Attached files
file | filename |
---|---|
EX-31.2 - PERPETUAL TECHNOLOGIES, INC. | v186361_ex31-2.htm |
EX-32.1 - PERPETUAL TECHNOLOGIES, INC. | v186361_ex32-1.htm |
EX-31.1 - PERPETUAL TECHNOLOGIES, INC. | v186361_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10−Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: March 31, 2010
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________ to _____________
Commission File Number:
000-53010
CHINA FILTRATION
TECHNOLOGY
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
90-0475058
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
Shishan
Industrial Park
Nanhai
District, Foshan City, Guangdong Province, PRC
(Address
of principal executive offices, Zip Code)
(86
22) 757-86683197
(Registrant’s
telephone number, including area code)
Perpetual Technologies,
Inc.
1442
East Lower River Road, Kamas, Utah
December
31
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated Filer ¨(Do not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 10, 2010 is as follows:
Class of Securities
|
Shares Outstanding
|
|
Common
Stock, $0.001 par value
|
15,235,714
|
Quarterly
Report on FORM 10-Q
Three
Months Ended March 31, 2010
Table
of Contents
PART
I
FINANCIAL
INFORMATION
|
||
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
3
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
4
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
16
|
ITEM
4.
|
CONTROLS
AND PROCEDURES.
|
16
|
PART
II
OTHER
INFORMATION
|
|
|
|
||
ITEM
1.
|
LEGAL
PROCEEDINGS.
|
19
|
ITEM
6.
|
EXHIBITS.
|
19
|
2
PART
I
FINANCIAL
INFORMATION
ITEM 1.
|
FINANCIAL
STATEMENTS.
|
China
Filtration Technology, Inc.
Condensed
Consolidated Financial Statements
Three
months ended March 31, 2010 and 2009
Index to
Condensed Consolidated Financial Statements
Page
|
|
Unaudited
Condensed Consolidated Balance Sheets
|
4
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive
Loss
|
5
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
6
|
Unaudited
Condensed Consolidated Statement of Changes in Stockholders’
Equity
|
7
|
Notes
to Unaudited Consolidated Financial Statements
|
8
|
3
CHINA
FILTRATION TECHNOLOGY,INC.
CONSOLIDATED
BALANCE SHEETS
March 31,
|
||||||||
2010
|
September 30,
|
|||||||
(Unaudited)
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 6,092,334 | $ | 3,297,648 | ||||
Accounts
receivable - Net
|
1,914,786 | 1,424,835 | ||||||
Advance
to suppliers
|
1,341,121 | 685,551 | ||||||
Inventory
|
1,022,404 | 1,197,289 | ||||||
Prepaid
expenses and other current assets
|
189,535 | 45,656 | ||||||
Total
Current Assets
|
10,560,180 | 6,650,979 | ||||||
Deposits
|
1,946,280 | - | ||||||
Property
and equipment - Net
|
10,130,508 | 10,711,865 | ||||||
Receivable
from related party
|
213,035 | 773,672 | ||||||
Land
use rights - Net
|
530,364 | 537,350 | ||||||
Total
Assets
|
$ | 23,380,367 | $ | 18,673,866 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Short
term loan
|
$ | 3,803,327 | $ | 4,578,409 | ||||
Accounts
payable and accrued liabilities
|
371,247 | 410,114 | ||||||
Client's
deposits
|
- | 75,176 | ||||||
Taxes
payable
|
17,154 | 726 | ||||||
Warrants
liabilities
|
1,052,000 | |||||||
Convertible
notes payable $4,140,000, net of discount -$2,134,793
|
2,005,207 | - | ||||||
Total
Current Liabilities
|
7,248,935 | 5,064,425 | ||||||
Total
Liabilities
|
7,248,935 | 5,064,425 | ||||||
Stockholder's
Equity
|
||||||||
Common
stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and
14,510,214 shares issued and outstanding at March 31, 2010 and September
30, 2009
|
15,236 | 14,510 | ||||||
Additional
paid-in Capital
|
8,205,582 | 7,548,752 | ||||||
Retained
earnings
|
6,390,212 | 4,500,532 | ||||||
Accumulated
other comprehensive income
|
1,520,402 | 1,545,647 | ||||||
Total
Stockholder's Equity
|
16,131,432 | 13,609,441 | ||||||
Total
Liabilities and Stockholder's Equity
|
$ | 23,380,367 | $ | 18,673,866 |
See
accompanying notes to financial statements
4
CHINA
FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
March 31
|
March 31
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
Sales
|
$ | 4,628,671 | $ | 2,214,940 | $ | 9,847,025 | $ | 4,540,833 | ||||||||
Cost
of Sales
|
3,237,311 | 1,373,921 | 6,843,833 | 2,906,402 | ||||||||||||
Gross
Profit
|
1,391,360 | 841,019 | 3,003,192 | 1,634,431 | ||||||||||||
Selling,
General and Administration expenses
|
407,461 | 275,526 | 662,138 | 758,442 | ||||||||||||
Income
from Operations
|
983,899 | 565,493 | 2,341,054 | 875,989 | ||||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
Income
|
292 | - | 517 | - | ||||||||||||
Interest
Expense
|
(390,355 | ) | (76,286 | ) | (452,387 | ) | (160,506 | ) | ||||||||
Gain
on disposal of fixed assets
|
496 | - | 496 | 16,263 | ||||||||||||
Total
other income (expenses)
|
(389,567 | ) | (76,286 | ) | (451,374 | ) | (144,243 | ) | ||||||||
Income
before IncomeTaxes
|
594,332 | 489,207 | 1,889,680 | 731,746 | ||||||||||||
Income
tax provision
|
- | - | - | - | ||||||||||||
Net
Income
|
$ | 594,332 | $ | 489,207 | $ | 1,889,680 | $ | 731,746 | ||||||||
Other
Comprehensive Income
|
||||||||||||||||
Foreign
Currency Translation Adjustments
|
(23,939 | ) | 14,446 | (25,245 | ) | (90,836 | ) | |||||||||
Total
Comphrensive Income
|
$ | 570,393 | $ | 503,653 | $ | 1,864,435 | $ | 640,910 | ||||||||
Net
Income Per Common Share:
|
||||||||||||||||
Basic
and diluted
|
$ | 0.04 | $ | 0.03 | $ | 0.13 | $ | 0.05 | ||||||||
Weighted-Average
Common Shares Outstanding:
|
||||||||||||||||
Basic
|
14,897,143 | 14,510,204 | 14,701,547 | 14,510,204 | ||||||||||||
Diluted
|
15,798,367 | 14,510,204 | 15,147,208 | 14,510,204 |
See
accompanying notes to financial statements
5
CHINA
FILTRATION TECHNOLOGY,INC.
Consolidated
Statements of Cash Flows
(Unaudited)
Six Months Ended March 31
|
||||||||
2010
|
2009
|
|||||||
Cash
Flow from Operating Activities:
|
||||||||
Net
income
|
$ | 1,889,680 | $ | 731,746 | ||||
Adjustments
to reconcile net income to net cash flow provided by operating
activities:
|
||||||||
Depreciation
|
569,358 | 352,070 | ||||||
Amortization
|
6,217 | 6,204 | ||||||
Non-cash
interest charges
|
304,950 | - | ||||||
Gain
from disposal of fixed assets
|
(496 | ) | (16,263 | ) | ||||
Change
in operating assets and liabilities:
|
- | - | ||||||
Accounts
receivable
|
(491,997 | ) | (122,271 | ) | ||||
Advance
to suppliers
|
(656,586 | ) | 3,271,122 | |||||
Inventory
|
173,173 | (124,682 | ) | |||||
Prepaid
expenses and other current assets
|
(143,956 | ) | (337,288 | ) | ||||
Accounts
payable & accrued liabilities
|
(38,281 | ) | (71,094 | ) | ||||
Clients'
deposits
|
(75,069 | ) | (93,257 | ) | ||||
Taxes
payable
|
16,430 | (9,843 | ) | |||||
Net
cash provided by (used in) operating activities
|
1,553,423 | 3,586,444 | ||||||
Cash
Flow from Investing Activities:
|
||||||||
Addition-property
and equipment, land use right
|
(3,333 | ) | (6,010,706 | ) | ||||
Deposits
for purchase of equipment
|
(1,946,280 | ) | - | |||||
Proceeds
from disposal of fixed assets
|
496 | 16,263 | ||||||
Proceeds
from related party receivable
|
559,535 | 1,066,996 | ||||||
Net
cash (used in) provided by investing activities
|
(1,389,582 | ) | (4,927,447 | ) | ||||
Cash
Flow from Financing Activities:
|
||||||||
Dividend
paid
|
- | (1,070,823 | ) | |||||
Repayment
of loans
|
(768,535 | ) | (4,963,547 | ) | ||||
Proceeds
from loans
|
3,404,798 | 6,229,337 | ||||||
Net
cash provided by (used) in financing activities
|
2,636,263 | 194,967 | ||||||
Effects
of Exchange Rates on Cash
|
(5,418 | ) | (19,995 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
2,794,686 | (1,166,031 | ) | |||||
Cash
and cash equivalents, beginning of year
|
3,297,648 | 2,367,570 | ||||||
Cash
and cash equivalents, end of year
|
$ | 6,092,334 | $ | 1,201,539 | ||||
Supplemental
information of cash flows
|
||||||||
Cash
paid for interest
|
$ | 85,329 | $ | 58,909 | ||||
Cash
paid for income taxes
|
$ | - | $ | - |
See
accompanying notes to financial statements
6
China
Filtration Technology, Inc.
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
|
Other
|
Total
|
|||||||||||||||||||||||||||||
Common Stock
|
Preferred Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Stockholders'
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings (Deficit)
|
Income
|
Equity
|
|||||||||||||||||||||||||
BALANCE,
September 30, 2008
|
14,510,204 | $ | 14,510 | - | $ | - | $ | 7,548,752 | $ | 2,054,880 | $ | 1,602,725 | $ | 11,220,867 | ||||||||||||||||||
Net
Income
|
- | - | - | - | - | 2,445,652 | - | 2,445,652 | ||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | (57,078 | ) | (57,078 | ) | |||||||||||||||||||||||
BALANCE,
September 30, 2009
|
14,510,204 | $ | 14,510 | - | $ | - | $ | 7,548,752 | $ | 4,500,532 | $ | 1,545,647 | $ | 13,609,441 | ||||||||||||||||||
Shares
effectively issued to former shareholders - 2/12/2010
|
2,600,000 | 2,600 | (2,600 | ) | - | |||||||||||||||||||||||||||
Cancellation
of stock in recapitalization
|
(2,528,000 | ) | (2,528 | ) | 2,528 | - | ||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||
Shares
issued to placement agents in conjuction with convertible
note
|
653,510 | 654 | - | - | 656,902 | - | 657,556 | |||||||||||||||||||||||||
Net
Income
|
- | - | - | - | - | 1,889,680 | (25,245 | ) | 1,864,435 | |||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
BALANCE,
March 31, 2010
|
15,235,714 | $ | 15,236 | - | $ | - | $ | 8,205,582 | $ | 6,390,212 | $ | 1,520,402 | $ | 16,131,432 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
7
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
1.
|
Nature
of business and Organization
History:
|
China
Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc. (the
“Company,” or ”we”) was incorporated under the laws of the State of Delaware in
March, 2007. Prior to reverse merger we had no operations or
substantial assets.
Hong Hui
Investment Holdings (“Hong
Hui”) was formed in January, 2010 in the territory of the British Virgin Islands
as a holding company by the shareholders of Technic International Inc.
(“Technic”). Upon formation, each shareholders transferred his ownership of
Technic to Hong Hui.
Technic
was incorporated under the laws of Hong Kong as a holding company that owns 100%
equity interest of Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in
Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin
Long was established in 2000 under the laws of China. In September
2005, Jin Long became a wholly-owned foreign enterprise (“WOFE). In
April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co.,
Ltd (“Foshan SLP”).
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of
the share exchange agreement we issued and delivered to the Hong Hui
stockholders a total of 14,510,204 (72,551,020 pre-split) shares of our common
stock in exchange for all of the outstanding shares of Hong Hui. As a
result of the share exchange or reverse merger, Hong Hui became our wholly-owned
subsidiary. The transaction is accounted for as a reverse acquisition, except
that no goodwill or other intangible has been recorded. The
recapitalization is considered to be a capital transaction in substance, rather
than a business combination.
Through
the operations of Foshan S.L.P., we engage in the manufacturing and sale,
research and development of non wovens fabrics..
2.
|
Basis
of presentation and principles of
consolidation:
|
These
interim consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). They do not include all the disclosures as required for annual financial
statements under generally accepted accounting principles. These interim
consolidated financial statements should be read in conjunction with the
Company’s annual consolidated financial statements for the year ended September
30, 2009.
Operating
results for the six-month period ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the full year ending
September 30, 2010 or for any other period.
3.
|
Summary
of significant accounting policies:
|
These
interim consolidated financial statements follow the same accounting policies
and methods of application as the Company's most recent annual financial
statements.
8
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
4.
|
Accounts
receivable:
|
As of
|
March 31,
|
September 30,
|
||||||
2010
|
2009
|
|||||||
Accounts
receivable
|
$ | 1,951,619 | $ | 1,461,721 | ||||
Less:
Allowance for doubtful accounts
|
(36,833 | ) | (36,886 | ) | ||||
Accounts
receivable – Net
|
$ | 1,914,786 | $ | 1,424,835 |
As of
March 31, 2010 and September 30, 2009, customer accounts receivable balances
exceeding 10% of the total balance are as follows:
March 31, 2010
|
||||||||
Customers:
|
Amount
|
Percentage
|
||||||
Wu
jiang jingshan
|
$ | 338,704 | 17 | % | ||||
Dalian
Ji er
|
440,766 | 23 | % | |||||
Shang
hai run dong
|
239,591 | 12 | % | |||||
San
Ya
|
210,877 | 11 | % |
September 30,2009
|
||||||||
Customers:
|
Amount
|
Percentage
|
||||||
Wu
jiang jingshan
|
$ | 434,556 | 30 | % | ||||
Shen
zhen Ya ming water
|
185,625 | 13 | % | |||||
Xiantao
ruixin
|
181,260 | 13 | % |
5.
|
Advances
to suppliers:
|
As of
March 31, 2010 and September 30, 2009, respectively, advances to suppliers
consisted of deposits on account with several key raw materials suppliers to
secure preferential pricing of raw materials. The deposits also are used to
ensure timely delivery of materials purchased.
6.
|
Inventory:
|
As of
|
March 31,
|
September 30,
|
||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 85,239 | $ | 40,126 | ||||
Work
in progress
|
240,386 | 50,443 | ||||||
Finished
goods
|
696,779 | 1,106,720 | ||||||
$ | 1,022,404 | $ |
1,197,289
|
9
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
7.
|
Property
and equipment:
|
As of
|
March 31,
2010
|
|||||||||||
Accumulated
|
Net book
|
|||||||||||
Cost
|
depreciation
|
value
|
||||||||||
Building
and plant
|
$ | 2,958,252 | $ | 592,938 | $ | 2,365,314 | ||||||
Machinery
|
11,158,514 | 3,585,441 | $ | 7,573,073 | ||||||||
Office
equipment and other equipment
|
770,547 | 669,760 | $ | 100,787 | ||||||||
Vehicles
|
139,553 | 48,219 | $ | 91,334 | ||||||||
$ | 15,026,866 | $ | 4,896,358 | $ | 10,130,508 |
As of
|
|
|
September 30,
2009
|
|||||||||
Accumulated
|
Net book
|
|||||||||||
Cost
|
depreciation
|
value
|
||||||||||
Building
and plant
|
$ | 2,958,978 | $ | 526,654 | $ | 2,432,324 | ||||||
Machinery
|
11,174,517 | 3,096,112 | $ | 8,078,405 | ||||||||
Office
equipment and other equipment
|
771,829 | 668,448 | $ | 103,381 | ||||||||
Vehicles
|
139,753 | 41,998 | $ | 97,755 | ||||||||
$ | 15,045,077 | $ | 4,333,212 | $ | 10,711,865 |
For the
three months ended March 31, 2010, depreciation expense of $271,848 was included
in cost of sales and $16,285 was included in selling, marketing, and
administrative expenses, for a total of $288,133.
For the
three months ended March 31, 2009, depreciation expense of $158,525 was included
in cost of sales and $16,035 was included in selling, marketing, and
administrative expenses, for a total of $174,560.
For the
six months ended March 31, 2010, depreciation expense of $536,787 was
included in cost of sales and $32,571 was included in selling, marketing, and
administrative expenses, for a total of $569,358
For the
six months ended March 31, 2009, depreciation expense of $318,986 was included
in cost of sales and $33,084 was included in selling, marketing, and
administrative expenses, for a total of $352,070.
8.
|
Deposits:
|
As of
March 31, 2010, we have deposits of $1,946,280 with equipment providers to
ensure timely fulfillment of our purchase contracts to build new product
assembly lines.
10
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
9.
|
Land
use rights:
|
As of
|
March 31 ,2010
|
September 30 ,2009
|
||||||
USD
|
USD
|
|||||||
Cost
|
$ | 621,817 | $ | 622,578 | ||||
Less:
accumulated amortization
|
(91,453 | ) | (85,228 | ) | ||||
$ | 530,364 | $ | 537,350 |
For the
three months ended March 31, 2010 and 2009, amortization expense was
$3,114 and $3,110, respectively.
For the
six months ended March 31, 2010 and 2009, amortization expense was $6,217 and
$6,204 respectively.
10.
|
Short-term
loans:
|
The
Company has several loans with Agricultural Bank of China, Foshan Branch and
these loans are due in September 2010. The interest on the outstanding balance
is payable every month at rates ranging from 5.93% to 7.75% per
annum.
11.
|
Convertible
note payable:
|
On
February 12, 2010, immediately following the closing of a share exchange
agreement we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants. In addition to the
finance cost of approximately $730,000, 654,510 common shares were issued to
placement agents. The notes have the following material
terms:
Maturity: The notes mature after
one year. If principal is not is not paid on maturity then 150% of
the principal amount shall be payable.
Interest: 10%
per annum payable quarterly increasing to 15% if there is a default. $204,464 is
being held in escrow from the closing proceeds and was recorded as prepaid
expense..
Conversion: In
the event of the closing of any equity or series of related financings resulting
in aggregate gross proceeds to the Company of at least $20,000,000 (or such
lesser amount as shall be approved in writing by the holder(s) of notes
evidencing at least 50% of the principal amount of the notes then outstanding),
a “qualified financing,” prior to the maturity
date of the notes, the principal amount of
the notes converts automatically into the securities sold in such financing at a
65% discount to the offering price of such securities.
Besides
the stated interest expense at 10% per annum, interest expenses are recorded to
accrete the note to its balance of $4,140,000 due on February 2011.
12.
|
Related
party transactions:
|
Amount due from related parties
|
March 31,
|
September 30,
|
||||||
2010
|
2009
|
|||||||
Advance
to former shareholders (a)
|
$ | 212,329 | $ | 259,538 | ||||
Advance
to current shareholders (b)
|
706 | 1,413 | ||||||
Advance
to director (c)
|
- | 73,246 | ||||||
Subtotal
|
213,035 | 334,197 | ||||||
Receivable
from related companies (d)
|
- | 439,475 | ||||||
|
$ | 213,035 | $ | 773,672 |
11
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
(a)
|
Advance
to former shareholders:
|
The
advance to former shareholders includes advances to three of the former
shareholders. The advance is non-interest bearing and due on
demand.
(b)
|
Advance
to current shareholders:
|
The
advance to current shareholders includes advances to current shareholders. The
advance is non-interest bearing and due on demand.
(c)
|
Receivable
from related companies
|
The
receivable from related companies includes Foshan SLP owned its parents company
and loans are non-interest bearing and due on demand.
13.
|
Subsequent
events
|
The
Company advised shareholders of action taken to approve a change in our
corporate name to China SLP Filtration Technology, Inc., which action was
approved on April 22, 2010 by the board of directors and on April 22, 2010 by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote thereon were present and voted.
The name
change will become effective on the filing of a certificate of amendment to our
certificate of incorporation with the Secretary of State of Delaware, which
filing will occur at least 20 days after the date of the mailing of this
Information Statement to our shareholders.
14.
|
Earnings
per share
|
Earnings
(loss) per share for the six months ended March 31, 2010 and 2009 is computed by
dividing net income for the periods by the weighted average number of both basic
and diluted shares of common stock and common stock equivalents
outstanding.
The
number of shares outstanding is used in calculation of basic and diluted
earnings per share as below.
Three Months ended
March 31, 2010
|
Three Months ended
March 31, 2009
|
|||||||
Numerator
for basic and diluted EPS
|
||||||||
-
Net income from continuing operations
|
594,332 | 489,207 | ||||||
Denominator
for basic and diluted EPS
|
||||||||
Weighted
average shares of common stock outstanding shares – basic
|
14,897,143 | 14,510,204 | ||||||
Weighted
average shares of common stock outstanding shares –
diluted
|
15,798,367 | 14,510,204 | ||||||
EPS–
basic and diluted
|
0.04 | 0.03 | ||||||
Six Months ended
March 31, 2010
|
Six Months ended
March 31, 2009
|
|||||||
Numerator
for basic and diluted EPS
|
||||||||
-
Net income from continuing operations
|
1,889,680 | 731,746 | ||||||
Denominator
for basic and diluted EPS
|
||||||||
Weighted
average shares of common stock outstanding shares – basic
|
14,701,547 | 14,510,204 | ||||||
Weighted
average shares of common stock outstanding shares –
diluted
|
15,147,208 | 14,510,204 | ||||||
EPS–
basic and diluted
|
0.13 | 0.05 |
12
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
15.
|
Accounting
for Warrants
|
The
warrants issued in conjuction with the convertible notes have the following
material terms:
The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $2,000,000. The warrants cannot be
exercised if no financing is consummated within five-year period after the issue
date and become void if the notes automatically convert into common
stock.
Number of
Shares: The warrants represent the right to purchase 8% of the
total shares of common stock outstanding (on a fully-diluted basis) immediately
after the closing of the financing.
Exercise
Price: The warrants are exercisable at the price for
which the shares of common stock (or common stock equivalent if derivative
securities are sold) are sold in the financing. If the financing
includes more than one type of security, the exercise price shall equal the
lowest price per share of common stock or common stock equivalent included in
the financing.
The
Company analyzed the warrants and the conversion features in the notes to assess
whether they meet the definition of a derivative under the guidance set forth by
ASC Topic 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities”) and, thereof, the applicability of the accounting rules in
accordance to ASC Topic 815 to treat the warrants as derivative
liabilities. Management also evaluated whether the warrants meet the
scope exception set forth by ASC Topic 815-40 (“Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), which is
that contracts issued or held by the reporting entity that are both (1) indexed
to its own stock and (2) classified in stockholders’ equity shall not be
considered to be derivative instruments for purposes of ASC Topic
815. The provisions in ASC Topic 815-40 apply to any freestanding
financial instruments or embedded features that have the characteristics of a
derivative, as defined by ASC Topic 815 and to any freestanding financial
instruments that are potentially settled in an entity’s own common
stock.
Management
concluded that the warrants issued in conjunction with the private placement of
convertible notes in February 2010 to certain accredited investors should be
treated as a derivative liability and the derivative accounting rules under ASC
Topic 815-40 were adopted to record the warrants. Fair market value
of the warrants were measured using the Black-Scholes pricing model at the
issuance date and recorded as warrants liabilities. Change in the fair value of
the warrants is recorded in other income or loss in the statement of operations
in the future reporting periods. Change in warrant value from February 2010 to
March 31, 2010 were not material.
As a
result of adopting accounting treatment of ASC Topic 815-40, $1,052,000 was
recorded as warrants liabilities based on 1,218,857 shares entitled under the
warrants and the valuation inputs as provided in the table as
follows.
February 2010 Financing Warrants - Valuation Inputs
|
||||
February 12 and March 31,
|
||||
Attribute
|
2010
|
|||
Stock Price
|
$ | 2.45 | ||
Risk
Free Interest Rate
|
2.25 | % | ||
Volatility
|
90.00 | % | ||
Exercise
Price
|
$ | 2.45 | ||
Dividend
Yield
|
0 | % | ||
Contractual
Life (Years)
|
1 |
13
China
Filtration Technology, Inc.
Notes to
Consolidated Financial Statements for the six months ended March 31,
2010
(Unaudited
- Expressed in US dollars)
16.
|
Recent
accounting pronouncements
|
In June
2009 the FASB established the Accounting Standards Codification (“Codification”
or “ASC”) as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in accordance with generally accepted accounting principles in the
United States (“GAAP”). Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) issued under authority of federal securities laws
are also sources of GAAP for SEC registrants. Existing GAAP was not intended to
be changed as a result of the Codification, and accordingly the change did not
impact our financial statements. The ASC does change the way the guidance is
organized and presented.
Statement
of Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855),
“Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of
Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC
Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC
Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles – a replacement of FASB Statement No.
162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current
applicability to the Company or their effect on the financial statements would
not have been significant.
Accounting
Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605),
Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985),
Certain Revenue Arrangements that include Software Elements, and Various other
ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company or
their effect on the financial statements would not have been
significant.
Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
14
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Special
Note Regarding Forward Looking Statements
This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of our management, and
involve risks and uncertainties, as well as assumptions, that, if they ever
materialize or prove incorrect, could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. The words
“believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,”
“aim,” “will” or similar expressions are intended to identify forward-looking
statements. All statements, other than statements of historical fact,
are statements that could be deemed forward-looking statements, including
statements regarding new and existing products, technologies and opportunities;
statements regarding market and industry segment growth and demand and
acceptance of new and existing products; any projections of sales, earnings,
revenue, margins or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements
regarding future economic conditions or performance; uncertainties related to
conducting business in China; any statements of belief or intention; any of the
factors and risks mentioned in the “Risk Factors” sections of our Current Report
on Form 8-K filed with the Securities and Exchange Commission on February 12,
2010, and any statements of assumptions underlying any of the foregoing. All
forward-looking statements included in this report are based on information
available to us on the date of this report. We assume no obligation and do not
intend to update these forward-looking statements, except as required by
law.
INTRODUCTION
This
section discusses and analyzes the results of operations and financial condition
of China Filtration Technology, Inc., formerly known as Perpetual Technologies,
Inc., (“we,” “us,” or the “Company”) which is the ultimate parent company of
Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a PRC-based operating
company located in Foshan, Guangdong Province in the PRC.
On
February 12, 2010, we acquired control of Foshan in a share exchange transaction
which closed on that date.
In the
share exchange or “reverse merger” we acquired control of Hong Hui Holdings
Limited (“Hong Hui”), a British Virgin Islands company and the owner
of all of the stock of Technic International Limited (“Technic”), a Hong Kong
holding company which in turn is the owner of all of the equity of Foshan, by
issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares of
our common stock in exchange for all of the outstanding capital stock of Hong
Hui.
15
The
transaction is accounted for as a reverse acquisition, except that no goodwill
or other intangible has been recorded. The recapitalization is
considered to be a capital transaction in substance, rather than a business
combination. Beginning with the quarter ended March 31, 2010
the operating results of Foshan are consolidated in the Company’s
financials results for that period.
Foshan is
engaged in the manufacture, sale, and research and development of advanced
spun-bond PET, or polyester, non-wovens.
Nonwoven
fabrics are broadly defined as sheet or web structures bonded together by
entangling fiber or filaments (and by perforating films) mechanically, thermally
or chemically. They are flat, porous sheets that are made directly from separate
fibers or from molten plastic or plastic film. They are not made by weaving or
knitting and do not require converting the fibers to yarn.
Our major
market is the Chinese market. In recent years, our products have been
successfully launched in the European, North American and South East Asian
markets.
Currently,
our major products are spun-bond, thermal calendaring and needle-punched
industrial non-woven PET (polyester) and PP (polypropylene) fabrics. These
products are used as filtration media and infrastructure engineering material,
among other uses.
We
currently operate three spun-bond production lines. Two lines are spun-bond,
thermal calendaring production lines with a total annual capacity of 4,000 tons
of spun-bond polyester filament thermal calendaring nonwoven. In
February 2009, we added the third line, spun-bond needle-punching production
line with an annual capacity of 4,000 tons of spun-bond polyester filament,
needle-punched nonwoven fabric.
We
recently developed a continuous filament, spun-bond, needle-punched
manufacturing process to manufacture polyphenylene sulfide fiber, or PPS, a
specialized type of high temperature resistant nonwoven fabric and intend to
begin commercial production of PPS using our proprietary manufacturing process
in 2010. We have applied for a process patent in the PRC for this
process (Patent No. PRC: 201010102660.2) and we intend to apply for a process
patent in North America and Europe. In comparison to other filtering
materials currently available, we believe that our nonwoven fabric will be
stronger, have lower production and operating costs, and will have higher
filtration efficiency. We have tested our PPS material nonwoven
fabric internally and, although a prototype using our material has not yet been
deployed by any industrial end user, we believe that our material has the
potential to replace the filtration materials and products currently available
and become the most popular filtration material in high temperature
environments such as coal-fired power plants, garbage incinerators and cement
factories.
On March
24, 2010 the Company effected a 1 for 5 reverse stock split of its outstanding
common stock.
16
On
February 12, 2010, immediately following the reverse merger, the Company entered
into a note purchase agreement with certain accredited investors for the sale of
convertible notes in the aggregate principal amount of $4,140,000 and warrants
(which are exercisable only in certain circumstances), with net proceeds of $3.2
million after finance costs. The notes require quarterly interest
payments at a rate of 10% per annum.
We intend
for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements. This discussion should be read in conjunction with our
audited financial statements and accompanying notes as of September 30, 2009,
and for the year then ended and the unaudited condensed consolidated interim
financial statements for the six monhts ended March 31, 2010.
17
Results
of Operations
Three
Month Period Ended March 31, 2010 compared to Three Month Period Ended March 31,
2009
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in US dollars and as a percentage of net sales
(percentages may not add due to rounding). See the financial statements of the
Company and the related notes thereto and other financial information included
elsewhere in this report.
Three months ended March 31
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Sales
|
4,628,671 | 100 | % | 2,214,940 | 100 | % | ||||||||||
Cost
of Sales
|
3,237,311 | 70 | % | 1,373,921 | 62 | % | ||||||||||
Gross
Profit
|
1,391,360 | 30 | % | 841,019 | 38 | % | ||||||||||
SG&A
expense
|
407,461 | 9 | % | 275,526 | 12 | % | ||||||||||
Operating
Income
|
983,899 | 21 | % | 565,493 | 26 | % | ||||||||||
Interest
Income
|
292 | 0 | % | - | 0 | % | ||||||||||
Interest
Expenses
|
(390,355 | ) | 8 | % | (76,286 | ) | 3 | % | ||||||||
Gain
on disposal of fixed assets
|
496 | 0 | % | 0 | 0 | % | ||||||||||
Net
Income before taxes
|
594,332 | 13 | % | 489,207 | 22 | % | ||||||||||
Net
Income
|
594,332 | 13 | % | 489,207 | 22 | % |
Sales
Net sales
revenue consists of revenue from sales of needle punched non woven fabric and
thermal calendared product. Net sales for three month period ended
March 31, 2010 were $4,628,671, an increase of $2,413,731, or 109%, from
$2,214,940 for the same period of prior year. In February 2009, we
installed a new production line to manufacture needle punched non woven
fabric. Sales of needle-punched products for the three month period
ended March31, 2010 were $1,942,811 compared to $220,718 for the same period of
the prior year. In addition, sales of thermal calendared materials
for the three month period ended March 31, 2010 $2,308,801, as increase of
$569,189 compared to $1,739,612 for the same period of the prior
year.
18
Cost
of Goods Sold
Cost of
goods sold principally consists of the cost of raw materials, labor, and
manufacturing overhead expenses.
Cost of
goods sold for the three month period ended March 31, 2010 was $3,237,311, an
increase of $1,863,390, or 136%, from $1,373,921 for the same period in
2009.
Raw
material expenses increased to 52% of the sales for the three month period ended
March 31, 2010, compared to 41% of sales for the same period of the prior year,
reflecting a mix of more expensive raw materials associated with 2010 sales.
98.7 % of our
raw materials consists of polyester the price of which fluctuates with the price
of oil
Labor
expenses were 6% of sales for the three month period ended March 31, 2010
compared to 2% for the same period of year 2009. Beginning in February
2009 we hired
17 additional employees to work the
new production line. Labor costs also increased
due to increased demand for labor.
Overhead
expenses were 11% of net sales for the three month period ended March 31, 2010,
compared to 19% of net sales for 2009 due to the increase of manufacturing
capacity of the Company with the addition of the new production line in February
2009.
Gross
Profit
Gross
profits represents net sales less cost of goods sold. Gross profit
for the three month period ended March 31, 2010 was $1,391,360, an increase of
$550,341, or 65%, from $841,019 for the same period in 2009. As a
percentage of net sales, gross profit was 30% for the three month period ended
March 31, 2010, compared to 38% for the same period last year. This was
primarily due to increase of purchase of price of the raw materials associated
with 2010 sales, which price increase was caused by fluctuations in the price of oil.
Selling,
Marketing and Administrative Expenses
Selling
expenses include salaries, advertising expenses, cost of manufacturing, rent,
and all expenses dirirectly related to producing and selling
product. General expenses include general operating expenses that are
directly related to the general operation of the company but excluding selling
and administrative expenses. Administrative expense includes
executive salaries and other expenses related to the overall administration of
the company.
Selling,
general and administrative expenses for the three month period ended March 31,
2010 were $407,461, an increase of $131,935 compared to $275,526 for the same
period 1n 2009. The increase was primarily due to increase of $25,524
in export delivery expenses and $83,286 additional
professional expenses incurred in connection with the company’s planned
financing.
19
Other
Expenses
Other
expenses solely consist of interest expense.
Interest
expense for the three month period ended March 31, 2010 was $390,355 compared to
$76,286 for the same period in 2009. Interest expense as a percentage
of sales increased to 8% for the three month period ended March 31, 2010 from 3%
for the same period of last year. The
increase in interest expense was principally due to interest on the convertible
notes in the aggregate principal amount of $4,140,000. We accreted
non-cash related interest expense in the amount of $304,950.
Excluding the accretion of interest, our interest expense for this three-month
period was the same as for the same period in 2009.
Net
Income
Net
income for the three months ended March 31, 2010 increased by $105,125, from net
income of $489,207 for the three month period ended March 31, 2009 to net income
of $594,332. The increase was largely due to an increase in net sales
due to the sales generated from new needle-punch products.
Six Month Period Ended March 31, 2010 compared
to Six Month Period Ended March 31, 2009
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in US dollars and as a percentage of net sales
(percentages may not add due to rounding). See the financial statements of the
Company and the related notes thereto and other financial information included
elsewhere in this report.
Six months ended March 31
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Sales
|
9,847,025 | 100 | % | 4,540,833 | 100 | % | ||||||||||
Cost
of Sales
|
6,843,833 | 70 | % | 2,906,402 | 64 | % | ||||||||||
Gross
Profit
|
3,003,192 | 30 | % | 1,634,431 | 36 | % | ||||||||||
SG&A
expense
|
662,138 | 7 | % | 758,442 | 17 | % | ||||||||||
Operating
Income
|
2,341,054 | 24 | % | 875,989 | 19 | % | ||||||||||
Interest
income
|
517 | 0 | % | - | 0 | % | ||||||||||
Interest
Expenses
|
(452,387 | ) | 5 | % | (160,506 | ) | 4 | % | ||||||||
Gain
on disposal of fixed assets
|
496 | 0 | % | 16,263 | 0 | % | ||||||||||
Net
Income before taxes
|
1,889,680 | 19 | % | 731,746 | 16 | % | ||||||||||
Net
Income
|
1,889,680 | 19 | % | 731,746 | 16 | % |
20
Sales
Net sales
revenue consists of revenue from sales of needle punched non woven fabric and
thermal calendared product. Net sales for six month period ended March 31, 2010
were $9.85 million, an increase of $5.30 million or 116 %, from $4.55 million
for the same period of prior year. In February 2009, we installed a
new production line to manufacture needle punched non woven
fabric. Sales of needle-punched products for the six month period
ended March 31, 2010 were $[4,300,022] compared to $220,718
for the same period of the prior year. In addition, sales of
thermal
calendared materials for the six month period ended March 31, 2010 were $[5,559,365], as increase of
$[1,228,361] compared to $[4,331,204] for the same period
of the prior year.
Cost
of Goods Sold
Cost of
goods sold principally consists of the cost of raw materials, labor, and
manufacturing overhead expenses.
Cost of
goods sold for the six month period ended March 31, 2010 was $6,843,833, an
increased $3,937,431, or 135%, from $2,906,402 for the same period of the prior
year. As a percentage of net sales cost of good sold was 70 % for the six month
period ended March 31, 2001 compared to 64% for the same
period in 2009.
Raw
material expenses increased to 56% of the sales for the six month period ended
March 31, 2010, compared to 40% of sales for the same period in 2009, reflecting
a mix of more expensive raw materials associated with 2010
sales. 98.7% of our raw materials consists of polyester the price of
which fluctuates with the price of oil.
Labor
expenses were 6% of sales for the six month period ended March 31, 2010 compared
to 2% for the same period in 2009. Beginning in February 2009 we
hired 17 additional employees to work the new production line. Labor costs also
increased due to increased demand for labor.
Overhead
expenses were 12% of net sales for the six month period ended March 31, 2010,
compared to 19% of net sales for the same period last year due to the increase
of manufacturing capacity of the Company.
Gross
Profit
Gross
profits represents net sales less cost of goods sold. Gross profit
for the six month period ended March 31, 2010 was $3,003,192 and increase of
$1,368,761 or 83%, from $1,634,431 for the same period last year. As
a percentage of net sales, gross profit was 30% for the six month period ended
March 31, 2010, compared to 36% for the same period last year. This
decrease was primarily due to the increase in the purchase price of the raw
materials associated with 2010 sales. This was primarily due to increase of
purchase of price of the raw materials associated with 2010 sales, which price
increase was caused by fluctuations in the price of oil.
21
Selling,
Marketing and Administrative Expenses
Selling,
general and administrative expenses for the six month period ended March 31,
2010 were $662,138, an decrease of $96,304 compared to $758,442 for the same
period last year. This is mainly due to decreased stamp duty
$18,394 from $21,301 in 2009 compare to $2,907 for the same period this
year. Office expense also decreased $77,327 from $147,221 in 2009
compared to $69,894 for the same period 2010.
Other
Expenses
Other
expenses consist solely of interest expenses.
Interest
expense for the six month period ended March 31, 2010 was $452,387 compared to
$160,506 for the same period last year. Interest expense as a
percentage of net sales increased to 5% for the six month period ended March 31,
2010 from 4% for the same period of last year. The increase in
interest expense was principally due to record $4,140,000 of convertible notes.
We accreted non-cash related interest expense, in the amount of $304,950.
Excluding accretion on non-cash interest expense, interest expense for this six
month period remained the same as last year, and, as a percentage of net sales,
decreased to 1% from 4%.
Net
Income
Net
income for the six months ended March 31, 2010 increased by $1,157,934 from net
income of $731,746 for the same period in 2009 to net income of $1,889,680. The
increase was mainly due to the increase in sales due to the sales generated from
new needle-punch products.
Liquidity
and Capital Resources
We
finance our business with cash flows from operations and short-term bank loans
and we use shareholders’ equity investment and retained earnings to fund capital
expenditures.
Working
capital consists mainly of cash, accounts receivable, advances to suppliers and
inventory. Cash, inventory and accounts receivable account for the majority of
our working capital.
22
Our
working capital requirements may be influenced by many factors, including cash
flow, competition, relationships with suppliers, and the availability of credit
facilities and financing alternatives, none of which can be predicted with
certainty.
At March
31, 2010, we had several bank loans for the total amount of $3.8 million (RMB26
million) with Agriculture Bank of China, Foshan Branch and these loans are
repayable in December 2010. We have the highest credit rating for that
bank.
On
February 12, 2010 we completed a financing transaction in which we raised gross
proceeds of $4,140,000 through a private placement of convertible notes and
warrants to certain accredited investors.
Cash
from Operating Activities
Six
month period ended March 31, 2010 compared with six month period ended March 31,
2009
Net cash
proved by operating activities for the six months ended March 31, 2010 was
approximately $1.55 million, compared to a cash flow of $3.59 million for the
same period of the prior year. The decrease was due primarily to
increase in Non-cash interest charges, decrease in advance to
suppliers.
Cash
in Investing Activities
Six
month period ended March 31, 2010 compared with six month period ended March 31,
2009
Net cash
provided by investing activities for six months ended March 31, 2010 was
negative cash flow $1.39 million, compared to a negative cash flow of $4.93
million for the same period of the prior year. The increased cash used from
investing activities because there were no large capital expenditures during the
first six months of the year. Only deposits were made a new product assembly
line project. The net cash used in investing activities for the same
period of last year was due to the deposits for purchases of equipment and
expenses relating to outfitting our facilities.
We
satisfied this cash expenditure with cash reserves and cash generated from 2009
and 2010 operations.
Cash
in Financing Activities
Six
month period ended March 31, 2010 compared with six month period ended March 31,
2009
Net
cash provided by financing activities for the six month period ended
March 31, 2010 was approximately $2.64 million, compared to $0.19 million for
the same period of the prior year. The increase was the result of cash received
from the sale of the convertible notes.
23
Loans
The
balance of our outstanding short-term bank loans on March 31, 2010 was
approximately $3.8 million, compared with $4.6 million on March 31,
2009
On
February 12, 2010, immediately following the reverse merger, we entered into a
note purchase agreement with certain accredited investors for the sale of
convertible notes in the aggregate principal amount of $4,140,000 and warrants
(which are exercisable only in certain circumstances), with net proceeds for
$3.4 million after finance costs. The notes require quarterly interest payments
at a rate of 10% per annum and interest for six month in amount of $204,464 to
be held in an escrow account.
The
warrants become void if the notes automatically convert into common
stock.
The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $20,000,000. The warrants cannot be
exercised if no financing is consummated within the five-year period after the
issue date.
Future
Cash Commitments
We have
ambitious capital investment plans for our PPS projects in 2010 and which will
require significant investment capital. This demand for investment capital will
be met by the proceeds from the February private placement, and by outside
financing (including the public offering) that we intend to raise as needed to
continue our expansion.
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. Our
financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements “Summary of Significant
Accounting Policies.” We believe that the following paragraphs reflect the more
critical accounting policies that currently affect our financial condition and
results of operations:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method of accounting
for financial reporting purposes. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States and have been
consistently applied in the presentation of financial statements, which are
compiled on the accrual basis of accounting.
24
Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Management makes these estimates using the best information available
at the time the estimates are made; however actual results could differ
materially from those estimates.
Economic
and political risks
Our
operations are conducted in the PRC. Accordingly, our business, financial
condition and results of operations may be influenced by the political, economic
and legal environment in the PRC, and by the general state of the PRC
economy.
Our
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. Our results may be
adversely affected by changes in political and social conditions in the PRC and
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
Revenue
recognition
Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, and the seller’s price to the buyer is fixed or
determinable and collectible.
Land
use rights
Land use
rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method.
Estimated useful lives range from 20 to 50 years.
Property,
plant and equipment
Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of plant and equipment are as follows:
Buildings
|
15-35
years
|
|||
Machinery
and equipment
|
10
years
|
|||
Office
equipment
|
6-10
years
|
|||
Motor
vehicles
|
6-8
years
|
|||
Other
assets
|
6-10
years
|
25
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
Accounting
for the Impairment of Long-Lived Assets
The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the
assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
26
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable.
ITEM 4.
|
CONTROLS AND
PROCEDURES.
|
Evaluation of
Disclosure Controls and Procedures.
We
maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e)
under the Exchange Act) that are designed to ensure that information that would
be required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Rule 13a-15 under the Exchange Act, our management, including Mr.
Jie Li, our Chief Executive Officer and Ms. Sabrina Liang, our Controller,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2010. Based on that evaluation,
Mr. Lie and Ms. Liang concluded that as of March 31, 2010, and as of the date
that the evaluation of the effectiveness of our disclosure controls and
procedures was completed, our disclosure controls and procedures were not
effective in that certain “significant deficiencies” existed related to (i) the
U.S. GAAP expertise of our internal accounting staff, and (ii) our internal
audit function.
Changes in
Internal Control over Financial Reporting.
Under the
supervision and with the participation of our management, including our chief
executive officer and controller, identified a number of “significant
deficiencies” in the process of preparing our financial statements for the
quarter ended March 31, 2010 as described above.
During
the quarter ended March 31, 2010, we began to take certain remedial measures as
described below that have materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Because
our current accounting department is relatively new to U.S. GAAP and the related
internal control procedures required of U.S. public companies, our management
has determined that they require additional training and assistance in U.S. GAAP
matters. Management has determined that our internal audit function is also
significantly deficient due to insufficient qualified resources to perform
internal audit functions.
In order
to correct the foregoing significant deficiencies, we are taking the following
remediation measures:
|
·
|
We are arranging necessary
training for our accounting department
staff;
|
|
·
|
We plan to engage external
professional accounting or consultancy firms to assist us in the
preparation of the US GAAP
accounts;
|
|
·
|
We do not currently have a chief
financial officer but are currently searching for a qualified candidiate.
We remain committed to the establishment of effective internal audit
functions; however, due to the scarcity of qualified candidates with
extensive experience in U.S. GAAP reporting and accounting in the region,
we were not able to hire sufficient internal audit resources before the
end of our reporting period. However, we will increase our search for
qualified candidates with assistance from recruiters and through
referrals;
|
27
|
·
|
In addition, we have allocated
significant financial and human resources to strengthen the internal
control structure and we have been actively working with external
consultants to assess our data collection, financial reporting, and
control procedures and to strengthen our internal controls over financial
reporting.
|
We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems
appropriate.
28
PART
II
OTHER
INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
We are
not aware of any legal proceedings or claims that we expect will have a material
adverse affect on our business, financial condition or operating
results.
ITEM 6.
|
EXHIBITS.
|
The
following exhibits are filed as part of this report or incorporated by
reference:
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
Certification
of Principal Executive Officer and Principal Financial Officer furnished
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
29
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
May 24, 2009
CHINA
FILTRATION TECHNOLOGY, INC.
|
||
By:
|
/s/ Jie Li
|
|
Jie
Li
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
||
By:
|
/s/ Sabrina Liang
|
|
Sabrina
Liang
|
||
Controller
|
||
(Principal
Financial and Accounting
Officer)
|
30
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
Certifications
of Principal Executive Officer and Principal Accounting Officer furnished
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
31