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EX-3.5 - ZAPNAPS, INC. | v203568_ex3-5.htm |
EX-2.2 - ZAPNAPS, INC. | v203568_ex2-2.htm |
EX-3.2 - ZAPNAPS, INC. | v203568_ex3-2.htm |
EX-2.1 - ZAPNAPS, INC. | v203568_ex2-1.htm |
EX-3.4 - ZAPNAPS, INC. | v203568_ex3-4.htm |
EX-10.3 - ZAPNAPS, INC. | v203568_ex10-3.htm |
EX-10.1 - ZAPNAPS, INC. | v203568_ex10-1.htm |
EX-10.4 - ZAPNAPS, INC. | v203568_ex10-4.htm |
EX-10.2 - ZAPNAPS, INC. | v203568_ex10-2.htm |
EX-21.1 - ZAPNAPS, INC. | v203568_ex21-1.htm |
EX-10.6 - ZAPNAPS, INC. | v203568_ex10-6.htm |
EX-10.9 - ZAPNAPS, INC. | v203568_ex10-9.htm |
EX-10.5 - ZAPNAPS, INC. | v203568_ex10-5.htm |
EX-10.7 - ZAPNAPS, INC. | v203568_ex10-7.htm |
EX-10.8 - ZAPNAPS, INC. | v203568_ex10-8.htm |
EX-99.4 - ZAPNAPS, INC. | v203568_ex99-4.htm |
EX-99.3 - ZAPNAPS, INC. | v203568_ex99-3.htm |
EX-10.13 - ZAPNAPS, INC. | v203568_ex10-13.htm |
EX-10.14 - ZAPNAPS, INC. | v203568_ex10-14.htm |
EX-10.12 - ZAPNAPS, INC. | v203568_ex10-12.htm |
EX-10.11 - ZAPNAPS, INC. | v203568_ex10-11.htm |
EX-10.10 - ZAPNAPS, INC. | v203568_ex10-10.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): November 22, 2010
FUSIONTECH,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
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000-53837
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26-1250093
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(State or other Jurisdiction of
Incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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No. 26 Gaoneng Street, High Tech Zone, Dalian,
Liaoning Province, China
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116025
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s
telephone number, including area code: (86)
0411-84799486
No.
8 Mingshui Road
Changchun,
Jilin Province, China 130000
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
¨
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Written communications pursuant
to Rule 425 under the Securities Act (17 CFR
230.425)
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¨
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Soliciting material pursuant to
Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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¨
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Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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¨
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Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Throughout this
Current Report on Form 8-K, we will refer to FusionTech, Inc. as
“FusionTech,” the “Company,”
“we,” “us” and “our.”
Item
1.01 Entry into a Material Definitive Agreement.
On
November 22, 2010, FusionTech, Inc., a Nevada corporation (the “Company”),
entered into and consummated a series of agreements that resulted in the
acquisition of all of the ownership interests of Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. (“Dalian”), a foreign joint venture company organized
under the laws of the People’s Republic of China (“PRC”).
The
acquisition of Dalian’s ownership interests was accomplished pursuant to the
terms of a Share Exchange Agreement and Plan of Reorganization, dated November
22, 2010 (the “Share Exchange Agreement”), by and between Dalian, its owners,
and the Company. Pursuant to the Share Exchange Agreement, we acquired 100% of
Dalian from the owners of Dalian in exchange for the issuance of 24,990,000
shares of our common stock (the “Share Exchange”). The owners also agreed to
make such administrative filings in the PRC as necessary to record the transfer
of ownership of Dalian to the Company as a wholly foreign owned enterprise.
Concurrent with the closing of the transactions contemplated by the Share
Exchange Agreement and as a condition thereof, we entered into an agreement with
Mr. David Lu, our former Chief Executive Officer and Director, pursuant to which
he returned 80,000,000 shares of our common stock to us for cancellation. Mr. Lu
received compensation of $80,000 from us for the cancellation of his shares of
our common stock. Upon completion of the foregoing Share Exchange transactions,
we had 29,390,000 shares of common stock issued and outstanding. For accounting
purposes, the Share Exchange transaction was treated as a reverse acquisition
and recapitalization of Dalian because, prior to the transaction, the Company
was a non-operating public shell and, subsequent to the transaction, Dalian’s
owners beneficially owned a majority of the outstanding Common Stock of the
Company and will exercise significant influence over the operating and financial
policies of the consolidated entity.
We issued
the shares of common stock to the owners of Dalian in reliance upon the
exemption from registration provided by Regulation S under the Securities Act of
1933, as amended (the “Securities Act”).
Item
2.01 Completion of Acquisition or Disposition of Assets.
We refer
to Item 1.01 above, “Entry into a Material Definitive Agreement,” and
incorporate the contents of that section herein, as if fully set forth under
this Section 2.01.
Description
of Our Company
Historical
Business
Prior to
the transaction described in Item 1.01 above, we were a development stage
company with no revenues and no operations that intended to produce mini-paper
towels. We were incorporated in the State of Nevada on October 10, 2007, under
the name ZapNaps, Inc. On October 28, 2010, we changed our name to FusionTech,
Inc. and authorized an 8-for-1 forward split of our common stock, effective on
November 12, 2010.
Our
common stock will trade under the symbol “ZPNPD” for a 20-day period beginning
on November 12, 2010, pursuant to FINRA rules governing corporate actions, after
which period our symbol will revert to “ZPNP.”
Description
of FusionTech
We
believe we are a leading designer and manufacturer of clean technology
(“CleanTech”) industrial machinery used in the coking process, a critical but
highly pollutive step in the production of crude steel. Our products are sold to
large and medium size steel mills and coking plants in China who use or are
planning to use the coke dry quenching (“CDQ”) method of coking, a more
environmentally friendly and energy conservative method of coking as compared to
the traditional coke wet quenching method.
We
currently design and manufacture CDQ transport cars used in complete CDQ systems
and CleanTech coke oven products such as coke oven elevators, smoke transfer
machines, and coal cleaning machines. These CleanTech coke oven products are
used for maintaining coke ovens and reducing the amount of pollution they
emit. We also design and manufacture core coke oven products, such as
coke drums, coke drum carriers, wet quenching cars, coal freight cars, coke
guide cars, and coke pushers. These core coke oven products are necessary
components for all coke oven systems.
In the
second quarter of 2011, we plan to begin providing our proprietary steel plate
fusion services (“Steel Plate Fusion”) to a large steel plate manufacturer in
northern China, Minmetals Yingkou Medium Plate Co., Ltd. (“Minmetals Yingkou”).
Minmetals Yingkou is an established steel plate manufacturer in China with over
30 years of experience in producing clad steel plates and extra-thick carbon
steel plates. It is a subsidiary of the reputable China Minmetals Corporation, a
Fortune Global 500 Company based in China focusing on the development and
production of metals and minerals. We anticipate that our partnership with
Minmetals Yingkou will increase our revenues in 2011 as we have contracted to
process between 200,000 and 500,000 tons of steel plates using Steel Plate
Fusion.
1
We
believe Steel Plate Fusion is a next generation technology that is superior in
both cost and efficiency to conventional methods used to manufacture clad metal
plates and extra-thick carbon steel plates. Steel Plate Fusion uses an electron
beam welding machine in a vacuum chamber, and a proprietary process of surface
treatment and manipulation of pressure and temperature of the fusion process, to
fuse together metal slabs that can be hot rolled/compressed to
produce:
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clad
metal plates (“clad metal plates”), manufactured by fusing two dissimilar
metal plates such as stainless steel plates and carbon steel plates (“clad
steel plates”). Clad steel plates offer a more economical alternative to
pure stainless steel plates since they combine inexpensive carbon steel
and stainless steel. In addition, clad steel plates provide similar
functionalities as stainless steel plates and can be used in similar
industrial applications. Clad steel plates are commonly used and highly
demanded in heavy industrial applications such as the construction of
ships, piping, nuclear reactors, pressure vessels, heat exchangers, power
generation equipment, and coking equipment, all of which require the
anti-corrosive properties of clad steel
plates.
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specialty
extra-thick carbon steel plates (“extra-thick carbon steel plates”), more
than 80 millimeters thick, commonly used and highly demanded in heavy
industrial applications such as the construction of large ships, bridges,
buildings, metallurgical equipment, mining equipment, and power generation
equipment, all of which require the strength of extra-thick carbon steel
plates of certain standards and
specifications.
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We
operate through Dalian Heavy Mining Equipment Manufacturing Co. Ltd., our
subsidiary organized under the laws of the People’s Republic of China (“PRC”).
Our principal executive offices are located at No. 26, Gaoneng Street, High Tech
Zone, Dalian, Liaoning Province, China 116025. Our phone number is (86)
0411-84799486 and our website address is www.cleanfusiontech.com.
Clean
Coking and Related Products
FusionTech
designs and manufactures a wide variety of CleanTech coke oven products
including coke dry quenching (“CDQ”) transport cars, coke oven elevators, smoke
transfer machines, and coal cleaning machines. FusionTech also designs and
manufactures core coke oven products including wet quenching cars, coal freight
cars, coke guide cars, and coke pushers. FusionTech’s products are sold to the
China domestic steel and coking industries and have significant CleanTech
applications including use in complete CDQ systems. A complete CDQ system can
recycle the wasted heat produced during the coking process to generate
electricity and/or steam. CDQ systems are being phased into the coking process
in the China steel and coke industries because of these environmental and energy
conservation benefits. Additionally, PRC regulations set forth by the Ministry
of Industry and Information Technology (“MIIT”) now require all newly
constructed or reconstructed coke ovens to be accompanied by the installation of
a CDQ system. (1)
We were
one of the first manufacturers of CDQ transport cars in China, and believe that
we are a leading manufacturer of coke oven elevators. We have also been
manufacturing core coke oven products since our inception in 1992. Management
estimates that the market demand for coke ovens and related products will
approach the $1 billion mark as 40-60 new coke ovens are expected to be built in
China next year. We believe our eighteen-year operating history and focus on
product quality makes us one of the leading CleanTech focused coke oven product
manufacturers in China.
Industry
Overview
China is
the world’s largest steel producer and is projected to further expand its output
as domestic demand for the metal grows. According to statistics
released on the World Steel Association website, www.worldsteel.org, China
accounted for 47% of the world’s total crude steel output in 2009 and is on pace
to produce a record 600 million metric tons in 2010. As the China domestic steel
industry expands, environmental issues related to its production have become
more pressing. Within China’s industrial sector the steel industry accounts for
15% of aggregate energy consumption, 14% of aggregate wastewater production, and
17% of aggregate solid waste emission. (1)
The processes of smelting, coking, and steel casting,
contribute in excess of 70% of the total pollution and energy consumed within
the steel industry itself.(1)
(1)
Source: PRC Ministry of Industry and Information Technology “Steel
and Coking Industry CDQ Technology Marketing and Implementation Plan” January
20, 2010.
2
Coking is
the process by which coke is produced, a basic raw material used in the
production of iron. Coking involves baking coal at extremely high temperatures
in an oxygen-free oven (“coke oven”) and then rapidly cooling it. In the
conventional cooling process, the hot coke is cooled by drenching it with cold
water (“coke wet quenching”). Cooling the coke in this manner emits noxious
gases and the heat energy contained in the hot coke is lost. The modern CDQ
system cools the coke by circulating an inert gas in an enclosed heat exchange
system. This process reduces the harmful environmental effects associated with
the conventional cooling process as water is not contaminated with toxic
pollutants nor are air pollutants released.
CDQ
systems also promote renewable energy production as the wasted heat is recycled
to generate electricity. Compared to the coke wet quenching process, a steel
mill using two CDQ systems can produce approximately 167 gigawatt hours of
electricity from waste heat annually, saving approximately $9.2 million each
year on electricity costs, saving approximately 3.7 million tons of water, and
reducing its carbon dioxide emissions by approximately 130,000 metric tons.(2)
The PRC
government identified the steel industry as one of its primary targets for
pollution reduction in its 11th Five
Year Plan. In July 2010 China’s MIIT, to reduce emissions in the steel industry,
mandated that China’s existing steel mills consolidate to form larger more
efficient mills. Currently China’s steel industry includes many small steel
mills that use outdated technology. As steel industry consolidation progresses
in China, larger steel mills have sought to produce higher quality steel more
efficiently through the use of production methods which reduce environmental
impact.
In July
2010, China’s MIIT also mandated that the construction of new coke ovens or the
reconstruction of old coke ovens be accompanied by the installation of a
complete CDQ system. MIIT targeted 90% of large steel mills and 40% of all
coking plants to have CDQ systems installed before 2013. (3)
Products
CDQ
Transport Cars
We
believe we are a leading designer and manufacturer of CDQ transport cars
that are key components to a complete CDQ system.
A
complete CDQ system requires two CDQ transport cars, three coke drums, and three
coke drum carriers. A coke drum carrier is a long flatcar that runs along a
railway and is used to hold a coke drum, a large cylindrical container made of
metal used to hold coke. The CDQ transport car is a powered locomotive engine
that connects to the drum carrier and pulls it along the railway from the coke
oven to the CDQ machine for processing. An operator controls the speed of the
car from a control room located ontop of the CDQ transport car.
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CDQ
Transport Car for 6.25m Coke Oven
Source:
The Company
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FusionTech
manufactures CDQ transport cars by welding together steel plates to form the
car’s structure and then integrating electronic components such as engines,
wheels, and mechanical controls. Manufacture of CDQ transport cars requires
advanced technical knowledge as CDQ transport cars must be acutely responsive to
an operator’s commands to ensure the CDQ transport car stops at a precise
location where dangerous hot coke may be loaded and unloaded safely. Management
believes FusionTech’s CDQ transport cars are known in the coking industry for
their high quality and competitive pricing.
The
primary markets for FusionTech’s CDQ transport cars are new steel mills and
coking plants in the China domestic market and existing steel mills and coking
plants being modernized or seeking replacements for existing CDQ transport cars.
Management estimates that CDQ transport cars have a useful life expectancy of
approximately ten years.
(2) United
Nations Framework Convention on Climate Change: Baotou Iron & Steel CDQ and
Waste Heat Utilization for Electricity Generation Project, 03/08/2007, and
“CDQ-Modern coking technology,” by Anhui Vocational College of Metallurgy and
Technology. Assumptions made in calculations: Steel mill using two CDQ systems,
each with 125 tons/hour coal capacity and 15 megawatt electricity generating
capacity, and $0.055/kilowatt hour (based on average cost per KWH paid by
Huaneng in 2009).
(3)
PRC Ministry of Industry and Information Technology “Steel and Coking Industry
CDQ Technology Marketing and Implementation Plan” January 20, 2010.
3
Coke
Oven Elevator
We
believe we are a leading designer and manufacturer of coke oven elevators used
to repair damages and prevent toxic leaks as part of coke oven
maintenance.
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Source:
The Company
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According
to the U.S. Department of Energy, the largest environmental issue with the
steelmaking process is the carburizing of coal into coke for use in the
iron-making process. Coke ovens, in addition to emitting dust and particulate
emissions, produce noxius gases including nitrogen oxide, carbon monoxide, and
carbon dioxide. These
environmental hazards are particularly severe in China, the world’s largest
producer of coke according to the United Nations Statistics Division. The
PRC government has stated publicly that it plans to respond to these
environmental issues by including new pollutants such as nitrogen oxide in its
emission control list in China’s 12th Five
Year Plan.(4) We
believe the demand for coke oven maintenance products will increase as a result
of the inclusion of these pollutants, and that our coke oven elevators are
well-suited to meet this demand.
Coke oven
elevators are used to transport workers to the top of a coke oven where they can
repair damages and inspect for signs of toxic leaks. Regular coke oven
maintenance is one of the primary ways pollution emission can be controlled
during the coking process. Currently, we believe that we are the only domestic
manufacturer in China for coke oven elevators that attach to coke ovens 7 meters
and 7.63 meters in height. Management also believes that FusionTech’s coke oven
elevators with these specifications are 50% cheaper than imported coke oven
elevators, and are of superior quality as our elevators are powered by an
internal battery rather than diesel fuel. Additionally, demand for coke oven
elevators with these specifications is increasing due to the government directed
consolidation of the China steel industry. As small inefficient steel mills and
coking plants are closed and integrated into larger operations, all
reconstructed coke ovens or newly installed coke ovens will likely exceed 5.5
meters in height to take advantage of the increased production efficiencies a
larger coke oven provides. When a coke oven higher than 6 meters high is
installed, an area adjacent to the coke oven is typically reserved for the
installation of a coke oven elevator which can help reduce pollution emission
and maintain the coke oven for optimal performance. The PRC’s current pollution
emission reduction targets for the steel and coking industry also strongly
encourage the installation of these coke oven elevators.
We sell
our coke oven elevators to new steel mills and coking plants in China and to
steel mills and coking plants that are replacing and/or reconstructing old coke
oven elevators. Management estimates that the average coke oven elevator lasts
ten years.
Production
We
manufacture our CleanTech coke oven products and core coke oven products in our
facilities in the city of Dalian, Liaoning Province, China. We base our
production schedule on customer orders and schedule deliveries on a just-in-time
basis. Our manufacturing operations principally involve the welding together of
large steel plates and the integration of electronic components. It takes us
approximately three months to design a CDQ transport car according to our
customers’ specifications, and approximately another three months to
manufacture. Coke oven elevators can be designed and manufactured within three
months. We received ISO 9001:2008 Quality Management System certification in
January 2008. We have implemented comprehensive quality control procedures,
including non-destructive tests for defect detection conducted by our own
quality control group.
Sales and
Marketing
We employ
approximately 10 sales people to sell and market our products directly to
customers. Our sales people also engage in bidding for specific projects and
maintain our relationships with long-term clients. We currently sell our
products directly to large and medium scale China domestic steel mills and
coking plants, and through general contractors that are hired by steel mills and
coking plants to install complete CDQ systems. Management believes that these
general contractors are responsible for the majority of CDQ installations in
China. We fund our marketing costs through our working capital.
Suppliers
Our
principal raw material purchases include carbon steel, stainless steel, and
mechanical and electrical components. We have several suppliers for each of the
materials we use to manufacture our products. We believe we will be able to
obtain an adequate supply of steel and mechanical and electrical components to
meet our manufacturing requirements. We maintain a good business relationship
with all of our suppliers.
(4) Jing,
Li. “New pollution reduction targets listed.” China
Daily. January 26, 2010.
4
Customers
Our
customer base for our coking products includes large and medium scale steel
mills and coking plants in China. We sell our products either directly to these
steel mills and coking plants or through one of four general contractors in
China of CDQ systems. We believe we have strong business relationships with
these four general contractors, ACRE Coking and Refractory Engineering
Consulting Corporation Co., Ltd., Sinosteel Equipment and Engineering Co., Ltd.,
China-Japan Energy and Environment Engineering Technology Co., Ltd., and Jigang
International Engineering Technology Co., Ltd.
In 2009,
our three largest customers, ACRE Coking and Refractory Engineering Consulting
Corporation, Co., Ltd., Sinosteel Equipment and Engineering Co., Ltd., and Jinan
Steel Corp., accounted for approximately 32%, 28%, and 8%, respectively, of our
total revenues.
For the
nine months ended September 30, 2010, our three largest customers, ACRE Coking
and Refractory Engineering Consulting Corporation, Co., Ltd., Jinan Steel Corp.,
and Sinosteel Equipment and Engineering Co. Ltd., accounted for approximately
38%, 28%, and 22%, respectively, of our total revenues.
Intellectual
Property
We rely
on the patent laws in China, along with confidentiality procedures and
contractual provisions, to protect our intellectual property and maintain our
competitive edge in the marketplace. Currently we own seven patents, three for
different models of our CDQ transport cars, one for our coke oven elevator, one
for our coal cleaning machine, one for our steel belt feeding roller, and one
for our charging gas transfer car. One of our CDQ transport car patents will
expire in 2016 and two will expire in 2017. Our coke oven elevator patent will
expire in 2019, our coal cleaning machine patent will expire in 2018, and our
steel belt feeding roller and charging gas patents will expire in 2020. As we
continue to develop our CleanTech coke oven products we will apply for new
patents to protect our innovations. We have also executed non-disclosure
agreements with key employees to protect our patents and other trade secrets
related to our business.
Research and
Development
To
maintain our competitive edge in the marketplace and keep pace with new
technologies, we believe it is important to devote resources to ongoing research
and development to find improved efficiencies in the design, cost, pollution
reduction, and energy conservation capabilities of our products, while
identifying and developing new coking products. We plan to spend approximately
$750,000 on research and development in 2010.
Governmental and
Environmental Regulation
Our
business and company registrations are in compliance in all material respects
with the laws and regulations of the municipal and provincial authorities of the
Liaoning Province and China. We are subject to the National Environmental
Protection Law of the PRC as well as local laws regarding pollutant discharge,
air, water and noise pollution, with which we comply. We currently incur nominal
costs in connection with environmental laws as our manufacturing processes
generate minimal discharge.
We are
not subject to any other government regulations that would require us to obtain
a special license or approval from the PRC government to conduct our CleanTech
coke oven products and related products business.
Competition
Our
coking products compete against both China domestic manufacturers and
international manufacturers. Our deep industry expertise for the past 18 years
has allowed us to successfully design and manufacture products that we believe
meet the demand and satisfaction of our clients. We believe we have strong
relationships with our existing customer base and that our products are
recognized for their high quality and innovation. The manufacturing industry for
coking products in China is highly fragmented with many different manufacturers
holding small shares of the total market. Many of our competitors have
manufacturing operations that span many different heavy machinery industries,
and as a result they may have larger operations and greater financial resources
than us. We plan to remain competitive by continuing to market our eighteen year
operating history, our reputation for superior products, by funding research and
development to improve our current line of CleanTech coke oven products, and by
focusing on developing new innovative products that focus on environmental
conservation.
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Proprietary product
designs - We own seven different patents including three for
different models of our highly demanded CDQ transport cars. Management
estimates that these three models of CDQ transport cars occupy 60% of the
China domestic market.
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Award winning technology
– We designed and manufactured a CDQ transport car which was an integral
component of a major CDQ project in Maanshan, China. This CDQ project
received the Metallurgical Technology First Class Award from the China
Iron and Steel Association and the Chinese Society for Metals in 2005. In
2009 this CDQ project also received the National Science and Technology
Second Class Award.
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Strong business
relationships – We have strong business relationships with the four
CDQ general contractors who management believes occupy the majority of the
domestic China CDQ market. Management believes its relationships with
these contractors will continue, providing the Company with a valuable and
growing distribution channel for its CleanTech coke oven
products.
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Industry Experience – We
have an eighteen year operating history and are led by a management team
with over thirty years of metallurgical, heavy machinery, and coke
industry experience. At our inception we only manufactured
traditional core coke oven products. In 2002 we were able to successfully
expand our product offerings to include coke dry quenching
products.
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Customer Service – We
work closely with our customers to design and manufacture products to
their custom specifications. Our technical staff provides onsite guidance
through the installation process.
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Seasonality
We
typically experience stronger sales in the third and fourth quarters of our
fiscal year ending December 31st. This
is due to general contractors of CDQ systems, coking plants, and steel mills
typically placing their orders with us at the beginning of each fiscal year. We
typically ship these orders in the second half of the year.
Employees
As of
November 22, 2010 we had approximately 160 full-time employees. We plan to hire
an additional 100 full-time employees by the end of 2011. We believe that
relations with our employees are satisfactory and retention has been stable. We
enter into standard labor contracts with our employees as required by the PRC
government and adhere to state and provincial employment regulations. We provide
our employees with all social insurance as required by state and provincial
laws, including pension, unemployment, basic medical and workplace injury
insurance. We have no collective bargaining agreements with our
employees.
Planned
Expansion: Steel Plate Fusion
In the
second quarter of 2011, we plan to expand our existing operations to offer our
proprietary Steel Plate Fusion services to China steel plate manufacturers of
clad metal plates and extra-thick carbon steel plates.
Clad
metal plates is a general term used to describe metal plates composed of two
dissimilar metals. For example, a clad metal plate may combine stainless and
carbon steel, titanium and steel, aluminum and steel, or nickel and steel. Our
Steel Plate Fusion services will be initially used in the production of clad
steel plates, composed of stainless and carbon steel. However, management
believes that Steel Plate Fusion can be used to manufacture all types of clad
metal plates.
A
clad steel plate is a composite steel plate manufactured by bonding stainless
steel with carbon steel. Currently the most common method of producing clad
steel plates in China is through the use of a technique called explosion
welding. Clad steel plates have the structural strength of carbon steel and the
anticorrosive and heat resistant properties of stainless steel, but are less
costly than pure stainless steel plates because they combine cheaper carbon
steel with stainless steel. In addition, clad steel plates provide
similar functionalities as stainless steel plates and can be used for similar
industrial applications. Clad steel plates have widespread industry
applications, especially in areas of rapid growth in China. Clad steel plates
are used in heavy industrial applications such as in the construction of ships,
piping, nuclear reactors, pressure vessels, heat exchangers, power generation
equipment, and coking equipment, all of which require the anti-corrosive and
heat resistant properties of clad steel plates.
6
An
extra-thick carbon steel plate is a steel plate over 80 millimeters thick and is
currently manufactured through either mold casting or electroslag remelting.
Extra-thick carbon steel plates are also used in heavy industrial applications
such as in the construction of ships, bridges, buildings, metallurgical
equipment, mining equipment, and power generation equipment, all of which
require the strength and endurance of extra-thick carbon steel plates of certain
standards and specifications.
China’s
growing demand for steel is reflected in the China domestic clad steel plate and
extra-thick carbon steel plate market. The market demand for clad steel plates
is estimated to be 2.4 million tons or $6.1 billion. The demand for clad steel
plates is expected to grow to 8.5 million tons or $22 billion by 2015. The
market demand for extra-thick carbon steel plates, or carbon steel plates that
exceed 80 millimeters in thickness, is estimated to be 8.2 million tons or $9
billion. By 2015, demand is expected to increase to 26 million tons or $28.7
billion. 5
We
believe Steel Plate Fusion will transform the way clad steel plates and
extra-thick carbon steel plates are made in China as it is a unique and
innovative method of production that will offer significant cost savings and
production efficiencies to China steel plate manufacturers who currently use
conventional methods.
Conventional Production
Methods
Clad
Steel Plates
Conventional
clad steel plate manufacturing occurs through a three step process:
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1.
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Continuous
casting - Molten steel is solidified into a thick rectangular slab through
a process known as continuous casting, a low-cost and efficient mass
production method of producing high quality carbon and stainless steel
slabs.
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2.
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The
resulting carbon and stainless steel slabs are hot rolled/compressed
through a steel rolling mill which flattens the slabs into rectangular
carbon and stainless steel plates.
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3.
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The
stainless steel plate is then welded to the carbon steel plate through a
technique known as explosion welding. Explosion welding uses force
generated from controlled explosions to weld together two dissimilar metal
plates. It is the most commonly used method of welding together metal
plates in China.
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The end
product is a clad steel plate which is comprised of a carbon steel plate and an
anti-corrosive layer of a stainless steel plate. Explosion welding can be
extremely dangerous as the use of explosives to weld together metal plates is an
inherently dangerous activity. Additionally, the explosions used to weld the
plates together can often produce unwanted bubbles on the outer surface of the
plate. These bubbles must be manually corrected, requiring significant time and
expense on the part of the steel plate manufacturer.
Extra-Thick
Carbon Steel Plates
Extra-thick
carbon steel plates are conventionally manufactured through either one of two
processes, mold casting or electroslag remelting.
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1.
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Mold
Casting - Molten steel is poured into a rectangular cast and cooled within
the cast until it solidifies. The resultant thick steel slab is compressed
through a steel rolling mill to produce an extra-thick carbon steel plate.
Mold casting is currently the most commonly used method to produce
extra-thick carbon steel plates in
China.
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2.
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Electroslag
Remelting (ESR) – Molten steel is solidified into a thick rectangular slab
through continuous casting and then remelted in a metal mold. Once the
remelted slab is cooled and solidified within the mold, it is compressed
through a steel rolling mill to produce an extra-thick carbon steel plate.
ESR is used instead of mold casting for certain industry applications that
require higher quality plates because it produces an extra-thick carbon
steel plate with fewer flaws. However, ESR is costlier than mold casting
because the steel is melted twice and the rejection rate for the final
steel plate is higher.
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Management
believes that our Steel Plate Fusion services are a more cost effective and
efficient method to produce extra-thick carbon steel plates. As compared to mold
casting, Steel Plate Fusion uses continuous casting in the production of
extra-thick carbon steel plates. Continuous casting is generally accepted as the
cheapest and most efficient method for producing metal slabs up to a certain
thickness and also produces a higher quality end product. As compared to
electroslag remelting, Steel Plate Fusion can produce a similar quality plate
without the added step of remelting the solidified metal slab prior to
compression in the steel rolling mill, thereby saving time and expense in the
production process.
(5) Source: Zero
Power Intelligence Research “China Thick Steel Plate Industry Research and
Analysis” 2010. (the “Steel Plate Report”)
7
Steel Plate
Fusion
Steel
Plate Fusion is our proprietary technology that we believe is the first and only
of its kind in China. We plan to offer Steel Plate Fusion as a value added
service to steel plate manufacturers in China. We believe Steel Plate Fusion
will be in high demand as it will lower production costs and improve
efficiencies in the manufacture of clad and extra-thick carbon steel plates in
China.
Steel
Plate Fusion uses electron-beam welding technology as part of its proprietary
process, which includes the manipulation of pressure and temperature during the
fusion process, to fuse together large metal slabs used in the production of
clad steel plates and extra-thick carbon steel plates. Electron-beam welding is
a fusion welding process that was first developed in 1958 to weld together
component parts used in modern technology such as jet engines, electric motors,
and automobiles. Electron-beam welding employs a high-velocity electron beam in
a vacuum to fuse together desired components. Through research and development,
FusionTech modified traditional electron beam welding technology so it could be
used to fuse together large metal slabs to produce clad steel plates or
extra-thick carbon steel plates. Management believes that Steel Plate Fusion
will be a cheaper, faster, and higher yielding method by which to produce clad
steel plates and extra-thick carbon steel plates in China, as compared to
conventional methods of production.
To
manufacture clad steel plates and extra-thick carbon steel plates through Steel
Plate Fusion, coal, limestone and iron ore are first processed by a blast
furnace to produce molten steel. The molten steel is then transformed into
rectangular steel slabs through the continuous casting process. After the slabs
have cooled and solidified, a truck transports the steel slabs to our processing
facilities which are adjacent to the steel plate manufacturing plant. At our
facility our staff mounts the rectangular steel slabs and fuses them together
using Steel Plate Fusion. The fused slab is then transported back to the steel
plate manufacturer where it is heated and compressed through a steel rolling
mill to produce the final clad steel or extra-thick carbon steel
plate.
8
During
our testing of Steel Plate Fusion we successfully produced clad steel plates and
extra-thick carbon steel plates in the facilities of a large steel manufacturer
in China. Microscopic and x-ray testing of the steel slabs fused together
through Steel Plate Fusion exceeded the stringent testing standards required by
steel plate manufacturers who produce clad steel plates and extra-thick carbon
steel plates. According to our tests, the final clad steel plates and
extra-thick carbon steel plates produced through Steel Plate Fusion are of
higher quality than those produced through explosion welding or mold casting
respectively. The clad steel plates produced through Steel Plate Fusion were
free of air bubbles often present in clad steel plates manufactured through
explosion welding. Additionally, we were able to produce extra-thick carbon
steel plates thicker than 100 millimeters and with an overall lower rejection
rate than plates produced through mold casting or electroslag
remelting.
Intellectual
Property
We filed
an application for an invention patent covering Steel Plate Fusion in China on
September 13, 2010. The invention patent offers stronger protection for new
technological processes than the more commonly used utility patent. If granted,
the invention patent will prevent competitors from utilizing Steel Plate Fusion
for a period of twenty years as compared to only ten years for a utility patent.
We strongly believe that the application for the invention patent will be
approved as no other company in China uses technology similar to Steel Plate
Fusion.
Although
the application process takes approximately eighteen months to complete, the
filing of an invention patent in China grants the applicant temporary protection
during this time. Should any competitor in China seek to implement Steel Plate
Fusion in its own operations, FusionTech will have a legal claim against
them.
The
operation of Steel Plate Fusion requires specific skills and operational
knowledge to prevent defects in production and waste of expensive raw materials.
We will protect our operational knowledge of Steel Plate Fusion as a trade
secret. FusionTech has implemented confidentiality procedures and contractual
provisions with its employees who work with Steel Plate Fusion. Steel
plate manufacturers who work with FusionTech will also be required to follow
strict confidentiality procedures with respect to Steel Plate Fusion. We believe
these steps will adequately protect our proprietary knowledge of the operational
and technical aspects of Steel Plate Fusion.
Customers
We
believe our customer base for Steel Plate Fusion will be medium and large-scale
steel plate manufacturers across China who produce clad steel plates and
extra-thick carbon steel plates. We believe that the cost and efficiency
advantages Steel Plate Fusion has over conventional methods of clad and
extra-thick carbon steel plate production will help drive demand for our
services.
We plan
to market our Steel Plate Fusion technology directly to steel plate
manufacturers across China through our existing sales team for our CleanTech
coke oven products. We believe that our pre-existing relationships with steel
manufacturers formed through the sale of our coking products will provide
avenues for marketing and selling the Steel Plate Fusion value added
service.
We have
signed a non-exclusive strategic contract to provide our Steel Plate Fusion
services to Minmetals Yingkou, a large steel plate manufacturer located in
northern China, and a subsidiary of China Minmetals Corporation, a large China
conglomerate with over $26 billion in revenue. Pursuant to the contract,
FusionTech is constructing a Steel Plate Fusion processing facility adjacent to
Minmetals Yingkou’s steel plate production facilities. Minmetals Yingkou will
produce the carbon and stainless steel slabs using its own continuous casting
system, and the slabs will then be sent to the adjacent FusionTech processing
factory to be fused together using Steel Plate Fusion. These fused metal slabs
will then be sent back to the Minmetals Yingkou steel plate rolling mill where
they will be compressed in Minmetals Yingkou’s rolling machinery to produce
finished clad steel plates and extra-thick carbon steel plates.
Minmetals
Yingkou will be responsible for selling the steel plates to end users. Minmetals
Yingkou, an established and reputable steel plate manufacturer in China, plans
to use its existing wide distribution network and customer relationships to sell
and market the steel plates manufactured using Steel Plate
Fusion. The contract requires Minmetals Yingkou to pay FusionTech an
agreed upon processing fee per ton of clad steel plates and extra-thick carbon
steel plates manufactured using Steel Plate Fusion. The contract provides for a
total production of 200,000 to 500,000 tons of plates. The final tonnage
produced will depend on market conditions. We believe that Steel Plate Fusion
will begin generating revenues by the third quarter of 2011. The Company plans
to hire an additional 70 employees to work in the Steel Plate Fusion processing
facility in Yingkou.
9
FusionTech
plans to use a similar business model when partnering with other medium and
large-scale steel plate manufacturers across China. We believe this franchise
model of expansion, where we build processing factories adjacent to major China
steel plate manufacturers, will provide us with first mover advantage and
discourage potential competitors from entering our newly created
market.
Business
Strategy
We
believe that we are the only Company in China to offer Steel Plate Fusion as a
method of producing clad steel plates and extra-thick carbon steel plates. We
believe that the production efficiencies and cost savings offered by Steel Plate
Fusion will enable us to successfully compete in a market dominated by less
efficient and more costly production methods. We plan to remain competitive by
vigorously protecting our intellectual property and heavily marketing our Steel
Plate Fusion technology as the low-cost, higher efficiency alternative to
conventional production methods for clad steel plates and extra-thick carbon
steel plates.
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·
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First mover advantage
–We believe our Steel Plate Fusion services will be successful because
FusionTech is the only Company to offer this low cost and high efficiency
method of producing clad steel plates and extra-thick carbon steel plates
in China, the market demand for which are expected to grow in the next
five years by 262% and 217% respectively, according to the Steel Plate
Report.
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Established barriers to
entry – The high research and development costs necessary to
develop Steel Plate Fusion technology will prevent competitors from
entering our newly created market. FusionTech has also applied for an
invention patent for Steel Plate Fusion which, if granted, will provide
legal protection for the technology for twenty years. We
strongly believe that the invention patent will be approved. Additionally,
we believe our franchise model of expansion will strengthen our presence
throughout different areas of China. The construction of processing
facilities adjacent to steel plate manufacturers will also create strong
barriers to entry and discourage potential
competitors.
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·
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Significant costs savings and
higher efficiencies over existing technologies – Based on our
testing of Steel Plate Fusion, management estimates that Steel Plate
Fusion technology will save steel plate manufacturers considerable costs,
time, resources, and help to expand production output of both clad steel
plates and extra-thick carbon steel
plates.
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·
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Asset-light, value added
service business model - As management
plans to pursue a strategy where clients pay FusionTech for its Steel
Plate Fusion services rather than for final steel plates produced,
FusionTech will not have to invest in expensive continuous casting and
steel rolling equipment in order to earn revenues from Steel Plate Fusion.
We believe this is a superior business model as compared to producing clad
steel plates and extra-thick carbon steel plates which require high
capital expenditures for steel slab production and their subsequent
compression through hot rolling. We also plan to leverage our steel plate
manufacturer partners’ existing distribution network and customer base to
expand the volume of steel plates produced using Steel Plate
Fusion.
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Properties
Our
principal executive offices and our designing and manufacturing facilities for
our CleanTech coke oven products and core coke oven products are located in
Dalian, Liaoning Province, China. We lease four buildings in Dalian, and the
land each of them occupy, which include our office headquarters and three
separate manufacturing factories. FusionTech is currently in the process of
obtaining the land-use rights from the PRC government for the land adjacent to
Minmetals Yingkou’s factory, where FusionTech has begun construction of a
processing facility for Steel Plate Fusion, and for another piece of land
located in Dalian, Liaoning Province, China.
Legal
Proceedings
FusionTech
may occasionally become involved in various lawsuits and legal proceedings
arising in the ordinary course of business. Litigation is subject to inherent
uncertainties and an adverse result in these or other matters that may arise
from time to time may have an adverse affect on our business, financial
conditions or operating results. FusionTech is currently not aware of any such
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse affect on our business, financial condition or operating
results.
10
Risk
Factors
Risks
Related to Our Business
Our
plans for growth rely on a new business that we have not yet commenced. This
line of business will be critical to our success in the future, and if it is
unsuccessful our potential for growth may be adversely affected.
Steel
Plate Fusion is a new service offered by the Company that will commence
operations in the second quarter of 2011. While we have already signed a
contract with a large steel plate manufacturer in China to provide these
services, we have not yet commenced mass production at any
facility. We cannot assure you that large scale production will be
profitable or that the production techniques we use will be suitable for mass
production. Moreover, while during the testing of Steel Plate Fusion we
successfully produced clad and extra-thick carbon steel plates, and the final
produced steel plates met or exceeded the quality standards required by our
customer; we cannot assure you that we will be able to maintain such standards
when we commence mass production. Therefore we cannot assure you that Steel
Plate Fusion will be a profitable line of business and will ultimately succeed
as currently planned. Any significant setback in our plans for Steel Plate
Fusion may adversely affect our future profitability and potential for
growth.
We
are a major purchaser of certain raw materials that we use in the manufacturing
process of our clean coking and related products, and price changes for the
commodities we depend on may adversely affect our profitability.
The
Company’s largest raw materials purchases consist of stainless steel and carbon
steel. As such, fluctuations in the price of steel in the China domestic market
will have an impact on the Company’s operating costs and related profits.
International steel prices were lower in 2009 than in 2008, but prices have
increased in 2010 along with the general economic recovery. The iron ore import
price in China has also increased since 2009, which will impact the price and
volume of steel produced by the China domestic steel industry.
Our
profitability depends in part upon the margin between the cost to us of certain
raw materials, such as stainless steel and carbon steel, used in the
manufacturing process, as well as our fabrication costs associated with
converting such raw materials into assembled products, compared to the selling
price of our products, and the overall supply of raw materials. It is our
intention to base the selling prices of our products in part upon the associated
raw materials costs to us. However, we may not be able to pass all increases in
raw material costs and ancillary acquisition costs associated with taking
possession of the raw materials through to our customers. Although we are
currently able to obtain adequate supplies of raw materials, it is impossible to
predict future availability or pricing. The inability to offset price increases
of raw materials by sufficient product price increases, and our inability to
obtain raw materials, would have a material adverse effect on our consolidated
financial condition, results of operations and cash flows.
The
Company does not engage in hedging transactions to protect against raw material
fluctuations, but attempts to mitigate the short-term risks of price swings by
purchasing raw materials in advance.
We
derive a substantial part of our revenues from several major customers. If we
lose any of these customers or they reduce the amount of business they do with
us, our revenues may be seriously affected.
Our three
largest customers accounted for approximately 69% of total sales for the fiscal
year ended December 31, 2009, and our largest customer accounted for
approximately 32% of total sales in the fiscal year ended December 31, 2009. Our
three largest customers accounted for approximately 88% of total sales for the
nine months ended September 30, 2010, and our largest customer accounted for
approximately 38% of total sales for the nine months ended September 30, 2010.
These customers may not maintain the same volume of business with us in the
future. If we lose any of these customers or they reduce the amount of business
they do with us, our revenues and profitability may be seriously affected. We do
not foresee our relying on these same customers for revenue generation as we
introduce new product lines, new generations of existing product lines, and
expand our business to include Steel Plate Fusion services. We cannot be
assured, however, that we will be able to successfully introduce new products or
services.
We
may lose customers for our traditional coke oven products due to consolidation
of the steel industry in China.
We
currently sell our traditional coke oven products to a number of medium size
steel mills and coking plants in China. If these medium size steel mills and
coking plants are forced to close or consolidate with larger operations, we may
lose them as our customers. While we believe that consolidation of the steel
industry in China will increase the demand for our clean coking products as
larger steel mills and coking plants with greater capital resources are formed,
there are no guarantees that we will be able to successfully retain these larger
steel mills and coking plants as our customers.
The
steel industry is cyclical in nature and is subject to the fluctuations of the
global economy, a downturn in which could adversely affect our revenues and the
profitability of our planned expansion into Steel Plate Fusion.
Our clean
coking and related products are used by large and medium size steel mills and
coking plants in China whose businesses are dependent on the strength of the
global steel industry. Any drop in the demand for steel due to global economic
factors may cause these steel mills and coking plants to reduce their level of
capital expenditures which in turn could adversely affect our revenues from our
coke oven products. Such an occurrence may also negatively affect the
profitability of our planned expansion into Steel Plate Fusion.
11
If
we are not able to manage our growth, we may not be profitable.
Our
continued success will depend on our ability to expand and manage our operations
and facilities. There can be no assurance we will be able to manage our growth,
meet the staffing requirements for our current or planned business or
successfully assimilate and train new employees. In addition, to manage our
growth effectively, we may be required to expand our management base and enhance
our operating and financial systems. If we continue to grow, there can be no
assurance the management skills and systems currently in place will be adequate.
Moreover, there can be no assurance we will be able to manage any additional
growth effectively. Failure to achieve any of these goals could have a material
adverse effect on our business, financial condition or results of
operations.
Our
accounts receivables remain outstanding for a significant period of time, which
has a negative impact on our cash flow and liquidity.
Our
agreements with our customers related to our clean coking and related products
generally provide that approximately 30% of the purchase price is due upon the
placement of an order, 30% upon reaching certain milestones in the manufacturing
process and 30% upon customer acceptance of the product. As a common practice in
the manufacturing business in China, payment of the final 10% of the purchase
price is due no later than the termination date of our warranty period, which is
a negotiated term of up to 24 months from the acceptance date. We account for
payments received from customers prior to customer acceptance of the product as
unearned revenue.
We
may experience material disruptions to our operations.
While we
seek to operate our facilities in compliance with applicable rules and
regulations and take measures to minimize the risks of disruption at our
facilities, a material disruption at one of our facilities could prevent us from
meeting customer demand, reduce our sales and/or negatively impact our financial
results. Any of our facilities, or any of our machines within an otherwise
operational facility, could cease operations unexpectedly due to a number of
events, including: prolonged power failures; equipment failures; disruptions in
the transportation infrastructure including roads, bridges, railroad tracks; and
fires, floods, earthquakes, acts of war, or other catastrophes.
We
cannot be certain our innovations and marketing successes will
continue.
We
believe our past performance has been based on, and our future success will
depend, in part, upon our ability to continue to improve our existing products
through product innovation and to develop, market and produce new products and
services. We cannot assure you that we will be successful in introducing,
marketing and producing any new products or services, or that we will develop
and introduce in a timely manner innovations to our existing products which
satisfy customer needs or achieve market acceptance. Our failure to develop new
products or services and introduce them successfully and in a timely manner
could harm our ability to grow our business and could have a material adverse
effect on our business, results of operations and financial
condition.
The
technology used in our products and services may not satisfy the changing needs
of our customers.
While we
believe we have hired or engaged personnel who have the experience and ability
necessary to keep pace with advances in technology, and while we continue to
seek out and develop “next generation” technology through our research and
development efforts, there is no guarantee we will be able to keep pace with
technological developments and market demands in our target industries and
markets. Although certain technologies in the industries we occupy are well
established, we believe our future success depends in part on our ability to
enhance our existing products and develop new products and services in order to
continue to meet customer demands. With any technology, including the technology
of our current and proposed products and services, there are risks that the
technology may not address successfully all of our customers’ needs. Moreover,
our customers’ needs may change or vary. This may affect the ability of our
present or proposed products and services to address all of our customers’
ultimate technology needs in an economically feasible manner, which could have a
material adverse affect on our business.
We
may not be able to keep pace with competition in our industry.
Our clean
coking and related products business is subject to risks associated with
competition from new or existing industry participants who may have more
resources and better access to capital. Many of our competitors and potential
competitors may have substantially greater financial and government support,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we do. Among other things, these industry participants compete
with us based upon price, quality, location and available capacity. We cannot be
sure we will have the resources or expertise to compete successfully in the
future. Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs to increase market share. We cannot
be sure we will be able to match cost reductions by our competitors or that we
will be able to succeed in the face of current or future
competition.
12
We will
face different market dynamics and competition as we develop new products and
services to expand our target markets. In some markets, our future competitors
would have greater brand recognition and broader distribution than we currently
enjoy. We may not be as successful as our competitors in generating revenues in
those markets due to lower recognition of our brand, lower customer acceptance,
lower product quality history and other factors. As a result, any new expansion
efforts could be more costly and less profitable than our efforts in our
existing markets.
If we are
not as successful as our competitors in our target markets, our sales could
decline, our margins could be impacted negatively and we could lose market
share, any of which could materially harm our business.
Our
coking products may contain defects, which could adversely affect our reputation
and cause us to incur significant costs.
Despite
testing by us, defects may be found in existing or new products. Any such
defects could cause us to incur significant return and exchange costs,
re-engineering costs, divert the attention of our engineering personnel from
product development efforts, and cause significant customer relations and
business reputation problems. Any such defects could force us to undertake a
product recall program, which could cause us to incur significant expenses and
could harm our reputation and that of our products. If we deliver defective
products, our credibility and the market acceptance and sales of our products
could be harmed.
The
nature of our products creates the possibility of significant product liability
and warranty claims, which could harm our business.
Material
failure of any of our clean coking or related products would have a material
adverse affect on our business. Customers use some of our products in
potentially hazardous applications that can cause injury or loss of life and
damage to property, equipment or the environment. In addition, some of our
products are integral to the production process for some end-users and any
failure of our products could result in a suspension of their operations.
Although we have a quality control group specifically charged with inspecting
our products prior to delivery, we cannot be certain our products will be
completely free from defects. Moreover, we do not have any product liability
insurance and may not have adequate resources to satisfy a judgment in the event
of a successful claim against us. While we have not yet experienced any product
liability claims against us, we cannot predict whether product liability claims
will be brought against us in the future or the impact of any resulting negative
publicity on our business. The successful assertion of product liability claims
against us could result in potentially significant monetary damages and require
us to make significant payments.
Our
Steel Plate Fusion technology and the steel plates it is used to produce may
contain defects, which could adversely affect our planned business
expansion.
While the
tests we have conducted on our Steel Plate Fusion technology have revealed no
defects in the technology or in the steel plates produced, we have not used
Steel Plate Fusion to produce a large quantity of steel plates, and will not do
so until the second quarter of 2011. We cannot be certain that when the
technology is used to produce a large quantity of steel plates that the final
produced steel plates will be free of defects. Any such defects could adversely
affect our planned business expansion.
We
face risks associated with managing domestic operations.
All of
our operations are conducted in China. There are a number of risks inherent in
doing business in such market, including the following:
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unfavorable political or
economical factors;
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fluctuations in foreign currency
exchange rates;
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potentially adverse tax
consequences;
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unexpected legal or regulatory
changes;
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lack of sufficient protection for
intellectual property
rights;
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difficulties in recruiting and
retaining personnel, and managing international operations;
and
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less developed
infrastructure.
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Our
inability to manage successfully the risks in our China domestic activities
could adversely affect our business. We can provide no assurances that any new
market expansion will be successful because of the risks associated with
conducting such operations, including the risks listed above.
We
may not be able to protect our technology and other proprietary rights
adequately.
Our
success will depend in part on our ability to obtain and protect our products,
methods, processes and other technologies, to preserve our trade secrets, and to
operate without infringing on the proprietary rights of third parties, both
domestically and abroad. Despite our efforts, any of the following may reduce
the value of our owned and used intellectual property:
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issued patents and trademarks
that we own or have the right to use may not provide us with any
competitive advantages;
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our efforts to protect our
intellectual property rights may not be effective in preventing
misappropriation of our technology or that of those from whom we license
our rights to use;
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our efforts may not prevent the
development and design by others of products or technologies similar to or
competitive with, or superior to those we use or develop;
or
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another party may obtain a
blocking patent and we or our licensors would need to either obtain a
license or design around the patent in order to continue to offer the
contested feature or service in our
products.
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Effective
protection of intellectual property rights may be unavailable or limited in
certain foreign countries. If we are unable to protect our proprietary rights
adequately, it would have a negative impact on our operations.
We
may be subject to claims that we have infringed the proprietary rights of
others, which could require us to obtain a license or change
designs.
Although
we do not believe any of our products or services infringe upon the proprietary
rights of others, there is no assurance that infringement or invalidity claims
(or claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against us or that any such assertions or prosecutions
will not have a material adverse affect on our business. Regardless of whether
any such claims are valid or can be asserted successfully, defending against
such claims could cause us to incur significant costs and could divert resources
away from our other activities. In addition, assertion of infringement claims
could result in injunctions that prevent us from distributing our products. If
any claims or actions are asserted against us, we may seek to obtain a license
to the intellectual property rights that are in dispute. Such a license may not
be available on reasonable terms, or at all, which could force us to change our
designs.
Our
application for an invention patent covering Steel Plate Fusion may not be
granted, which could adversely impact our planned business
expansion.
There can
be no absolute assurances that the PRC State Intellectual Property Officer, or
SIPO, will grant our patent. If we do not obtain a patent covering Steel Plate
Fusion we will have to rely on protecting our Steel Plate Fusion technology from
potential competitors as a trade secret, which may require greater resources and
may not be as effective in protecting the technology from use by potential
competitors.
We
may need additional capital to execute our business plan and fund operations and
may not be able to obtain such capital on acceptable terms or at
all.
In
connection with the planned expansion of our business to offer Steel Plate
Fusion services we will likely incur significant capital and operational
expenses. Management anticipates that our existing capital resources and cash
flows from operations and current short-term bank loans will be adequate to
satisfy our liquidity requirements for the next 12 months. However, if available
liquidity is not sufficient to meet our plans for expansion, current operating
expenses and loan obligations as they come due, our plans include pursuing
alternative financing arrangements. Our ability to obtain additional capital on
acceptable terms or at all is subject to a variety of uncertainties,
including:
14
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investors’ perceptions of, and
demand for, companies in our
industry;
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investors’ perceptions of, and
demand for, companies operating in
China;
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conditions of the United States
and other capital markets in which we may seek to raise
funds;
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our future results of operations,
financial condition and cash
flows;
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governmental regulation of
foreign investment in companies in particular
countries;
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economic, political and other
conditions in the United States, China, and other countries;
and
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governmental policies relating to
foreign currency borrowings.
|
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There is no
assurance we will be successful in locating a suitable financing transaction in
a timely fashion or at all. In addition, there is no assurance we will obtain
the capital we require by any other means. Future financings through equity
investments are likely to be dilutive to our existing shareholders. Also, the
terms of securities we may issue in future capital transactions may be more
favorable for our new investors. Newly issued securities may include preferences
or superior voting rights, be combined with the issuance of warrants or other
derivative securities, or be the issuances of incentive awards under equity
employee incentive plans, which may have additional dilutive effects.
Furthermore, we may incur substantial costs in pursuing future capital and
financing, including investment banking fees, legal fees, accounting fees,
printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we may issue,
such as convertible notes and warrants, which will adversely impact our
financial condition.
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital we are able
to raise from financing activities, together with our revenues from operations,
is not sufficient to satisfy our capital needs, even to the extent that we
reduce our operations accordingly, we may be required to cease
operations.
We
may not be able to attract the attention of major brokerage firms because we
became public by means of a share exchange.
There may
be risks associated with our becoming public through the Share Exchange
Agreement. Analysts of major brokerage firms may not provide coverage for our
company because there is no incentive for brokerage firms to recommend the
purchase of our common stock. Furthermore, we can give no assurance that
brokerage firms will, in the future, want to conduct any secondary offerings on
our behalf.
Our
business could be subject to environmental liabilities.
As is the
case with manufacturers of similar products, we use certain hazardous substances
in our operations. Currently, we do not anticipate any material adverse effect
on our business, revenues or results of operations as a result of compliance
with the environmental laws and regulations of the PRC. However, the risk of
environmental liability and charges associated with maintaining compliance with
PRC environmental laws is inherent in the nature of our business, and there is
no assurance that material environmental liabilities and compliance charges will
not arise in the future.
If
we lose our key personnel, or are unable to attract and retain additional
qualified personnel, the quality of our services may decline and our business
may be adversely impacted.
We rely
heavily on the expertise, experience and continued services of our senior
management, including our Chief Executive Officer, Mr. Lixin Wang. Loss of his
services could adversely impact our ability to achieve our business objectives.
Mr. Wang is a key factor in our success because of his extensive industry
experience and reputation. The continued development and planned expansion of
our business depends upon the continued employment of Mr. Wang. We do not
currently have an employment agreement with Mr. Wang, and his standard labor
contract does not include provisions for non-competition or
confidentiality.
15
We
believe our future success will depend upon our ability to retain key employees
and our ability to attract and retain other skilled personnel. The rapid growth
of the economy in China has caused intense competition for qualified personnel.
We cannot guarantee that any employee will remain employed by us for any
definite period of time or that we will be able to attract, train or retain
qualified personnel in the future. Such loss of personnel could have a material
adverse effect on our business and company. Moreover, qualified employees
periodically are in great demand and may be unavailable in the time frame
required to satisfy our customers’ requirements. We need to employ additional
personnel to expand our business. There is no assurance we will be able to
attract and retain sufficient numbers of highly skilled employees in the future.
The loss of personnel or our inability to hire or retain sufficient personnel at
competitive rates could impair the growth of our business.
We
will incur significant costs as a result of our operating as a public company
and our management will be required to devote substantial time to new compliance
initiatives.
While we
are a public company, our compliance costs prior to the Share Exchange in
November 2010 were not substantial in light of our limited operations. Dalian
never operated as a public company prior to the Share Exchange. As a public
company with substantial operations, we will incur increased legal, accounting
and other expenses. The costs of preparing and filing annual and quarterly
reports, proxy statements and other information with the SEC and furnishing
audited reports to shareholders is time-consuming and costly.
It will
also be time-consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”). Certain members of our management have
limited or no experience operating a company whose securities are listed on a
national securities exchange or with the rules and reporting practices required
by the federal securities laws and applicable to a publicly traded company. We
will need to recruit, hire, train and retain additional financial reporting,
internal control and other personnel in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with the internal controls requirements of the Sarbanes-Oxley Act, we may
not be able to obtain the independent accountant certifications required by the
Sarbanes-Oxley Act.
If
we fail to establish and maintain an effective system of internal controls, we
may not be able to report our financial results accurately or prevent fraud. Any
inability to report and file our financial results accurately and timely could
harm our business and adversely impact the trading price of our common
stock.
We are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act and the rules promulgated by the SEC. Our management, including our Chief
Executive Officer and Chief Financial Officer, cannot guarantee that our
internal controls and disclosure controls will prevent all possible errors or
prevent all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all control
systems, no system of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Furthermore, controls can be circumvented by individual acts
of some persons, by collusion of two or more persons, or by management override
of the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, a control may become inadequate because
of changes in conditions or the degree of compliance with policies or procedures
may deteriorate. Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.
We
are a holding company that depends on cash flow from our wholly owned subsidiary
to meet our obligations.
After the
Share Exchange, we became a holding company with no material assets other than
the stock of our wholly owned subsidiary, Dalian. Accordingly, Dalian will
conduct all of our operations, which are responsible for research, production
and delivery of goods. We currently expect that we will primarily retain the
earnings and cash flow of our subsidiary for use by us in our
operations.
16
All
of Dalian’s liabilities survived the Share Exchange and there may be undisclosed
liabilities that could have a negative impact on our financial
condition.
Before
the Share Exchange, certain due diligence activities on the Company and Dalian
were performed. The due diligence process may not have revealed all liabilities
(actual or contingent) of the Company and Dalian that existed or which may arise
in the future relating to the Company’s activities before the consummation of
the Share Exchange. Notwithstanding that all of the Company’s pre-closing
liabilities were transferred to a third party pursuant to the terms of the Share
Exchange Agreement, it is possible that claims for such liabilities may still be
made against us, which we will be required to defend or otherwise resolve. The
transfer pursuant to the Share Exchange Agreement may not be sufficient to
protect us from claims and liabilities, and any breaches of related
representations and warranties. Any liabilities remaining from the Company’s
pre-closing activities could harm our financial condition and results of
operations.
New
accounting standards could result in changes to our methods of quantifying and
recording accounting transactions, and could affect our financial results and
financial position.
Changes
to the U.S. Generally Accepted Accounting Principles arise from new and revised
standards, interpretations, and other guidance issued by the Financial
Accounting Standards Board, the SEC, and others. In addition, these or other
U.S. entities may issue new or revised Cost Accounting Standards or Cost
Principles. The effects of such changes may include prescribing an accounting
method where none had been previously specified, prescribing a single acceptable
method of accounting from among several acceptable methods that currently exist,
or revoking the acceptability of a current method and replacing it with an
entirely different method, among others. Such changes could result in
unanticipated effects on our results of operations, financial position, and
other financial measures.
Risks
Related to Our Business being Conducted in China
China’s
economic policies could affect our business.
All of
our assets are located in China and all of our revenue is derived from our
operations in China. Accordingly, our results of operations and prospects are
subject, to a significant extent, to the economic, political and legal
developments in China. While China’s economy has experienced significant growth
in the past twenty years, such growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of China, but they may also
have a negative effect on us. For example, operating results and financial
condition may be adversely affected by the government control over capital
investments or changes in tax regulations. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. In
recent years, the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform and the reduction of state
ownership of productive assets, and the establishment of corporate governance in
business enterprises; however, a substantial portion of productive assets in
China are still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, the control of payment of
foreign currency-denominated obligations, the setting of monetary policy and the
provision of preferential treatment to particular industries or
companies.
We
may have difficulty establishing adequate management, legal and financial
controls in China.
Historically,
China has not adopted a Western style of management or financial reporting
concepts and practices, nor modern banking, computer and other control systems.
We may have difficulty in hiring and retaining a sufficient number of qualified
employees to work in China. As a result of these factors, 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.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various national banks located in China. Our cash
accounts are not insured or otherwise protected. Should any bank holding our
cash deposits become insolvent, or if we are otherwise unable to withdraw funds,
we would lose the cash on deposit with that particular bank.
17
We
do not carry business insurance coverage and may incur losses due to business
interruptions resulting from natural and man-made disasters.
The
insurance industry in China is still in an early stage of development and
insurance companies located in China offer limited business insurance products.
We currently do not carry property and casualty insurance for our buildings,
plant and equipment. Should any natural catastrophes such as earthquakes,
floods, or any acts of terrorism occur where our primary operations are located
and most of our employees are based, or elsewhere, we might suffer not only
significant property damage, but also loss of revenues due to interruptions in
our business operations. The occurrence of a significant event for which we are
not fully insured or indemnified could materially and adversely affect our
operations and financial condition. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates we consider
reasonable.
Tax
laws and regulations in China are subject to substantial revision, some of which
may adversely affect our profitability.
The
Chinese tax system is in a state of flux, and it is anticipated that China’s tax
regime will be altered in the coming years. Tax benefits that we presently enjoy
may not be available to us in the wake of these changes, and we could incur tax
obligations to the Chinese government that are significantly higher than
currently anticipated. These increased tax obligations could negatively impact
our financial condition and our revenues, gross margins, profitability and
results of operations may be adversely affected as a result.
We
may face judicial corruption in China.
The
political, governmental and judicial systems in China are sometimes impacted by
corruption. There is no assurance we will be able to obtain recourse in any
legal disputes with suppliers, customers or other parties with whom we conduct
business, if desired, through China’s poorly developed and sometimes corrupt
judicial systems.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
China
could change its policies toward private enterprise or even nationalize or
expropriate private enterprises.
Our
business is subject to significant political and economic uncertainties and may
be affected by political, economic and social developments in China. Over the
past several years, the PRC government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The PRC government may not continue to pursue these policies
or may significantly alter them to our detriment from time to time with little,
if any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to shareholders, or devaluations of currency
could cause a decline in the price of our common stock, should a market for our
common stock ever develop. Nationalization or expropriation could even result in
the total loss of your investment.
The
nature and application of many laws of China create an uncertain environment for
business operations and they could have a negative effect on us.
The legal
system in China is a civil law system. Unlike the common law system, the civil
law system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, China began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes to existing laws and the abrogation of local regulations by national
laws could cause a decline in the price of our common stock. In addition, as
these laws, regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty.
Fluctuation
of the Renminbi may affect our financial condition and the value of our
securities.
Although
we use the United States dollar for financial reporting purposes, most of the
transactions effected by our operating subsidiary is denominated in China’s
Renminbi. The value of the Renminbi fluctuates and is subject to changes in
China’s political and economic conditions. Since June 2008, the Renminbi has
been pegged to the U.S. dollar. Since the People’s Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term.
Moreover, it is possible that in the future the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. In fact, In June 2010, The People’s
Bank of China announced that it will manage the renminbi’s (RMB) exchange rate
more flexibly, following nearly two years in which the Chinese currency has been
pegged to the US dollar.
18
Future
movements in the exchange rate of the Renminbi could adversely affect our
financial condition as we may suffer financial losses when transferring money
raised outside of China into the country or paying vendors for services
performed outside of China. Moreover, fluctuations in the exchange rate between
the U.S. dollar and the Renminbi will affect our financial results reported in
U.S. dollar terms without giving effect to any underlying change in our
business, financial condition or results of operations. The value of our common
stock likewise will be affected by the foreign exchange rate between U.S.
dollars and RMB, and between those currencies and other currencies in which our
sales may be denominated. Fluctuations in the exchange rate will also affect the
relative value of any dividend we may issue in the future that will be exchanged
into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future. For example, if we need to
convert U.S. dollars into RMB for our operational needs and the RMB appreciates
against the U.S. dollar at that time, our financial position, our business, and
the price of our common stock may be harmed. Conversely, if we decide to convert
our RMB into U.S. dollars for the purpose of declaring dividends on our common
stock or for other business purposes and the U.S. dollar appreciates against the
RMB, the U.S. dollar equivalent of our earnings from our subsidiary in China
would be reduced.
Inflation
in China could negatively affect our profitability and growth.
The rapid
growth of China’s economy has been uneven among economic sectors and
geographical regions of the country. China’s economy grew at an annual rate of
9.60% in the third quarter of 2010, as measured by the year-over-year change in
Gross Domestic Product, according to the National Bureau of Statistics of China.
Rapid economic growth can lead to growth in the money supply and rising
inflation. According to the National Bureau of Statistics of China, the
inflation rate in China declined in the second half of 2008 and much of 2009
during the current worldwide economic downturn, before climbing again to a high
point of 1.9% in 2009, as compared to 8.7% and 6.9% in 2008. The inflation rate
in China is expected to continue to increase in 2010 as the worldwide economy
recovers, reaching 3.6% as of September 2010. If prices for our products
and services fail to rise at a rate sufficient to compensate for the increased
costs of supplies, such as raw materials, due to inflation, it may have an
adverse effect on our profitability.
Furthermore,
in order to control inflation in the past, the PRC government has imposed
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. The implementation of such policies may impede future
economic growth. The People’s Bank of China, the central bank of the PRC, kept
interest rates fixed during the recent economic crisis, but in the past has
effected increases in the interest rates in response to inflationary concerns in
the China’s economy. If the central bank raises interest rates from the current
crisis levels, economic activity in China could slow and, in turn, materially
increase our costs and reduce demand for our products and services.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
As our
executive officers and directors, including the Chairman of our Board of
Directors, are citizens of the PRC, it may be difficult, if not impossible, to
acquire jurisdiction over these persons in the event a lawsuit is initiated
against us and/or our officers and directors by a shareholder or group of
shareholders in the United States. Also, because our operating subsidiary and
assets are located in China, it may be extremely difficult or impossible for
individuals to access those assets to enforce judgments rendered against us or
our directors or executive offices by United States courts. In addition, the
courts in China may not permit the enforcement of judgments arising out of
United States federal and state corporate, securities or similar laws.
Accordingly, United States investors may not be able to enforce judgments
against us for violation of United States securities laws.
PRC
regulations relating to mergers, off-shore companies and Chinese resident
shareholders, if applied to us, may limit our ability to operate our business as
we see fit.
PRC
regulations govern the process by which we may participate in an acquisition of
assets or equity interests. Depending on the structure of the transaction, these
regulations require involved parties to make a series of applications and
supplemental applications to various government agencies. In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be
completed and reported to the government agencies. Compliance with the new
regulations is likely to be more time consuming and expensive than in the past
and the government can now exert more control over the combination of two
businesses. Accordingly, due to PRC regulations, our ability to engage in
business combination transactions in China through our subsidiary in China has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate transactions acceptable to us or sufficiently
protective of our interests.
19
If
we fail to satisfy contribution of capital requirements at our PRC subsidiaries,
our business in China will be adversely affected.
We
will be required to contribute additional capital to our PRC subsidiaries which
is planned as part of our subsequent financing efforts. Under PRC laws,
shareholders of a foreign-invested enterprise are required to contribute capital
to satisfy the registered capital requirement of the foreign-invested enterprise
within a period of not more than two years from the date when the
foreign-invested enterprise’s license to conduct business is initially granted.
The relevant PRC government agencies may grant an additional three-month grace
period. If the shareholders are unable to complete the capital contribution
within the grace period, the business license of the foreign-invested enterprise
may be revoked by the PRC government. Further, until such contribution of
capital is satisfied, the foreign-invested enterprise is not allowed to
repatriate profits to its shareholders, unless otherwise approved by the State
Administration for Foreign Exchange (“SAFE”).
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
Renminbi is currently convertible under the “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our China subsidiary may purchase foreign currencies for settlement
of current account transactions, including payments of dividends to us, without
the approval of the State Administration of Foreign Exchange (“SAFE”). However,
the relevant PRC government authorities may limit or eliminate their ability to
purchase foreign currencies in the future. Since a significant amount of our
future revenues will be denominated in Renminbi, any existing and future
restrictions on currency exchange may limit our ability to utilize revenues
generated in Renminbi to fund our business activities outside China that are
denominated in foreign currencies.
Foreign
exchange transactions by our China subsidiary under the capital account continue
to be subject to significant foreign exchange controls and require the approval
of or need to register with PRC governmental authorities, including SAFE. In
particular, if our China subsidiary borrows foreign currency loans from us or
other foreign lenders, these loans must be registered with SAFE, and if we
finance our China subsidiary by means of additional capital contributions, these
capital contributions must be approved by certain government authorities,
including the NDRC, Ministry of Commerce (“MOFCOM”), or their respective local
counterparts. These limitations could affect the ability of our Chinese
subsidiary to obtain foreign exchange through debt or equity
financing.
Recent
PRC regulations relating to the registration requirements for China resident
shareholders owning shares in off-shore companies as well as registration
requirements of employee stock ownership plans or share option plans may subject
the Company’s China resident shareholders to personal liability and limit its
ability to acquire Chinese companies or to inject capital into its operating
subsidiary in China, limit its subsidiary’s ability to distribute profits to the
Company, or otherwise materially and adversely affect the Company.
The SAFE
issued a public notice in October 2005 (“Circular 75”) requiring PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “off-shore special purpose company,” for the purpose of
acquiring any assets of or equity interest in PRC companies and raising funds
from overseas. In addition, any PRC resident who is the shareholder of an
off-shore special purpose company is required to amend his or her SAFE
registration with the local SAFE branch, with respect to that off-shore special
purpose company in connection with any increase or decrease of capital, transfer
of shares, merger, division, equity investment or creation of any security
interest over any assets located in China. To clarify further the implementation
of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24,
2005 and May 29, 2007, respectively. Under Circular 106, a PRC subsidiary of an
off-shore special purpose company are required to coordinate and supervise the
filing of SAFE registrations by the off-shore holding company’s shareholders who
are PRC residents in a timely manner. If these shareholders fail to comply, the
PRC subsidiary is required to report to the local SAFE authorities. If the PRC
subsidiary of the off-shore parent company does not report to the local SAFE
authorities, they may be prohibited from distributing their profits and proceeds
from any reduction in capital, share transfer or liquidation to their off-shore
parent company and the off-shore parent company may be restricted in its ability
to contribute additional capital into its PRC subsidiary. Moreover, failure to
comply with the above SAFE registration requirements could result in liabilities
under PRC laws for evasion of foreign exchange restrictions. We cannot predict
fully how Circular 75 will affect our business operations or future strategies
because of ongoing uncertainty over how Circular 75 will be interpreted and
implemented, and how or whether SAFE will apply it to us.
20
We have
requested our PRC resident beneficial owners, including our Chairman, to make
the necessary applications, filings and amendments as required under SAFE
regulations in connection with their equity interests in us. We attempt to
ensure that our subsidiary in China complies, and that our PRC resident
beneficial owners subject to these rules comply, with the relevant SAFE
regulations. The Company cannot provide any assurances that all of our present
or prospective direct or indirect PRC resident beneficial owners will comply
fully with all applicable registrations or required approvals. The failure or
inability of our PRC resident beneficial owners to comply with the applicable
SAFE registration requirements may subject these beneficial owners or the
Company to fines, legal sanctions and restrictions described above.
On March
28, 2007, SAFE released detailed registration procedures for employee stock
ownership plans or share option plans to be established by overseas listed
companies and for individual plan participants. Any failure to comply with the
relevant registration procedures may affect the effectiveness of the Company’s
employee stock ownership plans or share option plans and subject the plan
participants, the companies offering the plans or the relevant intermediaries,
as the case may be, to penalties under PRC foreign exchange regime. The Company
has no employee stock ownership plan or share option plan in effect. These
penalties may subject the Company to fines and legal sanctions, prevent the
Company from being able to make distributions or pay dividends, as a result of
which the Company’s business operations and its ability to distribute profits
could be materially and adversely affected.
The
Company’s PRC subsidiary may be exposed to penalties by the PRC government due
to noncompliance with taxation, land use and construction administration,
environmental and employment rules.
While the
Company believes its PRC subsidiary has been in compliance with PRC taxation,
land use and construction administration, environmental and employment rules
during its operations in China, the Company has not obtained letters from the
competent PRC government authorities confirming such compliance. If any
competent PRC government authority takes the position that there is
noncompliance with the taxation, land use and construction administration,
environmental or employment rules by the Company’s PRC subsidiary, it may be
exposed to penalties by such PRC government authority, in which case the
operation of the Company’s PRC subsidiary in question may be adversely
affected.
The
Share Exchange Agreement may be subject to additional registration and filing
requirements with various PRC governmental agencies.
We have
entered into the Share Exchange Agreement with Dalian and its owners, and all of
the parties have contractually agreed that the laws of the State of Nevada
governing the purchase and sale of Dalian shall apply. However, we
cannot assure you that either the PRC Ministry of Finance or SAFE will apply
Nevada law to the Share Exchange Agreement. Therefore, Dalian and the owners of
Dalian have agreed to make such filings and recordation of the transfer as
required under PRC law to additionally qualify the purchase and transfer of
ownership with the relevant PRC ministries. The filing of such
documents may not commence until completion of the Share Exchange Agreement
under Nevada law. We cannot offer assurances as to when these filings will be
completed. If the applications are rejected for any reason, an
adverse effect upon the Company could result if the relevant PRC ministries
refuse to honor the choice of law selected by the parties to the Share Exchange
Agreement.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act (the
“FCPA”), which prohibits U.S. companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices occur from time-to-time in mainland China.
If our competitors engage in these practices, they may receive preferential
treatment from personnel of some companies, giving our competitors an advantage
in securing business or from government officials who might give them priority
in obtaining new licenses, which would put us at a disadvantage. Although we
inform our personnel that such practices are illegal, we cannot assure you that
our employees or other agents will not engage in such conduct for which we might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties.
Risks
Related to Our Securities
The
market price for our common stock may be volatile.
The
trading price of our common stock may fluctuate widely in response to various
factors, some of which are beyond our control. These factors include, but not
limited to, our quarterly operating results or the operating results of other
companies in our industry, announcements by us or our competitors of
acquisitions, new products, product improvements, commercial relationships,
intellectual property, legal, regulatory or other business developments and
changes in financial estimates or recommendations by stock market analysts
regarding us or our competitors. In addition, the stock market in general, and
the market for companies based in China in particular, has experienced extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
or disproportionate to their operating performance. These broad market
fluctuations may materially affect our stock price, regardless of our operating
results. Furthermore, the market for our common stock is limited and we cannot
assure you that a larger market will ever be developed or maintained. The price
at which investors purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, these factors may make it more difficult
or impossible for you to sell our common stock for a positive return on your
investment.
21
Shares
of our common stock lack a significant trading market.
Shares of
our common stock are not yet eligible for trading on any national securities
exchange. Our common stock may be quoted in the over-the-counter market on the
OTC Bulletin Board or in what are commonly referred to as “pink sheets.” These
markets are highly illiquid. Although we plan to apply for listing of our common
stock on the NASDAQ Stock Market or the New York Stock Exchange, national
securities exchanges, there can be no assurance of if and when such application
would be granted. There is no assurance that an active trading market in our
common stock will develop, or if such a market develops, that it will be
sustained. In addition, there is a greater chance for market volatility for
securities quoted on the OTC Bulletin Board as opposed to securities traded on a
national exchange. This volatility may be caused by a variety of factors,
including the lack of readily available quotations, the absence of consistent
administrative supervision of “bid” and “ask” quotations and generally lower
trading volume. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, our common
stock, or to obtain coverage for significant news events concerning us, and the
common stock could become substantially less attractive for margin loans, for
investment by financial institutions, as consideration in future capital raising
transactions or for other purposes.
Future
sales of shares of our common stock by our shareholders could cause our stock
price to decline.
Future
sales of shares of our common stock could adversely affect the prevailing market
price of our stock. If our significant shareholders sell a large number of
shares, or if we issue a large number of shares, the market price of our stock
could decline. Moreover, the perception in the public market that shareholders
might sell shares of our stock could depress the market for our shares. If our
shareholders who received shares of our common stock issued in the Share
Exchange sell substantial amounts of our common stock in the public market upon
the effectiveness of a registration statement, or upon the expiration of any
holding period under Regulation S, such sales could create a circumstance
commonly referred to as an “overhang” and in anticipation of which the market
price of our common stock could fall. The existence of an overhang, whether or
not sales have occurred or are occurring, also could make it more difficult for
us to raise additional financing through the sale of equity or equity-related
securities in the future at a time and price we deem reasonable or appropriate.
The shares of common stock issued in the Share Exchange will be freely tradable
upon the earlier of (i) effectiveness of a registration statement covering such
shares and (ii) the date on which such shares may be sold without registration
pursuant to Regulation S under the Securities Act and the sale of such shares
could have a negative impact on the price of our common stock.
We
may issue additional shares of our capital stock or debt securities to raise
capital or complete acquisitions, which would reduce the equity interest of our
shareholders.
Our
Articles of Incorporation, as amended, authorize the issuance of up to
100,000,000 shares of common stock, par value $.001 per share. As
of November 22, 2010, there were approximately 70,610,000 authorized and
unissued shares of our common stock that have not been reserved and are
available for future issuance. Although we have no commitments as of the date of
this registration statement to issue our securities, we may issue a substantial
number of additional shares of our common stock to raise capital. The issuance
of additional shares of our common stock may (i) significantly reduce the equity
interest of our existing shareholders and (ii) adversely affect prevailing
market prices for our common stock.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
Our
common stock may be subject to the “penny stock” rules adopted under Section
15(g) of the Securities Exchange Act of 1934. The penny stock rules apply to
non-NASDAQ-listed issuers whose common stock trades at less than $5.00 per share
or that have a tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from those rules, to deliver a standardized risk disclosure document
prepared by the SEC, which contains the following information:
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§
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a description of the nature and
level of risk in the market for penny stocks in both public offerings and
secondary trading;
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§
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a description of the broker’s or
dealer’s duties to the customer and of the rights and remedies available
to the customer with respect to violation to such duties or other
requirements of securities
laws;
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22
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§
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a brief, clear, narrative
description of a dealer market, including “bid” and “ask” prices for penny
stocks and the significance of the spread between the “bid” and “ask”
prices;
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§
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a toll free telephone number for
inquiries on disciplinary
actions;
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§
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definitions of any significant
terms in the disclosure document or in the conduct of trading in penny
stocks; and
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§
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such other information and is in
such form (including language, type, size and format), as the SEC shall
require by rule or
regulation.
|
Prior to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer with the following information:
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§
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bid and offer quotations for the
penny stock;
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§
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compensation of the broker-dealer
and our salesperson in the
transaction;
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§
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number of shares to which such
bid and ask prices apply, or other comparable information relating to the
depth and liquidity of the market for such stock;
and
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§
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monthly account statements
showing the market value of each penny stock held in the customer’s
account.
|
The penny
stock rules further require that, prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving penny stocks
and a signed and dated copy of a written suitability statement.
Due to
the requirements of the penny stock rules, many brokers have decided not to
trade penny stocks. As a result, the number of broker-dealers willing to act as
market makers in such securities is limited. If we remain subject to the penny
stock rules for any significant period, that could have an adverse effect on the
market, if any, for our securities. Moreover, if our securities are subject to
the penny stock rules, investors will find it more difficult to dispose of our
securities.
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our common stock and do not anticipate doing so in
the foreseeable future. The payment of dividends on our common stock will depend
on earnings, financial condition and other business and economic factors
affecting it at such time as the Board of Directors may consider relevant. If we
do not pay dividends, our common stock may be less valuable because a return on
your investment will occur only if our stock price appreciates.
Capital
outflow policies in China may hamper our ability to declare and pay dividends to
our shareholders.
China has
currency and capital transfer regulations, which may require us to comply with
complex regulations for the movement of capital. Although our management
believes we will be in compliance with these regulations, should these
regulations or the interpretation of them by courts or regulatory agencies
change, we may not be able to pay dividends to our shareholders outside of
China. In addition, under current PRC law, we must retain a reserve equal to 10%
of net income after taxes, not to exceed 50% of registered capital. Accordingly,
this reserve will not be available to be distributed as dividends to our
shareholders. We presently do not intend to pay dividends in the foreseeable
future. Our management intends to follow a policy of retaining all of our
earnings to finance the development and execution of our strategy and the
expansion of our business.
23
Our
principal shareholder has the ability to exert significant control in matters
requiring a shareholder vote and could delay, deter or prevent a change of
control in our company.
As
of November 22, 2010, Mr. Lixin Wang, our Chairman and Chief Executive
Officer, and our largest shareholder, beneficially owned approximately 46.77% of
our outstanding shares. In addition, Mr. Wang’s son, Yang Wang, and wife, Peili
Wang, hold approximately 12.75% and 8.5% of our outstanding shares respectively.
Mr. Wang possesses significant influence over us, giving him the ability, among
other things, to exert significant control over the election of all or a
majority of the Board of Directors and to approve significant corporate
transactions. Such stock ownership and control may also have the effect of
delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination, or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of our company. Without the consent of Mr. Wang, we could be prevented
from entering into potentially beneficial transactions if they conflict with our
principal stockholder’s interests. The interests of this stockholder may differ
from the interests of our other stockholders.
Provisions
in our Articles of Incorporation and Amended and Restated Bylaws could make it
very difficult for you to bring any legal actions against our directors or
officers for violations of their fiduciary duties or could require us to pay any
amounts incurred by our directors or officers in any such actions.
Pursuant
to our Articles of Incorporation, members of our Board of Directors and our
officers will have no liability for breaches of their fiduciary duty of care as
a director or officer, except in limited circumstances. This means you may be
unable to prevail in a legal action against our directors or officers even if
you believe they have breached their fiduciary duty of care. In addition, our
Articles of Incorporation and Amended and Restated Bylaws allow us to indemnify
our directors and officers from and against any and all costs, charges and
expenses resulting from their acting in such capacities with us. This means if
you were able to enforce an action against our directors or officers, in all
likelihood, we would be required to pay any expenses they incurred in defending
the lawsuit and any judgment or settlement they otherwise would be required to
pay.
Taxation
We
will not obtain an opinion of legal counsel regarding the United States income
tax consequences of an investment in our securities.
We will
not obtain an opinion of counsel regarding the U.S. income tax consequences of
investing in our securities including whether we will be treated as a company
for U.S. income tax purposes. Recent changes in tax laws have not, as yet, been
the subject of administrative or judicial scrutiny or interpretation. Moreover,
there is no assurance that future legislation may not further affect the tax
consequences of an investment in our securities. INVESTORS ARE URGED TO CONSULT
WITH THEIR TAX ADVISORS REGARDING THE POSSIBLE U.S. FEDERAL, STATE, AND LOCAL
TAX CONSEQUENCES OF INVESTING IN OUR SECURITIES.
Cautionary
Notice Regarding Forward-Looking Statements
This
Current Report on Form 8-K includes 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. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar expressions. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those listed under the heading “Risk Factors” and those listed in
our other Securities and Exchange Commission filings. The following discussion
should be read in conjunction with our Financial Statements and related Notes
thereto included elsewhere in this Current Report. Throughout this Current
Report, we will refer to FusionTech, Inc. as “FusionTech,” the “Company,” “we,”
“us” and “our.”
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We design
and manufacture clean technology (“CleanTech”) industrial machinery used in
coking, a critical but highly pollutive step in the production of crude steel.
Our products are sold to large and medium size steel mills and coking plants in
China who use or are planning to use the coke dry quenching (“CDQ”) method of
coking, a more environmentally friendly and energy conservative method of coking
as compared to the traditional coke wet quenching method.
We
currently design and manufacture CDQ transport cars used in complete CDQ systems
and CleanTech coke oven products such as coke oven elevators, smoke transfer
machines, and coal cleaning machines. These CleanTech coke oven products are
used for maintaining coke ovens and reducing the amount of pollution they
emit. We also design and manufacture core coke oven products, such as
coke drums, coke drum carriers, wet quenching cars, coal freight cars, coke
guide cars, and coke pushers. These core coke oven products are necessary
components for all coke oven systems.
24
We
operate through Dalian Heavy Mining Equipment Manufacturing Co., Ltd., our
subsidiary organized under the laws of the People’s Republic of
China.
Results of
Operations
Comparison of the nine
months ended September 30, 2010 and 2009
Revenues: Revenues increased
to $9,877,237 for the nine months ended September 30, 2010 from $6,248,007 for
the nine months ended September 30, 2009, an increase of $3,629,230 or 58%. The
increase was primarily due to the increase in completed contracts as a result of
the economic recovery.
Costs of Revenue: Cost of
revenue increased to $7,724,279 for the nine months ended September 30, 2010
from $5,046,372 for the nine months ended September 30, 2009, an increase of
$2,677,907 or 53%. Cost of revenue as a percentage of sales was 78%
and 81% for the nine months ended September 30, 2010 and 2009,
respectively. The decrease in cost of revenue as a percentage of
revenues was due to the decrease in the cost of raw materials and an increased
focus on managing the production process.
Selling Expenses: Selling
expenses decreased to $174,661 for the nine months ended September 30, 2010 from
$254,359 for the nine months ended September 30, 2009, a decrease of $70,698 or
29%. The decrease was attributable to the Company increasing its marketing
expenses in efforts to increase market share. During 2010, the
Company focused on cutting costs.
General and Administrative Expenses:
General and administrative expenses increased to $673,279 for the nine
months ended September 30, 2010 from $520,479 for the nine months ended
September 30, 2009, an increase of $152,800 or 29%. The increase was primarily
due to the increase in bad debt allowance, which increased from approximately
$27,000 for the nine months ended September 30, 2009 to approximately $138,000
for the nine months ended September 30, 2010.
Interest Expense: Interest
expense increased to $95,992 for the nine months ended September 30, 2010 from
$19,592 for the nine months ended September 30, 2009, an increase of $76,400 or
390%. The increase was primarily due to the increase in loans taken
out by the Company.
Provision for income tax:
Provision for income tax increased to $326,437 for the nine months ended
September 30, 2010 from $61,142 for the nine months ended September 30, 2009, an
increase of $265,295 or 434%. The tax provision as a percentage of
income before tax was 25% and 12% for the nine months ended September 30, 2010
and 2009, respectively. By year end the tax rate for 2009 was 19%
which is consistent with our expectations.
Comparison of the
years ended
December 31, 2009 and 2008
Revenues: Revenues increased
to $9,947,893 for the year ended December 31, 2009 from $6,043,828 for the year
ended December 31, 2008, an increase of $3,904,065 or 65%. The increase was due
to the introduction of new products that expanded our sales and
our expansion into a new facility.
Costs of Revenue: Cost of
revenue increased to $7,817,162 for the year ended December 31, 2009 from
$5,269,971 for the year ended December 31, 2008, an increase of $2,547,191 or
48%. Cost of revenue as a percentage of revenues was 79% and 87%
for the years ended December 31, 2009 and 2008, respectively. The
decrease in our costs of revenue as a percentage of revenues was due to a
decrease in raw material costs, higher profit margins from our new products, and
a focus on cutting unnecessary costs.
Selling Expenses: Selling
expenses increased to $382,671 for the year ended December 31, 2009 from
$290,617 for the year ended December 31, 2008, an increase of $92,054 or 32%.
The increase was primarily due to our increase in marketing expenses in efforts
to increase our market share.
General and Administrative Expenses:
General and administrative expenses increased to $732,735 for the year
ended December 31, 2009 from $564,814 for the year ended December 31, 2008, an
increase of $167,921 or 30%. The increase was primarily due to an increase in
salaries, depreciation and bad debts of approximately $42,000, $42,000 and
$69,000, respectively.
Interest Expense: Interest
expense increased to $31,223 for the year ended December 31, 2009 from $23,158
for the year ended December 31, 2008, an increase of $8,065 or
35%. The increase was primarily due to interest charged for
retentions that are factored to the bank.
25
Provision for income tax:
Provision for income tax increased to $204,632 for the year ended
December 31, 2009 from $0 for the year ended December 31, 2008, an increase of
$204,632. The tax provision as a percentage of income before tax was
19% for the year ended December 31, 2009. The tax rate of 19% is
consistent with our expectations.
Liquidity and Capital
Resources
As of
September 30, 2010, we had $1,001,213 in cash and cash
equivalents. During the nine months ended September 30, 2010, we
received proceeds of $1,765,200 from a short-term note. The note is
due on January 11, 2011. In August 2010, we repaid $294,200 of the
note’s principal balance. During the nine months ended September 30,
2010, we repaid $147,100 of advances from related parties and paid dividends of
$512,750. We also purchased property and equipment of
$121,703. We will continue to finance operations through the
collection of our accounts receivable and the sale of our
inventory. As of September 30, 2010, we have working capital of
$932,248 which we believe is sufficient to finance us for the foreseeable
future.
Contractual
Obligations
Our
significant contractual obligations as of December 31, 2009 are as
follows:
Payments due by Period
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Less than
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One to
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Three to
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More Than
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One Year
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Three Years
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Five Years
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Five Years
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Total
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Short-term
note
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$ | 1,497,000 | $ | - | $ | - | $ | - | $ | 1,497,000 | ||||||||||
Factory
leases
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150,000 | 444,607 | - | - | 594,607 | |||||||||||||||
Total
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$ | 1,647,000 | $ | 444,607 | $ | - | $ | - | $ | 2,091,607 |
Off-Balance Sheet
Arrangements
We have
no outstanding off-balance sheet guarantees, interest rate swap transactions or
foreign currency contracts.
Critical Accounting
Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires our
management to make assumptions, estimates and judgments that affect the amounts
reported, including the notes thereto, and related disclosures of commitments
and contingencies, if any. We have identified certain accounting policies
that are significant to the preparation of our financial statements. These
accounting policies are important for an understanding of our financial
condition and results of operation. Critical accounting policies are those that
are most important to the portrayal of our financial conditions and results of
operations and require management's difficult, subjective, or complex judgment,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. Certain
accounting estimates are particularly sensitive because of their significance to
financial statements and because of the possibility that future events affecting
the estimate may differ significantly from management's current judgments.
We believe the following critical accounting policies involve the most
significant estimates and judgments used in the preparation of our financial
statements.
Use of
Estimates
The
preparation of financial statements in conformity with U.S.
GAAP 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 revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to the
determination of depreciation rates for equipment, reserves for slow moving and
obsolete inventory, future tax rates used to determine future income taxes, and
the carrying values of goodwill and accrued derivative liabilities. Actual
results could differ from these estimates upon which the carrying values were
based.
26
Fair Value
Measurements
For
certain of our financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, accrued liabilities and
short-term debt, the carrying amounts approximate their fair values due to their
short maturities. In addition, we have long-term debt with financial
institutions. The carrying amounts of the line of credit and other long-term
liabilities approximate their fair values based on current rates of interest for
instruments with similar characteristics.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held us. ASC Topic 825, “Financial Instruments”
defines fair value, and establishes a three-level valuation hierarchy for
disclosures of fair value measurement that enhances disclosure requirements for
fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
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·
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Level
1 inputs to the valuation methodology are quoted prices for identical
assets or liabilities in active
markets.
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·
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Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
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·
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Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
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We
analyze all financial instruments with features of both liabilities and equity
under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
Long-Lived
Assets
In
accordance with ASC Topic 360, “Property, Plant and Equipment,” the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances that may suggest impairment.
We recognize impairment when the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its
estimated fair value.
Foreign Currency
Translation
Our
reporting currency is the U.S. dollar. Our subsidiaries use their local
currencies, the RMB, as their functional currencies. Assets and liabilities
are translated using the exchange rates prevailing at the balance sheet date.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the consolidated statements of
stockholders’ 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.
Revenue
Recognition
In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) Topic 13, “Revenue Recognition,” we recognize
revenue when it is realized or realizable and earned. The four criteria under
SAB 104 are:
· Persuasive
evidence of an arrangement exists
· Delivery
has occurred
· The
sales price is fixed or determinable
· Collection
is reasonably assured
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
27
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The evaluation of a tax position is a
two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred. No significant penalties or interest relating to income taxes
were incurred during the years ended December 31, 2009 and 2008. GAAP also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition.
Recent
Pronouncements
In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This
ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this ASU did not have a significant impact on the Company’s financial
statements.
On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting. The adoption of this ASU did not have a material impact on
the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-17 Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This ASU is effective for fiscal years beginning on or
after November 15, 2009, and interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on the Company’s financial
statements.
In March
2010, FASB issued ASU No. 2010-10 Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s financial statements.
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s financial
statements.
28
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU was effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its financial statements.
Directors
and Executive Officers
The
following persons became our executive officers and directors on November 22,
2010, upon effectiveness of the Share Exchange and hold the positions set forth
opposite their respective names.
Name
|
Position
|
Age
|
||
Mr.
Lixin Wang
|
Chairman
and Chief Executive Officer
|
55
|
||
Mr.
Linqiang Yang
|
Chief
Financial Officer
|
34
|
||
Mr.
Yueqi Zou
|
Director
|
35
|
||
Ms.
Yiran Wang
|
|
Corporate
Secretary
|
|
30
|
Our
executive officers are appointed by, and serve at the discretion of, our Board
of Directors. Each executive officer is a full time employee. Our directors hold
office for one-year terms or until their successors have been elected and
qualified. There are no family relationships between any of our directors,
executive officers or other key personnel and any other of our directors,
executive officers or key personnel.
Mr.
Lixin Wang, Chairman and Chief Executive Officer
Mr. Wang
was appointed Chairman and Chief Executive Officer of the Company on November
22, 2010. Mr. Wang was one of the founders of Dalian in December 1992, which is
now a wholly owned subsidiary of the Company, and was appointed its Chairman of
the Board and Chief Executive Officer in December 1992. From 1990 to 1992 Mr.
Wang served as Manager of Dalian Xinkai Electronics Co., Ltd. and from 1987 to
1990 he was the Manager of Dalian Metallurgical Machinery Plant, Co. Ltd. Mr.
Wang has designed three patented models of coke dry quenching transport cars.
Mr. Wang graduated from the Technical School of Lushan and Dalian in 1977. As
one of the Company’s founders, Mr. Wang brings to the Board of Directors his
extensive knowledge of the operations and long-term strategy of the Company. The
Board of Directors believes that Mr. Wang’s vision, leadership and extensive
knowledge of the Company is essential to our future growth. His skills include
operations, marketing, business strategy and product development.
Mr.
LinqiangYang, Chief Financial Officer
Mr. Yang
was appointed Chief Financial Officer of the Company on November 22, 2010. Mr.
Yang joined Dalian in 2003 as its Chief Financial Officer. From 2001 to 2002, he
served as an accountant for Dalian Jilian Whole Set Metallurgical Machinery
Equipment Co., Ltd. From 1998 to 2000, Mr. Yang served as Chief Accountant of
Jinan Qiya Machinery and Equipment Co., Ltd. Mr. Yang graduated from
Shaanxi University of Finance and Economics in 1998.
29
Mr.
Yueqi Zou, Director
Mr. Zou
was appointed Director of the Company on November 22, 2010. Mr. Zou has had
significant experience in the sales and marketing of heavy industrial
equipment. He joined Dalian in 2004 as Dalian’s Deputy Manager of
Sales. Previously, he was the Project Manager of Sales from 2003-2004, and the
Vice Director of Technology from 1998-2003, at Dalian Heavy Industry Group. Mr.
Zou graduated from Shenyang University of Technology in 1996.
Ms.
Yiran Wang, Corporate Secretary
Ms. Wang
was appointed Corporate Secretary of the Company on November 22,
2010. Previously, she was the General Assistant Manager and a Human
Resources Supervisor for Dalian East Sign Design & Engineering Co.,
Ltd. She graduated from the Dalian University of Foreign Languages in
2002 with a major in English studies and from the Dalian Maritime University
where she received a business English degree. Ms. Wang is fluent in Mandarin
Chinese and English.
Security
Ownership of Certain Beneficial Owners and Management
The
following table provides information concerning the beneficial ownership of our
common stock as of November 22, 2010, by (i) each person that we know
beneficially owns more than 5% of our outstanding common stock, (ii) each of our
named executive officers, (iii) each of our directors and (iv) all of our named
executive officers and directors as a group.
The
amounts and percentages of common stock beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
“beneficial owner” of a security if that person has or shares “voting power,”
which includes the power to vote or to direct the voting of such security, or
“investment power,” which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days of November 22, 2010. Under these rules, more than one
person may be deemed a beneficial owner of the same securities and a person may
be deemed to be a beneficial owner of securities as to which such person has no
economic interest. As of November 22, 2010, there were 29,390,000 shares of our
common stock issued and outstanding.
Unless
otherwise indicated, each of the stockholders named in the table below, or his
or her family members, has sole voting and investment power with respect to such
shares of common stock. Except as otherwise indicated, the address of each of
the stockholders listed below is: c/o FusionTech, Inc., No. 26 Gaoneng Street,
High Tech Zone, Dalian, Liaoning Province, China 116025.
Name of beneficial owner
|
Number of shares
|
Percent of class
|
||||||
5%
Stockholders
|
||||||||
Yang
Wang
|
3,748,500 | 12.75 | % | |||||
Peili
Wang
|
2,499,000 | 8.5 | % | |||||
Directors
and Named Executive Officers
|
||||||||
Lixin
Wang
|
13,744,500 | 46.77 | % | |||||
Linqiang
Yang
|
— | * | % | |||||
Yueqi
Zou
|
— | * | % | |||||
All
Directors and Named Executive Officers as a Group (3
Persons)
|
13,744,500 | 46.77 | % |
*Represents
less than 1% of shares outstanding.
We are
not aware of any arrangements that could result in a change in control of the
Company.
Executive
Compensation
As a
“smaller reporting company,” we have elected to follow scaled disclosure
requirements for smaller reporting companies with respect to the disclosure
required by Item 402 of Regulation S-K. Under the scaled disclosure obligations,
the Company is not required to provide a Compensation Discussion and Analysis,
Compensation Committee Report and certain other tabular and narrative
disclosures relating to executive compensation.
The
following table sets forth information concerning the compensation for the years
ended December 31, 2009 and 2008, of certain of our executive
officers.
30
Summary Compensation Table
|
||||||||||||||||||||||||||||||||||
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Nonequity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Lixin
Wang
|
2009
|
12,000 | 2,286 | 14,286 | ||||||||||||||||||||||||||||||
Chairman
and Chief Executive Officer
|
2008
|
12,000 | 2,286 | 14,286 | ||||||||||||||||||||||||||||||
Linqiang
Yang
|
2009
|
12,000 | 2,286 | 14,286 | ||||||||||||||||||||||||||||||
Chief
Financial Officer
|
2008
|
12,000 | 2,286 | 14,286 |
Narrative
Disclosure to Summary Compensation Table
Employment
Agreements
Neither
the Company nor its subsidiary has employment agreements with their respective
officers currently. We have entered into standard China domestic labor contracts
with Mr. Lixin Wang, our Chairman and Chief Executive Officer, and Mr. Linqiang
Yang, our Chief Financial Officer.
Change-In-Control
Agreements
We do not
have any existing arrangements providing for payments or benefits in connection
with the resignation, severance, retirement or other termination of any of our
named executive officers, or a change in control of the Company or a change in
the named executive officer’s responsibilities following a change in
control.
Equity
Incentive Plans
We have
no equity incentive plan currently. We intend to adopt an equity incentive plan
in order to further the growth and general prosperity of the Company by enabling
our officers, employees, contractors and service providers to acquire our common
stock, increasing their personal involvement in the Company and thereby enabling
the Company to attract and retain its officers, employees, contractors and
service providers.
Outstanding
Equity Awards at Fiscal Year-End
As of
December 31, 2009, there were no outstanding equity awards held by the executive
officers of the Company.
Compensation
of Directors
As of
December 31, 2009, none of our directors has received any compensation from us
for serving as our directors.
We do not
currently compensate our directors for acting as such, although we may do so in
the future, including with cash and/or equity.
We have
not compensated, and will not compensate, our non-independent directors, such as
Mr. Wang and Mr. Zou, for serving as our directors, although they are entitled
to reimbursements for reasonable expenses incurred in connection with attending
our board meetings.
31
We do not
maintain a medical, dental or retirement benefits plan for our
directors.
Legal
Proceedings
During
the past ten years, none of the Company’s directors or executive officers has
been:
|
§
|
the subject of any bankruptcy
petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy
or within two years prior to that
time;
|
|
§
|
convicted in a criminal
proceeding or is subject to a pending criminal proceeding (excluding
traffic violations and other minor
offenses);
|
|
§
|
subject to any order, judgment or
decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking
activities;
|
|
§
|
found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, that has not been reversed, suspended, or
vacated;
|
|
§
|
subject of, or a party to, any
order, judgment, decree or finding, not subsequently reversed, suspended
or vacated, relating to an alleged violation of a federal or state
securities or commodities law or regulation, law or regulation respecting
financial institutions or insurance companies, law or regulation
prohibiting mail or wire fraud or fraud in connection with any business
entity; or
|
|
§
|
subject of, or a party to, any
sanction or order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization, any registered entity or any equivalent
exchange, association, entity or organization that has disciplinary
authority over its members or persons associated with a
member.
|
Certain
Relationships and Related Transactions, and Director Independence
On
January 12, 2010, Dalian received a short-term loan of approximately $1,765,200
from Shanghai Pudong Development Bank. The loan is due on January 11, 2011 and
bears an interest rate of 5.841%. The loan is currently guaranteed by Dalian
Union-Chuangye Bonding Co. Ltd. Lixin Wang, Chairman, Chief Executive Officer,
and named beneficial owner of the Company’s common stock, and his wife, Peili
Wang, also a named beneficial owner of the Company’s common stock, also
personally guaranteed the loan. Mr. and Mrs. Wang undertook to counter-guarantee
Dalian Union Chuangye Bonding Co. Ltd, by pledging their ownership interests in
Dalian on January 12, 2010. Mr. and Mrs. Wang’s pledge of ownership interests to
Dalian Union-Cuangye Bonding Co., Ltd. was subsequently canceled on September
10th,
2010.
From time
to time, Dalian has made loans to Dalian Yujiu, a company that is 40% owned by
the Chief Executive Officer of Company’s son, Yang Wang. Mr. Yang Wang is also a
named beneficial owner of the Company’s common stock. As of September
30, 2010, December 31, 2009 and December 31, 2008, Dalian Yujiu owed Dalian
$50,298, $96,226, and $172,433, respectively. All amounts due to Dalian from
Dalian Yujiu have been paid as of November 2, 2010.
There
were no other transactions with any related persons aside from those disclosed
above (as that term is defined in Item 404 of Regulation SK) since the beginning
of the Company’s last fiscal year, and for the two fiscal years preceding the
Company’s last fiscal year, or any currently proposed transaction, in which the
Company was or is to be a participant and the amount involved was in excess of
$120,000 and in which any related person had a direct or indirect material
interest.
We rely
on our Board of Directors to review related party transactions involving our
Company on an ongoing basis to prevent conflicts of interest. The Board of
Directors reviews a transaction in light of the affiliations of the director,
officer or employee and the affiliations of such person’s immediate family.
Transactions are presented to the Board of Directors for approval before they
are entered into or, if this is not possible, for ratification after the
transaction has occurred. If the Board of Directors finds that a conflict of
interest exists, then it will determine the appropriate remedial action, if any.
The Board of Directors approves or ratifies a transaction if it determines that
the transaction is consistent with the best interests of the
Company. These policies and procedures are not evidenced in
writing.
32
Director
Independence
Our Board
of Directors currently is comprised of two directors. None of our current
directors qualifies as an “independent” director for the purposes of the listed
company standards of The NASDAQ Stock Market LLC (“NASDAQ”) currently in effect
and approved by the SEC and all applicable rules and regulations of the SEC. The
Company intends to add independent directors to its Board of Directors as a
requirement to the listing of its common stock on a national securities
exchange. The composition of our Board of Directors, and that of its committees,
will be subject to the corporate governance provisions of the Company’s primary
trading market, including the requirement for the appointment of independent
directors in accordance with the Sarbanes-Oxley Act of 2002 and regulations
adopted by the SEC and NASDAQ pursuant thereto.
Audit
Committee
We have a
separately designated Audit Committee of the Board of Directors, which functions
are performed by our Board of Directors. None of our directors currently is
deemed “independent”—our Chairman is also our Chief Executive Officer and our
other director is the Director of Sales of the Company. None of our directors is
an “audit committee financial expert” as defined under Item 407(d) of Regulation
S-K. Our Audit Committee is responsible for: (i) selection and oversight of our
independent registered public accounting firm; (ii) establishing procedures for
the receipt, retention and treatment of complaints regarding accounting,
internal controls and auditing matters; (iii) establishing procedures for the
confidential, anonymous submission by our employees of concerns regarding
accounting and auditing matters; (iv) engaging outside advisors; and, (v)
funding for the independent registered public accounting firm and any outside
advisors engaged by the Audit Committee.
Compensation
Committee
We intend
to establish a Compensation Committee of the Board of Directors. The
Compensation Committee would review and approve our salary and benefits
policies, including the compensation of executive officers. The Compensation
Committee would also administer our equity incentive plans and recommend and
approve grants of stock options under such plans.
Indemnification
of Directors and Officers
The
Nevada Revised Statutes provide that a director or officer is not individually
liable to the corporation or its shareholders or creditors for any damages as a
result of any act or failure to act in his capacity as a director or officer
unless it is proven that his act or failure to act constituted a breach of his
fiduciary duties as a director or officer and his breach of those duties
involved intentional misconduct, fraud or a knowing violation of law. The
Articles of Incorporation or an amendment thereto may, however, provide for
greater individual liability. Furthermore, directors may be jointly and
severally liable for the payment of certain distributions in violation of
Chapter 78 of the Nevada Revised Statutes.
This
provision is intended to afford directors and officers protection against and to
limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, shareholders of our company will be unable to recover
monetary damages against directors or officers for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct meets the requirements of Nevada law to impose such liability. The
provision, however, does not alter the applicable standards governing a
director’s or officer’s fiduciary duty and does not eliminate or limit the right
of our company or any shareholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary duty.
The
Nevada Revised Statutes also provide that under certain circumstances, a
corporation may indemnify any person for amounts incurred in connection with a
pending, threatened or completed action, suit or proceeding in which he is, or
is threatened to be made, a party by reason of his being a director, officer,
employee or agent of the corporation or serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person (a) is not
liable for a breach of fiduciary duty involving intentional misconduct, fraud or
a knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Additionally, a
corporation may indemnify a director, officer, employee or agent with respect to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, if such person (a) is not liable
for a breach of fiduciary duty involving intentional misconduct, fraud or a
knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, however, indemnification may not be made for any claim, issue or
matter as to which such a person has been adjudged by a court to be liable to
the corporation or for amounts paid in settlement to the corporation, unless the
court determines that the person is fairly and reasonably entitled to indemnity
for such expenses as the court deems proper. To the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, the corporation shall indemnify
him against expenses, including attorneys’ fees, actually and reasonably
incurred by him in connection with the defense.
33
Our
Articles of Incorporation and Amended and Restated Bylaws provide, among other
things, that a director, officer, employee or agent of the corporation may be
indemnified against expenses (including attorneys’ fees inclusive of any
appeal), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such claim, action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best of our interests, and
with respect to any criminal action or proceeding, such person had no reasonable
cause to believe that such person’s conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
provided for directors, officers, employees, agents or persons controlling an
issuer pursuant to the foregoing provisions, the opinion of the SEC is that such
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
Available
Information
We file
annual, quarterly, and special reports and other information with the SEC. You
may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549, on official business
days during the hours of 10 a.m. to 3 p.m. You may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our
filings are also available to the public from commercial document retrieval
services and at the website maintained by the SEC at www.sec.gov.
Item
3.02 Unregistered Sales of Equity Securities.
Pursuant
to the Share Exchange Agreement, we issued an aggregate of 24,990,000 shares of
common stock to 7 non-U.S. persons, as contemplated by Rule 902 under the
Securities Act of 1933, as amended (the “Securities Act”), in exchange for all
of the ownership interests of Dalian. The issuance of our common stock to these
non-U.S. persons was exempt from the registration requirements of the Securities
Act pursuant to Regulation S. The shares issued pursuant to Regulation S were
issued in an “offshore transaction” as defined in, and pursuant to, Rule 902
under the Securities Act, on the basis that the purchasers were not offered the
shares in the United States and did not execute or deliver any agreement within
the United States.
Description
of Registrant’s Securities
The
following information describes our securities and provisions of our Articles of
Incorporation and Amended and Restated Bylaws, all as in effect upon the closing
of the Share Exchange. This description is only a summary. You should also refer
to our Articles of Incorporation and Amended and Restated Bylaws, copies of
which have been incorporated by reference or filed as exhibits to this Current
Report on Form 8-K.
After
giving effect to the Share Exchange, there are approximately 40 holders of
record of our common stock and our issued and outstanding securities, on a fully
diluted basis, consist of:
|
§
|
29,390,000 shares of common
stock, approximately 85% of which are held by the former stockholders of
Dalian and approximately 15% of which are held by the existing
stockholders of the Company;
|
|
§
|
No options to purchase any
capital stock or securities convertible into capital stock;
and,
|
|
§
|
No warrants to purchase any
capital stock or securities convertible into capital
stock.
|
Description
of Common Stock
The
holders of common stock are entitled to one vote per share. Our Articles of
Incorporation does not provide for cumulative voting. The holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by our Board of Directors out of legally available funds; however, the current
policy of our Board of Directors is to retain earnings, if any, for operations
and growth. Upon liquidation, dissolution or winding-up, the holders of common
stock are entitled to share ratably in all assets that are legally available for
distribution. The holders of common stock have no preemptive, subscription,
redemption or conversion rights.
34
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Dalian is
and always has been a privately held company and now is a wholly owned
subsidiary of the Company. There is not and never has been a public market for
the securities of Dalian. Our common stock qualified for quotation on the OTC
Bulletin Board (“OTCBB”) maintained by the Financial Industry Regulatory
Authority (“FINRA”) on December 12, 2009, under the symbol “ZPNP.” Our common
stock will trade under the symbol “ZPNPD” for a 20-day period beginning on
November 12, 2010, pursuant to FINRA rules governing corporate actions, after
which period our symbol will revert to “ZPNP.” There currently is no liquid
trading market for our common stock. Since its initial listing, no trades of our
common stock have occurred through the facilities of the OTCBB.
As soon
as practicable, and assuming we satisfy all necessary initial listing
requirements, we intend to apply to have our common stock listed for trading on
a national securities exchange such as The NASDAQ Stock Market or the New York
Stock Exchange, although we cannot be certain that our application will be
approved.
Dividends
Dividends
may be declared and paid out of legally available funds at the discretion of our
Board of Directors. We have not paid previously any cash dividends on our common
stock and do not anticipate or contemplate paying dividends on our common stock
in the foreseeable future. We currently intend to utilize all available funds to
develop our business. We can give no assurances that we will ever have excess
funds available to pay dividends.
In
addition, our ability to pay dividends may be affected by the foreign exchange
controls in China that restrict the payment of dividends to the Company by its
subsidiary in China. China has adopted currency and capital transfer regulations
that may require our subsidiary in China to comply with complex regulations for
the movement of capital. These regulations include a public notice issued in
October 2005 by the State Administration of Foreign Exchange (“SAFE”) requiring
PRC residents, including both legal persons and natural persons, to register
with the competent local SAFE branch before establishing or controlling any
company outside of China. Although the Company believes its subsidiary in China
is in compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change, the Company may
not be able to pay dividends outside of China.
Securities
Authorized for Issuance under Equity Compensation Plans
During
the year ended December 31, 2009, we did not have a formal equity compensation
plan in effect. We did not grant any equity based compensation awards during the
year ended December 31, 2009, nor do we have any equity compensation plan not
approved previously by security holders.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Interwest Transfer Company,
Inc., 1981 Murray Holladay Road, Suite 100, Salt Lake City,
UT 84117. Our transfer agent’s telephone number is (801)
272-9294.
Item
5.01 Changes in Control of Registrant.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
On
November 22, 2010, as of the closing of the Share Exchange, Mr. David Lu and Mr.
David Xu resigned as our directors and Mr. Lixin Wang was appointed Chairman of
the Board of Directors and Mr. Yueqi Zou was appointed to our Board of
Directors. As a result, Mr. Wang and Mr. Zou became the sole members of our
Board of Directors.
On
November 22, 2010, as of the closing of the Share Exchange, Mr. Lu resigned as
President, Chief Executive Officer, Chief Financial Officer, Treasurer,
and Secretary of the Company and Mr. Lixin Wang was appointed Chief
Executive Officer, Mr. Linqiang Yang as Chief Financial Officer, and Ms. Yiran
Wang as Corporate Secretary.
35
Reference
is made to the disclosure of the biographies of each of the new directors and
officers as set forth under Item 2.01 of this Current Report on Form 8-K, which
disclosure is incorporated herein by reference.
There are
no family relationships between any of our directors, executive officers or
other key personnel and any other of our directors, executive officers or key
personnel. Other than those transactions disclosed and set forth under Item 2.01
of this Current Report on Form 8-K, there were no transactions since the
beginning of our last fiscal year, and for the two fiscal years preceding the
Company’s last fiscal year, or any currently proposed transaction, in which we
were or are to be a participant and the amount involved exceeds the lesser of
$120,000 or one percent of the average of our total assets at year-end for the
last three completed fiscal years, and in which any of our directors or officers
had or will have a direct or indirect material interest, other than the
ownership of shares of our common stock as a result of the Share Exchange.
Reference is made to the disclosure of the beneficial ownership of each of the
new directors and officers as set forth under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by reference.
Item
5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On
October 28, 2010, the Company changed its name to FusionTech, Inc. and filed
Articles of Merger with the Secretary of State of the State of Nevada amending
the Articles of Incorporation of the Company to reflect such change in company
name. On November 1, 2010, the Company increased its authorized shares from
75,000,000 to 100,000,000 shares of Common Stock and filed a Certificate of
Change with the Secretary of State of the State of Nevada amending the Articles
of Incorporation of the Company to reflect the increase in authorized shares. No
other changes to the Articles of Incorporation were made. The Articles of Merger
are filed as Exhibit 3.3 and the Certificate of Change is filed as Exhibit 3.4
to this Current Report on Form 8-K.
On
November 22, 2010, the Board of Directors (the “Board”) of the Company, by
unanimous consent, made all of the following amendments to the Company’s
Bylaws:
The Board
amended Article I, Section 1 of the Company’s Bylaws to authorize the Board of
Directors to set the date and time of the Company’s annual meeting of
shareholders, rather than requiring the meeting to be held within 100 days after
the anniversary of the date of incorporation of the Company. The amendment was
effective immediately.
The Board
amended Article I, Section 11 of the Company’s Bylaws to permit actions that
require shareholder approval to be taken by the written consent of a majority of
the Company’s shareholders, rather than requiring unanimous written consent of
the shareholders. The amendment was effective immediately.
The Board
amended Article IV, Section 1 of the Company’s Bylaws to permit shares of the
Company’s Common Stock to be uncertificated, rather than requiring the shares of
the Company’s Common Stock be represented by certificates. The
amendment was effective immediately.
The Board
amended the Article V of the Company’s Bylaws by adding a new section 5 which
provided for the indemnification of directors and officers of the Company. The
amendment was effective immediately.
The
Amended and Restated Bylaws of the Company are filed as Exhibit 3.2 to this
Current Report on Form 8-K.
On
November 22, 2010, as of the closing of the Share Exchange, the Board of
Directors of the Company, by unanimous consent, changed the fiscal year of the
Company to end on December 31 from January 31. Beginning with the periodic
report required pursuant to the Securities Exchange Act of 1934, as amended, for
the quarter in which the transaction contemplated by the Share Exchange
Agreement was consummated, the Company will file annual and quarterly reports
based upon a December 31 fiscal year end.
Item
5.06 Change in Shell Company Status.
On
November 22, 2010, we consummated the transactions contemplated by the Share
Exchange Agreement. As a result of the consummation of the Share Exchange
described in Item 1.01 of this Current Report on Form 8-K, we are no longer a
shell company as that term is defined in Rule 405 under the Securities Act and
Rule 12b-2 under the Exchange Act.
Item
8.01 Other Events
On
October 28, 2010, our Board of Directors authorized an 8-for-1 forward stock
split of all outstanding shares of our common stock, par value $.001 per share,
and an increase in the authorized shares of the Company from 75,000,000 shares
of Common Stock to 100,000,000 shares of Common Stock. The forward stock split
was made effective as of November 12, 2010. The forward stock split increased
the number of shares of Common Stock outstanding but did not affect the par
value of the Common Stock.
36
The
effect of the forward stock split was to increase the number of shares of Common
Stock issued and outstanding from 550,000 shares to 29,390,000 shares after
giving effect to the Share Exchange Agreement and shares returned to the
treasury for cancellation by Mr. Lu.
Our
common stock will trade under the symbol “ZPNPD” for a 20-day period beginning
on November 12, 2010, pursuant to FINRA rules governing corporate actions, after
which period our symbol will revert to “ZPNP.”
Item
9.01 Financial Statements and Exhibits
(a)
Financial statements of businesses acquired.
The
audited consolidated financial statements of Dalian for the years ended December
31, 2009 and 2008, and the unaudited consolidated financial statements for the
nine months ended September 30, 2010 and 2009, including the notes to such
financial statements, are incorporated herein by reference to Exhibit 99.3 of
this Current Report on Form 8-K.
(b)
Pro forma financial information
The pro
forma combined balance sheet presents the accounts of FusionTech, Inc. and
Dalian Heavy Mining Equipment Manufacturing Co., Ltd. as if the acquisition of
Dalian by FusionTech occurred on October 31, 2010. The pro forma
combined statement of operations presents the accounts of FusionTech and Dalian
for the year ended January 31, 2010, and for the nine months ended October 31,
2010 as if the acquisition occurred on January 1, 2009. For
accounting purposes, the transaction is being accounted for as a
recapitalization of Dalian. The Company’s pro forma financial
statements are incorporated herein by reference to Exhibit 99.4 of this Current
Report on Form 8-K.
(c)
Shell company transactions.
Reference
is made to Item 9.01(a) of this Current Report on Form 8-K and the exhibit
referred to therein, which are incorporated herein by reference.
(d)
Exhibits.
2.1
|
Share
Exchange Agreement and Plan of Reorganization by and between Dalian Heavy
Mining Equipment Manufacturing Co. Ltd. and FusionTech, Inc., dated
November 22, 2010
|
|
2.2
|
Return
to Treasury Agreement by and between FusionTech, Inc. and David Lu, dated
November 22, 2010
|
|
2.3
|
Agreement
and Plan of Merger by and between ZapNaps, Inc. and FusionTech, Inc.,
dated October 28, 2010 (incorporated herein by reference to Exhibit 2.3 to
the Company’s Quarterly Report on Form 10Q (File No. 000-53837) filed on
November 12, 2010)
|
|
3.1
|
Articles
of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the
Company’s Form S-1 (File No. 333-152355) filed on July 16,
2008)
|
|
3.2
|
Amended
and Restated Bylaws
|
|
3.3
|
Articles
of Merger between ZapNaps, Inc. and FusionTech, Inc., amending the
Articles of Incorporation filed with the Secretary of State of the State
of Nevada on October 28, 2010 (incorporated herein by reference to Exhibit
3.3 to the Company’s Quarterly Report on Form 10Q (File No. 000-53837)
filed on November 12, 2010)
|
|
3.4
|
Certificate
of Change pursuant to NRS 78.209, amending the Articles of Incorporation
filed with the Secretary of State of the State of Nevada on November 1,
2010
|
|
3.5
|
Articles
of Exchange of Dalian Heavy Mining Equipment Manufacturing Co. Ltd. and
FusionTech, Inc. filed with the Secretary of State of the State of Nevada
on November 22, 2010
|
37
10.1
|
Agreement
for Short-Term Loan by and between Shanghai Pudong Development Bank Co.,
Ltd. and Dalian Heavy Mining Equipment Manufacturing, Co.,
Ltd., dated January 1, 2010
|
|
10.2
|
Contract
to Guarantee by and between Dalian Union-Chuangye Bonding Company, Ltd.
and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated January
12, 2010
|
|
10.3
|
Contract
to Guarantee by and between Shanghai Pudong Development Bank Co., Ltd. and
Lixin Wang and Peili Wang, dated January 12, 2010
|
|
10.4
|
Registration
Notice of Cancelling Equity Pledge between Dalian Union-Chuangye Bonding
Company, Ltd. and Lixin Wang, dated September 10, 2010
|
|
10.5
|
Registration
Notice of Cancelling Equity Pledge between Dalian Union-Chuangye Bonding
Company, Ltd. and Peili Wang, dated September 10, 2010
|
|
10.6
|
Investment
Agreement by and between Management Committee of Laobian Industrial Park
and Dalian Heavy Mining Equipment Manufacturing Co.,
Ltd.
|
|
10.7
|
Agreement
by and between Zhuanghe Port Industrial Zone Management Committee and
Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated September 17,
2009
|
|
10.8
|
Lease
Contract at Gaoneng Street Incubating Base by and between Dalian Shuangde
Scientific Industry and Trading Co. Ltd and Dalian Heavy Mining Equipment
Manufacturing Co., Ltd.
|
|
10.9
|
Workshop
Lease by and between Dalian Yilong Zhongkuan Machine Manufacturing Co.
Ltd., and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated
September 25, 2008
|
|
10.10
|
Lease
Agreement by and between Dalian Yilong Zhongkuan Machine Manufacturing Co.
Ltd. and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated
November 20, 2009
|
|
10.11
|
Workshop
Lease and Processing Cooperation Agreement by and between Dalian Shengyang
Heavy Industry Co., Ltd. and Dalian Heavy Mining Equipment Manufacturing
Co., Ltd., dated August 10, 2010
|
|
10.12
|
Standard
Labor Contract by and between Lixin Wang and Dalian Heavy Mining Equipment
Manufacturing Co., Ltd., dated January 4, 2008
|
|
10.13
|
Standard
Labor Contract by and between Linqiang Yang and Dalian Heavy Mining
Equipment Manufacturing Co., Ltd., dated January 18,
2008
|
|
10.14
|
Agreement
by and between Minmetals Yingkou Medium Plate Co., Ltd and Dalian Heavy
Mining Equipment Manufacturing Co. Ltd., dated June 2, 2010 as
supplemented on August 9, 2010(1)
|
|
21.1 | Subsidiaries of the Company | |
99.3
|
Audited
consolidated financial statements of Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. for the years ended December 31, 2009 and 2008,
and the unaudited financial statements for the nine months ended September
30, 2010 and 2009
|
|
99.4
|
Unaudited
pro forma financial statements of FusionTech, Inc and Dalian Heavy Mining
Equipment Manufacturing Co., Ltd. as of October 31,
2010
|
(1)
Application has been made with the Securities and Exchange Commission to seek
confidential treatment of certain provisions of the Agreement by and between
Minmetals Yingkou Medium Plate Co., Ltd. and Dalian Heavy Mining Equipment
Manufacturing Co. Ltd. Omitted material for which confidential treatment has
been requested has been furnished separately to the Securities and Exchange
Commission.
38
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.
FUSIONTECH, INC.
|
||||
(Registrant)
|
||||
Date:
|
November 22, 2010
|
By:
|
/s/ Lixin Wang
|
|
Name:
|
Lixin
Wang
|
|||
Title:
|
Chief
Executive Officer
|
39