
|
Transportation
and Infrastructure Construction Industry- Our projects in this industry
include the design, manufacturing and installation of waste water
treatment equipment related to highway
construction.
|
The Company
sells to a wide range of customers. No single customer accounted for more than
10% of revenue or project expenditures for the years ended September 30, 2008
and 2009. The average accounts receivable collection period is about
one year, and our bad debt rate is below 2% of the total accounts receivable
balance.
Raw
Materials and Major Vendors
Major raw
materials used in our production process include steel, polyresen, industrial
chemicals, standardized mechanical parts, and electrical elements. 98% of our
raw materials and parts were purchased locally. For those parts that have to be
imported, we choose to cooperate with the local agents of such foreign companies
as SEW, Ruode, and Siemens.
We
established strategic long term relationship with our suppliers. In order to
guarantee our raw material supply, we typically keep a list of multiple vendors
for each category of materials rather than using an exclusive
vendor.
Our purchase
of raw materials from our largest vendors accounts for 16% to 21.5% of our total
purchase. For the fiscal year 2009, 54.96% of our raw materials were purchased
from our top two vendors.
23
Product
Delivery
We strive to
deliver products or services to our customers on a timely basis.
For orders of
our equipment in small quantity, we use China Railway Express or our own
transportation vehicles for the delivery. For large-scale equipment or larger
orders of our equipment, we rely on logistics companies to make the delivery.
Quality
Control
We emphasize
quality control to ensure that our products and projects meet our standards and
provide high quality service. We have implemented a rigid quality control system
and devote significant attention to quality control procedures at every stage of
our manufacturing process. We monitor our manufacturing process closely and
conduct performance and reliability testing to ensure our products to meet our
end-user customers’ expectations. In addition, we regularly seek feedback from
our end-user customers on the quality of our products.
In 2000, we
acquired certificate of ISO9001. In terms of internal quality control in
inventory management, we perform strict quality inspection on purchased
materials and parts before they enter into our warehouse. Inspection is
conducted based on material quality, physical dimension, models and
performance testing, etc. Personnel from our technology department, purchasing
department, quality inspection department and warehouse participate in this
process.
We perform
strict quality inspection and performance testing in our manufacturing process
in order to ensure our finished goods meet the quality standards and customer
demand.
Research
and Development
In light of
the rapid development of environmental protection industry and huge market
demand emerging from the Chinese market, we are committed to strengthening our
R&D abilities. In 1999, we established a cooperative relationship with
Shanghai Tongji University to form a Rotating Disc Aeration Testing Center,
focusing on research and development as well as technological improvement
activities on rotating disc aeration equipment. Our R&D effort on this
matter enabled us to obtain four national patents.
On September
15, 2007, our R&D center has been established within our company, with eight
technical personnel specializing in R&D activities. As a result, an
innovative product, ZYTS Air Sand Bailer, has been developed by our R&D
staff for our client in Sichuan
Our current
R&D focus includes (a) extension of the basic sewage treatment projects,
such as engineering construction of sewage treatment plants in Hubei and Hunan
provinces, and (b) advanced water treatment with technological innovation such
as membrane treatment and biological packing for old sewage treatment plants
remodeling along developed coastal areas in China.
Competition
The waste
water treatment industry in China is highly competitive. We compete primarily on
the basis of customer recognition and industry reputation, market coverage,
research and development strength, comprehensive product offerings, and a
competitive cost structure. We believe we can continue to compete successfully
with international competitors because of our competitive cost structure and
government support s because of our superior technology, patented products as
well as our manufacturing capacity and capability. Our footprints in several
provinces, extensive industry resources and knowledge of local markets provide
us with an advantage over international competitors. In order to maintain and
enhance our competitive advantage, we must continue to focus on competitive
pricing and technological innovation by improving our proprietary manufacturing
processes.
Employees
As of
February 10, 2010, we had 171 full time employees. The following table sets
forth the number of our full time employees categorized by function as of the
period indicated:
As
of February 10, 2010
|
|
Management
|
9
|
R&D
|
8
|
Manufacturing
|
107
|
Sales
and marketing
|
29
|
Quality
control
|
5
|
Administrative
and human resource
|
9
|
Accounting
and finance
|
4
|
Total
|
171
|
24
We
participate in various employee benefit plans that are organized by municipal
and provincial governments, including retirement, medical, unemployment, work
injury and maternity benefit plans for our managerial and key employees. In
addition, we provide short term insurance plans for all our employees while on
duty to cover work related accidents. We have entered into
non-competition agreements with our management and key personnel, which prohibit
them from engaging in any activities that compete with our business during, and
for one or two years after, the period of their employment with our company. We
have also entered into confidentiality agreements with all of our
employees.
We have not
been subjected to any strikes or other labor disturbances that have interfered
with our operations, and we believe that we have a good relationship with our
employees. Our employees are not covered by any collective bargaining
agreements.
Properties
Our principal
executive offices are located at West Garden, Gaocheng Town, Yixing City,
Jiangsu Province, P.R. China, 214214. The Company owns the office
building. However, the company does not own the land. All land in the
People’s Republic of China is government owned and cannot be sold to any
individual or company. However, the government grants the user a “land use
right” (the Right) to use the land. The land use right of 10,619 square meters
(approximately 114,302 square feet) was originally acquired by the Company in
the amount of RMB 7,965,000 from the relevant PRC land authority in April 2007.
The Company has the right to use the land for 50 years on which the office
premises, production facilities and warehouse of the Company are situated, and
amortized the Right on a straight-line basis over the period of 50
years.
Results
of Operations
Operation
Results for the Twelve Months Ended September 30, 2009 and 2008
The following
table sets forth information from our statements of operations for the twelve
months ended September 30, 2009 and 2008, in dollars and as a percentage of
revenues:
REVENUES
|
12
Months Ended September 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Equipment Sales
|
$
|
1,518,233
|
$
|
1,110,075
|
$
|
408,158
|
36.77
|
%
|
||||||||
Equipment-Bundled
Installation Projects
|
$
|
24,670,772
|
$
|
7,626,873
|
$
|
17,043,899
|
223.47
|
%
|
||||||||
Total
Revenues
|
$
|
26,189,005
|
$
|
8,736,948
|
$
|
17,452,057
|
199.75
|
%
|
Revenues
During the
twelve months ended September 30, 2009, we reported revenues of $26,189,005 as
compared to $8,736,948 for the twelve months ended September 30, 2008, an
increase of $17,425,057, or 199.75%. The increase was primarily attributable to
our seven Equipment-bundled installation projects completed in 2009, which
normally have a 5% to 10% higher profit margin than ordinary equipment
sales. Furthermore, the increase in sales was attributable to our
strengthened market campaign and promotion activities to target certain market
areas in 2009, our strategic business transition from traditional equipment
sales model to current equipment-bundled installation project model, our close
cooperative relationship with design institutions as well as local government
and our high product quality and enhanced brand-name awareness.
COST
OF REVENUE
|
12
Months Ended September 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Cost on Equipment Sales
|
$
|
1,139,432
|
$
|
658,434
|
$
|
480,998
|
73.05
|
%
|
||||||||
Cost
on Equipment-Bundled Installation Projects
|
$
|
15,963,767
|
$
|
4,097,004
|
$
|
11,866,763
|
289.64
|
%
|
||||||||
Total
Cost of Sale
|
$
|
17,103,199
|
$
|
4,755,438
|
$
|
12,347,761
|
259.66
|
%
|
25
Cost
of Revenue
During the
twelve months ended September 30, 2009, our cost of revenue was $17,103,199 as compared to cost of
revenue of $4,755,438 during the twelve months ended September 30, 2008, an
increase of $12,347,761, or 259.66%. The increase in cost of revenue
is primarily due to increased sales and associated sales taxes levied by various
tax authorities, increased direct labor costs and increased prices of raw
materials used in our manufacturing and installation projects. The percentage of
increase in cost of revenue was slightly higher than that of the increase in
revenue. The higher percentage of our increase in cost of revenue is primarily
due to increased prices of raw materials.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses, totaled $1,296,132 during the twelve months
ended September 30, 2009 as compared to $1,814,706 for the twelve months
ended September 30, 2008. The increase in selling, general and administrative
expense was mainly attributable to the increase in research and development
expenses. In addition, increase in our general administrative
expenses to support the our expanded business, increases in salaries expenses in
support of our sales growth, increase in selling expenses
for successful bidding the equipment-bundled installation project
contracts, increase in our product delivery fees, and increase in the
advertising expenses to raise our brand awareness among customers all attributed
to the increase of our operating expenses for the year ended September 30, 2009
as compared to the prior comparative period..
Interest
expense
Net Interest
expense decreased from $28,466 for the
twelve months ended September 30, 2008 to $19,506 for the
twelve months ended September 30, 2009. The decrease in interest expense
resulted from our repayment of the long term loans in 2009.
Income
taxes
The majority
of our net income was from Zhenyu, which is subject to 25% of corporate income
tax rate in PRC. For the years ended September 30, 2006 and 2007, Zhenyu
suffered operating losses in the amount of RMB 17,224,713 and RMB 8,667,007,
respectively. For Chinese income tax purpose, these operating losses can be
carried forward and be available to reduce future years' taxable income.
Management believes that the realization of the deferred tax asset arising from
these losses appear to be in the best interest to the Company's business
operations. The Company has recorded income tax provision of $1,366,290 for the
year ended September 30, 2009 after applying the net operating loss
carry-forwards. No provision for income tax is required for Zhenyu as a result
of the realization of net operating loss carry-forward for the year ended
September 30, 2008.
Net
Income
As a result
of the factors described above, we reported net income of $6,017,588 for the
twelve months ended September 30, 2009, as compared with $1,589,325 during the
twelve months ended September 30, 2008. The $4,428,263 increase in our net
income was primarily attributable to our increased revenue for the year ended
September 30, 2009.
Other
Comprehensive Income
We operate
exclusively in the PRC and the functional currency of our operating subsidiary
is the Chinese Renminbi (”RMB”). The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through
authorized institutions. No representation is made that the RMB amounts could
have been, or could be, converted into USD at the rates used in
translation.
Translation
adjustments resulting from this process amounted to $28,605 gain and ($230,194)
loss as of September 30, 2009 and 2008, respectively. The balance
sheet amounts with the exception of equity at September 30, 2009 were translated
at 6.8263 RMB to 1.00 USD as compared to 6.7899 RMB to 1.00 USD at September 30,
2008. The equity accounts were stated at their historical rate. The average
translation rates applied to the income statements accounts for the periods
ended September 30, 2009 and 2008 were 6.8340 RMB and 7.0961 RMB,
respectively.
Liquidity
and Capital Resources
Liquidity is
the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing
basis.
To date, we
have financed our operations primarily through cash flows from operations and
borrowings from banks. As of September 30, 2009, we had $2,103,946 in
working capital, as compared to $1,370,047 as of September 30,
2008. Based on our current operating plan, we believe that our
existing resources, including cash generated from operations as well as the bank
loans, will be sufficient to meet our working capital requirement for our
current operations. In order to fully implement our business plan and continue
our growth, however, we will require additional capital either from our
shareholders or from outside sources.
26
Total current
assets increased to $6,578,156 for the twelve months ended September 30, 2009
from $5,534,828 for the twelve months ended September 30, 2008. The
primary changes in our current assets during this period were from changes in
retainage, other receivables, inventory and deferred tax assets.
Our strategic
business transition from traditional equipment sales model to current
equipment-bundled installation project model and associated seven
equipment-bundled installation projects completed in 2009 accounted for the
increase of retainage from $1,319,537 at September 30, 2008 to $2,485,482 as of
September 30, 2009. Retainage represents the security deposits withheld by the
Company’s customers to warrant against potential defects for the initial one
year period upon sales of equipments or installation of water treatment
projects. Retainage normally accounts for 5% to 10% of the total contract price,
depending on various terms included in different equipment sales contracts or
waste water treatment construction contracts. The deposits are to be refunded in
one year after the completion of sales or installation.
The decrease
of inventory, primarily in water treatment equipments as finished goods, from
$1,810,549 as of September 30, 2008 to $1,457,480 as of September 30, 2009 was
due to our increased sales which reduced our raw material
stockpiles.
The decrease
of deferred tax assets from $388,801 at September 30, 2008 to $0 as of September
30, 2009 was solely due to deferred tax expense fully utilized during 2009
because the income before income tax in 2009 is greater than the carrying net
operating loss in China as of the beginning of fiscal year of
2009. Deferred income tax reflects the net effects of temporary
difference between the carrying amounts of assets and liabilities for financial
statements purposes and the amounts used for income tax purposes, and operating
loss carry-forward.
The following
table details the change in deferred tax assets as of September 30, 2009 and
2008:
2009 | 2008 | |||||||
Deferred tax assets - Beginning Balance | $ | 388,801 | $ | 928,964 | ||||
Deferred tax expense - utilized | 388,801 | 540,163 | ||||||
Net deferred tax assets | $ | - | $ | 388,801 |
Our total
current liabilities as of September 30, 2009 totaled in the amount of $4,474,210
as compared to $4,164,781 in prior fiscal year. The decrease in current
liabilities was primarily due to the increase in accounts payable and tax
payable, offset by decrease- in other payables. Accounts payable
increased from $437,764 at September 30, 2008 to $1,588,850 as of
September 30, 2009 primarily attributable to our increased installation projects
and equipment sales which required more advances been made to us by our material
suppliers to support operating activities.
The increase
of tax payable from $14,732 at September 30, 2008 to $1,341,918 as of September
30, 2009 was because of our application of net operation loss carry-forward as
an deferred tax asset to against our taxes for the year ended September 30, 2008
while our increased sales and taxable income required us to pay more taxes for
the year ended September 30, 2009.
Other
payables consist of balances for non-construction costs with unrelated companies
and individuals with which the Company has business relationships. These amounts
are unsecured, non-interest bearing and generally are short-term in
nature. The decrease of other payables from $2,529,988 at September
30, 2008 to $437,447 as of September 30, 2009 was due to our repayments of these
amounts to these unrelated companies or individuals in 2009 when our operating
cash flows became available. .
The decrease
of long term liabilities from $5,466,944 at September 30, 2008 to $0 as of
September 30, 2009 was due to our full repayment of these loans during 2009 when
our increased sales generated more cash. Based on our current
operating plan, we believe that existing cash and cash equivalents balances, as
well as cash forecast by management to be generated by operations will be
sufficient to meet our working capital and capital requirements for our current
operations.
Discussion
of Cash
Flow
Comparison of
cash flows results for the fiscal year ended September 30, 2009 to the fiscal
year ended September 30, 2008, is summarized as follows:
As of September 30 | ||||||||
2009 | 2008 | |||||||
Cash flow from operating activites | $ | 5,573,827 | $ | 129,202 | ||||
Cash flow from investing activities | $ | (17,211 | ) | $ | (757,683 | ) | ||
Cash flow from financing activities | $ | (5,431,646 | ) | $ | - | |||
27
Operating
activities
Cash flows
provided by operating activities during the twelve months ended September 30,
2009 amounted to $5,573,827, which consists of our net income of $6,017,588,
adds back noncash adjustments of $548,629 and offset by net changes in operating
assets and liabilities due to our expanded operating activities, including the
increase in accounts payable of $1,152,125 in support of expanded operating
activities and the increase in taxes payable of $1,325,770 as a result of
increased taxable income after applying the carrying net operating loss from
prior fiscal year, offset by the increase in retainage in the amount of
$1,171,617 due to our increased equipment-bundled installation projects which
required more security deposits been withheld by our clients to warrant against
potential equipment defects, and the decrease of other payables in the amount of
$2,076,699 due to our repayments of non-construction costs with unrelated
companies and individuals with which we have business
relationships.
Cash flows
provided by operating activities in the twelve months ended September 30, 2008
amounted to $129,202, which consist of our net income of $1,589,325 adds back
noncash adjustments of $726,458 and offset by net changes in operating assets
and liabilities including the decrease of accounts payable
of $1,460,449 and the decrease of advance from customers of
$1,698,912 attributable to our strategic business transition from traditional
equipment sales model to current equipment-bundled installation project
model.
Cash flows
from operations during the twelve months ended September 30, 2009 increased by
$5,444,625 or 42140.36% as compared to the prior comparative
period. The increase in our cash flows provided by operations as of
September 30, 2009 was mainly attributable to our increased net sales which made
more cash to be available to us.
Investing
activities
Net cash used
in investing activities amounted to $17,211 in the twelve months ended September
30, 2009, which is primarily due to our purchase of electronic equipment to be
used in our manufacturing plants. Cash flows used in investing
activities amounted to $757,683 in the twelve months ended September 30, 2008,
which represented the addition of a new office building to our fixed asset
account. Cash flows used in investing activities in the twelve months
ended September 30, 2009 decreased by $740,472 or 97.73% as compared to the
prior comparative period.
Financing
activities
Net cash used
in financing activities amounted to $5,431,646 in the twelve months ended
September 30, 2009, which was due to our full repayment of the long term
loans during 2009. No cash was used in financing activities in the
twelve months ended September 30, 2008.
Off-Balance
Sheet Arrangements
As of the
date of this report, we do not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors. The term "off-balance sheet arrangement" generally means
any transaction, agreement or other contractual arrangement to which an entity
unconsolidated with us is a party, under which we have: (i) any obligation
arising under a guarantee contract, derivative instrument or variable interest;
or (ii) a retained or contingent interest in assets transferred to such entity
or similar arrangement that serves as credit, liquidity or market risk support
for such assets.
Inflation
Inflation has
not had a material impact on our business and we do not expect inflation to have
a material impact on our business in the near future.
Executive
Compensation
Information
regarding the compensation paid to the executive officers and directors of the
Company during the past two fiscal years is set forth in Part III, Item 11 of
the Company’s Annual Report on Form 10-K, which was filed with the Securities
and Exchange Commission on September 23, 2009. None of the
individuals who served as officers of the Company during the past two fiscal
years will remain an officer or director of the Company after the
merger.
The following
table sets forth information concerning cash and non-cash compensation paid by
Zhenyu to Mr. Boping Li, Chairman, President and Chief Executive Officer, and
Mr. Yuqiang Wu, Vice President, for services rendered during the preceding two
fiscal years. No executive officer of Zhenyu received compensation in excess of
$100,000 for any of those two years.
28
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)(1)
|
Bonus
($)
|
Nonequity
Incentive Plan Compensation ($)
|
All
Other Compensation ($)
|
Total
($)
|
||||||||||||||||
Boping
Li
|
2009
|
32,192 | - | - | - | 32,192 | ||||||||||||||||
Chairman,
President and Chief Executive Officer
|
2008
|
22,548 | - | - | - | 22,548 | ||||||||||||||||
Yuqiang
Wu
|
2009
|
17,559 | - | - | - | 17,559 | ||||||||||||||||
Vice
President
|
2008
|
11,274 | - | - | - | 11,274 |
(1) The
Company pays salaries in RMB to all executive officers and directors of the
board every month. The RMB amount is translated into USD when the Company files
SEC documents. The relevant exchange rates for fiscal years 2009 and 2008, are
$1 to RMB 6.834 and RMB 7.096, respectively. .
Employment
Agreements
On January 1,
2010, the Company entered into a three-year employment agreement with Boping Li
as Chief Executive Officer. Mr. Li has an annual salary of RMB 216,000
(approximately USD $31,765), less all applicable taxes and other appropriate
deductions. Mr. Li is entitled to an annual bonus in an amount of 10% of his
annual salary, which shall be approved by the Company’s board of directors based
on the operation results of the Company.
As of the
date of this report, we have no formal or informal arrangements or agreements to
compensate our directors for services they provide as directors. We plan to
implement a compensation program for our independent directors, as and when they
are appointed, which we anticipate will include such elements as an annual
retainer, meeting attendance fees and stock options. The details of that
compensation program will be negotiated with each independent director.
Currently, the directors for Zhenyu are not compensated for their service as
directors.
Audit
Committee Financial Expert
Our board of
directors currently acts as our audit committee. Our Board of Directors is in
the process of finding an "audit committee financial expert" as defined in
Regulation S-K and directors that are "independent" as that term is used in
Section 10A of the Securities Exchange Act.
Audit
Committee
We have not
yet appointed an audit committee. At the present time, we believe that the
members of Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting. We do, however, recognize the importance of
good corporate governance and intend to appoint an audit committee comprised
entirely of independent directors, including at least one financial expert, in
the near future.
Compensation
Committee
We do not
presently have a compensation committee. Our board of directors currently acts
as our compensation committee.
Nominating
Committee
We do not
presently have a nominating committee. Our board of directors currently acts as
our nominating committee. We are in search for qualified independent board
members to staff this committee.
Section 16(a)
beneficial reporting compliance
Pursuant to
Section 16(a) of the Securities Exchange Act of 1934 and the rules issued
thereunder, our directors and executive officers and any persons holding more
than 10% of our common stock are required to file with the SEC reports of their
initial ownership of our common stock and any changes in ownership of such
common stock. Copies of such reports are required to be furnished to us. Section
16(a) of the Securities Exchange Act requires our executive officers and
directors, and persons who own more than 10% of our common stock, to file
reports regarding ownership of, and transactions in, our securities with the SEC
and to provide us with copies of those filings. Our officers and directors,
David Kaztir and Asael Karfiol failed to timely file their form 3. Form 3 was
filed on September 11, 2009. Our 10% shareholders, Kaeyo Investments Ltd., Orit
Wolkin and Juemin Chu failed to timely file their Form 3. The forms were rather
filed on September 11, 2009. Kaeyo Investments Ltd. and Orit Wolkin
also failed to timely file their form 4 reporting purchases of shares in
November 2008, February 2009 and May 2009. The form 4s were filed on September
11, 2009 and amended on September 17, 2009.
Code of
Ethics
We do not
currently have a Code of Ethics applicable to our principal executive, financial
or accounting officer and are in the process of adopting such a
code.
29
Related Party
Transactions
Agreements Among Us, Yixing Dragon
Path and Zhenyu
We have
entered into a series of contractual arrangements with Zhenyu, including
contracts relating to the provision of services and certain shareholder rights
and corporate governance matters.
The following
is a summary of the material provisions of these agreements. For more complete
information you should read these agreements in their entirety which are
attached to this Form 8-K as exhibits.
Transfer of
Ownership When Permitted by Law
Pursuant to
the call option agreement by and among Yixing Dragon Path, Zhenyu and
Zhenyu’s shareholders dated as of January 27, 2010, Yixing Dragon Path or its
designee has an exclusive option to purchase all or part of the equity interests
in Zhenyu, when and to the extent permitted by PRC law. The purchase price of
the equity interest shall be equal to the capital paid in by the transferors,
adjusted pro rata for purchase of less than all of the equity interest, unless
applicable PRC laws and regulations require an appraisal of the equity interest
or stipulate other restrictions regarding the purchase price of the equity
interest.
Voting
Arrangement
Pursuant to
the voting rights proxy agreement by and among Yixing Dragon Path, Zhenyu and
its shareholders dated as of January 27, 2010, the shareholders of Zhenyu have
irrevocably granted and entrusted Yixing Dragon Path with all of their voting
rights as Zhenyu’s shareholders.
Equity Pledge
Agreement
Pursuant to
the equity pledge agreement by and among Yixing Dragon Path, Zhenyu and its
shareholders dated as of January 27, 2010, each of shareholders of Zhenyu has
pledged his or her equity interest in Zhenyu to Yixing Dragon Path to secure
their obligations under the consulting services agreement.
Consulting
Services Agreement
Pursuant to
the consulting services agreement by and among Yixing Dragon Path and Zhenyu
dated January 27, 2010, Yixing Dragon Path provides management and consulting
services to Zhenyu in exchange for service fees. The service fees, payable in
RMB each quarter, equal to all of Zhenyu’s net income for such quarter based on
Zhenyu’s quarterly financial statements.
Description of
Securities
The Board of
Directors of the Company is authorized to issue:
Ø
|
160,000,000 shares
of Common Stock, $.001 par value per share, of which 850,000 shares were
issued and outstanding before the Merger after the stock reverse
split;
|
Ø
|
10,000,000
shares of Preferred Stock.
|
We are
authorized to issue 160,000,000 shares of common stock, par value $0.001, of
which 17,000,000 shares are issued and outstanding upon the completion of the
Merger. Each holder of shares of our common stock is entitled to one vote for
each share held of record on all matters submitted to the vote of stockholders,
including the election of directors. The holders of shares of common stock have
no preemptive, conversion, subscription or cumulative voting rights. There is no
provision in our Certificate of Incorporation or By-laws that would delay, defer
or prevent a change in control of our Company.
Preferred
Stock
We are
authorized to issue 10,000,000 shares of preferred stock, none of which is
issued and outstanding. Our board of directors has the right, without
shareholder approval, to issue preferred shares with rights superior to the
rights of the holders of shares of common stock. As a result, preferred shares
could be issued quickly and easily, negatively affecting the rights of holders
of common shares and could be issued with terms calculated to delay or prevent a
change in control or make removal of management more difficult. Because we may
issue up to 10,000,000 shares of preferred stock in order to raise capital for
our operations, your ownership interest may be diluted which results in your
percentage of ownership in us decreasing.
Warrants and
Options
Currently,
there are no warrants, options or other convertible securities
outstanding.
30
Market Price and Dividends
on Common Equity and Other Shareholder Matters
Information
regarding the market price of the Company’s common equity, payment of dividends,
and other shareholder matters is set forth in Part II, Item 5 of the
Company’s Annual Report on Form 10-K, which was filed with the Securities and
Exchange Commission on September 23, 2009.
Legal
Proceedings
From time to
time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. We are currently not a party to
any legal proceeding and are not aware of any legal claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.
Indemnification of Directors
and Officers
Our By-laws
provide to the fullest extent permitted by law, our directors or officers,
former directors and officers, and persons who act at our request as a director
or officer of a body corporate of which we are a shareholder or creditor shall
be indemnified by us. We believe that the indemnification provisions in our
By-laws are necessary to attract and retain qualified persons as directors and
officers.
Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Act" or "Securities Act") may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, or otherwise, we have 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.
Item
2.01 Completion of Acquisition of
Assets
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 2.01.
Item
3.02 Unregistered Sale of Equity Securities
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 3.02.
Item
3.03 Material Modification to Rights of Security
holders
Prior to the effectiveness of the Merger, the Company
effectuated a 4.61896118 to 1 reverse stock split so that immediately after such
split and prior to the closing the Company will have approximately 850,000
shares of common stock issued and outstanding.
The reverse stock split will
not affect the rights of holders of the common stock.
Item
4.01 Changes in Registrant’s Certifying Accountant
On February
9, 2010, the Company’s Board of Directors approved the change of its principal
independent accountants. On such date, Berman & Company, PA was dismissed
from serving as the Company’s principal independent accountants and on the same
day, Friedman LLP was engaged as the Company’s new principal independent
accountants.
The
Dismissal of Berman & Company, PA
Berman &
Company, PA was the independent registered public accounting firm for the
Company from December
7, 2007 to
February 9, 2010. None of Berman &
Company, PA’s reports on the Company’s financial statements, including its
reports on the Company’s two most recent fiscal years ended June 30, 2009 and
June 30, 2008, contained an adverse opinion or disclaimer of opinion
or was qualified or modified as to uncertainty, audit scope, or accounting
principles.
During the
Company’s two most recent fiscal years ended June 30, 2009 and June 30, 2008 and
through the dismissal date of February 9, 2010, there were no
disagreements with Berman & Company,PA on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Berman & Company, PA, would have caused it to make reference
to the subject matter of the disagreements in connection with its reports. None
of the reportable events set forth in Item 304(a)(1)(v) of Regulation S-K
occurred during the period in which Berman & Company, PA served as the
Company’s principal independent accountants.
In accordance
with Item 304(a)(3), the Company has provided Berman & Company, PA with a
copy of this disclosure and has requested that Berman & Company, PA furnish
it with a letter addressed to the U.S. Securities and Exchange Commission
stating whether it agrees with the above statements, and if not, stating the
respects in which it does not agree. A copy of the letter from Berman &
Company, PA addressed to the U.S. Securities and Exchange Commission is filed as
Exhibit 16.1 to this 8-K Report.
31
The
Engagement of Friedman LLP
During the
Company’s two most recent fiscal years ended June 30, 2009 and June 30, 2008 and
through February 9, 2009, the date when the Company engaged Friedman LLP as its
principal independent accountants:
(1)
The Company did not consult Friedman LLP regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Company’s financial statements;
(2)
Neither a written report nor oral advice was provided to the Company
by Friedman LLP in which they concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue; and
(3)
The Company did not consult Friedman LLP regarding any matter that was either
the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions) or any of the reportable events set forth in
Item 304(a)(1)(v) of Regulation S-K.
Item
5.01 Changes in Control of
Registrant
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.01.
Item
5.02 Departure of Directors or Certain
Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.02.
Item
9.01 Financial Statements and
Exhibits
Financial
Statements
Consolidated
Financial Statements of Jiangsu Zhenyu Environmental Protection Technology
Co. Ltd. for the Fiscal Years Ended September 30, 2009 and
September
30, 2008 (Audited)
|
F-1
|
||
Notes
to Consolidated Financial Statements (Audited)
|
F-7
|
||
Pro
Forma Condensed Consolidated Financial Statements of T.O.D Taste on
Demand, Inc. for the Period ended September 30, 2009
(Unaudited)
|
F-23
|
||
Notes
to Consolidated Financial Statements (Unaudited)
|
F-29
|
Exhibits
Exhibit
No.
|
Description
|
3.1
|
|
3.2
|
|
10.2
|
|
10.3
|
|
10.4
|
|
10.5
|
|
10.6
|
|
10.7
|
Employment
Agreement, dated January 1, 2010, by and between Zhenyu and Boping Li.
*
|
10.8
|
|
10.9
|
Incentive
Option Agreement dated January 27, 2010 among Boping Li, Qinfen Ding,
Panhong Li and Weihua Zhao
*
|
16.1
|
|
* Filed
herewith.
** To be
filed by amendment.
33
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
Dated:
February 12, 2010
T.O.D.
Taste On Demand Inc.
|
|||
By:
|
/s/
Boping Li
|
||
Name:
Boping Li
Title:
Chairman, President and Chief Executive
Officer
|
34
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
3.1
|
|
3.2
|
|
10.2
|
|
10.3
|
|
10.4
|
|
10.5
|
|
10.6
|
|
10.7
|
Employment
Agreement, dated January 1, 2010, by and between Zhenyu and Boping Li.
*
|
10.8
|
|
10.9
|
Incentive
Option Agreement dated January 27, 2010 among Boping Li, Qinfen Ding,
Panhong Li and Weihua Zhao
*
|
16.1
|
|
** To be
filed by amendment.
35
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION
TECHNOLOGY
CO., LTD.
INDEX
TO CONSOLDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2009 and 2008 | |
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 2009 and 2008 | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED SEPTEMEBR 30, 2009 and 2008 | |
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2009 and 2008 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Jiangsu
Zhenyu Environmental Protection Technology Co., Ltd.:
We have
audited the accompanying balance sheets of Jiangsu Zhenyu Environmental
Protection Technology Co., Ltd. as of September 30, 2009 and 2008, and the
related statements of income, shareholders’ equity and comprehensive income, and
cash flows for each of the years in the two-year period ended September 30,
2009. Jiangsu Zhenyu Environmental Protection Technology Co., Ltd.’s management
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 statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Jiangsu Zhenyu Environmental
Protection Technology Co., Ltd. as of September 30, 2009 and 2008, and the
results of its operations and its cash flows for each of the years in the
two-year period ended September 30, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/
Friedman LLP
Friedman
LLP
Marlton,
New Jersey
February
2, 2010
F-2
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOGY CO., LTD.
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
As
of September 30,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& cash equivalents
|
$ | 538,767 | $ | 402,245 | ||||
Restricted
cash
|
80,863 | - | ||||||
Accounts
receivable, net allowance for doubtful accounts
|
614,158 | 646,953 | ||||||
Retainage
|
2,485,432 | 1,319,537 | ||||||
Other
receivables
|
1,120,818 | 795,438 | ||||||
Inventory
|
1,457,480 | 1,810,549 | ||||||
Prepaid
expenses
|
47,379 | 21,015 | ||||||
Advance
to suppliers
|
233,259 | 150,290 | ||||||
Deferred
tax assets
|
- | 388,801 | ||||||
Total
current assets
|
6,578,156 | 5,534,828 | ||||||
Property
and equipment, net
|
1,665,574 | 1,792,858 | ||||||
Land
use right, net
|
1,112,355 | 1,141,784 | ||||||
TOTAL
ASSETS
|
9,356,085 | 8,469,470 | ||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
1,588,850 | 437,764 | ||||||
Salary
and welfare payables
|
444,177 | 464,777 | ||||||
Taxes
payable
|
1,341,918 | 14,732 | ||||||
Short-term
loans
|
292,983 | 294,555 | ||||||
Advance
from customers
|
368,835 | 422,965 | ||||||
Other
payables
|
437,447 | 2,529,988 | ||||||
Total
current liabilities
|
4,474,210 | 4,164,781 | ||||||
LONG-TERM
LOANS
|
- | 5,466,944 | ||||||
TOTAL
LIABILITIES
|
4,474,210 | 9,631,725 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Registered
capital
|
2,140,116 | 2,140,116 | ||||||
Additional
paid-in capital
|
169,194 | 169,194 | ||||||
Accumulated
other comrehensive loss
|
(223,190 | ) | (251,795 | ) | ||||
Retained
earnings (Accumulated deficit)
|
2,389,688 | (3,609,895 | ) | |||||
Non-controlling
interest
|
406,067 | 390,125 | ||||||
Total
shareholders' equity (deficiency)
|
4,881,875 | (1,162,255 | ) | |||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 9,356,085 | $ | 8,469,470 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOGY CO., LTD.
|
||||||||
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
|
||||||||
For
The Years Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
sales
|
26,189,005 | 8,736,948 | ||||||
Cost
of goods sold
|
(17,103,199 | ) | (4,755,438 | ) | ||||
Gross
profit
|
9,085,806 | 3,981,510 | ||||||
Selling,
general and administrative expenses
|
||||||||
Selling
expenses
|
(200,248 | ) | (1,219,004 | ) | ||||
General
and administrative expenses
|
(1,095,884 | ) | (595,702 | ) | ||||
Total
SG&A expenses
|
(1,296,132 | ) | (1,814,706 | ) | ||||
Income
from operations
|
7,789,674 | 2,166,804 | ||||||
Non-operating
income (expenses):
|
||||||||
Interest
income (expenses)
|
(19,506 | ) | (28,466 | ) | ||||
Other
expenses
|
- | (5,121 | ) | |||||
Total
non-operating income (expenses)
|
(19,506 | ) | (33,587 | ) | ||||
Income
before income taxes
|
7,770,168 | 2,133,217 | ||||||
Provision
for income taxes (benefit)
|
||||||||
Current
|
1,366,290 | 3,729 | ||||||
Deferred
|
386,290 | 540,163 | ||||||
Net
income
|
$ | 6,017,588 | $ | 1,589,325 | ||||
Less:
net income attributable to the noncontrolling interest
|
18,005 | (7,791 | ) | |||||
Net
Income attributable to the Company
|
5,999,583 | 1,597,116 | ||||||
Other
comprehensive item
|
||||||||
Foreign
currency translation gain(loss)
|
28,605 | (230,194 | ) | |||||
Comprehensive
Income
|
$ | 6,028,188 | $ | 1,366,922 | ||||
Basic
and diluted income per share
|
$ | 0.36 | $ | 0.09 | ||||
Weighted
average number of shares
|
16,880,000 | 16,880,000 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOGY CO., LTD.
|
||||||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF SHAREHOLDER'S EQUITY
|
||||||||||||||||||||||||
For the Years ended September 30, 2009 and 2008 | ||||||||||||||||||||||||
Registered
capital
|
Additional
paid in capital
|
Accumulated
Other comprehensive income (loss)
|
Retained
earnings
(Accumulated
deficits)
|
Non
Controlling Interest
|
Total
|
|||||||||||||||||||
Balance
at September 30, 2007
|
$ | 2,140,116 | $ | 169,194 | $ | (21,601 | ) | $ | (5,207,011 | ) | $ | 360,906 | $ | (2,558,396 | ) | |||||||||
Net
income attributable to the Company
|
- | - | - | 1,597,116 | - | 1,597,116 | ||||||||||||||||||
Net
income for non-controlling interest
|
- | - | - | - | (7,791 | ) | (7,791 | ) | ||||||||||||||||
Foreign
currency translation gain (loss)
|
- | - | (230,194 | ) | - | 37,010 | (193,184 | ) | ||||||||||||||||
Balance
at September 30, 2008
|
2,140,116 | 169,194 | (251,795 | ) | (3,609,895 | ) | 390,125 | (1,162,255 | ) | |||||||||||||||
Net
income attributable to the Company
|
- | - | - | 5,999,583 | - | 5,999,583 | ||||||||||||||||||
Net
income for non-controlling interest
|
- | - | - | - | 18,005 | 18,005 | ||||||||||||||||||
Foreign
currency translation gain (loss)
|
- | - | 28,605 | - | (2,063 | ) | 26,542 | |||||||||||||||||
Balance
at September 30, 2009
|
$ | 2,140,116 | $ | 169,194 | $ | (223,190 | ) | $ | 2,389,688 | $ | 406,067 | $ | 4,881,875 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOGY CO., LTD.
|
||||||||
CONSOLIDATED
STATEMENT OF CASH FLOW
|
||||||||
For
The Years Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 6,017,588 | $ | 1,589,325 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
158,104 | 173,253 | ||||||
Bad
debt
|
4,235 | 13,042 | ||||||
Deferred
tax expense
|
386,290 | 540,163 | ||||||
Decrease
(increase) in current assets:
|
||||||||
Restricted
cash
|
(80,772 | ) | - | |||||
Accounts
receivable
|
25,075 | 471,195 | ||||||
Refundable
security deposits
|
(1,171,617 | ) | 644,605 | |||||
Other
receivable
|
(329,256 | ) | (558,224 | ) | ||||
Inventory
|
343,021 | (200,924 | ) | |||||
Prepaid
expenses
|
(26,447 | ) | (12,627 | ) | ||||
Advances
to suppliers
|
(83,676 | ) | 171,688 | |||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payables and accrued expenses
|
1,152,125 | (1,460,449 | ) | |||||
Salaries
and welfare payable
|
(18,099 | ) | (104,370 | ) | ||||
Taxes
payable
|
1,325,770 | 14,081 | ||||||
Advance
from customers
|
(51,815 | ) | (1,698,912 | ) | ||||
Other
payables
|
(2,076,699 | ) | 547,356 | |||||
Net
cash provided by operating activities
|
5,573,827 | 129,202 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Aditions
to property and equipment
|
(17,211 | ) | (757,683 | ) | ||||
Net
cash used in investing activities
|
(17,211 | ) | (757,683 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of long term loans
|
(5,431,646 | ) | - | |||||
Net
cash used in financing activities
|
(5,431,646 | ) | - | |||||
EFFECT
OF EXCHANGE RATE CHANGE ON
|
||||||||
CASH
AND CASH EQUIVALENTS
|
11,552 | 71,011 | ||||||
NET
INCREASE (DECREASE) IN
|
||||||||
CASH
AND CASH EQUIVALENTS
|
136,522 | (557,470 | ) | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
402,245 | 959,715 | ||||||
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 538,767 | $ | 402,245 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Income
tax paid
|
$ | 8,663 | $ | 4,904 | ||||
Interest
paid
|
$ | 19,500 | $ | 28,466 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-6
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Jiangsu
Zhenyu Environmental Protection Technology Co., Ltd. (“Zhenyu” or the
“Company”), formerly known as Yixing Zhenyu Water Treatment Equipment Factory,
was incorporated in Yixing City, Jiangsu Province, People’s Republic of China
(“PRC”) on March 28, 1993 with an initial registered capital of RMB 1,880,000.
Its registered capital was increased to RMB 16,880,000 (equivalent to
$2,038,353) in May 2000. The principal business activities of Zhenyu include
design, manufacturing, marketing, construction and installation of waste water
and sewage treatment equipments, devices and facilities for environmental
protection purposes, especially focusing on collaboration with various
industrial and municipal waste water treatment plants. The Company’s water
treatment equipments offer some of key solutions in water treatment process,
such as filtration, water softening, water sediment separation, aeration,
disinfection and reverse osmosis.
The
Company directly owns 75% equity interest in Jiangsu Jinyu Environmental
Engineering Co., Ltd. (“Jinyu”), a sino-foreign joint venture established under
the laws of PRC on June 7, 2004, with registered capital of $1,120,000. The main
business activities of Jinyu include the research and development,
manufacturing, marketing and sales of water treatment equipments as well as
providing high-quality post-sales services.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
consolidated financial statements include the financial statements of the
Company and its majority-owned subsidiary, Jinyu. All significant inter-company
transactions and balances between the Company and its subsidiary have been
eliminated upon consolidation.
Minority
interest
Minority
interest results from the consolidation of 75% owned subsidiary, Jiangsu Jinyu
Environmental Engineering Co., Ltd.
F-7
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes, and disclosure of contingent
liabilities at the date of the consolidated financial statements. Estimates are
used for, but not limited to, the selection of the useful lives of property and
equipment, provision necessary for contingent liabilities, taxes and other
similar charges. Management believes that the estimates utilized in preparing
its consolidated financial statements are reasonable and prudent. Actual results
could differ from these estimates.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains bank accounts in the PRC. Total cash at September 30, 2009 and
2008 amounted to $538,767 and $402,245 respectively, of which no deposits are
covered by insurance. The Company has not experienced any losses in such
accounts and management believes it is not exposed to any risks on its cash in
bank accounts.
Accounts
receivable
The
Company carries accounts receivable at cost less an allowance for doubtful
accounts. Allowances for doubtful accounts are recorded as a selling, general
and administrative expense. The Company evaluates the adequacy of the allowance
for doubtful accounts at least quarterly and computes the allowance for doubtful
accounts based on the history of actual write-offs. The Company also performs a
subjective review of specific large accounts to determine if an additional
reserve is necessary. The formula for calculating the allowance closely
parallels the Company’s history of actual write-offs and account adjustments
based upon contractual terms. The allowance for doubtful accounts totals $17,797
and $13,631 as of September 30, 2009 and 2008, respectively.
Retainage
Retainage
represents the security deposits withheld by the Company’s customers to warrant
against potential defects for the initial one year period upon sales of
equipments or installation of water treatment projects. Refundable deposits
normally account for 5% to 10% of the total contract price, depending on various
terms included in different equipment sales contracts or waste water treatment
construction contracts. The deposits are to be refunded in one year after the
completion of sales or installation. Total refundable security deposits at
September 30, 2009 and 2008 amounted to $2,485,432 and $ 1,319,537,
respectively.
F-8
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory
is stated at the lower of cost or market using a weighted average method.
Inventory consists of raw materials, work in process and finished goods. Raw
materials consist of steel, polyresen, silicone and filtering components used in
manufacturing of water treatment equipments. Cost of finished goods included
direct costs of raw materials as well as direct labor used in production and an
allocated portion of manufacturing overheads.
Management
compares cost of inventory with its market value and an allowance is made for
estimated obsolescence or for writing down the inventory to its market value, if
lower than cost.
Advance
to suppliers
Advance
to suppliers represent the payments made and recorded in advance for goods and
services received. The Company makes advances to suppliers for the purchase of
certain materials and equipment components. Advances to suppliers are reviewed
periodically to determine whether their carrying value has become impaired. The
Company considers the assets to be impaired if the collectability of the
services and materials become doubtful.
Revenue
recognition
All of
the Company’s construction and installation contracts are generally short-term
in nature, range from three to six months. The Company recognizes sales in
accordance with FASB ASC 605-10 “Revenue Recognition”
(formerly known as Staff Accounting Bulletin No. 104). The
Company recognizes revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the price to the customer is fixed or
determinable and (iv) collection of the resulting receivable is reasonably
assured. Revenue is not recognized until title and risk of loss is
transferred to the customer, which occurs upon delivery of goods, and objective
evidence exists that customer acceptance provisions have been
met. Deposits or advance payments from customers prior to delivery of
goods and passage of title of goods are recorded as advance from
customers.
Advance
from Customers
Advances
from customers consist of prepayments to the Company for products or equipments
that have not yet been shipped to the customers. Any amounts received prior to
satisfying the Company’s revenue recognition criteria are recorded as advances
from customers. The Company will recognize the prepayments from the customers as
revenue at the time of delivery.
F-9
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property
and equipment
Property
and equipment are recorded at cost less accumulated depreciation and any
impairment losses. The cost of an asset comprises of its purchase
price and any directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure incurred
after the fixed assets have been put into operation, such as repairs and
maintenance and overhaul costs, is normally charged to expense account in the
year in which it is incurred.
In
situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the asset beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the
asset.
Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, less any estimated residual value. Estimated useful lives
of the assets are as follows:
Buildings | 20 years |
Machinery and office equipment | 10 years |
Vehicles | 5 years |
Any gain
or loss on disposal or retirement of a fixed asset is recognized in the profit
and loss account and is the difference between the net sales proceeds and the
carrying amount of the relevant asset. When property and equipment are retired
or otherwise disposed of, the asset and accumulated depreciation are removed
from the accounts and the resulting profit or loss is reflected in
operations.
Other
payables
Other
payables consist of balances for non-construction costs with unrelated companies
and individuals with which the Company has business relationships. These amounts
are unsecured, non-interest bearing and generally are short-term in nature. As
of September 30, other payables totaled $437,447 and $2,529,988,
respectively.
Fair
value of financial instruments
ASC 820
“Fair Value Measurements and Disclosures”, previously FAS 157, adopted January
1, 2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying values of the Company’s
financial instruments, including cash and cash equivalents, restricted cash,
accounts receivable, other current assets, short-term loans, accounts payable,
customer deposits, other payables, accrued expenses, and taxes payable,
approximate their fair value due to the short term maturities of these
instruments.
F-10
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign
currency translation
The
Company’s financial information is presented in US dollars. The functional
currency of the Company is Rimini (“RMB”), the currency of the PRC. Transactions
at the Company which are denominated in currencies other than RMB are translated
into RMB at the exchange rate quoted by the People’s Bank of China prevailing at
the dates of the transactions. Exchange gains and losses resulting from
transactions denominated in a currency other than that RMB are included in the
consolidated statements of income as exchange gains or loss. The financial
statements of the Company have been translated into U.S. dollars in accordance
with Statement of Financial Accounting Standard “Foreign Currency
Translation”. The financial information is first prepared in RMB and then
is translated into U.S. dollars at period-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income in
shareholders’ equity.
2009 | 2008 | |||||
Year end RMB: USD exchange rate | 6.8263 | 6.7899 | ||||
Annual average RMB: USD exchange rate | 6.8340 | 7.0961 |
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
Impairment
of long-lived assets
Long-lived
assets, which include property, plant and equipment, long-term investment and
finite-lived intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using
the asset’s expected future discounted cash flows or market value, if readily
determinable. No impairment loss is recorded for the years ended September 30,
2009 and 2008.
F-11
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product
warranty
The
Company provides product warranty to its customers that all equipment
manufactured by the Company will be free from defects in materials and
workmanship under normal use for a period of one year from the date of shipment
and installation. The Company's experience for costs and expenses in connection
with such warranties has been minimal and during the years ended September 30,
2009 and 2008, no product warranty reserve was considered
necessary.
Income
taxes
The
Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes”, (formerly SFAS
No. 109, “Accounting for Income Taxes”) and FASB ASC 740-10, (formerly FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109”). Deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have been
included in the financial statements or income tax returns. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted rates expected
to apply to taxable income in the years in which those differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
Value-added
tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price.
This VAT may be offset by VAT paid by the Company on raw materials and other
materials included in the cost of producing their finished product. The Company
recorded VAT Payable and VAT receivable net of payments in the financial
statements. The VAT tax return is filed offsetting the payables against the
receivables.
Comprehensive
income (loss)
Comprehensive
income (loss) is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. The Company’s only
components of comprehensive income during the years ended September 30, 2009 and
2008 were net income and the foreign currency translation
adjustment.
Subsequent
event
As
required by ASC Topic 855 “Subsequent Events”, the
Company has evaluated subsequent events that have occurred through February 8,
2010, the date the consolidated financial statements were available to be
issued. The Company did not have any subsequent events that would require
recognition or disclosure in the financial statements and footnotes as of and
for the year ended September 30, 2009.
F-12
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings
per share
The
Company computes earnings per share (“EPS”) in accordance with the ASC 260, “Earnings
per share” which requires
companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as net income divided by the weighted average
common shares outstanding for the period. Diluted EPS is similar to basic
EPS but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible securities, options and warrants) as if they had been
converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Statement
of Cash Flows
In
accordance with FASB ASC 230 "Statement of Cash Flows",
cash flows from the Company's operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to concentration of credit risk
consist primarily of accounts receivables and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients'
financial condition and customer payment practices to minimize collection risk
on accounts receivables.
Risks
and uncertainties
The
operations of the Company are located in the PRC. Accordingly, the Company’s
operations are subject to special considerations and significant risks not
typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company’s results may be
adversely affected by changes in the political and social conditions in the PRC,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
F-13
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements
In May
2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent
Events” (“ASC 855”) which provides authoritative accounting literature related
to evaluating subsequent events. ASC 855 is similar to the current guidance
with some exceptions that are not intended to result in significant change to
current practice. ASC 855 defines subsequent events and also requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The Company’s disclosures have been updated to
reflect the adoption of this standard.
In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162, now included in FASB
ASC 105, “Generally Accepted Accounting Principles”. This guidance establishes
the FASB Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied in the preparation of
financial statements in conformity with generally accepted accounting
principles. This guidance explicitly recognizes rules and interpretive releases
of the SEC under federal securities laws as authoritative GAAP for SEC
registrants and is effective for the Company’s current reporting period.
References made to FASB guidance throughout this document have been updated for
the Codification.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”, now included in FASB ASC 810-10, “Consolidation”, which amends
FASB Interpretation No. 46 (revised December 2003) to address the
elimination of the concept of a QSPE. This guidance replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
this guidance provides more timely and useful information about an enterprise’s
involvement with a variable interest entity and will become effective
January 1, 2010. We are currently evaluating the impact, if any, of these
guidelines.
In August
2009, the FASB issued ASU 2009-5, “Fair Value Measurements and Disclosures
(Topic 820) – Measuring Liabilities at Fair Value” (“FASB ASU 2009-5”), which
provides a single definition of fair value, a framework for measuring fair
value, and requires additional disclosure about the use of fair value to measure
assets and liabilities. ASU 2009-05 provides clarification for
circumstances in which a quoted price in an active market for the identical
liability is not available. In such circumstances, a reporting entity is
required to measure fair value using one or more of the following techniques:
(1) a valuation technique that uses: (a) the quoted price of the identical
liability when traded as an asset; or (b) quoted prices for similar liabilities
or similar liabilities when traded as assets; or (2) another valuation technique
that is consistent with the principles of Topic 820 such as an income approach
or a market approach. The guidance provided in ASU 2009-05 is
effective for the first reporting period (including interim periods) beginning
after issuance.
F-14
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-13”). ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted. The Company is currently evaluating this
update.
NOTE
3. Restricted Cash
Restricted
cash is cash set aside for a particular use or event and is subject to
withdrawal restrictions. Prior to the start of the construction and installation
of waste water treatment projects, the Company is required to maintain certain
deposits, as restricted cash, with PRC banks that provide quality guarantee to
the Company’s industrial or municipal clients in relation to the execution of
the construction and installation contracts of waste water treatment
projects. These deposits are normally equivalent to 5% to 10% of the
contract price and are subject to withdrawal restrictions up to one
year.
NOTE
4. Accounts Receivables
Accounts
receivables consist of trade receivables resulting from sales of products during
the normal course of business. For the years ended September 30, 2009 and 2008,
account receivables, net of allowance for doubtful accounts, amounted to
$614,158 and $646,953, respectively. As of September 30, 2009 and 2008, the
Company’s allowance for doubtful accounts totaled $ 17,797 and $ 13,631 as of
September 30, 2009 and 2008, respectively.
The
Company reviews the composition of accounts receivable and analyzes historical
bad debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of
accounts receivable and records a reserve when they believe collection of
amounts due are at risk. Accounts considered uncollectible are written off
through a charge to the income.
F-15
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
5. Inventory
The
inventory consists of the following:
As
of September 30,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
763,203 | 759,391 | ||||||
Work-in-process
|
188,489 | 39,434 | ||||||
Finished
goods
|
505,788 | 1,011,724 | ||||||
Total
|
$ | 1,457,480 | $ | 1,810,549 |
No allowance for obsolete inventories was charged to operations for both years ended September 30, 2009 and 2008.
NOTE
6. Property, Plant and Equipment
The
detail of property, plant and equipment is as follows:
As
of September 30,
|
||||||||
2009
|
2008
|
|||||||
Machinery
& equipment
|
$ | 547,373 | $ | 532,986 | ||||
Vechiles
|
61,853 | 62,185 | ||||||
Plant
& buildings
|
1,648,427 | 1,657,272 | ||||||
Sub
total
|
2,257,653 | 2,252,443 | ||||||
Less:
accumulated depreciation
|
(592,079 | ) | (459,585 | ) | ||||
Property,
plant and equipment, net
|
$ | 1,665,574 | $ | 1,792,858 |
Depreciation
expense for the year ended September 30, 2009 and 2008 was $134,794 and
$148,932, respectively.
NOTE
7. Land Use Right
All land
in the People’s Republic of China is government owned and cannot be sold to any
individual or company. However, the government grants the user a “land use
right” (the Right) to use the land. The land use right of 10,622 square meters
was originally acquired by the Company in the amount of RMB 7,965,000 from the relevant PRC land
authority in April 2007. The Company has the right to use the land for 50
years on which the
office premises, production facilities and warehouse of the Company are
situated, and amortized the Right on a straight-line basis over the
period of 50 years.
The
amortization expense from the year ended September 30, 2009 and 2008 was $23,310
and $24,320 respectively.
F-16
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
8. Short-Term Bank Loan
Short-term
bank loans represent amounts due to a local bank and are due on the dates
indicated below. These loans generally can be renewed with the bank. Short-term
bank loans at September 30, 2009 and 2008 consisted of the
following:
Balance
as of September 30,
|
||||||||
2009
|
2008
|
|||||||
a)
Loan payable to China Construction Bank
|
$ | - | $ | 294,555 | ||||
1
year term from 6/27/2008 to 6/26/2009
|
||||||||
a
fixed interest rate of 0.556% per month
|
||||||||
b)
Loan payable to China Construction Bank
|
292,983 | - | ||||||
1
year term from 7/8/2009 to 7/7/2010,
|
||||||||
a
fixed interest rate of 0.487% per month
|
||||||||
Total
|
$ | 292,983 | $ | 294,555 |
The loan payable to China Construction Bank Yixing Branch was originally one year term from June 7, 2007 to June 6, 2008 with a fixed interest rate of 0.5703% per month. The loan was first renewed in 2008 for another year upon maturity for a higher fixed rate of 0.556% per month, and then renewed once again in 2009 for one more year with a lower fixed rate of 0.487% per month. The new maturity date is July 7, 2010. The Company pledged a land use right in the amount of RMB 1.7 million as well as a building in the amount of RMB 500,000 as collateral for the loans (a) and (b) shown above.
Interest
expense for the above short term loans totaled $19,500 and $28,466 for the years
ended September 30, 2009 and 2008, respectively.
F-17
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
9. Long-Term Loans
Long-term
loans represent amounts due to unrelated companies and are due on the dates
indicated below. As of September 30, 2008, the Company borrowed $5,466,944 from
several non-related companies. These loans were intended to be free
of interest and have been repaid to these unrelated companies as of September
30, 2009. The
long-term loans include the following:
As
of September 30,
|
||||||||
2009
|
2008
|
|||||||
a)
Loan payable to Yixing Yulong Environmental Protection
Co.,Ltd.
|
||||||||
18
months term, due on 6/27/2007, bear no interest
|
$ | - | $ | 533,145 | ||||
b)
Loan payable to Yixing Yulong Environmental Protection
Co.,Ltd.
|
||||||||
three
year term, due on 1/27/2009, fixed interest
|
- | 2,061,886 | ||||||
c)
Loan payable to Yixing Tianma Environmental Protection Engineering
Co.,Ltd.
|
||||||||
18
months term, bear no interest, maturing in 6/1/2007
|
- | 1,472,776 | ||||||
d)
Loan payable to Jiangsu Guangyang Environmental Protection
Co.,Ltd.
|
||||||||
18
months term, bear no interest, maturing on 5/17/2007
|
- | 1,399,137 | ||||||
Total
|
$ | - | $ | 5,466,944 |
NOTE
10. Income Taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning private-run enterprises, which are generally subject to income tax at
statutory rate on income reported in the statutory financial statements after
appropriate tax adjustments.
On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the People’s Republic of China (the New CIT Law), which is effective
from January 1, 2008. Under the new law, the corporate income tax
rate applicable to all Companies, including both domestic and foreign-invested
companies, will be 25%, replacing the old tax rate of 33%. However,
pending the detailed implementation rulings from the tax authorities, we believe
that some of the tax concession granted to eligible companies prior to the new
CIT laws will be grand fathered.
F-19
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
10: Income taxes (continued)
The
following table reconciles the U.S. statutory rates to The Company’s effective
tax rate for the years ended September 30, 2009 and 2008:
For
the years ended September 30,
|
||||||||
2009
|
2008
|
|||||||
China
Staturoty income tax rate
|
25 | % | 25 | % | ||||
Net
operating loss carry-forward (1)
|
(5.03 | %) | (23.3 | %) | ||||
China
income tax exemption (2)
|
(2.2 | %) | - | |||||
Effective
tax rate
|
17.77 | % | 1.70 | % |
(1)
|
Net
operating loss carry-forward was used to offset taxable income in
PRC.
|
(2)
|
China
income tax exemption represents the income tax that could be reduced by
favorable tax treatment authorized by relevant tax authority to the
Company’s direct-owned subsidiary Jiangsu Jinyu
Environmental Engineering Co., Ltd., which is subject to reduced tax rate
of 12.5%, as it is registered as State-recognized high-tech
company.
|
The
majority of the Company’s net income was from Zhenyu, which is subject to 25% of
corporate income tax rate in PRC. For the years ended September 30, 2006 and
2007, Zhenyu suffered operating losses in the amount of RMB 17,224,713 and RMB
8,667,007, respectively. For Chinese income tax purpose, these operating losses
can be carried forward and be available to reduce future years' taxable income.
Management believes that the realization of the deferred tax asset arising from
these losses appear to be in the best interest to the Company's business
operations. The Company has recorded income tax provision of $1,366,290 for the
year ended September 30, 2009 after applying the net operating loss
carry-forwards. No current provision for income tax is required for Zhenyu as a
result of the realization of net operating loss carry-forward for the year ended
September 30, 2008.
Deferred
income tax reflects the net effects of temporary difference between the carrying
amounts of assets and liabilities for financial statements purposes and the
amounts used for income tax purposes, and operating loss
carry-forward.
The
components of deferred tax assets as of September 30, 2009 and 2008 consist of
the following:
2009 | 2008 | |||||||
Deferred tax assets - Beginning Balance | $ | 388,801 | $ | 928,964 | ||||
Deferred tax expense utillized | 388,801 | 540,163 | ||||||
Net deferred tax assets | $ | - | $ | 388,801 |
F-20
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
11. Non-Controlling Interest
Non-controlling
interest represents the minority stockholders’ proportionate share of 25% of the
equity of Jiangsu
Jinyu Environmental Engineering Co., Ltd.
The
Company’s controlling interest requires that Jinyu’s operations
be included in the Company’s Consolidated Financial Statements.
A
reconciliation of minority interest as of September 30, 2009 is as
follows:
Balance
as of September 30, 2007
|
$ | 360,906 | ||
Proportionate
share of Net Income (loss) from Jinyu
|
(7,791 | ) | ||
Foreign
currency translation gain (loss)
|
37,010 | |||
|
390,125 | |||
Proportionate
share of Net Income from Jinyu
|
18,005 | |||
Foreign
currency translation gain (loss)
|
(2,063 | ) | ||
Balance
as of September 30, 2009
|
$ | 406,067 |
NOTE
12. Shareholder’s Equity
The
Company’s total registered capital is RMB16, 880,000 as of September 30, 2009,
equivalent to $2,140,116. The industry practice in PRC does not
require the issuance of stock certificates to the shareholders, nor a third
party transfer agent to maintain the records. For the purpose of
financial reporting, the Company elected to designate one (1) common share for
each RMB contributed. Accordingly, there were total 16,880,000 shares
issued and outstanding as of September 30, 2009 and 2008.
NOTE
13. Concentration of Risks
The
Company sells to a wide range of customers. No single customer accounted for
more than 10% of revenue or project expenditures for the years ended September
30, 2008 and 2009.
Two major
vendors provided approximately 54.96% of the Company’s purchases of raw
materials for the year ended September 30, 2009, with each vendor individually
accounting for 30.05% and 24.64%, respectively. Three vendors provided 61.53% of
the Company’s purchase of raw materials for the year ended September 30, 2008,
with each vendor individually accounting for 30.91%, 21.16%, and 9.47%,
respectively.
F-21
JIANGSU
ZHENYU ENVIRONMENTAL PROTECTION TECHNOLOPGY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE
14. Commitments and Contingencies
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. 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 changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions at exchange rates set by the People’s Bank
of China, the central bank of China. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
F-22
T.O.D.
TASTE ON DEMAND INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLODATED
FINANCIAL
STATEMENTS
September
30, 2009
T.O.D.
TASTE ON DEMAND INC.
INDEX
TO UNAUDITED PRO FORMA CONDENSED CONSOLODATED
FINANCIAL
STATEMENTS
PAGES(S) | |
Introduction to Unaudited Pro Forma Condensed Consolidated Financial statements | F-24 |
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2009 (Unaudited) | F-26 |
Pro Forma Condensed Consolidated Statement of Operations for the Year Ended June 30, 2008 (Unaudited) | F-27 |
Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2009 (Unaudited) | F-28 |
Notes to Condensed Consolidated Pro Forma Financial Statements (Unaudited) | F-29 |
F-23
T.O.D.
TASTE ON DEMAND INC.
INTRODUCTION
TO UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
On
February 12, 2010, T.O.D. Taste On Demand Inc. (the “Company” or
“Parent”) acquired all of the outstanding capital stock of Dragon Path
International Limited, a British Virgin Islands corporation (“Dragon Path”),
through China Environmental Protection Inc., a Nevada corporation (the “Merger
Sub”) wholly owned by the Company. Dragon Path is a holding company whose only
asset, held through a subsidiary, is 100% of the registered capital of Yixing
Dragon Path Environment Technology Limited (“Yixing Dragon Path”), a limited
liability company organized under the laws of the People’s Republic of China
(“China” or “PRC”). Substantially all of Dragon Path's operations are conducted
in China through Yixing Dragon Path, and through contractual arrangements with
Yixing Dragon Path’s consolidated affiliated entitity in China, Jiangsu Zhenyu
Environmental Protection Technology Co. Ltd. (“Zhenyu”). Zhenyu is engaged in
design, manufacture, and installation of waste water treatment equipment for
environmental protection purposes, as well as providing high-quality after-sales
services.
In
connection with the acquisition, the Merger Sub issued 100 shares of the common
stock of the Merger Sub which constituted no more than 10% ownership interest in
the Merger Sub in exchange for all the shares of the capital stock of Dragon
Path (the “Share Exchange” or “Merger”). The 100 shares of the common stock of
the Merger Sub were converted into approximately 16,150,000 shares of the common
stock of the Company so that upon completion of the Merger, the shareholder of
Dragon Path and his designees own approximately 95% of the common stock of the
Company.
Before
the closing of the Merger, the Company affected a 4.61896118 for 1 reverse split
of the outstanding common stock of the Company, so that after such split there
were approximately issued and outstanding 850,000 shares of common stock of the
Company.
As a
result of these transactions, persons affiliated with Zhenyu now own securities
that in the aggregate represent approximately 95% of the equity in the Company.
In addition, persons affiliated with Zhenyu will control the Board of Directors
of the Company ten days after the notice pursuant to Rule 14f-1 is mailed to the
shareholders of record.
In
connection with the change of control contemplated by the Share Exchange, the
directors and officers of the Company will be resigning from their positions and
new directors and officers will be appointed effective upon the
effectiveness of the Merger.
The
transaction will be accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, Dragon
Path will be treated as the continuing entity for accounting
purposes.
F-24
T.O.D.
TASTE ON DEMAND INC.
INTRODUCTION
TO UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
The
accompanying unaudited pro forma condensed consolidated balance sheet has been
presented with consolidated subsidiaries at September 30, 2009. The unaudited
pro forma condensed consolidated statement of operations for the three months
ended September 30, 2009 and for the year ended June 30, 2008 has been presented
as if the share exchange had occurred on July 1, 2007.
The
unaudited pro forma condensed consolidated financial statements do not
necessarily represent the actual results that would have been achieved had the
companies been combined at the beginning of the year, nor may they be indicative
of future operations. These unaudited pro forma condensed financial statements
should be read in conjunction with the companies’ respective historical
financial statements and notes included thereto.
F-25
T.O.D.
TASTE ON DEMAND INC.
|
||||||||||||||||||||
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
||||||||||||||||||||
SEPTEMBER
30, 2009
|
||||||||||||||||||||
T.O.D.
Taste on Demand Inc
|
Jiangsu
Zhenyu Environmental Protection Technology Co., Ltd.
|
Adjustments
|
Notes
|
Pro
Forma
Combined
Total
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
CURRENT
ASSETS
|
||||||||||||||||||||
Cash
& cash equivalents
|
$ | 30 | $ | 538,767 | $ | (30 | ) | a | $ | 538,767 | ||||||||||
Restricted
cash
|
- | 80,863 | 80,863 | |||||||||||||||||
Accounts
receivable, net allowance for doubtful accounts
|
- | 614,158 | 614,158 | |||||||||||||||||
Refundable
security deposits
|
- | 2,485,432 | 2,485,432 | |||||||||||||||||
Other
receivables
|
- | 1,120,818 | 1,120,818 | |||||||||||||||||
Inventory
|
- | 1,457,480 | 1,457,480 | |||||||||||||||||
Prepaid
expenses
|
- | 47,379 | 47,379 | |||||||||||||||||
Advance
to suppliers
|
- | 233,259 | 233,259 | |||||||||||||||||
Deferred
tax assets
|
- | - | - | |||||||||||||||||
Total
current assets
|
30 | 6,578,156 | 6,578,156 | |||||||||||||||||
Property
and equipment, net
|
- | 1,665,574 | 1,665,574 | |||||||||||||||||
Intangible
assets, net
|
- | 1,112,355 | 1,112,355 | |||||||||||||||||
- | ||||||||||||||||||||
TOTAL
ASSETS
|
30 | 9,356,085 | 9,356,085 | |||||||||||||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||
CURRENT
LIABILITIES
|
||||||||||||||||||||
Accounts
payable
|
14,129 | 1,588,850 | (14,129 | ) | a | 1,588,850 | ||||||||||||||
Salary
and welfare payables
|
- | 444,177 | 444,177 | |||||||||||||||||
Taxes
payable
|
- | 1,341,918 | 1,341,918 | |||||||||||||||||
Short-term
loans
|
- | 292,983 | 292,983 | |||||||||||||||||
Advance
from customers
|
- | 368,835 | 368,835 | |||||||||||||||||
Other
payables
|
- | 437,447 | 437,447 | |||||||||||||||||
Total
current liabilities
|
14,129 | 4,474,210 | 4,474,210 | |||||||||||||||||
LONG
TERM LIABILITIES
|
3,072 | - | (3,072 | ) | a | - | ||||||||||||||
TOTAL
LIABILITIES
|
17,201 | 4,474,210 | 4,474,210 | |||||||||||||||||
SHAREHOLDERS'
EQUITY
|
||||||||||||||||||||
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; none issued and
outstanding
|
- | - | - | |||||||||||||||||
Common
stock, $0.001 par value, 160,000,000 shares authorized and
3,857,257
shares
issued and outstanding at September 30, 2009 and 3,857,257 shares
issued and outstanding at September 30, 2009
|
3,857 | - | (3,022 | ) | b | 17,000 | ||||||||||||||
16,165 | b | |||||||||||||||||||
Registered
capital
|
- | 2,140,116 | (2,140,116 | ) | b | - | ||||||||||||||
Additional
paid-in capital
|
70,676 | 169,194 | 2,052,440 | a, b | 2,292,310 | |||||||||||||||
Deficit
accumulated during the development stage
|
(91,704 | ) | 91,704 | a, b | - | |||||||||||||||
Accumulated
other comrehensive income (loss)
|
- | (223,190 | ) | (223,190 | ) | |||||||||||||||
Retained
earnings (Accumulated deficits)
|
- | 2,389,688 | 2,389,688 | |||||||||||||||||
Non-controlling
interest
|
- | 406,067 | 406,067 | |||||||||||||||||
Total
shareholders' equity
|
(17,171 | ) | 4,881,875 | 4,881,875 | ||||||||||||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 30 | $ | 9,356,085 | $ | 9,356,085 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
F-26
T.O.D.
TASTE ON DEMAND INC.
|
||||||||||||||||||||
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
||||||||||||||||||||
FOR
THE YEAR ENDED JUNE 30, 2009
|
||||||||||||||||||||
T.O.D.
Taste on Demand Inc
|
Jiangsu
Zhenyu Environmental Protection Technology Co., Ltd.
|
Adjustments
|
Notes
|
Pro
Forma
Combined
Total
|
||||||||||||||||
Net
sales
|
$ | - | $ | 19,845,917 | $ | 19,845,917 | ||||||||||||||
Cost
of goods sold
|
(13,703,256 | ) | (13,703,256 | ) | ||||||||||||||||
Gross
profit
|
- | 6,142,661 | 6,142,661 | |||||||||||||||||
Selling,
general and administrative expenses
|
||||||||||||||||||||
Selling
expenses
|
(198,748 | ) | (198,748 | ) | ||||||||||||||||
General
and administrative expenses
|
(27,737 | ) | (1,118,329 | ) | 27,737 | a | (1,118,329 | ) | ||||||||||||
Research
and development
|
(11,072 | ) | - | 11,072 | a | - | ||||||||||||||
Total
SG&A expenses
|
(38,809 | ) | (1,317,077 | ) | (1,317,077 | ) | ||||||||||||||
Income
from operations
|
(38,809 | ) | 4,825,584 | 4,825,584 | ||||||||||||||||
Non-operating
income (expenses):
|
||||||||||||||||||||
Interest
income (expenses)
|
94 | (20,146 | ) | (94 | ) | a | (20,146 | ) | ||||||||||||
Other
expenses
|
- | (5,182 | ) | (5,182 | ) | |||||||||||||||
Total
non-operating income (expenses)
|
94 | (25,328 | ) | (25,328 | ) | |||||||||||||||
Income
before income taxes
|
(38,715 | ) | 4,800,256 | 4,800,256 | ||||||||||||||||
Provision
for income taxes (benefit)
|
||||||||||||||||||||
Current
|
- | 737,897 | 737,897 | |||||||||||||||||
Deferred
|
- | 386,290 | 386,290 | |||||||||||||||||
Net
income
|
$ | (38,715 | ) | $ | 3,676,069 | $ | 3,676,069 | |||||||||||||
Less:
net income attributable to the noncontrolling interest
|
- | 9,680 | 9,680 | |||||||||||||||||
Net
Income attributable to the Company
|
(38,715 | ) | 3,666,389 | 3,666,389 | ||||||||||||||||
Other
comprehensive item
|
||||||||||||||||||||
Foreign
currency translation gain(loss)
|
- | 571,482 | 571,482 | |||||||||||||||||
Comprehensive
Income
|
$ | (38,715 | ) | $ | 4,237,871 | $ | 4,237,871 | |||||||||||||
Basic
and diluted income per share
|
$ | (0.01 | ) | $ | 0.22 | $ | 0.22 | |||||||||||||
Weighted
average number of shares
|
3,785,596 | 16,880,000 | 17,000,000 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
F-27
T.O.D.
TASTE ON DEMAND INC.
|
||||||||||||||||||||
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
||||||||||||||||||||
FOR
THREE MONTHS PERIOD FROM JULY 1, 2009 TO SEPTEMBER 30,
2009
|
||||||||||||||||||||
T.O.D.
Taste on Demand Inc
|
Jiangsu
Zhenyu Environmental Protection Technology Co., Ltd.
|
Adjustments
|
Notes
|
Pro
Forma
Combined
Total
|
||||||||||||||||
Net
sales
|
$ | - | $ | 9,503,831 | $ | 9,503,831 | ||||||||||||||
Cost
of goods sold
|
(6,769,885 | ) | (6,769,885 | ) | ||||||||||||||||
Gross
profit
|
- | 2,733,946 | 2,733,946 | |||||||||||||||||
Selling,
general and administrative expenses
|
||||||||||||||||||||
Selling
expenses
|
(77,898 | ) | (77,898 | ) | ||||||||||||||||
General
and administrative expenses
|
(4,817 | ) | (102,649 | ) | 4,817 | a | (102,649 | ) | ||||||||||||
Total
SG&A expenses
|
(4,817 | ) | (180,547 | ) | (180,547 | ) | ||||||||||||||
Income
from operations
|
(4,817 | ) | 2,553,399 | 2,553,399 | ||||||||||||||||
Non-operating
income (expenses):
|
||||||||||||||||||||
Interest
income (expenses)
|
(5,307 | ) | (5,307 | ) | ||||||||||||||||
Other
expenses
|
- | |||||||||||||||||||
Total
non-operating income (expenses)
|
- | (5,307 | ) | (5,307 | ) | |||||||||||||||
Income
before income taxes
|
(4,817 | ) | 2,548,092 | 2,548,092 | ||||||||||||||||
Provision
for income taxes (benefit)
|
||||||||||||||||||||
Current
|
632,261 | 632,261 | ||||||||||||||||||
Deferred
|
- | |||||||||||||||||||
Net
income
|
$ | (4,817 | ) | $ | 1,915,831 | $ | 1,915,831 | |||||||||||||
Less:
net income attributable to the noncontrolling interest
|
7,668 | 7,668 | ||||||||||||||||||
Net
Income attributable to the Company
|
(4,817 | ) | 1,908,163 | 1,908,163 | ||||||||||||||||
Other
comprehensive item
|
||||||||||||||||||||
Foreign
currency translation gain(loss)
|
389,944 | 389,944 | ||||||||||||||||||
Comprehensive
Income
|
$ | (4,817 | ) | $ | 2,298,107 | $ | 2,298,107 | |||||||||||||
Basic
and diluted income per share
|
$ | (0.00 | ) | $ | 0.11 | $ | 0.11 | |||||||||||||
Weighted
average number of shares
|
3,857,257 | 16,880,000 | 17,000,000 | |||||||||||||||||
The accompanying notes are an integral part of
these condensed consolidated financial statements
F-28
T.O.D.
TASTE ON DEMAND INC.
NOTES
TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of September 30,
2009 and the unaudited pro forma condensed consolidated statement of income for
three months ended September 30, 2009 and for the year ended June 30, 2009 to
reflect the Share Exchange between the Company and Dragon Path:
a.
|
To
record the spin-off of the Company’s assets and liabilities prior to the
reverse acquisition;
|
b.
|
These
adjustments reflect the recapitalization as a result of the transactions
related to the share exchange.
|
F-29