Attached files
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 (DATE OF EARLIEST EVENT REPORTED): April 22,
2010
SILVER
PEARL ENTERPRISES, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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Nevada
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333-124837
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45-0538522
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||
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(STATE
OR OTHER JURISDICTION OF
INCORPORATION
OR ORGANIZATION)
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(COMMISSION
FILE NO.)
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(IRS
EMPLOYEE IDENTIFICATION NO.)
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Qingshi
Industrial Park
Ningbo
Economic & Technological Development Zone
Ningbo,
Zhejiang Province
P.R.
China 315803
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
(86)
574-8623-2955
(ISSUER
TELEPHONE NUMBER)
1541
E. Interstate 30
Rockwall, Texas
75087
(FORMER
NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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––––––––––––––––
Copies
to:
Gregg
E. Jaclin, Esq.
Eric
M. Stein, Esq.
Joy
Z. Hui, Esq.
Anslow
+ Jaclin, LLP
195
Route 9 South, Suite 204
Manalapan,
New Jersey 07726
(732)
409-1212
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|
––––––––––––––––
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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 Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form 8-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Registrant’s expectations,
beliefs, intentions or strategies for the future, which are indicated by words
or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we
believe,” “management believes” and similar words or phrases. The
forward-looking statements are based on management’s current expectations and
are subject to certain risks, uncertainties and assumptions. Our actual results
could differ materially from results anticipated in these forward-looking
statements. All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements.
Item 1.01 Entry into a Material Definitive
Agreement.
Share
Exchange Agreement
On April
22, 2010 (the “Closing Date”), Silver Pearl Enterprises, Inc. (the “Company,”
“we,” “our” or “us”) entered into a Share Exchange Agreement (the “Exchange
Agreement”), by and among Keyuan International Group Limited (“Keyuan
International”), a company organized under the laws of the British Virgin
Islands, Delight Reward Limited, the sole shareholder of Keyuan International
and a company organized under the laws of the British Virgin Islands (the
“Keyuan International Shareholder”), and Denise D. Smith, our former principal
stockholder (“Smith”). Pursuant to the terms of the Exchange Agreement, the
Keyuan International Shareholder transferred to us all of the issued and
outstanding ordinary shares of Keyuan International (the “Keyuan International
Shares”) in exchange for the issuance of 47,658 shares of our Series M preferred
stock, par value $0.001 per share (the “Series M Preferred Stock”) (such
transaction is sometimes referred to herein as the “Share Exchange”). As a
result of the Share Exchange, we are now the holding company of Keyuan Plastics
Co., Ltd., the operating subsidiary of Keyuan International organized in the
People’s Republic of China (“China” or the “PRC”) and engaged in manufacturing
and supplying various petrochemical products in China.
Immediately
prior to the Share Exchange, 3,264,000 shares of our common
stock, par value $0.001 (the “Common Stock”) then outstanding were cancelled and
retired, so that immediately prior to the Private Placement described in Item
3.02 of this Current Report on Form 8-K, we had 2,432,800 shares of Common Stock
issued and outstanding.
Securities
Purchase Agreement
Immediately
after the Share Exchange, we entered into a securities purchase agreement (the
“Purchase Agreement”) with certain accredited investors listed on Exhibit A
thereto (collectively, the “Investors”) for the issuance and sale in a private
placement of 661,562 units (the “Units”) at a purchase price of $35 per Unit,
consisting of, in the aggregate, (a) 5,954,058 shares of Series A convertible
preferred stock, par value $0.001 per share (the “Series A Preferred Stock”)
convertible into the same number of shares of Common Stock, (b) 661,562 shares
of Common Stock (the “Shares”), (c) three-year Series A Warrants to purchase up
to 661,562 shares of Common Stock, at an exercise price of $4.50 per share (the
“Series A Warrant Shares”), and (d) three-year Series B Warrants to purchase up
to 661,562 shares of Common Stock, at an exercise price of $5.25 per share (the
“Series B Warrant Shares”), for aggregate gross proceeds of approximately $23.2
million (the “Private Placement”).
Registration
Rights Agreement
In
connection with the Private Placement, we also entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investors, in
which we agreed to file a registration statement (the “Registration Statement”)
with the Securities and Exchange Commission (the “SEC”) to register for resale
the Shares, the Common Stock issuable upon conversion of the Series A Preferred
Stock, the Series A Warrant Shares and the Series B Warrant Shares, within 30
calendar days of the Closing Date, and to have the registration statement
declared effective within 150 calendar days of the Closing Date or within 180
calendar days of the Closing Date in the event of a full review of the
registration statement by the SEC. If we do not comply with the foregoing
obligations under the Registration Rights Agreement, we will be required to pay
cash liquidated damages to each investor, at the rate of 1% of the applicable
subscription amount for each 30 day period in which we are not in compliance;
provided, that such
liquidated damages will be capped at 10% of the subscription amount of each
investor and will not apply to any registrable securities that may be sold
pursuant to Rule 144 under the Securities Act, or are subject to an SEC comment
with respect to Rule 415 promulgated under the Securities Act.
-2-
Securities
Escrow Agreement
We also
entered into a securities escrow agreement with the Investors (the “Securities
Escrow Agreement”), pursuant to which, we delivered into an escrow account 5,000
shares of our Series M Preferred Stock convertible into 5,000,000 shares of
Common Stock to be used as escrow shares (the “Escrow Shares”) after we amend
our Articles of Incorporation to increase our authorized Common Stock to one
hundred million (100,000,000) shares. With respect to the 2010 performance year,
if we achieve less than 95% of the 2010 performance threshold, then the Escrow
Shares for such year will be delivered to the Investors in the amount of 500,000
shares of Common Stock for each full percentage point by which such threshold
was not achieved up to a maximum of 5,000,000 shares of Common
Stock.
Lock-up
Agreement
On the
Closing Date, we and the Keyuan International Shareholder, entered into a
lock-up agreement whereby such entity is prohibited from selling our securities
until six (6) months after the effective date of the registration statement
required to be filed under the Registration Rights Agreement. For one (1) year
thereafter, it will be permitted to sell up to 1/12 of its initial holdings
every month.
A copy of
the Exchange Agreement, the Purchase Agreement, the Registration Rights
Agreement, the Securities Escrow Agreement and the Lock-Up Agreement are
incorporated herein by reference and are filed as Exhibits 2.1, 10.1, 10.2, 10.3
and 10.4, respectively, to this Current Report on Form 8-K. The description of
the transactions contemplated by such agreements set forth herein do not purport
to be complete and is qualified in its entirety by reference to the full text of
the exhibits filed herewith and incorporated herein by reference.
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Item
2.01
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Completion
of Acquisition or Disposition of
Assets
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On the
Closing Date, we consummated the transactions contemplated by the Exchange
Agreement, pursuant to which we acquired all of the issued and outstanding
ordinary shares of Keyuan International in exchange for the issuance in the
aggregate of 47,658 shares of Series M Preferred Stock to the Keyuan
International Shareholder resulting in Keyuan International becoming our wholly
owned subsidiary. As a result, we are now a holding company of Keyuan Plastics
Co., Ltd., the operating subsidiary of Keyuan International organized in China
and are engaged in manufacturing and supplying various petrochemical products in
China.
BUSINESS
Operating
through our wholly-owned subsidiary, Keyuan Plastics, Co., Ltd. (“Keyuan
Plastics”), located in Ningbo, China, we are a leading independent manufacturer
and supplier of various petrochemical products in China. Through Keyuan
Plastics, our operations include (i) an annual petrochemical manufacturing
capacity of 550,000 metric tons (MT) of a variety of petrochemical products,
(ii) facilities for the storage and loading of raw materials and finished goods,
(iii) a manufacturing technology that can support our manufacturing process with
low raw material costs and high utilization and yields, (iv) a strong management
team consisting of petrochemical experts with proven track records from some of
China’s largest state-owned enterprises in the petrochemical industry, and (v) a
robust customer base with long-term purchase contracts.
-3-
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| Storage Tanks | Production Facility |
Due to
China’s growing demand for refined petrochemical products, which is mainly
attributable to China’s robust economic growth and under-developed domestic
supply capacity, our customer request orders for the year 2010 have exceeded our
current annual production capacity. In order to grow our business to meet the
increasing market demands, our management team plans to expand our manufacturing
capacity to include a raw material pre-treatment facility, additional storage
capacity and an asphalt production facility.
Asphalt
is used as building material for highways, roads, airport pavement or as raw
material for emulsified, diluted and modified asphalt. Ranked second in the
world in length of highways at 75,000 km (46,603 miles), China’s demand for
asphalt has exceeded the domestic supply capacity in the past five years, which
resulted in the import of 13.5 million MT in the aggregate from 2005 to 2008.
Maintenance and expansion of the highway system is expected to continue; and
thus the demand for asphalt is expected to remain high.
The
Ningbo Municipal Government has reserved approximately 1.3 million square feet
of land adjacent to our current production facility for our proposed
manufacturing expansion which will include a raw material pre-treatment
facility, additional storage capacity and an asphalt production
facility.
Our
Products
We
manufacture and supply a variety of petrochemical products, including BTX
aromatics, propylene, styrene, liquid petroleum gas (LPG), MTBE and other
petrochemicals, each of which is described below:
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·
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BTX Aromatics: consists
of benzene, toluene, xylene and other chemical components used for further
processing into oil resin, gasoline and solvent materials widely used in
paint, ink, construction coating and
pesticide;
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|
·
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Propylene: a chemical
intermediate which is one of the building blocks for an array of chemical
and plastic products that are commonly used to produce polypropylene,
acrylonitrile, oxo chemicals, propylene oxide, cumene, isopropyl alcohol,
acrylic acid and other chemicals for paints, household detergents,
automotive brake fluids, indoor/outdoor carpeting, textile, insulating
materials, auto parts and electrical
appliances;
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|
·
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Styrene: a precursor to
polystyrene and several copolymers widely used for packaging materials,
construction materials, electronic parts, home appliances, household
goods, home furnishings, toys, sporting goods and other
products;
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|
·
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LPG: a mixture of
hydrocarbon gases used as fuel in heating appliances and vehicles. A
replacement for chlorofluorocarbons as an aerosol propellant and a
refrigerant which reduces damage to the ozone layer;
and
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|
·
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MTBE & Other
Chemicals: MTBE, oil slurry, sulphur and others which are used for
a variety of applications including fuel components, refrigeration
systems, fertilizers, insecticides and
fungicides.
|
-4-
Corporate
Structure
Our
current corporate structure is set forth below:
Production
Capacity and Expansion
The
following chart depicts our current production capacity:
Current
Capacity Breakdown (MT)
In order
to develop our business to meet the increasing customer purchase orders, our
management team plans to expand our manufacturing capacity to include a raw
material pre-treatment facility, additional storage capacity and an asphalt
production facility which is expected to commence operation in the third quarter
of 2012.
-5-
The
following chart depicts our production capacity assuming the completion of the
asphalt facility:
Capacity
Breakdown with Asphalt Facility (MT)
Petrochemical
Manufacturing Process
The
following chart illustrates our petrochemical manufacturing
process:
-6-
Petrochemical
Market in China
China has
the world’s second largest petrochemical market after the U.S. in terms of
production and consumption. China’s petrochemical output value grew from RMB
1,240 billion in 2000 to 6,584 billion in 2008, representing a Compound Annual
Growth Rate (CAGR) of 23.2%. China Petrol and Chemical Industry Association
(CPCIA) expects that the total profits in petrochemical industry will increase
between 8% and 10% in 2010. (Source: http://english.people
daily.com.cn)
China’s
Petrochemical Market Size from 2000-2008 (RMB billions)
China’s
Monthly Imports of Petrochemicals in 2009 (Thousand tons)
Note:
Does not include crude oil.
Source:
customs.gov.cn
China’s
increasing domestic demand for petrochemical products has exceeded the domestic
supply in the past several years:
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·
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China’s
benzene supply grew from 2.13 million MT in 2002 to 4.06 million MT
in 2007 representing a CAGR of 13.8%. China’s benzene demand
increased from 2.08 million MT in 2002 to 4.25 million MT in 2007,
representing a CAGR of 15.4%.
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-7-
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·
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China’s
toluene supply grew from 697,000 MT in 2002 to 1.52 million MT in 2007,
representing a CAGR of 16.9%. China’s toluene demand increased from
1.56 million MT in 2002 to 1.96 million MT in 2007, representing a CAGR
of 4.7%.
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|
·
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China’s
xylene supply grew from 820,000 MT in 2002 to 1.62 million MT in 2007,
representing a CAGR of 14.6%. China’s xylene demand increased from 1.1
million MT in 2002 to 1.99 million MT in 2007, representing a CAGR of
12.6%.
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·
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China’s
propylene supply has grown from 3.78 million MT in 2000 to 9.35 million MT
in 2006, representing a CAGR of 16.3%. China’s propylene demand has risen
from 4.39 million MT in 2000 to 14.43 million MT in 2006, representing a
CAGR of 21.9%.
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·
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China’s
styrene supply has grown from 0.89 million MT in 2002 to 2.25 million MT
in 2006, representing a CAGR of 26.1%. China’s Styrene demand has
increased from 2.69 million MT in 2002 to 4.58 million MT in 2006,
representing a CAGR of 14.2%.
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|
·
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China’s
LPG supply has grown from 12.56 million MT in 2003 to 17.8 million MT in
2007, representing a CAGR of 9.1%. China’s LPG demand has increased from
18.77 million MT in 2003 to 22 million MT in 2007, representing a CAGR of
4.05%.
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As a
result, China has imported petrochemical products to meet the domestic demand,
which is expected to continue for a number of years:
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·
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China
imported 480,000 MT of benzene between 2003 and 2007 averaging 96,000 MT a
year;
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·
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China
imported 863,000 MT of toluene in 2002 and 445,000 MT in 2007,
averaging 746,000 MT per year;
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·
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China
imported 271,000 MT of xylene in 2002 and 420,000 MT in 2007, averaging
430,000 MT a year;
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·
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China’s
import of propylene has increased from 210,000 MT in 2004 to 920,000
MT in 2008;
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|
·
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China’s
import of styrene has risen from 1.79 million MT in 2002 to 2.81 million
MT in 2008, averaging 2.63 million MT a
year;
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|
·
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China’s
import of LPG was 6.21 million MT in 2003 and 4.2 million MT in 2007,
averaging 5.63 million MT of LPG imported per
year.
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Asphalt
Market in China and Pretreatment & Asphalt Process
In
addition to its use as raw materials for emulsified, diluted and modified
asphalt-based products, asphalt is widely used for highways, roads and airport
pavements. Currently the length of China’s highways has reached 75,000 km
(46,603 miles) in the aggregate, which made China rank the second in the world
in terms of the length of its highway system. According to the PRC government
plan, the length of China's highways will reach 100,000 km (62,137 miles)
by 2020. In November 2008, Ministry of Communication issued RMB 5 trillion
investment plan and according to this plan, the average annual investment for
construction of highways in the next five years will be RMB 980 billion, among
which 60% will be used for construction of expressways, 20% for
provincial highways and 20% for highways in the
countryside.
To ensure
the high-quality condition of roads and highways, the PRC government requires
regular pavement maintenance every five years. In the past five years, the
domestic demand for asphalt in China has exceeded supply with total imports of
approximately 3.3 million MT in 2009.
-8-
Source:
www.chem99.com
The
following chart depicts the pretreatment and Asphalt Process:
Environmental
Protection and Safety Measures
We are
committed to environmental protection, facility safety and quality control
throughout the design, maintenance and growth of our operation facilities and
manufacturing process.
-9-
Environmental
Protection
We have
taken various measures to meet national standards and ensure our
environmental compliance. For example, we recycle the water for cooling in
our production process and large amounts of water can be saved through
recycling. Sulfureted hydrogen generated in production will be sent
to the facility for sulfur recovery. The waste water and waste gas
will be treated by our sewage water treatment station and emission control
facility to meet the national standards before discharge. The industrial residue
and garbage will be sent to qualified companies for safe treatment.
Safety
Measures
Our
safety control measures include:
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1.
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Distribution
control system;
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2.
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Emergency
shutdown mechanism;
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3.
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Automatic
interlocking system;
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4.
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Detection
& alarm system for flammable and toxic
gas;
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5.
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Fire
detection & automatic sprinkler system;
and
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6.
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Real-time
system and process monitoring
system
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Quality
Control
With our
commitment to quality control, our petrochemical products have met all national
standards of petrochemical products set by the General Administration of Quality
Supervision, the Inspection and Quarantine of the PRC, and National
Standardization Committee.
Our
Competitive Strengths
As a
leading independent petrochemical manufacturer and supplier, our competitive
strengths include:
Technology
Advantage
We have
proprietary manufacturing technologies that allow for better use of raw
materials, higher yield rate and enhanced operational efficiency. Specifically,
we possess the technology to use heavy oil, instead of naphtha which is a
commonly used component in the petrochemical production industry. Heavy oil is
approximately RMB 1,000 cheaper per ton and more readily available than naphtha,
which provides us with competitive advantage in the selection of raw materials.
In addition, we use proprietary catalytic pyrolysis with higher reaction
temperature, which results in 15% higher yield rate than conventional fluidized
cracking processes. Finally, we use enhanced technologies in our production
process that allow for lower capital investment and enhanced operations
efficiency.
Research & Development
Advantage
Armed
with a team of experienced engineers and technicians with state-of-the-art
research and laboratory facilities, we are confident in our strong research and
development capacities. To further enhance our research capacities, we have
partnered with several leading scientists and petrochemical research and
development institutions in the industry.
Elite
Workforce
Our
management team, composed of seasoned petrochemical experts with proven track
records from China’s largest state-owned enterprises, provides us with excellent
operating management and technical administration. In addition, we have allied
with many industry-renowned technology experts and advisors assisting us to
achieve consistent technological improvement.
-10-
Ideal
Location
Our
operation and storage facilities are in close proximity to raw material
suppliers and downstream manufacturers which provides us with readily available
access to raw materials. In addition, being located in Qingshi Chemical Park in
Ningbo provides us with access to skilled labor and industry
resources.
Sales
and Pricing
Sales
In
selling our products, approximately 90% of our customers pay cash payment in
advance. With respect to core customers with excellent credit history, we may
make an exception by conducting credit sales as part of our strategy to maintain
core customer loyalty.
In order
to meet customers’ demand, we have improved our manufacturing technologies and
streamlined our transactional process to achieve a 30 days’ raw
material-to-sales cycle.
Currently,
our customer request orders for our products have exceeded our production
capacity. The following chart sets forth the comparison between our annual
production capacity and the size of customer requests for the listed products
below:
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Product
Line
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Annual
Capacity
(MT)
|
Customer
Requests
(MT)
|
Requests/Capacity
|
|
BTX
Aromatics
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345,000
|
480,000
|
1.39x
|
|
Propylene
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51,500
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90,000
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1.75x
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Styrene
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36,000
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48,000
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1.33x
|
|
LPG
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77,500
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93,000
|
1.20x
|
Note
1: Contracts are “blanket orders” which define transaction terms and fees. Some
customers are required to provide a deposit
Note
2: The actual quantities sold are based on Keyuan’s capacity to satisfy the
order as well as customer demand. On an order-to-order basis, Keyuan and
customers agree to a minimum and maximum quantity amount, of which Keyuan
commits to fulfill the minimum order
Pricing
China’s
raw material price fluctuations are primarily attributable to international oil
prices and market effects of supply and demand. We set our selling prices based
upon benchmark prices published by national petrochemical companies, and/or
through individually negotiated prices with customers. Specifically, BTX
aromatic prices are influenced by benchmark prices set by the National
Development and Reform Commission, or NDRC.
Major
Customers
Our
target customers are component manufacturers located in the Yangtze River Delta
and Pearl River Delta. 80% of our sales are direct sales and the remaining 20%
of our sales are via distributors.
Intellectual
Property
We have a
pending trademark application for the company logo of Keyuan Plastics with the
State Administration for Industry and Commerce, Trademark Office. Our management
considers our manufacturing technologies and manufacturing design critical to
our business, and intends to take steps to protect these
technologies.
Legal
Proceedings
We are
currently not a party to any material legal or administrative proceedings and
are not aware of any pending legal or administrative proceedings against us. We
may from time to time become a party to various legal or administrative
proceedings arising in the ordinary course of our business.
-11-
Property
We have
acquired the state-granted use rights to land set forth in the table below.
Currently, we are not leasing any property from third
parties.
|
Item
|
Address
|
Size
|
Leased/Owned
|
Function
|
|
1.
|
Qingshi
Industrial Park, Beilun District, Ningbo, Zhejiang, China
|
119,093.50
Square
meters
|
Owned
|
Plant
land
|
|
2.
|
No.8
Lianhe Road 239 Block, Qijiashan Neighborhood, Beilun District, Ningbo,
Zhejiang, China
|
4,948.17
Square meters
|
Owned
|
Dormitory
Building
|
Employees
Currently,
we have 354 full-time employees, including 10 executive officers and other
senior management, 21 engineers, 9 sales people, 6 researchers and developers
and 37 administrative staff. The remaining 271 full-time employees are
production facility manufacturers.
We are
compliant with local prevailing wage, contractor licensing and insurance
regulations, and have good relations with our employees.
As required by PRC
regulations, we participate in various employee benefit plans that are organized
by municipal and provincial governments, including pension, work-related injury
benefits, maternity insurance, medical and unemployment benefit plans. We are
required under PRC laws to make contributions to the employee benefit plans at
specified percentages of the salaries, bonuses and certain allowances of our
employees, up to a maximum amount specified by the local government from time to
time. Members of the retirement plan are entitled to a pension equal to a fixed
proportion of the salary prevailing at the member’s retirement
date.
On May 1,
2007, Keyuan Plastics entered into a non-fixed term employment agreement with
Mr. Chunfeng Tao, pursuant to which, Keyuan Plastics hired Mr. Tao as its
general manager effective May 1, 2007. The compensation in connection with this
employment shall be commensurate with Mr. Tao’s duties and responsibility as the
general manager and is subject to mutual agreement between Mr. Tao and Keyuan
Plastics.
On May 1,
2007, Keyuan Plastics also entered into a confidentiality and non-compete
agreement with Mr. Tao, pursuant to which, Mr. Tao agrees, among others, (i)
that he will keep in confidence all Keyuan Plastics confidential information
obtained in connection with such employment; (ii) that Keyuan Plastics has the
sole ownership right to all Keyuan Plastics intellectual properties, either
developed by Mr. Tao individually or collectively with other parties during his
employment term or within one (1) year following the termination of his
employment; and (iii) that within two (2) years following the termination of his
employment, he will not, directly or indirectly, engage in any business or other
activities related to Keyuan Plastics confidential information that he obtained
during his last five (5) years of employment (or such less term) with Keyuan
Plastics.
Copies of
the employment agreement and confidentiality and non-compete agreement are
included herein as Exhibit 10.12 and 10.13.
Corporation
Information
Our
principal executive offices are located at Ningbo Industrial Park, Ningbo, China
315803, Tel: (86) (0) 574-8623-3999, Fax: (86) (0) 574-8623-2616.
-12-
CHINA
REGULATIONS
This
section sets forth a summary of the most significant China regulations or
requirements that may affect our business activities operated in China or our
shareholders’ right to receive dividends and other distributions of profits from
the PRC subsidiary.
Foreign
Investment in PRC Operating Companies
The Foreign Investment Industrial
Catalogue jointly issued by the China's Ministry of Commerce (MOFCOM) and
the NDRC in 2007 classified various industries/businesses into three different
categories: (i) encouraged for foreign investment; (ii) restricted to foreign
investment; and (iii) prohibited from foreign investment. For any
industry/business not covered by any of these three categories, they will be
deemed industries/businesses permitted for foreign investment. Except for those
expressly provided with restrictions, encouraged and permitted
industries/businesses are usually 100% open to foreign investment and ownership.
With regard to those industries/businesses restricted to or prohibited from
foreign investment, there is always a limitation on foreign investment and
ownership. The PRC subsidiary’s business does not fall under the industry
categories that are restricted to, or prohibited from foreign investment and is
not subject to limitation on foreign investment and ownership.
Regulation
of Foreign Currency Exchange
Foreign
currency exchange in the PRC is governed by a series of regulations, including
the Foreign Currency
Administrative Rules (1996), as amended, and the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), as amended.
Under these regulations, the Renminbi is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment,
loans or investments in securities outside the PRC without the prior approval of
State Administration of Foreign Exchange (SAFE). Pursuant to the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), foreign
investment enterprises, or FIEs may purchase foreign exchange without the
approval of SAFE for trade and service-related foreign exchange transactions by
providing commercial documents evidencing these transactions. They may also
retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign
exchange liabilities or to pay dividends. However, the relevant Chinese
government authorities may limit or eliminate the ability of FIEs to purchase
and retain foreign currencies in the future. In addition, foreign exchange
transactions for direct investment, loan and investment in securities outside
the PRC are still subject to limitations and require approvals from
SAFE.
Regulation
of FIEs’ Dividend Distribution
The
principal laws and regulations in the PRC governing distribution of dividends by
FIEs include:
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(i)
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The
Sino-foreign Equity
Joint Venture Law (1979), as amended, and the Regulations for the
Implementation of the Sino-foreign Equity Joint Venture Law (1983),
as amended;
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(ii)
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The
Sino-foreign Cooperative
Enterprise Law (1988), as amended, and the Detailed Rules for the
Implementation of the Sino-foreign Cooperative Enterprise Law
(1995), as amended;
|
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(iii)
|
The
Foreign Investment
Enterprise Law (1986), as amended, and the Regulations of Implementation
of the Foreign Investment Enterprise Law (1990), as
amended.
|
Under
these regulations, FIEs in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with Chinese accounting
standards and regulations. In addition, the wholly owned foreign enterprises in
the PRC are required to set aside at least 10% of their respective accumulated
profits each year, if any, to fund certain reserve funds unless such reserve
funds have reached 50% of their respective registered capital. These reserves
are not distributable as cash dividends.
-13-
Regulation
of a Foreign Currency’s Conversion into RMB and Investment by FIEs
On August
29, 2008, SAFE issued a Notice
of the General Affairs Department of the State Administration of Foreign
Exchange on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises or Notice 142, to further regulate the
foreign exchange of FIEs. According to Notice 142, FIEs shall obtain
verification report from a local accounting firm before converting its
registered capital of foreign currency into Renminbi, and the converted Renminbi
shall be used for the business within its permitted business scope. The Notice
142 explicitly prohibits FIEs from using RMB converted from foreign capital to
make equity investments in the PRC, unless the domestic equity investment is
within the approved business scope of the FIE and has been approved by SAFE in
advance. In addition, SAFE strengthened its oversight over the flow and use of
Renminbi funds converted from the foreign currency-dominated capital of a FIE.
The use of such Renminbi may not be changed without approval from SAFE, and may
not be used to repay Renminbi loans if the proceeds of such loans have not yet
been used. Violations of Notice 142 may result in severe penalties, including
substantial fines as set forth in the SAFE rules.
Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions
In
October 2005, SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Return Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or SAFE Notice 75, which became effective as of November 1,
2005. SAFE Notice 75 requires PRC residents (including both corporate entities
and natural persons) to register with SAFE or its competent local branch before
establishing or
controlling any
company outside of China referred to as an “offshore special purpose company”
for the purpose of raising fund from overseas to acquire assets of, or equity
interests in, PRC companies. Under SAFE Notice 75, a “special purpose vehicle”,
or SPV, refers to an offshore entity established or controlled, directly or
indirectly, by PRC residents for the purpose of seeking offshore equity
financing using assets or interests owned by such PRC residents in onshore
companies. In addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend his or her SAFE registration with
the SAFE or its competent local branch, with respect to that offshore special
purpose company in connection with any of its increase or decrease of capital,
transfer of shares, merger, division, equity investment or creation of any
security interest over any assets located in China. The SAFE regulations require
retroactive approval and registration of direct or indirect investments
previously made by PRC residents in offshore special purpose companies. To
further clarify the implementation of SAFE Notice 75, SAFE issued Circular 106
in May, 2007. Under Circular 106, PRC subsidiaries of an offshore special
purpose company are required to coordinate and supervise the filing of SAFE
registrations by the offshore holding company’s shareholders who are PRC
residents in a timely manner. In the event that a PRC resident shareholder with
a direct or indirect investment in an offshore parent company fails to obtain
the required SAFE approval and make the required registration, the PRC
subsidiaries of such offshore parent company may be prohibited from making
distributions of profit to the offshore parent and from paying the offshore
parent proceeds from any reduction in capital, share transfer or liquidation in
respect of the PRC subsidiaries. Further, failure to comply with the various
SAFE approval and registration requirements described above, as currently
drafted, could result in liability under PRC law for foreign exchange
evasion.
There
still remain uncertainties as to how certain procedures and requirements under
the aforesaid SAFE regulations will be enforced, and it remains unclear how
these existing regulations, and any future legislation concerning offshore or
cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We will attempt to comply, and attempt to
ensure that all of our shareholders subject to these rules comply with the
relevant requirements. We cannot, however, assure the compliance of all of our
China-resident shareholders. Any failure to comply with the relevant
requirements could subject us to fines or sanctions imposed by the Chinese
government, including restrictions on certain of our subsidiaries’ ability to
pay dividends or hinder our investment in those subsidiaries or affect our
ownership structure, which could adversely affect our business and
prospects.
Government
Regulations Relating to Taxation
On March
16, 2007, the National People’s Congress or NPC, approved and promulgated the
PRC Enterprise Income Tax
Law, which we refer to as the New EIT Law. The New EIT Law took effect on
January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject
to a uniform tax rate of 25%. The New EIT Law provides a five-year transition
period starting from its effective date for those enterprises which were
established before the promulgation date of the New EIT Law and which were
entitled to a preferential lower tax rate under the then-effective tax laws or
regulations.
-14-
On
December 26, 2007, the State Council issued a Notice on Implementing Transitional
Measures for Enterprise Income Tax, or the Notice, providing that the
enterprises that have been approved to enjoy a low tax rate prior to the
promulgation of the New EIT Law will be eligible for a five-year transition
period since January 1, 2008, during which time the tax rate will be increased
step by step to the 25% unified tax rate set out in the New EIT Law. From
January 1, 2008, for the enterprises whose applicable tax rate was 15% before
the promulgation of the New EIT Law , the tax rate will be increased to 18% for
year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year
2012. For the enterprises whose applicable tax rate was 24%, the tax rate will
be changed to 25% from January 1, 2008.
The New
EIT Law and Implementation Rules of the New EIT Law provide that an income tax
rate of 10% may be applicable to dividends payable to non-PRC investors that are
“non-resident enterprises”, which (i) do not have an establishment or place of
business in the PRC, or (ii) have such establishment or place of business in the
PRC but the relevant income is not effectively connected with the establishment
or place of business, to the extent such dividends are derived from sources
within the PRC. The income tax for non-resident enterprises shall be subject to
withholding at the income source, with the payor acting as the obligatory
withholder under the New EIT Law, and therefor such income taxes generally
called withholding tax in practice. It is currently unclear in what
circumstances a source will be considered as located within the PRC. We are a
U.S. holding company and substantially all of our income is derived from
dividends we receive from our subsidiaries located in the PRC. Thus, if we are
considered as a “non-resident enterprise” under the New EIT Law and the
dividends paid to us by our subsidiary in the PRC are considered income sourced
within the PRC, such dividends may be subject to a 10% withholding
tax.
Such
income tax may be exempted or reduced by the State Council of the PRC or
pursuant to a tax treaty between the PRC and the jurisdictions in which our
non-PRC shareholders reside. For example, the 10% withholding tax is reduced to
5% pursuant to the Double Tax
Avoidance Agreement Between Hong Kong and Mainland China if the
beneficial owner in Hong Kong owns more than 25% of the registered capital in a
company in the PRC.
The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in the combined company’s tax rate in the future could have a material
adverse effect on its financial conditions and results of
operations.
Regulations
of Overseas Investments and Listings
On August
8, 2006, six PRC regulatory agencies, including MOFCOM, the China Securities
Regulatory Commission or the CSRC, the State Asset Supervision and
Administration Commission or the SASAC, the State Administration of Taxation or
the SAT, the State Administration for Industry and Commerce or the SAIC and
SAFE, jointly amended and released the M&A Rules, which became effective on
September 8, 2006. This regulation, among other things, includes provisions that
purport to require that an offshore SPV formed for purposes of overseas listing
of equity interest in PRC companies and controlled directly or indirectly by PRC
companies or individuals obtain the approval of CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange.
On
September 21, 2006, CSRC published on its official website procedures regarding
its approval of overseas listings by SPVs. CSRC approval procedures require the
filing of a number of documents with CSRC and it would take several months to
complete the approval process. The application of the M&A Rules with respect
to overseas listings of SPVs remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope of the
applicability of CSRC approval requirement.
Regulations
on Work Safety
On June
29, 2002, the Work Safety Law (“WSL”) of the PRC was adopted by the Standing
Committee of the 9th National People’s Congress and came into effect on November
1, 2002, as amended on August 27, 2009. The WSL provides general work safety
requirements for entities engaging in manufacturing and business activities
within the PRC. Additionally, Regulation on Work Safety Licenses (“RWSL”), as
adopted by the State Council on January 7, 2004 effective on January 13, 2004,
requires enterprises engaging in the manufacture of dangerous chemicals to
obtain a work safety license with a term of three years. If a work safety
license needs to be extended, the enterprise must go through extension
procedures with authorities three months prior to its expiration. In addition,
on May 17, 2004, the Measures for Implementation of Work Safety Licenses of
Dangerous Chemicals Production was promulgated as implementing measures to the
Regulation on Work Safety Licenses which provides that entities producing
dangerous chemicals are required to obtain work safety licenses pursuant to
specific requirements. Without work safety licenses, no entity may engage in the
formal manufacture of dangerous chemicals.
-15-
The
Regulations on the Safety Administration of Dangerous Chemicals (“RSADC”) was
promulgated by the State Council on January 26, 2002, effective as of March 15,
2002. It sets forth general requirements for manufacturing and storage of
dangerous chemicals in China. The RSADC requires that companies manufacturing
dangerous chemicals establish and strengthen their internal regulations and
rules on safety control and fulfill the national standards and other relevant
provisions of the State. In addition, according to the RSADC, companies that
manufacture, store, transport or use dangerous chemicals shall be required to
obtain corresponding approvals or licenses with the State Administration of Work
Safety and its local branches and other proper authorities. Companies that
manufacture or store dangerous chemicals without approval or registration with
the proper authorities can be shut down, ordered to stop manufacturing or
ordered to destroy the dangerous chemicals. Such companies can also be subject
to fines. If criminal law is violated, the persons chiefly liable, along with
other personnel directly responsible for such impropriety, shall be subject to
relevant criminal liability.
Regulations
on Environmental Protection
According
to the Prevention and Control of Water Pollution Law, as adopted by the Standing
Committee of the 10th
National People’s Congress on February 28, 2008 and effective on June 1, 2008,
China adopted a licensing system for pollutant discharge. Companies directly or
indirectly responsible for discharge of industrial waste water or medical sewage
to waters shall be required to obtain a pollutant discharge license. All
companies are prohibited from discharging wastewater and sewage to waters
without or in violation of the terms of the pollutant discharge
license.
The
Regulations on the Administration of Construction Projects Environmental
Protection (“RACPEP”), as adopted by the State Council on November 18, 1998 and
effective on November 29, 1998, governs construction projects and the impact
such projects will have on the environment. Pursuant to the RACPEP, the
governing body is responsible for supervising the implementation of a three
tiered system that includes (i) reviewing and approving a construction project,
(ii) overseeing the construction project and (iii) to inspect the finished
construction project and ensure that all harmful pollutants are disposed of
correctly. Manufacturing companies are required to apply for inspection with
environmental protection authorities upon completion of a construction
project.
RISK FACTORS
Risks
Related to Our Business
Our
limited operating history makes evaluation of our business
difficult.
We have a
limited operating history and have encountered and expect to continue to
encounter many of the difficulties and uncertainties often faced by early stage
companies. Our limited operating history makes it difficult to evaluate our
future prospects, including our ability to develop a wide customer and
distribution network for our services, to expand our operations to include
additional services and to control raw material costs, all of which are critical
to our success. An investor must consider our business and our prospects in
light of the risks, uncertainties and difficulties common to early stage
companies. We may encounter unanticipated problems, expenses and delays in
developing and marketing our services and securing additional blending and
storage facilities. We may not be able to successfully address these risks. If
we are unable to address these risks, our business may not grow, our stock price
may suffer, and we may be unable to stay in business.
As
of December 31, 2009, we had not yet generated any net income from our
operations.
We have
incurred net operating losses since our inception. Our net loss was
approximately $8,800,000 and $1,500,000 for the years ended December 31,
2009 and 2008, respectively. As of December 31, 2009, we had an accumulated net
loss of $10,664,819. Although we anticipate that we will cease to incur
operating losses commencing this year, there is no assurance that we will be
able to generate net income in the near future or in such amount that meets our
anticipation.
-16-
Key
employees are essential to growing our business.
Chunfeng
Tao, Jingtao Ma, Shifa Wang, Weifeng Xue and Mingliang Liu are essential to our
ability to continue to grow our business. They have established relationships
within the industries in which we operate. If they were to leave us, our growth
strategy might be hindered, which could limit our ability to increase
revenue.
In
addition, although we are located in an area with good supply of skilled labor,
we still face competition from other companies located in the same area for
attracting skilled personnel. If we fail to attract and retain qualified
personnel to meet current and future needs, this could slow our ability to grow
our business, which could result in a decrease in market share.
We need additional capital to expand
our manufacturing facility and we may not be able to obtain it at acceptable
terms, or at all, which could adversely affect our ability to increase our
production capacity and expand our business.
With the
gross proceeds of $23.2 million from this Private Placement, we still need
additional cash resources to expand our manufacturing facility to include a raw
material pre-treatment facility, additional storage capacity and an asphalt
production facility. Our ability to obtain additional capital on acceptable
terms is subject to a variety of uncertainties, including, but not limited
to:
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·
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investors’
perception of, and demand for, securities of petrochemical manufacturing
and supply companies;
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·
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conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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·
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our
future results of operations, financial condition and cash
flow;
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·
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PRC
governmental regulation of foreign investment in petrochemical
manufacturing companies in China;
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·
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economic,
political and other conditions in China;
and
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·
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PRC
governmental policies relating to foreign currency
borrowings.
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Our
operations may be adversely affected by the cyclical nature of the petroleum and
petrochemical market and by the volatility of prices of petrochemical
products.
All of
our revenues are attributable to petrochemical products, which have historically
been cyclical and sensitive to the availability and price of raw materials and
general economic conditions. Markets for many of our products are sensitive to
changes in industry capacity and output levels, cyclical changes in regional and
global economic conditions, the price and availability of substitute products
and changes in consumer demand, which from time to time have had a significant
impact on product prices in the regional and global markets. Historically, the
markets for these products have experienced alternating periods of tight supply,
causing prices and margins to increase, followed by periods of capacity
additions, finally resulting in oversupply and declining prices and margins. As
tariffs and other import restrictions are reduced and the control of product
pricing is relaxed in China, the markets for many of our products have become
increasingly subject to the cyclicality of regional and global
markets.
We
do not have a majority of independent directors serving on our board of
directors, which could present the potential for conflicts of
interest.
At the
closing of the Share Exchange, Mr. Chunfeng Tao was appointed as the sole member
and Chairman of our Board of Directors (the “Board”). In addition, Mr. Tao also
serves as our President, Chief Executive Officer and Chief Financial Officer. As
a result, we do not have a majority of independent directors serving on our
Board. In the absence of a majority of independent directors, our executive
officers could establish policies and enter into transactions without
independent review and approval thereof. This could present the potential for a
conflict of interest between us and our stockholders, generally, and the
controlling officers, stockholders or directors.
-17-
Our
manufacturing processes could expose us to substantial production liability
claims which will negatively impact our profitability.
We face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse side
effects. Side effects or marketing or manufacturing problems pertaining to any
of our products could result in product liability claims or adverse publicity.
These risks will exist for those products in clinical development and with
respect to those products that have received regulatory approval for commercial
sale. To date, we have not experienced any product liability claims. However,
that does not mean that we will not have any such claims with respect to our
products in the future which will negatively impact our
profitability.
Insurance
coverage for some of our operations may be insufficient to cover
losses.
The
insurance industry in China is still at an early stage of its development.
Insurance companies in China offer limited business insurance products or offer
them at a high price. We do not maintain insurance coverage for various risks,
including environmental claims. A significant uninsured claim against us would
have a material adverse effect on our financial position and results of
operations.
Failure
to comply with environmental laws and regulations may have a material adverse
effect on our business and results of operations.
We are
subject to various environmental laws and regulations that require us to obtain
environmental permits for our operations. If we fail to obtain all required
environmental permits for our operations, or comply with the provisions of our
permit, we could be subject to fines, criminal charges or other sanctions by
regulators, including the suspension or termination of our operations. We are
required to comply with extensive and complex environmental laws and regulations
at various levels in the PRC relating to, among other things:
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•
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the
handling of petrochemical products;
|
|
•
|
the
operation of petrochemical product storage
facilities;
|
|
•
|
workplace
safety;
|
|
•
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environmental
damage; and
|
|
•
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hazardous
waste disposal.
|
If we are
involved in a spill or other accident involving hazardous substances, or if we
are found to be in violation of environmental laws or regulations, we could be
subject to liabilities that could have a material adverse effect on our
business, financial condition and results of operations. If we should fail to
comply with applicable environmental regulations, we could be subject to
substantial fines or penalties and to civil and criminal liability. We cannot
assure you that at all times we will be in compliance with environmental laws
and regulations or our environmental permits or that we will not be required to
expend significant funds to comply with, or discharge liabilities arising under,
environmental laws, regulations and permits.
Our failure to protect our
technologies could have a negative impact on our business.
Our
manufacturing technologies and process, which have not been patented or
registered as our property, are key components of our competitive advantage and
our growth strategy. We rely on confidentiality and license agreements with
certain of our employees, customers and others to protect the confidentiality of
our technologies. If we are unable to adequately protect the confidentiality of
these technologies, our business, results of operations, financial condition and
prospects could be materially and adversely affected.
-18-
If
we are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
to effectively prevent fraud. We maintain a system of internal control over
financial reporting, which is defined as a process designed by, or under the
supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
As a
public company, we will have significant additional requirements for enhanced
financial reporting and internal controls. We will be required to document and
test our internal control procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent registered public accounting firm
addressing these assessments. The process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company.
We cannot
assure you that we will not, in the future, identify areas requiring improvement
in our internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be
successful or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our growth. If we
are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.
Lack
of experience as officers of publicly-traded companies of our management team
may hinder our ability to comply with Sarbanes-Oxley Act.
It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act.
We may need to hire additional financial reporting, internal controls and other
finance staff or consultants in order to develop and implement appropriate
internal controls and reporting procedures. If we are unable to comply with the
Sarbanes-Oxley Act’s internal controls requirements, we may not be able to
obtain the independent auditor certifications that Sarbanes-Oxley Act requires
publicly-traded companies to obtain.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act,
as well as new rules subsequently implemented by the SEC, has required changes
in corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
Risks
Relating to Regulation of Our Business
Uncertainties
with respect to the governing regulations could have a material and adverse
effect on us.
There are
substantial uncertainties regarding the interpretation and application of the
PRC laws and regulations, including, but not limited to, the laws and
regulations governing our business and our ownership of equity interest in
Keyuan Plastics, a wholly foreign owned enterprise under the PRC laws. These
laws and regulations are relatively new and may be subject to change, 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.
-19-
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business permits and other
licenses and requiring actions necessary for compliance. In particular, licenses
and permits issued or granted to the PRC subsidiary by relevant governmental
bodies may be revoked at a later time by higher regulatory bodies. We cannot
predict the effect of the interpretation of existing or new PRC laws or
regulations on our businesses. We cannot assure you that our current ownership
and operating structure would not be found in violation of any current or future
PRC laws or regulations. As a result, we may be subject to sanctions, including
fines, and could be required to restructure our operations or cease to provide
certain services. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management attention.
Any of these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of our business
operations, which could materially and adversely affect our business, financial
condition and results of operations.
Keyuan
Plastics will be subject to restrictions on dividend payments.
We may
rely on dividends and other distributions from Keyuan Plastics to provide us
with cash flow and to meet our other obligations. Current regulations in the PRC
would permit the PRC subsidiary to pay dividends to us only out of its
accumulated distributable profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, Keyuan Plastics will be
required to set aside at least 10% (up to an aggregate amount equal to half of
its registered capital) of its accumulated profits each year. Such cash reserve
may not be distributed as cash dividends. In addition, if the PRC subsidiary
incurs debt on its own behalf in the future, the instruments governing the debt
may restrict its ability to pay dividends or make other payments to
us.
PRC
regulations on loans and direct investments by overseas holding companies in PRC
entities may delay or prevent us to make overseas loans or additional capital
contributions to our PRC subsidiary.
Under the
PRC laws, foreign investors may make loans to their PRC subsidiaries or foreign
investors may make additional capital contributions to their PRC subsidiaries.
Any loans to such PRC subsidiaries are subject to the PRC regulations and
foreign exchange loan registrations, i.e. loans by foreign investors to their
PRC subsidiaries to finance their activities cannot exceed statutory limits and
must be registered with the SAFE, or its local branch. Foreign investors may
also decide to finance their PRC subsidiaries by means of additional capital
contributions. These capital contributions must be examined and approved by the
MOFCOM, or its local branch in advance.
Under
the PRC Enterprise Income Tax
Law, we may be classified as a “resident enterprise” of China, and such
classification would likely result in unfavorable tax consequences to us and our
non-PRC stockholders.
On March
16, 2007, the National People’s Congress or NPC, approved and promulgated the
PRC Enterprise Income Tax
Law, which we refer to as the New EIT Law. The New EIT Law took effect on
January 1, 2008. Under the New EIT Law, Foreign Investment Enterprises, or FIEs,
and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law
provides a five-year transition period starting from its effective date for
those enterprises which were established before the promulgation date of the New
EIT Law and which were entitled to a preferential lower tax rate under the
then-effective tax laws or regulations.
On
December 26, 2007, the State Council issued a Notice on Implementing Transitional
Measures for Enterprise Income Tax, or the Notice, providing that the
enterprises that have been approved to enjoy a low tax rate prior to the
promulgation of the New EIT Law will be eligible for a five-year transition
period since January 1, 2008, during which time the tax rate will be increased
step by step to the 25% unified tax rate set out in the New EIT Law. From
January 1, 2008, for the enterprises whose applicable tax rate was 15% before
the promulgation of the New EIT Law , the tax rate will be increased to 18% for
year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011 and 25% for
year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate
will be changed to 25% from January 1, 2008.
Under the
New EIT Law, an enterprise established outside of China with “de facto
management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the New EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. Because the New EIT Law and its implementing rules are new, no
official interpretation or application of this new “resident enterprise”
classification is available. Therefore, it is unclear how tax authorities will
determine tax residency based on the facts of each case.
-20-
If the
PRC tax authorities determine that we are “resident enterprises” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on offering proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules, dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” and we cannot guarantee that such dividends will
not be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC stockholders and with respect to gains derived by our non-PRC
stockholders from transferring our shares. We are actively monitoring the
possibility of “resident enterprise” treatment for the applicable tax years and
are evaluating appropriate organizational changes to avoid this treatment, to
the extent possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
credited against our U.S. tax.
Dividends
we received from Keyuan Plastics may be subject to PRC withholding
tax.
The New
EIT Law and the Implementation Rules of the New EIT Law provides that an income
tax rate of 10% may be applicable to dividends payable to non-PRC investors that
are “non-resident enterprises”, which (i) do not have an establishment or place
of business in the PRC, or (ii) have such establishment or place of business in
the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends are derived
from sources within the PRC. The income tax for non-resident enterprises shall
be subject to withholding at the income source, with the payer acting as the
obligatory withholder under the New EIT Law, and therefore such income taxes are
generally called withholding tax in practice. It is currently unclear in what
circumstances a source will be considered as located within the PRC. We are an
offshore holding company. Thus, if we are considered as a “non-resident
enterprise” under the New EIT Law and the dividends paid to us by our subsidiary
in the PRC are considered income sourced within the PRC, such dividends may be
subject to a 10% withholding tax.
In January 2009, the State Administration of Taxation,
or SAT, promulgated the Provisional Measures for the Administration of
Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”),
pursuant to which, the entities which have the direct obligation to make the
following payment to a non-resident enterprise shall be the relevant tax
withholders for such non-resident enterprise, and such payment includes: incomes
from equity investment (including dividends and other return on investment),
interests, rents, royalties, and incomes from assignment of property as well as
other incomes subject to enterprise income tax received by non-resident
enterprises in China. Further, the Measures provides that in case of equity
transfer between two non-resident enterprises which occurs outside China, the
non-resident enterprise which receives the equity transfer payment shall, by
itself or engage an agent to, file tax declaration with the PRC tax authority
located at place of the PRC company whose equity has been transferred, and the
PRC company whose equity has been transferred shall assist the tax authorities
to collect taxes from the relevant non-resident enterprise. However, it is
unclear whether the Measures refer to the equity transfer by a non-resident
enterprise which is a direct or an indirect shareholder of the said PRC company.
Given these Measures, there is a possibility that Keyuan Plastics may have an
obligation to withhold income tax in respect of the dividends paid to
non-resident enterprise investors.
The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in the combined company’s tax rate in the future could have a material
adverse effect on its financial conditions and results of
operations.
-21-
We face uncertainty from China’s Circular on
Strengthening the Administration of Enterprise Income Tax on Non-Resident
Enterprises' Share Transfer (Circular 698 that was released in December 2009
with retroactive effect from January 1, 2008.)
The Chinese State Administration of Taxation released a
circular (“Circular 698”) on December 10, 2009 that addresses the transfer of
shares by nonresident companies. Circular 698, which is effective retroactively
to January 1, 2008, may have a significant impact on many companies that use
offshore holding companies to invest in China. Pursuant to Circular 698, where
the withholding agent does not withhold in accordance with laws or can’t perform
the withholding obligation, the non-resident enterprises shall file tax
declaration with the PRC tax authority located at place of the resident
enterprise whose equity has been transferred, within seven days since the date
of equity transfer provided under the contracts.
Where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise by selling the shares in an offshore
holding company, and the latter is located in a country or jurisdiction where
the effective tax burden is less than 12.5% or where the offshore income of his,
her, or its residents is not taxable, the foreign investor is required to
provide the tax authority in charge of that Chinese resident enterprise with the
relevant information within 30 days of the transfers. Moreover, where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
through an abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the PRC tax
authority will have the power to re-assess the nature of the equity transfer in
accordance with PRC’s “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning
purposes.
There is uncertainty as to the application of Circular
698. For example, while the term "indirectly transfer" is not defined, it is
understood that the relevant PRC tax authorities have jurisdiction regarding
requests for information over a wide range of foreign entities having no direct
contact with China. Moreover, the relevant authority has not yet promulgated any
formal provisions or formally declared or stated how to calculate the effective
tax in the country or jurisdiction and to what extent and the process of the
disclosure to the tax authority in charge of that Chinese resident enterprise.
In addition, there are no formal declarations with regard to how to decide abuse
of form of organization and reasonable commercial purpose, which can be utilized
by us to balance if our company complies with the Circular 698. As a result, we
may become at risk of being taxed under Circular 698 and we may be required to
expend valuable resources to comply with Circular 698 or to establish that we
should not be taxed under Circular 698, which could have a material adverse
effect on our financial condition and results of operations.
Keyuan
Plastics is obligated to withhold and pay PRC individual income tax on behalf of
our employees who are subject to PRC individual income tax. If we fail to
withhold or pay such individual income tax in accordance with applicable PRC
regulations, we may be subject to certain sanctions and other penalties and may
become subject to liability under PRC laws.
Under PRC
laws, Keyuan Plastics is obligated to withhold and pay individual income tax on
behalf of our employees who are subject to PRC individual income tax. If the PRC
subsidiary fails to withhold and/or pay such individual income tax in accordance
with PRC laws, it may be subject to certain sanctions and other penalties and
may become subject to liability under PRC laws.
In
addition, the SAT has issued several circulars concerning employee stock
options. Under these circulars, our employees working in the PRC (which could
include both PRC employees and expatriate employees subject to PRC individual
income tax) who exercise stock options will be subject to PRC individual income
tax. Our PRC subsidiary has obligations to file documents related to employee
stock options with relevant tax authorities and withhold and pay individual
income taxes for those employees who exercise their stock options. While tax
authorities may advise us that our policy is compliant, they may change their
policy, and we could be subject to sanctions.
-22-
Regulation
of foreign currency’s conversion into RMB and investment by FIEs may adversely
affect our PRC subsidiary’s direct investment in China
On August
29, 2008, SAFE issued a Notice
of the General Affairs Department of the State Administration of Foreign
Exchange on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises or Notice 142, to further regulate the
foreign exchange of FIEs. According to the Notice 142, FIEs shall obtain a
verification report from a local accounting firm before converting its
registered capital of foreign currency into Renminbi, and the converted Renminbi
shall be used for the business within its permitted business scope. The Notice
142 explicitly prohibits FIEs from using RMB converted from foreign capital to
make equity investments in the PRC, unless the domestic equity investment is
within the approved business scope of the FIE and has been approved by SAFE in
advance. In addition, SAFE strengthened its oversight over the flow and use of
Renminbi funds converted from the foreign currency-dominated capital of a FIE.
The use of such Renminbi may not be changed without approval from SAFE, and may
not be used to repay Renminbi loans if the proceeds of such loans have not yet
been used. Violations of Notice 142 may result in severe penalties, including
substantial fines as set forth in the SAFE rules.
Regulations
of Overseas Investments and Listings may increase the administrative burden we
face and create regulatory uncertainties.
On August
8, 2006, six PRC regulatory agencies, including the MOFCOM, the CSRC, the SASAC,
SAT, the SAIC and the SAFE, amended and released the New M&A Rule, which
took effect as of September 8, 2006. This regulation, among other things,
includes provisions that purport to require that an offshore SPV formed for
purposes of overseas listing of equity interest in PRC companies and controlled
directly or indirectly by PRC companies or individuals obtain the approval of
CSRC prior to the listing and trading of such SPV’s securities on an overseas
stock exchange.
On
September 21, 2006, CSRC published on its official website procedures regarding
its approval of overseas listings by SPVs. CSRC approval procedures require the
filing of a number of documents with CSRC and it would take several months to
complete the approval process.
The
application of the New M&A Rule with respect to overseas listings of SPVs
remains unclear with no consensus currently existing among the leading PRC law
firms regarding the scope of the applicability of CSRC approval
requirement.
It is not
clear whether the provisions in the new regulation regarding the offshore
listing and trading of the securities of a SPV apply to an offshore company such
as us which owns equity interest in Keyuan Plastics. We believe that the M&A
Rules and CSRC approval are not required in the context of the share exchange
under our transaction because (i) such share exchange is a purely foreign
related transaction governed by foreign laws, not subject to the jurisdiction of
PRC laws and regulations; (ii) we are not a SPV formed or controlled by PRC
companies or PRC individuals; (iii) Keyuan Plastics was established as a foreign
investment enterprise by means of direct investment rather than by merger or
acquisition of an existing PRC domestic company and it is not owned or
controlled by PRC individuals or entities; (iv) we are owned or substantively
controlled by foreigners; and (v) there is no clear requirement in the New
M&A Rule that would require an application to be submitted to the MOFCOM or
CSRC for the approval of the listing and trading of our common stock on the U.S.
security market. However, we cannot be certain that the relevant PRC government
agencies, including CSRC, would reach the same conclusion, and we still cannot
rule out the possibility that CSRC may deem that the transactions effected by
the share exchange circumvented the M&A Rules, the PRC Securities Law and
other rules and notices.
If CSRC
or another PRC regulatory agency subsequently determines that CSRC’s approval is
required for the transaction, we may face sanctions by CSRC or another PRC
regulatory agency. If this happens, these regulatory agencies may impose fines
and penalties on our operations in the PRC, limit our operating privileges in
the PRC, delay or restrict the repatriation of the proceeds from this Offering
into the PRC, restrict or prohibit payment or remittance of dividends to us or
take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as
the trading price of our shares. CSRC or other PRC regulatory agencies may also
take actions requiring us, or making it advisable for us, to delay or cancel the
transaction.
The
M&A Rules, along with foreign exchange regulations discussed in the above
subsection, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions,
and we cannot predict how they will affect our business development
strategy.
-23-
Failure
to comply with PRC laws and regulations relating to the environmental protection
and safety in production requirements in China may result in severe penalties
and liabilities.
The
Chinese government has been adopting increasingly stringent regulations relating
to the safety and environmental protection, and our business depends upon
compliance with the aforesaid regulations and requirements. We are in the
process of conducting as-build acceptance inspection and have to obtain relevant
safety production permits and approvals from a variety of competent government
authorities upon completion of aforesaid inspection. There is no assurance that
we will obtain or renew all of such permits or approvals from relevant competent
government authorities, which are subject to our fulfillment of the standards
and requirements set out by the regulatory authorities. Our operations at our
production facilities are subject to periodic checks by the relevant authorities
in the PRC and they have the power to take action against us, impose fines,
withdraw or suspend our relevant licenses or activities or impose other
penalties if we fail to comply with relevant regulations, in the event of which
our business operations may be adversely affected. In addition, any change in
the scope or application of these laws and regulations may limit our production
capacity or increase our cost of operation and could therefore have an adverse
effect on our business operations, financial condition and operating results.
Our failure to comply with these laws and regulations could result in fines,
penalties or legal proceedings. There can be no assurance that the Chinese
government will not impose additional or stricter laws or regulations,
compliance with which may cause us to incur significant capital expenditures,
which it may not be able to pass on to our customers.
Risks
Associated With Doing Business in China
There
are substantial risks associated with doing business in China, as set forth in
the following risk factors.
Our
operations and assets in China are subject to significant political and economic
uncertainties.
Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
We
derive a substantial portion of ours sales from China.
Substantially
all of our sales are generated from China. We anticipate that sales of our
products in China will continue to represent a substantial proportion of our
total sales in the near future. Any significant decline in the condition of the
PRC economy could adversely affect consumer demand of our products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of exchange
rate fluctuations with respect to any of these currencies. For example, the
value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as
well as supply and demand in the local market. Since 1994, the official exchange
rate for the conversion of Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on
July 21, 2005, the Chinese government changed its policy of pegging the value of
Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. As a result of this policy change, Chinese Renminbi appreciated
approximately 0.09% against the U.S. dollar in 2009 and 3.35% in 2008. It is
possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be
stable against the U.S. dollar or any other foreign currency.
-24-
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currency denominated transactions could result in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions could result in increased
revenue, operating expenses and net income for our international operations. We
are also exposed to foreign exchange rate fluctuations as we convert the
financial statements of our foreign subsidiaries into U.S. dollars in
consolidation. If there is a change in foreign currency exchange rates, the
conversion of the foreign subsidiaries’ financial statements into U.S. dollars
will lead to a translation gain or loss which is recorded as a component of
other comprehensive income. In addition, we have certain assets and liabilities
that are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or loss. We
have not entered into agreements or purchased instruments to hedge our exchange
rate risks, although we may do so in the future. The availability and
effectiveness of any hedging transaction may be limited and we may not be able
to successfully hedge our exchange rate risks.
Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of Chinese Renminbi into foreign currency for current account
items, conversion of Chinese Renminbi into foreign exchange for capital items,
such as foreign direct investment, loans or securities, requires the approval of
SAFE which is under the authority of the People’s Bank of China. These
approvals, however, do not guarantee the availability of foreign currency
conversion. We cannot be sure that we will be able to obtain all required
conversion approvals for our operations or that Chinese regulatory authorities
will not impose greater restrictions on the convertibility of Chinese Renminbi
in the future. Because a significant amount of our future revenue may be in the
form of Chinese Renminbi, our inability to obtain the requisite approvals or any
future restrictions on currency exchanges could limit our ability to utilize
revenue generated in Chinese Renminbi to fund our business activities outside of
China, or to repay foreign currency obligations, including our debt obligations,
which would have a material adverse effect on our financial condition and
results of operations
We
may have limited legal recourse under PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted laws and regulations dealing with matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, their experience in implementing, interpreting and enforcing
these laws and regulations is limited, and our ability to enforce commercial
claims or to resolve commercial disputes is unpredictable. If our new business
ventures are unsuccessful, or other adverse circumstances arise from these
transactions, we face the risk that the parties to these ventures may seek ways
to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations.
Because
our funds are held in banks in uninsured PRC bank accounts, the failure of any
bank in which we deposit our funds could affect our ability to continue our
business.
Funds on
deposit at banks and other financial institutions in the PRC are often
uninsured. A significant portion of our assets are in the form of cash deposited
with banks in the PRC, and in the event of a bank failure, we may not have
access to our 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.
-25-
Our
business could be severely harmed if the Chinese government changes its
policies, laws, regulations, tax structure or its current interpretations of its
laws, rules and regulations, relating to our operations in China.
Our
business is located in Ningbo, China and virtually all of our assets are located
in China. We generate our sales revenue only from customers located in
China. Our results of operations, financial state of affairs and future growth
are, to a significant degree, subject to China’s economic, political and legal
development and related uncertainties. Our operations and results could be
materially affected by a number of factors, including, but not limited
to
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in policies by the Chinese government resulting in changes in laws or
regulations or the interpretation of laws or
regulations,
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changes
in taxation,
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changes
in employment restrictions,
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import
duties, and
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currency
revaluation.
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Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activities and greater economic
decentralization. If the Chinese government does not continue to pursue its
present policies that encourage foreign investment and operations in China, or
if these policies are either not successful or are significantly altered, then
our business could be harmed. Following the Chinese government’s policy of
privatizing many state-owned enterprises, the Chinese government has attempted
to augment its revenues through increased tax collection. It also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Continued efforts to increase tax revenues could result
in increased taxation expenses being incurred by us. Economic development may be
limited as well by the imposition of austerity measures intended to reduce
inflation, the inadequate development of infrastructure and the potential
unavailability of adequate power and water supplies, transportation and
communications. In addition, the Chinese government continues to play a
significant role in regulating industry by imposing industrial
policies.
Failure
to comply with the U.S. foreign corrupt practices act and Chinese
anti-corruption laws could subject us to penalties and other adverse
consequences.
Our
executive officers, employees and other agents may violate applicable law in
connection with the marketing or sale of our products, including China’s
anti-corruption laws and the U.S. Foreign Corrupt Practices Act, or the FCPA,
which generally prohibits United States companies from engaging in bribery or
other prohibited payments to foreign officials for the purpose of obtaining or
retaining business. In addition, we are required to maintain records that
accurately and fairly represent our transactions and have an adequate system of
internal accounting controls. Foreign companies, including some that may compete
with us, are not subject to these prohibitions, and therefore may have a
competitive advantage over us. The PRC also strictly prohibits bribery of
government officials. However, corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC.
While we
intend to implement measures to ensure compliance with the FCPA and China’s
anti-corruption laws by all individuals involved with our company, our employees
or other agents may engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of
operations. In addition, our brand and reputation, our sales activities or our
stock price could be adversely affected if we become the target of any negative
publicity as a result of actions taken by our employees or other
agents.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
Renminbi is not a freely convertible currency currently, and the restrictions on
currency exchanges may limit our ability to use revenues generated in Renminbi
to fund our business activities outside the PRC or to make dividends or other
payments in United States dollars. The PRC government strictly regulates
conversion of Renminbi into foreign currencies. Over the years, foreign exchange
regulations in the PRC have significantly reduced the government’s control over
routine foreign exchange transactions under current accounts. In the PRC, SAFE
regulates the conversion of the Renminbi into foreign currencies. Pursuant to
applicable PRC laws and regulations, foreign invested enterprises incorporated
in the PRC are required to apply for “Foreign Exchange Registration
Certificates.” Currently, conversion within the scope of the “current account”
(e.g. remittance of foreign currencies for payment of dividends, etc.) can be
effected without requiring the approval of SAFE. However, conversion of currency
in the “capital account” (e.g. for capital items such as direct investments,
loans, securities, etc.) still requires the approval of SAFE.
-26-
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities, and, as a result, we are dependent on our relationship with
the local government in the province in which we operate our business. Chinese
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, 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 these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic conditions in
China or particular regions thereof, and could require us to divest ourselves of
any interest we then hold in Chinese properties.
The
implementation of the new PRC employment contract law and increase in the labour
costs in China may hurt our business and profitability.
A new
employment contract law became effective on January 1, 2008 in China. It imposes
more stringent requirements on employers in relation to entry into fixed-term
employment contracts, recruitment of temporary employees and dismissal of
employees. In addition, under the newly promulgated Regulations on Paid
Annual Leave for Employees, which also became effective on January 1, 2008,
employees who have worked continuously for more than one year are entitled to a
paid vacation ranging from 5 to 15 days, depending on the length of the
employee’s service. Employees who waive such vacation entitlements at the
request of the employer will be compensated for three times their normal daily
salaries for each vacation day so waived. As a result of the new law and
regulations, our labor costs may increase. There is no assurance that disputes,
work stoppages or strikes will not arise in the future. Increases in the labor
costs or future disputes with our employees could damage our business, financial
condition or operating results.
According
to PRC labor laws, the employer shall be responsible to deal with and pay social
insurances and housing fund for all of its employees based on the actual salary
of the employees. There is no guarantee that we and our subsidiaries will be
able to comply with the relevant requirements. Failure to comply with the
various PRC Labor Laws and regulation requirements described above could result
in liability under PRC law.
Future
inflation in China may inhibit our activity to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. These factors have led to the adoption by Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain inflation.
High inflation may in the future cause Chinese government to impose controls on
credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby harm the market for our products.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
We may
have difficulty in hiring and retaining a sufficient number of qualified
employees to work in the PRC. As a result, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. We may have
difficulty establishing adequate management, legal and financial controls in the
PRC.
-27-
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.
We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, some of our directors and
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon some of our directors and senior executive officers, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws. It would also be difficult for investors to bring an original
lawsuit against us or our directors or executive officers before a Chinese court
based on U.S. federal securities laws or otherwise. Moreover, China does not
have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.
Because
Chinese laws will govern almost all of our business’ material agreements, we may
not be able to enforce our rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities or
capital.
The
Chinese legal system is similar to 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. Although legislation in the PRC over the past 25
years has significantly improved the protection afforded to various forms of
foreign investment and contractual arrangements in the PRC, these laws,
regulations and legal requirements are relatively new. Due to the limited volume
of published judicial decisions, their non-binding nature, the short history
since their enactments, the discrete understanding of the judges or government
agencies of the same legal provision, inconsistent professional abilities of the
judicators, and the inclination to protect local interest in the court rooms,
interpretation and enforcement of PRC laws and regulations involve
uncertainties, which could limit the legal protection available to us, and
foreign investors, including you. The inability to enforce or obtain a remedy
under any of our future agreements could result in a significant loss of
business, business opportunities or capital and could have a material adverse
impact on our business, prospects, financial condition, and results of
operations. In addition, the PRC legal system is based in part on government
policies and internal rules (some of which are not published on a timely basis
or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until some time after the
violation. In addition, any litigation in the PRC, regardless of outcome, may be
protracted and result in substantial costs and diversion of resources and
management attention.
Risks
Related to our Securities
Insiders
have substantial control over us, and they could delay or prevent a change in
our corporate control even if our other stockholders wanted it to
occur.
Our
executive officers, directors, and principal stockholders hold 47,658 shares of
our Series M Preferred Stock, that are convertible into 47,658,000 shares
of our common stock, representing approximately 95.14% of our Common Stock after
giving effect to the conversion of the Series M Preferred Shares (without giving
effect to the Private Placement). Accordingly, these stockholders are able to
control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This could delay
or prevent an outside party from acquiring or merging with us even if our other
stockholders wanted it to occur.
There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.
There is
currently only a limited public market for our Common Stock and there can be no
assurance that a trading market will develop further or be maintained in the
future.
-28-
The
market price of our Common Stock may be volatile.
The
market price of our Common Stock has been and will likely continue to be highly
volatile, as is the stock market in general, and the market for OTC Bulletin
Board quoted stocks in particular. Some of the factors that may materially
affect the market price of our Common Stock are beyond our control, such as
changes in financial estimates by industry and securities analysts, conditions
or trends in the industry in which we operate or sales of our Common Stock.
These factors may materially adversely affect the market price of our Common
Stock, regardless of our performance. In addition, the public stock markets have
experienced extreme price and trading volume volatility. This volatility has
significantly affected the market prices of securities of many companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of our Common Stock.
Because
we are becoming public by means of a reverse merger, it may not be able to
attract the attention of major brokerage firms.
Since we
became public through a “reverse merger,” the newly-issued common shares issued
in connection with the “reverse merger” and the Private Placement are restricted
shares, As a result, our common stock will continue to be very thinly traded
after the reverse merger, until a considerable number of such shares are
registered in an effective registration statement or become sellable under Rule
144. Therefore, securities analysts of major brokerage firms may not provide
coverage of our Company since there is little incentive to brokerage firms to
recommend the purchase of our Common Stock. No assurance can be given that
brokerage firms will want to conduct any secondary offerings on behalf of the
Company in the future.
When the registration statement
required to be filed under the Registration Rights Agreement becomes effective, there will be a
significant number of shares of Common Stock eligible for sale, which could
depress the market price of such stock.
Following
the effective date of the registration statement required to be filed under the
Registration Rights Agreement, a large number of shares of Common Stock would
become available for sale in the public market, which could harm the market
price of the stock. Further, shares may be offered from time to time in the open
market pursuant to Rule 144, and these sales may have a depressive effect as
well. In general, a non-affiliate who has held restricted securities for a
period of six (6) months may sell such securities into the market and an
“affiliate” who has held restricted shares for a period of six (6) months may,
upon filing a notification with the SEC on Form 144, sell Common Stock into the
market in an amount equal to one percent (1%) of the outstanding
shares.
Any market that develops in shares of
our common stock will be subject to the penny stock regulations and
restrictions, which could impair liquidity and make trading
difficult.
SEC Rule 15g-9, as amended, establishes the definition
of a "penny stock" as any equity security that has a market price of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to a limited number of exceptions. The market price of the Common Stock
is currently less than $5.00 per share and therefore may be a “penny stock.”
This classification severely and adversely affects
the market liquidity for our common stock.
For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person’s account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased. To approve a person’s account for
transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that that person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
-28-
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market
which, in highlight form, sets forth:
|
|
the
basis on which the broker or dealer made the suitability determination,
and
|
|
|
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stock in both public
offerings and in secondary trading and commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. 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.
Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and/or may encounter
difficulties in their attempt to sell shares of our common stock, which may
affect the ability of selling stockholders or other holders to sell their shares
in any secondary market and have the effect of reducing the level of trading
activity in any secondary market. These additional sales practice and disclosure
requirements could impede the sale of our securities, if and when our securities
become publicly traded. In addition, the liquidity for our securities may
decrease, with a corresponding decrease in the price of our securities. Our
shares, in all probability, will be subject to such penny stock rules for the
foreseeable future and our shareholders will, in all likelihood, find it
difficult to sell their securities.
The
market for penny stocks has experienced numerous frauds and abuses which could
adversely impact investors in our stock.
OTCBB
securities are frequent targets of fraud or market manipulation, both because of
their generally low prices and because OTCBB reporting requirements are less
stringent than those of the stock exchanges or NASDAQ.
Patterns
of fraud and abuse include:
|
·
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
|
·
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
|
·
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
-29-
|
·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
|
·
|
Wholesale
dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the inevitable
collapse of those prices with consequent investor
losses.
|
Our
management is aware of the abuses that have occurred historically in the penny
stock market.
We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.
We have
never paid any cash dividends on our Common Stock and do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future and any return
on investment may be limited to the value of our Common Stock. We plan to retain
any future earning to finance growth.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of Keyuan International for the fiscal years ended December 31, 2009
and 2008, should be read in conjunction with the Selected Consolidated Financial
Data, Keyuan International’s financial statements, and the notes to those
financial statements that are included elsewhere in this Memorandum. Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the Risk
Factors, Cautionary Notice Regarding Forward-Looking Statements and Business
sections in this Memorandum. We use words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements.
Overview
Operating
through our wholly-owned subsidiary, Keyuan Plastics, located in Ningbo, China,
we are a manufacturer and supplier of various petrochemical products in China.
Through Keyuan Plastics, our operations include (i) an annual petrochemical
manufacturing capacity of 550,000 metric tons (MT) of a variety of petrochemical
products, (ii) facilities for the storage and loading of raw materials and
finished goods, (iii) a manufacturing technology that can support our
manufacturing process with low raw material costs and high utilization and
yields, (iv) a strong management team consisting of petrochemical experts with
proven track records from some of China’s largest state-owned enterprises in the
petrochemical industry, and (v) a robust customer base with long-term purchase
contracts.
Due to
China’s growing demand for refined petrochemical products, which is mainly
attributable to China’s robust economic growth and under-developed domestic
supply capacity, our customer request orders for the year 2010 has exceeded our
current annual production capacity. In order to increase our production capacity
to meet the increasing market demands, our management team plans to expand our
manufacturing capacity to include a raw material pre-treatment facility,
additional storage capacity and an asphalt production facility.
Asphalt
is used as building material for highways, roads, airport pavement or as raw
material for emulsified, diluted and modified asphalt. Ranked second in the
world in length of highways at 75,000 km (46,603 miles), China’s demand for
asphalt has exceeded the domestic supply capacity in the past five years, which
resulted in the import of 13.5 million MT in the aggregate from 2005 to 2008.
Maintenance and expansion of the highway system is expected to
continue.
The
Ningbo Municipal Government has reserved approximately 1.3 million square feet
of land adjacent to our current production facility for our proposed
manufacturing expansion which will include a raw material pre-treatment
facility, additional storage capacity and an asphalt production
facility.
-30-
Our
Facility and Equipment
Facility
To date,
we have invested a total of approximately $132,000,000 in the construction and
improvement of our production facility with a total of 1.2 million square feet,
including 594,000 square feet for production and 19,500 square feet for
laboratories and offices.
We have a
total of 100,000 MT of storage capacity, consisting of 50,000 MT of storage
capacity for raw materials and 50,000 MT for finished products. In addition, we
plan to add 100,000 MT of new storage capacity.
We have
an on-site ocean shipping dock with 5,000 MT of shipping capacity and a 10-truck
loading facility. Approximately 90% of our feedstock and finished products use
this shipping dock. In addition, we also have adjacent access to another
shipping dock with an additional 50,000 MT of shipping capacity.
Equipment
Our major
processing equipment includes
|
·
|
heavy
oil catalytic pyrolysis processing equipment-
risers/generators/precipitators, fuel gas boilers, fractionating tower,
absorbing re-absorbing and desorbing towers, heat exchangers, pumps, a
stabilizing tower;
|
|
·
|
gas
fractionation processing equipment- de-propanizing tower, refining
propylene tower, de-ethanizination tower, heat exchangers,
pumps;
|
|
·
|
ethylbenzene
processing equipment- alkylation reactor, anti-alkylation reactor,
dehydrogenation reactor, propylene absorbing tower, de-ethylene tower,
ethylbenzene recovering tower, heating furnace for benzene, heating
furnace for gas, steam overheating furnace, tail gas compressor, washing
tower; and
|
|
·
|
liquefied
petroleum gas (LPG) and sulfur recovery process- LPG desulfurization
extraction tower, dry gas desulfurization tower, regenerating tower, LPG
de-mecaptan extraction tower.
|
Our
Products
We
manufacture and supply a variety of petrochemical products, including BTX
aromatics, propylene, styrene, LPG, MTBE and other petrochemicals.
|
·
|
BTX Aromatics:
consisting of benzene, toluene, xylene and other chemical components for
further processing into oil resin, gasoline and solvents materials widely
used in paint, ink, construction coating and
pesticide.
|
|
·
|
Propylene: a chemical
intermediate as one of the building blocks for an array of chemical and
plastic products that are commonly used to produce polypropylene,
acrylonitrile, oxo chemicals, propylene oxide, cumene, isopropyl alcohol,
acrylic acid and other chemicals for paints, household detergents,
automotive brake fluids, indoor/outdoor carpeting, textile, insulating
materials, auto parts and electrical
appliances.
|
|
·
|
Styrene: a precursor to
polystyrene and several copolymers widely used for packaging materials,
construction materials, electronic parts, home appliances, household
goods, home furnishings, toys, sporting goods and others. LPG: a mixture of
hydrocarbon gases used as fuel in heating appliances and vehicles. A
replacement for chlorofluorocarbons as an aerosol propellant and a
refrigerant which reduces damage to the ozone
layer.
|
|
·
|
MTBE & Other
Chemicals: MTBE, oil slurry, sulphur and others are used for a
variety of applications including fuel components, refrigeration systems,
fertilizers, insecticides and fungicides,
etc.
|
-31-
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities. On an on-going basis, we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of inventory, income taxes and contingencies. We
base our estimates on historical experience and on other assumptions that we
believes to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the
weighted-average cost method. Provisions are made for excess, slow moving and
obsolete inventory as well as inventory whose carrying value is in excess of net
realizable value. Management continually evaluates the recoverability based on
assumptions about customer demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory reserves or write-downs may be required that could negatively impact
our gross margin and operating results. The Company did not record any provision
for slow-moving and obsolete inventory as of December 31, 2009 and
2008.
Property and
Equipment
Property
and equipment are stated at cost. Depreciation is calculated based on the
straight-line method over the estimated useful lives of the assets as
follows:
|
Vehicles
Furniture,
machinery and equipment
Buildings
and improvements
|
5
years
5
to 10 years
45
years
|
Construction
in progress primarily represents the renovation costs of plant, machinery and
equipment. Costs incurred are capitalized and transferred to property and
equipment upon completion, at which time depreciation commences.
Cost of
repairs and maintenance is expensed as incurred. Gain or loss on disposal of
property and equipment, if any, is recognized in the statements of
operations.
Long-Lived
Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” codified in FASB ASC Topic 360-10, the Company reviews the
recoverability of its long-lived assets on a periodic basis in order to identify
business conditions, which may indicate a possible impairment. The assessment
for potential impairment is based primarily on the Company’s ability to recover
the carrying value of its long-lived assets from expected future discounted cash
flows. If the total of the expected future discounted cash flows is less than
the total carrying value of the assets, a loss is recognized for the difference
between the fair value (computed based upon the expected future discounted cash
flows) and the carrying value of the assets.
Intangible
Assets
Intangible
assets are stated at cost. Intangible assets with finite life are amortized over
their estimated useful life using straight-line method. Impairment test is
performed at a minimum once a year to determine possible impairment loss.
Estimated useful life of intangible assets is as follows:
|
Rights
to use land
Software
Technology
|
15-50
years
10
years
9-20
years
|
-32-
Impairment of Intangible
Assets
We apply
the provisions of Financial Accounting Statement No. 142 “Goodwill and Other
Intangible Assets”, codified in FASB ASC Topic 350, which addresses how goodwill
and other acquired intangible assets should be accounted for in financial
statements. In this regard, the Company tests these intangible assets for
impairment annually or more frequently if indicators of potential impairment are
present. Such circumstances could include, but are not limited to: (1) a
significant decrease in the market value of an asset, (2) a significant adverse
change in the extent or manner in which an asset is used, or (3) an accumulation
of costs significantly in excess of the amount originally expected for the
acquisition of an asset. The Company measures the carrying amount of the asset
against the estimated discounted future cash flows associated with it at a
risk-free rate of interest. Should the present value of the expected future net
cash flows be less than the carrying value of the asset being evaluated, an
impairment loss would be recognized. The impairment loss would be calculated as
the amount by which the carrying value of the asset exceeds its fair
value.
The fair
value is measured based on quoted market prices, if available. If quoted market
prices are not available, the estimate of fair value is based on various
valuation techniques, including the discounted value of estimated future cash
flows. The evaluation of asset impairment requires us to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and
estimated amounts. Based on our review, we believes that, as of December 31,
2009 and 2008, there were no significant impairments of our intangible
assets.
Revenue
Recognition
We derive
our revenues primarily from sale of petrochemicals. In accordance with the
provisions of Staff Accounting Bulletin No. 104, codified in FASB ASC Topic 480,
revenue should not be recognized until it is realized or realizable and earned.
Revenues are considered to have been earned when the entity has substantially
accomplished what it must do to be entitled to the benefits represented by the
revenues. In this regard, our revenue is recognized when merchandise is received
by customers or shipped by us pursuant to contractual terms of sales, title and
risk of loss passes to the customers and the collectibility is reasonably
assured.
Research and
Development
Research
and development costs are expensed as incurred. Research and development costs
for the years ended December 31, 2009 and 2008 were insignificant.
Recently
Issued Accounting Pronouncements
In
October 2009, the FASB issued an amendment to the accounting and disclosure for
revenue recognition. The amendment modifies the criteria for recognizing revenue
in multiple element arrangements. Under the guidance, in the absence of
vendor-specific objective evidence (“VSOE”) or other third party evidence
(“TPE”) of the selling price for the deliverables in a multiple-element
arrangement, this amendment requires companies to use an estimated selling price
(“ESP”) for the individual deliverables.
On July
1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched
the FASB Accounting Standards Codification (“ASC”), which has become the single
official source of authoritative nongovernmental U.S. GAAP, in addition to
guidance issued by the Securities and Exchange Commission. The ASC is designed
to simplify U.S. GAAP into a single, topically ordered structure. All guidance
contained in the ASC carries an equal level of authority. The ASC is effective
for all interim and annual periods ending after September 15, 2009.
-33-
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), codified
in FASB ASC Topic 855-10-05, which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. SFAS 165 (ASC 855-10-05) also requires entities to disclose the
date through which subsequent events were evaluated as well as the rationale for
why that date was selected. SFAS 165 (ASC 855-10-05) is effective for interim
and annual periods ending after June 15, 2009, and accordingly, the Company
adopted this pronouncement during the year ended December 31, 2009. SFAS 165
(ASC 855-10-05) requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through February 23, 2010.
Results
of Operations
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009, and 2008:
|
For
the Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Sales
|
$ | 68,653,603 | $ | - - | ||||
|
Cost
of sales
|
75,311,595 | - | ||||||
|
Gross
profit
|
(6,657,992 | ) | - | |||||
|
Operating
expenses
|
||||||||
|
Selling expenses
|
24,836 | - | ||||||
|
General and administrative
expenses
|
2,714,093 | 1,839,253 | ||||||
|
Total operating
expenses
|
2,738,929 | 1,839,253 | ||||||
|
Loss
from operations
|
(9,396,921 | ) | (1,839,253 | ) | ||||
|
Other
income (expenses):
|
||||||||
|
Interest
expense, net
|
(2,031,983 | ) | (64,584 | ) | ||||
|
Non-operating
expenses
|
(348,515 | ) | (39,885 | ) | ||||
|
Total
other expenses
|
(2,380,498 | ) | (104,469 | ) | ||||
|
Loss
before provision for income tax
|
(11,777,419 | ) | (1,943,722 | ) | ||||
|
Provision(benefit)
for income tax
|
(2,944,350 | ) | (441,794 | ) | ||||
|
Net
loss
|
(8,833,069 | ) | (1,501,928 | ) | ||||
|
Other
comprehensive income
|
||||||||
|
Foreign currency translation
adjustment
|
15,991 | 649,089 | ||||||
|
Comprehensive
loss
|
$ | (8,817,078 | ) | $ | (852,839 | ) | ||
-34-
For
the years ended December 31, 2009 and 2008
Sales: Our sales for the year
ended December 31, 2009 were $68,653,603, compared to sales of $-0- for the year
ended December 31, 2008. The substantial increase in our sales was due to our
commencement of trial production and distribution from September 2009 after a
long-term construction period through the year 2008.
Cost of Sales: Cost of sales
was $75,311,595 for the year ended December 31, 2009, compared to cost of sales
of $-0- for the year ended December 31, 2008. Our cost of sales are primarily
composed of the costs of direct raw materials (mainly heavy oil, benzene and
carbinol), labor, depreciation and amortization of manufacturing equipment and
facilities, and other overhead. This increase was due to our commencement of
trial production and distribution from September 2009, which resulted in some
non-recurring expenses associated with pre-running the production totaling
$8,600,000.
Gross Profit: Gross profits
for the year ended December 31, 2009 was ($6,657,992) compared to gross profits
of $-0- for the comparable period in 2008. Our negative gross profit for the
year ended December 31, 2009 was due to the non-recurring expenses described in
the preceeding paragraph before mass production which caused cost of sales on
our trial production stage to exceed revenue. With our normal production in the
first quarter of year 2010 and beyond, our cost of sales will be lower than our
revenue and we will generate positive gross profit.
Operating Expenses: Operating
expenses, including selling expenses, and general and administrative expenses,
were $2,738,929 for the year ended December 31, 2009 as compared to $1,839,253
for the comparable period in 2008, an increase of $899,676. Selling expenses
were $24,836 for the year ended December 31, 2009, compared to selling expenses
of $-0- for the comparable period in 2008. General and administrative expenses
were $2,714,093 for the year ended December 31, 2009, compared to $1,839,253 for
the comparable period in 2008. The increase of these major expenses was due to
our commencement of production and distribution activities.
Interest Expense: Interest
expense for the year ended December 31, 2009 was $2,031,983 compared to interest
expense of $64,584 for the comparable period in 2008. The increase in interest
expense was primarily due to the significant increase of our short-term bank
loans borrowed in 2009 which were used to fund our working capital at the
beginning of our production and distribution.
Net Loss: Net loss
for the year ended December 31, 2009 was approximately ($8,833,069) compared to
($1,501,928) for the year ended December 31, 2008, an increase of ($7,331,141).
The increase in net loss was due to the negative gross profit and the increase
of operating and interest expenses.
Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Currency
translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to $15,991 as of December 31, 2009. The balance sheet amounts with
the exception of equity at December 31, 2009 and 2008 were translated both at
RMB 6.82 to 1.00 U.S. dollar. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement
accounts for the year ended December 31, 2009 and 2008 were RMB 6.82082 and RMB
6.93722 to 1.00 U.S. dollar.
Liquidity
and Capital Resources
As of
December 31, 2009, we had an accumulated net loss of ($10,664,819) and a
negative working capital of approximately ($90,166,474). At December 31, 2009,
we had cash and cash equivalents of $20,043,345 as compared to $9,094,537 as of
December 31, 2008.
-35-
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
For
the Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by (used in) operating activities
|
(33,665,158 | ) | (1,786,362 | ) | ||||
|
Net
cash used in investing activities
|
(41,354,725 | ) | (46,556,768 | ) | ||||
|
Net
cash provided by financing activities
|
85,961,975 | 53,883,625 | ||||||
Net cash
used in operating activities was ($33,665,158) for the year ended December 31,
2009, compared to net cash used in operations of ($1,786,362) for the year ended
December 31, 2008. The ($31,878,796) increase was primarily due to the mass
material purchases at the beginning of production.
Net cash
used in investing activities was ($41,354,725) for the year ended December 31,
2009, compared to net cash used in investing activities of ($46,556,768) for the
year ended December 31, 2008. During the development stage through 2008 and
2009, large amounts of money were continuously invested in building construction
and equipment installation. It is expected net cash used in investing activities
will fall significantly in year 2010.
Net cash
provided by financing activities amounted to $85,961,975 for the year ended
December 31, 2009, compared to net cash used by financing activities of
$53,883,625 for the year ended December 31, 2008. The increase of
cash provided by financing activities was primarily a result of more loans
borrowed from banks for the year ended December 31, 2009.
We have
entered into loan agreements with our primary lenders, Bank of China, China
Construction Bank, Agricultural Bank of China, etc. under which we have term
loans. As of December 31, 2009, we had an aggregate principal amount of
$127,922,400 outstanding under the loan agreements, with maturity dates from
January 2010 to October 2012 and interest rates from 4.78% to 8.13% per annum.
$82,885,500 is classified as short term bank loans, $7,628,400 as current
portion of long term bank loans and $37,408,500 as long term bank loans. The
loan agreements contain customary affirmative and negative covenants and were
mainly guaranteed by third parties and individual persons or secured by a lien
on our property and equipment. As of December 31, 2009, we were in material
compliance with the terms of our loan agreements.
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
We have
70,000,000 shares of authorized capital stock, consisting of 50,000,000 shares
of Common Stock, par value $0.001, and 20,000,000 shares of the Company’s
Preferred Stock, par value $0.001, 11,000,000 of which are designated as Series
A Convertible Preferred Stock and 47,658 shares are designated as Series M
Convertible Preferred Stock. The following summary description relating to the
Company’s capital stock does not purport to be complete.
Common
Stock
As of the
date hereof, 3,094,362 shares of our Common Stock are issued and outstanding.
Holders of Common Stock are entitled to cast one vote for each share on all
matters submitted to a vote of shareholders, including the election of
directors. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board out of funds legally
available therefore. See “Dividend Policy.” Such holders do not have any
preemptive or other rights to subscribe for additional shares. All holders of
Common Stock are entitled to share ratably in any assets for distribution to
shareholders upon the liquidation, dissolution or winding up of the Company.
There are no conversion, redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred
Stock
The Board
is authorized, without further action by the shareholders, to issue, from time
to time, up to 20,000,000 shares of preferred stock in one or more classes or
series. Similarly, the Board will be authorized to fix or alter the
designations, powers, preferences, and the number of shares which constitute
each such class or series of preferred stock. Such designations, powers or
preferences may include, without limitation, dividend rights (and whether
dividends are cumulative), conversion rights, if any, voting rights (including
the number of votes, if any, per share), redemption rights (including sinking
fund provisions, if any), and liquidation preferences of any unissued shares or
wholly unissued series of preferred stock. As of the date hereof, the Board has
designated two classes of Preferred Stock, consisting of Series M Preferred
Stock and Series A Preferred Stock.
-36-
Series
A Preferred Stock
As of the
date hereof, we have 5,954,058 shares of Series A Preferred Stock issued and
outstanding. The Series A Preferred Shares being issued by us in the Private
Placement will, by its principal terms:
|
(a)
|
pay
a cumulative dividend at an annual rate of 6%, payable quarterly, at our
option, in cash or in shares of Common
Stock;
|
|
(b)
|
have
a preference over the Common Stock on liquidation, dissolution or winding
up of the Company equal to the original purchase price per Series A
Preferred Share;
|
|
(c)
|
be
convertible at any time after issuance, at the option of the holder, into
shares of Common Stock, without the payment of additional consideration,
at an initial conversion ratio of one-to-one (subject to anti-dilution
adjustment);
|
|
(d)
|
automatically
convert into shares of Common Stock at $3.50 per share, at the earlier to
occur of the following: (i) the twenty four (24) month anniversary of the
Closing, and (ii) such time that the VWAP of the Common Stock is no less
than $5.00 for a period of ten (10) consecutive trading days with the
daily volume of the Common Stock equal to at least 50,000 shares per
day;
|
|
(e)
|
the
conversion price and the number of common shares underlying the Series A
Preferred Stock are subject to customary adjustments, including weighted
average broad-based anti-dilution protection for a period of twelve (12)
months after the effective date of the registration statement required to
be filed under the Registration Rights Agreement;
and
|
|
(f)
|
require
that we, prior to taking certain corporate actions (including certain
issuances or redemptions of its securities or changes in its
organizational documents), obtain the approval of more than 50% of the
Series A Preferred Shares then issued and outstanding, voting as a
group.
|
Series
M Preferred Stock
As of the
date hereof, we have 47,658 shares of Series M Preferred Stock issued and
outstanding. Each share of Series M Preferred Stock being issued to Keyuan
International Shareholder in connection with the Share Exchange will, by its
principal terms:
|
(a)
|
convert
into one thousand (1,000) shares of Common Stock immediately following the
amendment to the Articles of Incorporation of the Company to increase the
number of authorized shares of Common Stock to one hundred million
(100,000,000);
|
|
(b)
|
have
the same voting rights as holders of Common Stock on an as-converted basis for
any matters that are subject to shareholder
vote;
|
|
(c)
|
not
be entitled to any dividends; and
|
|
(d)
|
be
treated pari
passu with the Common Stock on liquidation, dissolution or winding
up of the Company.
|
Copies of
the Series A Preferred Stock Certificate of Designations and Series M Preferred
Stock Certificate of Designations are attached hereto as Exhibits 4.1 and 4.2,
respectively.
The
Series A Warrants
As of the
date hereof, there are 661,562 Series A Warrants issued and outstanding. The
Series A Warrants will, by its principal terms,
|
(a)
|
entitle
the holder to purchase one (1) share of Common
Stock;
|
|
(b)
|
be
exercisable at any time after the consummation of the Private Placement
and shall expire on the date that is three (3) years following the
original issuance date of the Series A
Warrants;
|
|
(c)
|
be
exercisable, in whole or in part, at the Series A Warrant exercise price
of $4.50 per share;
|
|
(d)
|
be
exercised only for cash (except that there will be a cashless exercise
option at any time during which a registration statement covering such
shares is not effective); and
|
|
(e)
|
be
callable at $0.01 by us following the date that the VWAP of the Common
Stock equals or exceeds $9.00 for fifteen (15) consecutive trading days
with the average daily trading volume of no less than 75,000
shares.
|
-37-
The
Series B Warrants
As of the
date hereof, there are 661,562 Series B Warrants issued and outstanding. The
Series B Warrants will, by its principal terms,
|
(a)
|
entitle
the holder to purchase one (1) share of Common
Stock;
|
|
(b)
|
be
exercisable at any time after consummation of the Private Placement and
shall expire on the date that is three (3) years following the original
issuance date of the Series B
Warrants;
|
|
(c)
|
be
exercisable, in whole or in part, at the Series B Warrant exercise price
of $5.25 per share;
|
|
(d)
|
be
exercised only for cash (except that there will be a cashless exercise
option at any time during which registration statement covering such
shares is not effective); and
|
|
(e)
|
be
callable at $0.01 by us following the date that the VWAP of the Common
Stock equals or exceeds $10.50 for fifteen (15) consecutive trading days
with the average daily trading volume of no less than 75,000
shares.
|
Copies of
the Series A Warrant and Series B Warrant are attached hereto as Exhibits 10.5
and 10.6, respectively.
Market
Price of and Dividends on Common Equity and Other Shareholder
Matters
Market
Information
Our
Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“SVPE” and has very limited trading. No public market currently exists for
shares of our Common Stock and there can be no assurance that an active market
will develop.
Holders
of Common Stock
As of
April 22, 2010, there were of record approximately 208 holders of our Common
Stock.
Dividend
Policy
We have
not paid cash dividends on any class of common equity since formation and we do
not anticipate paying any dividends on our outstanding Common Stock in the
foreseeable future. We plan to retain any earnings to finance the development of
the business and for general corporate purposes.
Future
cash dividends, if any, will be at the discretion of our board of directors and
will depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other factors
as our board of directors may deem relevant. We can pay dividends only out of
our profits or other distributable reserves and dividends or distribution will
only be paid or made if we are able to pay our debts as they fall due in the
ordinary course of business.
Indemnification
of Directors and Officers
Our
officers and directors are indemnified as provided by the Nevada Revised
Statutes (‘NRS”) and our bylaws.
Under the
NRS, director immunity from liability to a company or its shareholders for
monetary liabilities applies automatically unless it is specifically limited by
a company’s articles of incorporation that is not the case with our articles of
incorporation. Excepted from that immunity are:
(1) a
willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
(2) a
violation of criminal law (unless the director had reasonable cause to believe
that his or her conduct was lawful or no reasonable cause to believe that his or
her conduct was unlawful);
(3) a
transaction from which the director derived an improper personal profit;
and
(4) willful
misconduct.
-38-
Our
Articles of Incorporation permits us to indemnify our officers and directors to
the fullest extent authorized or permitted by law in connection with any
proceeding arising by reason of the fact any person is or was our officer or
director. Notwithstanding this indemnity, a director shall be liable to the
extent provided by law for any liability incurred by him by his own fraud or
willful default.
Our
bylaws provide that we will indemnify our directors and officers to the fullest
extent not prohibited by Nevada law. Our bylaws provide that we will advance all
expenses incurred to any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was our director or officer, or is or was serving at our request
as a director or executive officer of another company, partnership, joint
venture, trust or other enterprise, prior to the final disposition of the
proceeding, promptly following request. This advance of expenses is to be made
upon receipt of an undertaking by or on behalf of such person to repay said
amounts should it be ultimately determined that the person was not entitled to
be indemnified under our bylaws or otherwise.
Principal
Stockholders
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of April 22, 2010 by (i) each person (or group of
affiliated persons) who is known by us to own more than five percent (5%) of the
outstanding shares of our Common Stock, (ii) each director, executive
officer and director nominee, and (iii) all of our directors, executive
officers and director nominees as a group. As of April 22, 2010, after the
closing of the Share Exchange and the Private Placement, we had 3,094,362 shares
of Common Stock issued and outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise noted,
the principal address of each of the stockholders, directors and officers listed
below is Qingshi
Industrial Park, Ningbo Economic & Technological Development Zone, Ningbo,
Zhejiang Province, P. R. China 31580. For purposes of this table, a person or
group of persons is deemed to have “beneficial ownership” of any shares of
common stock that such person has the right to acquire within 60 days of April
22, 2010. For purposes of computing the percentage of outstanding shares of
our common stock held by each person or group of persons named above, any shares
that such person or persons has the right to acquire within 60 days of April 22,
2010 is deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. The
inclusion herein of any shares listed as beneficially owned does not constitute
an admission of beneficial ownership.
|
Name
of Beneficial Owner
|
Amount
(number
of
shares)
|
Percentage
of Outstanding Shares of Common Stock
|
||||||
|
Delight
Reward Limited(1)
|
47,658,000 | (3) | 93.9 | %* | ||||
|
Chunfeng
Tao(2)
|
0 | 0 | % | |||||
|
Denise
D. Smith(4)
|
50,000 | (5) | 1.61 | %** | ||||
* Based
upon 50,752,362 shares of Common Stock issued and outstanding after the closing
of the Share Exchange and the Private Placement on April 22, 2010 after giving
effect to the conversion of the Series M Preferred Stock.
** Based
upon 3,094,362 shares of Common Stock issued and outstanding after the closing
of the Share Exchange and the Private Placement on April 22, 2010.
(1)
Delight Reward Limited is owned by Apex Smart Limited (45.6132%), Best Castle
Investments Limited (23.2523%), Chance Brilliant Holdings Limited (20.5694%),
Harvest Point Limited (5.3896%) and Strategic Synergy Limited (5.1755%). Mr.
Brian Pak-Lun Mok is the controlling person of Apex Smart Limited (subject to
the share transfer agreement described in Footnote 2 and the discussion below).
Mr. O. Wing Po is the controlling person of Best Castle Investments Limited
(subject to the share transfer agreement described in more detail below). Mr. Lo
Kan Kwan is the controlling person of Chance Brilliant Holdings Limited (subject
to the share transfer agreement described in more detail below). Mr. Brian
Pak-Lun Mok is the controlling person of Harvest Point Limited (subject to the
share transfer agreement described in more detail below). Mr. Brian Pak-Lun Mok
is the controlling person of Strategic Synergy Limited (subject to the share
transfer agreement described in more detail
below).
-39-
(2)
Chufeng Tao will become the chairman of our board of directors effective 10 days
after the mailing of Schedule 14(f). Pursuant to a share transfer agreement, Mr.
Chunfeng Tao, our Chairman, Chief Executive Officer, President and Chief
Financial Officer, will have an option, subject to certain performance targets,
to purchase from Mr. Brian Pak-Lun Mok, the current sole shareholder of Apex
Smart Limited (the current owner of 45.6132% of the share capital of Delight
Reward Limited), up to 100% of Apex Smart Limited equity, which, upon exercise,
would entitle Mr. Tao to own 45.6132% of the equity of Delight Reward Limited.
Accordingly, upon exercise of such option, Mr. Tao will indirectly (through his
45.6132% ownership of Delight Reward Limited) own and control 21,738,338 shares
of our Common Stock after giving effect to the conversion of the Series M
Preferred Stock.
(3) In
connection with the Share Exchange, Delight Reward will be issued 47,658 shares
of Series M Preferred Stock that will convert into 47,658,000 shares of Common
Stock at such time when we amend our Articles of Incorporation to increase the
number of authorized shares to one hundred million (100,000,000).
(4)
Denise D. Smith will resign from our board of directors effective 10 days after
the mailing of Schedule 14(f).
(5) At
the closing of the Share Exchange, Ms. Smith cancelled and transferred an
aggregate of 3,950,000 shares of our common stock that she owned.
Share Transfer
Agreements
The
controlling persons of the shareholders of Delight Reward Limited have entered
into certain Share Transfer Agreements whereby the controlling persons have each
agreed to transfer their interests to another beneficiary, subject to certain
performance targets being met.
Apex
Smart Limited
Mr. Brian
Pak-Lun Mok, the sole shareholder of Apex Smart Limited, entered into a Share
Transfer Agreement with Chunfeng Tao dated April 2, 2010. Pursuant to the Share
Transfer Agreement, Mr. Mok has granted to Mr. Tao an option to acquire the
50,000 ordinary shares of Apex Smart Limited if certain performance targets are
met. Specifically, the option to acquire the shares shall vest at a rate of
one-third (1/3) for each performance target that is met. The performance targets
are:
|
-
|
at
least $39 million of our gross revenue for the three months commencing
from July 2010 to September 2010;
|
|
-
|
at
least $40 million of our gross revenue for the three months commencing
from October 2010 to December 2010;
and
|
|
-
|
at
least $41 million of our gross revenue for the three months commencing
from January 2011 to March 2011.
|
A copy of
the Share Transfer Agreement between Brian Pak-Lun Mok and Chunfeng Tao is
attached hereto as Exhibit 10.7.
Best
Castle Investments Limited
Mr. O.
Wing Po, the sole shareholder of Best Castle Investments Limited, entered into a
Share Transfer Agreement with Jicun Wang dated April 2, 2010. Pursuant to the
Share Transfer Agreement, Mr. Po has granted to Mr. Wang an option to acquire
the 50,000 ordinary shares of Best Castle Investments Limited if certain
performance targets are met. Specifically, the option to acquire the shares
shall vest at a rate of one-third (1/3) for each performance target that is met.
The performance targets are:
|
-
|
at
least $39 million of our gross revenue for the three months commencing
from July 2010 to September 2010;
|
|
-
|
at
least $40 million of our gross revenue for the three months commencing
from October 2010 to December 2010;
and
|
|
-
|
at
least USD 41 million of our gross revenue for the three months commencing
from January 2011 to March 2011.
|
A copy of
the Share Transfer Agreement between O. Wing Po and Jicun Wang is attached
hereto as Exhibit 10.8.
-40-
Chance
Brilliant Holdings Limited
Mr. Lo
Kan Kwan, the sole shareholder of Chance Brilliant Holdings Limited, entered
into a Share Transfer Agreement with Peijun Chen dated April 2, 2010. Pursuant
to the Share Transfer Agreement, Mr. Kwan has granted to Mr. Chen an option to
acquire the 50,000 ordinary shares of Chance Brilliant Holdings Limited if
certain performance targets are met. Specifically, the option to acquire the
shares shall vest at a rate of one-third (1/3) for each performance target that
is met. The performance targets are:
|
-
|
at
least $39 million of our gross revenue for the three months commencing
from July 2010 to September 2010;
|
|
-
|
at
least $40 million of our gross revenue for the three months commencing
from October 2010 to December 2010;
and
|
|
-
|
at
least $41 million of our gross revenue for the three months commencing
from January 2011 to March 2011.
|
A copy of
the Share Transfer Agreement between Lo Kan Kwan and Peijun Chen is attached
hereto as Exhibit 10.9.
Harvest
Point Limited
Mr. Brian
Pak-Lun Mok, the sole shareholder of Harvest Point Limited, entered into a Share
Transfer Agreement with Xin Yue dated April 2, 2010. Pursuant to the Share
Transfer Agreement, Mr. Mok has granted to Mr. Yue an option to acquire the
50,000 ordinary shares of Harvest Point Limited if certain performance targets
are met. Specifically, the option to acquire the shares shall vest at a rate of
one-third (1/3) for each performance target that is met. The performance targets
are:
|
-
|
at
least $39 million of our gross revenue for the three months commencing
from July 2010 to September 2010;
|
|
-
|
at
least $40 million of our gross revenue for the three months commencing
from October 2010 to December 2010;
and
|
|
-
|
at
least $41 million of our gross revenue for the three months commencing
from January 2011 to March 2011.
|
A copy of
the Share Transfer Agreement between Brian Pak-Lun Mok and Xin Yue is attached
hereto as Exhibit 10.10.
Strategic
Synergy Limited
Mr. Brian
Pak-Lun Mok, the sole shareholder of Strategic Synergy Limited, entered into a
Share Transfer Agreement with Xin Yue dated April 2, 2010. Pursuant to the Share
Transfer Agreement, Mr. Mok has granted to Mr. Yue an option to acquire the
50,000 ordinary shares of Strategic Synergy Limited if certain performance
targets are met. Specifically, the option to acquire the shares shall vest at a
rate of one-third (1/3) for each performance target that is met. The performance
targets are:
|
-
|
at
least $39 million of our gross revenue for the three months commencing
from July 2010 to September 2010;
|
|
-
|
at
least $40 million of our gross revenue for the three months commencing
from October 2010 to December 2010;
and
|
|
-
|
at
least $41 million of our gross revenue for the three months commencing
from January 2011 to March 2011.
|
A copy of
the Share Exchange Agreement between Brian Pak-Lun Mok and Xin Yue is attached
hereto as Exhibit 10.11.
|
Item
3.02
|
Unregistered
Sales of Equity Securities
|
In
connection with the Exchange Agreement, April 22, 2010, we issued an aggregate
of 47,568 shares of our Series M Preferred Stock to the Keyuan International
Shareholder. We received in exchange from the Keyuan International
Shareholder 50,000 shares of Keyuan International, representing 100% of the
issued and outstanding shares of Keyuan International, which exchange resulted
in Keyuan International becoming our wholly-owned subsidiary. The issuance of such securities was
exempt from registration pursuant to Section 4(2) of, and Regulation D and/or
Regulation S promulgated under the Securities Act of 1933, as amended (the
“Securities Act”).
-41-
As more
fully described in Item 1.01 above, on April 22, 2010, immediately following the
Share Exchange, we consummated the Private Placement for the issuance and sale
of Units, consisting of an aggregate of (a) 5,954,058 shares of Series A
Preferred Stock, (b) 661,562 Shares, (c) three-year Series A Warrants to
purchase up to 661,562 Series A Warrant Shares, and (d) three-year Series B
Warrants to purchase up to 661,562 Series B Warrant Shares, for aggregate gross
proceeds of approximately $23.2 million.
The
issuance of the Units, the Series A Preferred Stock, the Shares, the Series A
Warrants, the Series B Warrants and the placement agent warrants pursuant to the
Private Placement were exempt from registration pursuant to Section 4(2) of, and
Regulation D and/or Regulation S promulgated under the Securities
Act.
Item
4.01 Changes in Registrant’s Certifying Accountant
On April
22, 2010, our board of directors dismissed The Hall Group, CPAs (“Hall”) as our
independent auditors and engaged Patrizio & Zhao,
LLC, an Independent Registered Public Accounting Firm (“Patrizio”), to serve
as our independent auditors.
Hall’s
report dated February 24, 2010 on our audited financial statements for the
fiscal years ended December 31, 2009 and 2008 did not contain an adverse opinion
or a disclaimer of opinion nor was it qualified or modified as to uncertainty,
audit scope or accounting principles, except for a “going concern” uncertainty.
In addition, in its letter to the Company in 2009 pursuant to “Statement on
Auditing Standards (SAS) 112: Communicating Internal Control Related
Matters,”.Hall identified the following material weakness of our internal
controls:
|
·
|
Reliance
on financial reporting consultants for review of critical accounting areas
and disclosures and material non-standard
transactions;
|
|
·
|
Lack
of sufficient accounting staff which results in a lack of segregation of
duties necessary for a good system of internal
control.
|
During
our two most recent fiscal years and the subsequent interim period through the
date Hall was dismissed, there were no disagreements between us and Hall on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to Hall’s
satisfaction, would have caused Hall to make reference to the subject
matter of the disagreement in connection with its reports.
During
our two most recent fiscal years and through the subsequent interim period
through the date Hall was dismissed, Hall did not advise us as to any reportable
events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K.
Furthermore, during our two most recent fiscal years, and the subsequent interim
period prior to engaging Patrizio, we (nor anyone on our behalf) did not consult
Patrizio 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 our financial statements, and neither a
written report was provided to us nor oral advice was provided that Patrizio
concluded was an important factor considered by us in reaching a decision as to
the accounting, auditing or financial reporting issue; or any matter that was
either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item
304 of Regulation S-K and the related instructions to this item) or a reportable
event (as described in paragraph (a)(1)(v) of Item 304).
On April
22, 2010, we acquired all of the capital stock of Keyuan International and
assumed the operations of Keyuan International and its wholly owned PRC
subsidiary, Keyuan Plastics, pursuant to a Share Exchange. Prior to
the Share Exchange, Patrizio was the independent accountants for Keyuan Plastics
and Keyuan International. Our board of directors determined that because our
financial statements are tantamount to the financial statements of Keyuan
International and Keyuan Plastics, for reasons of continuity, Patrizio should be
appointed as our independent accountants.
During
our two most recent fiscal years and through the subsequent interim period
through the date Hall was dismissed, we have not consulted with Patrizio
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or any of the matters or reportable events set
forth in Item 304(a)(2)(ii)(A) through (D) of Regulation S-K. In addition,
prior to the Share Exchange, neither Keyuan International, nor any of its
subsidiaries consulted with Hall as to any accounting or auditing
matter.
We have
provided Hall with a copy of the disclosures it is making in response to Item
304(a). We have requested and received from Hall a letter, dated April 26, 2010,
addressed to the SEC stating whether Hall agrees with the above statements.
A copy of the letter is attached hereto as Exhibit 16.1.
-42-
|
Item
5.01
|
Changes
In Control of the Registrant
|
At the
closing of the Share Exchange, we acquired 50,000 ordinary shares of Keyuan
International, representing all of the issued and outstanding shares of Keyuan
International, in exchange for the issuance in the aggregate of 47,658 shares of
our Series M Preferred Stock convertible into 47,658,000 shares of our Common
Stock which represents approximately 95.14% of our shares of Common Stock issued
and outstanding after giving effect to the conversion of the Series M Preferred
Stock (without giving effect to the Private Placement).
Other
than the transactions and agreements disclosed in this Form 8-K, we know of no
other arrangements which may result in a change in control.
|
Item
5.02
|
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
|
As of the
closing of the Share Exchange, Ms. Smith resigned as Chairman of the Board,
Chief Executive Officer, Chief Financial Officer, President and Secretary,
effective immediately. Our Board of Directors appointed Chunfeng Tao to serve as
President, Chief Executive Officer, and Chief Financial Officer effective
immediately at the closing of the Share Exchange.
Prior to
the consummation of the Share Exchange, our Board of Directors was comprised of
one director, Ms. Smith. Effective at the closing of the Share Exchange, Ms.
Smith resigned from her position as Chairman and appointed Mr. Chunfeng Tao to
serve as Chairman of our Board effective 10 days following the mailing of
schedule 14(f) to our shareholders. Ms. Smith tendered her resignation as a
director to be effective 10 days following the mailing of schedule
14(f).
Set forth
below is information regarding our current directors, executive officers and
director nominee.
|
Name
|
Age
|
Position
|
|
Chunfeng
Tao
|
43
|
Chairman,
President, Chief Executive Officer, Chief Financial Officer, Treasurer and
Secretary
|
|
Denise
D. Smith (1)
|
51
|
Director
|
|
(1)
|
Resignation
effective on the 10th
day after the mailing of schedule
14(f).
|
Mr.
Chunfeng Tao, Chairman, President, Chief Executive Officer and Chief Financial
Officer
Mr. Tao
has over 20 years’ extensive experience in the petrochemical industry. Between
2005 and 2008, he served as President of Ningbo Hebang Chemical Co., a company
with annual revenue of RMB 10 billion which he managed and built to an annual
production capacity of 250,000 MT for aromatic and heavy oil cracking products.
Between 2002 and 2005, Mr. Tao served as Executive Vice President of Ningbo
Daxie Liwan Petrochemcials Co., a company with annual revenue of RMB 6 billion.
Under his management, the company’s annual production was increased to 500,000
MT of high grade asphalt. Between 1989 and 2002, Mr. Tao served in various
senior management and technical positions at Sinopec Zhenhai Refining &
Chemical Co., the largest base for crude oil processing and sour crude oil
processing in China, and won over 30 technological innovations, management
awards and distinction during his service period.
Mr. Tao
received his Bachelor of Science in Petroleum Processing from Guangdong
Petrochemical College and Master of Science in Chemical Engineering from China
University of Petrochemical.
Denise
D. Smith, Director
Ms. Smith
graduated from Oklahoma State University with a degree in Advertising and Public
Relations. She held various sales positions selling advertising for brochures,
magazines and a television station. These positions required her to interact
with business owners and help them develop an advertising and marketing plan for
their business and working with local and national advertising agencies in
selling advertising for their clients. This entailed describing the different
advertising avenues which gave her an expertise in the advertising and marketing
area. She also was required to develop territories and generate new business for
her employers. After working successfully in these sales positions she took time
to raise a family. June 4, 2004 and April 22, 2010, she served as our sole
officer and director.
-43-
Significant
Employees
The
following are employees who are not executive officers, but who are expected to
make significant contributions to our business:
Dr.
Jingtao Ma, Executive Vice President
Dr. Ma
has over 20 years’ experience in corporate management, research &
development, sales & marketing, and business development. Dr. Ma is
responsible for the sales & marketing and raw material procurement of the
Company. Between 1992 and 2007, he served in management and technical positions
at Sinopec Zhenhai Refining & Chemical Co. in various functions including
manufacturing and operations, and chemical and technical
analysis.
Dr. Ma
received his Master of Science and Doctorate in Physical Chemistry from Lanzhou
Chemistry & Physics Research Institute of CSA.
Mr.
Shifa Wang, Vice President & Chief Engineer
With 30
years’ management experience in petrochemical technology and manufacturing, and
specialty in oil refining and catalytic cracking, Mr. Wang is responsible for
technology, and research and development of the Company. Between 2007 and 2009,
Mr. Wang served as General Manager at Guangdong Yingchang Heavy Road Asphalt
Co., Ltd, responsible for managing and overseeing the overall business
operations of the company. Between 1981 and 2002, he served as the Chief
Engineer at Sinopec Anqing Refinery Co., Ltd., responsible for technology
development and research and development. Between 2003 and 2006, he was the Head
of Operations for Phase II production line expansion, including construction of
500,000 MT heavy oil catalytic cracking facility, 150,000 MT gas fractionation
facility, 10,000 MT sulphur recovery facility and 30,000 MT polypropylene
facility, at Guangdong Tianyi Group Co., Ltd.
Mr. Wang
received his Bachelor of Science from Chemical Engineering Department of China
Petroleum University and Master of Art in Enterprise Management from Qinghua
University.
Mr.
Weifeng Xue, Vice Present of Accounting
Mr. Xue
is in charge of the accounting and financing of the Company. He has more than 20
years experience in accounting and finance, account settlement, capital
planning, commercial bank, corporate credit, loan operations and management.
Between 2001 and 2006, he served as Supervisor of Accounting and Finance at Aux
Group Co., Ltd., a privately-held electronics manufacturer. Between 1993 and
2001, he acted as Finance Director at China Agriculture Bank, Ningbo
branch.
Mr. Xue
received his Bachelor of Science in Economics from Hangzhou Electronics &
Industrial Institute in 1990.
Mingliang
Liu, Vice President of Manufacturing
Mr. Liu
is responsible for overseeing the manufacturing by the Company. Mr. Liu has over
30 years of experience in petrochemical manufacturing and production management
and specializes in oil refining, heavy oil cracking and crude oil
processing.
Between
1975 and 2009, he served in various supervisory and managerial positions at
Sinopec Zhenhai Refining & Chemical Co.
Mr. Liu
majored in Economics & Management at Zhejiang CCP Institute.
Family
Relationships
There are
no family relationships between any of our directors or executive
officers.
Employment
Agreements
We have
entered into employment agreements with each of the PRC subsidiary’s employees,
officers and directors.
Board
of Directors
All
directors hold office until the next annual meeting of shareholders and until
their successors have been duly elected and qualified. Officers are elected by
and serve at the discretion of the Board.
-44-
Our
directors are reimbursed for expenses incurred by them in connection with
attending Board meetings, but they do not receive any other compensation for
serving on the Board.
Executive
Compensation
The
following table sets forth all cash compensation paid by us, as well as certain
other compensation paid or accrued, in 2009 and 2008, to each of the following
named executive officers.
Summary
Compensation of Named Executive Officers
|
Name and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)
|
All Other
Compensation ($)
|
Total
($)
|
||||||||||||||||
|
Chunfeng
Tao,
|
2009
|
73,147.60
|
-
|
-
|
-
|
73,147.60
|
||||||||||||||||
|
(President,
Chief Executive Officer, Chief Financial Officer)
|
2008
|
65,886.00
|
-
|
-
|
-
|
65,886.00
|
||||||||||||||||
|
Jingtao
Ma (1)
|
2009
|
43,888.60
|
-
|
-
|
-
|
43,888.60
|
||||||||||||||||
|
(Executive
Vice President)
|
2008
|
36,603.00
|
-
|
-
|
-
|
36,603.00
|
||||||||||||||||
|
Weifeng
Xue(1)
|
2009
|
43,888.60
|
-
|
-
|
-
|
43,888.60
|
||||||||||||||||
|
(Vice
President of Accounting)
|
2008
|
36,603.00
|
-
|
-
|
-
|
36,603.00
|
||||||||||||||||
|
(1)
|
Although
they are not executive officers, based on upon the compensation received,
Mr. Ma and Mr. Xue qualify as named executive officers for purposes of
this table.
|
Outstanding
Equity Awards at the End of the Fiscal Year
We do not
have any equity compensation plans and therefore no equity awards are
outstanding as of our year fiscal year end.
Director
Compensation
Our
directors are reimbursed for expenses incurred by them in connection with
attending Board of Directors’ meetings. They do not receive any other
compensation for serving on the Board of Directors, but may participate in our
incentive compensation program, once such a program is established.
-45-
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Director
Independence and Board Committees
We do not
have any independent directors and our board of directors is in the process of
searching for suitable candidates. Our board of directors does not have any
committees, as companies whose securities are traded on the OTC Bulletin Board
are not required to have board committees. However, at such time in the future
that we appoint independent directors on our board we expect to form the
appropriate board committees.
Lock
Up Agreements
All of
the shares of Common Stock to be owned by the management shareholders of the
Company will be restricted from public or private sale for a period of six (6)
months following the effective date of the registration statement providing for
the resale of the Registrable Shares under the Securities Act; following such
six (6) month period, management shall be allowed to sell up to 1/12 of their
holdings each month for the next twelve months.
Share
Escrow Agreement
We also
entered into an escrow agreement with the Investors, pursuant to which we placed
5,000 shares of Series M Preferred Stock in an escrow account. The 5,000 shares
of Series M Preferred Stock will automatically convert into 5,000,000 shares of
Common Stock (the “Escrow Shares”) after we amend our Articles of Incorporation
to increase our authorized Common Stock to one hundred million (100,000,000)
shares.
With
respect to the 2010 performance year, if we achieve less than 95% of the 2010
performance threshold, then the Escrow Shares for such year will be delivered to
the Investors in the amount of 500,000 shares of Common Stock for each full
percentage point by which such threshold was not achieved up to a maximum of
5,000,000 shares of Common Stock.
|
Item
5.06
|
Change
in Shell Company Status.
|
As
described in Item 1.01 of this Form 8-K, on April 22, 2010, we entered into the
Exchange Agreement and consummated the Share Exchange, pursuant to which we
acquired all of the issued and outstanding ordinary shares of Keyuan
International in exchange for the issuance of 47,658 shares of Series M
Preferred Stock to the Keyuan International Shareholder. As a result of the
Share Exchange, Keyuan International became our wholly-owned operating
subsidiary and we are no longer a shell company as that term is defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended.
|
Item
8.01
|
Other
Events.
|
On April
23, 2010, we issued a press release announcing the Private
Placement. A copy of the press release is attached as Exhibit 99.3 to
this Current Report on Form 8-K.
-46-
|
Item
9.01
|
Financial
Statements and Exhibits.
|
Reference
is made to the reverse take-over transaction under the Exchange Agreement, as
described in Item 1.01. As a result of the closing of the Share
Exchange, our primary operations consist of the business and operations of
Keyuan International, which are conducted by Keyuan Plastics Co.,
Ltd. In the Share Exchange, we are the accounting acquiree and Keyuan
International is the accounting acquiror. Accordingly, we are
presenting the financial statements of Keyuan International and its
subsidiaries.
|
(a)
|
Financial statements of business
acquired.
|
|
(i)
|
Audited
consolidated financial statements of Keyuan International Group Limited as
of and for the years ended December 31, 2009 and 2008, and related notes
thereto.
Pro
forma financial information.
|
|
(b)
|
Unaudited
pro forma financial statements and related notes
thereto.
|
|
| (c) |
Shell
company transactions.
None.
|
|
(d)
|
Exhibits.
|
|
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement dated April 22, 2010.
|
|
4.1
|
Certificate
of Designation of Rights and Preferences of Series A Preferred
Stock
|
|
4.2
|
Certificate
of Designation of Rights and Preferences of Series M Preferred
Stock
|
|
10.1
|
Form
of Securities Purchase Agreement
|
|
10.2
|
Registration
Rights Agreement
|
|
10.3
|
Form
of Securities Escrow Agreement
|
|
10.4
|
Lock-up
Agreement with Delight Reward Limited dated April 22,
2010.
|
|
10.5
|
Form
of Series A Warrant
|
|
10.6
|
Form
of Series B Warrant
|
|
10.7
|
Share
Transfer Agreement between Brian Pak-Lun Mok and Chunfeng Tao, dated April
2, 2010.
|
|
10.8
|
Share
Transfer Agreement between O. Wing Po and Jicun Wang, dated April 2,
2010.
|
|
10.9
|
Share
Transfer Agreement between Lo Kan Kwan and Peijun Chen, dated April 2,
2010.
|
|
10.10
|
Share
Transfer Agreement between Brian Pak-Lun Mok and Xin Yue, dated April 2,
2010.
|
|
10.11
|
Share
Transfer Agreement between Brian Pak-Lun Mok and Xin Yue, dated April 2,
2010.
|
|
10.12
|
Employment
Agreement by and between Chunfeng Tao and Keyuan Plastics Co., Ltd., May
1, 2007 (English translation).
|
|
10.13
|
Confidentiality
and Non-Compete Agreement by and between Chunfeng Tao and Keyuan Plastics
Co., Ltd., May 1, 2007 (English translation).
|
|
16.1
|
Letter
from The Hall Group, CPAs, dated April 26, 2010.
|
|
99.1
|
Audited
consolidated balance sheets of Keyuan International Group Limited and its
subsidiaries as of December 31, 2009 and 2008 and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the
two years ended December 31, 2009.
|
|
99.2
|
Unaudited
pro forma financial statements and related notes
thereto.
|
|
99.3
|
Press
Release dated April 23, 2010.
|
-47-
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.
|
Silver
Pearl Enterprises, Inc.
|
|
|
By:
|
/s/
Chunfeng
Tao
|
|
Name:
|
Chunfeng
Tao
|
|
Title:
|
Chief
Executive Officer
|
|
Dated:
|
April
28, 2010
|
-48-