Attached files
file | filename |
---|---|
EX-4.4 - Asia Cork Inc. | v205388_ex4-4.htm |
EX-4.3 - Asia Cork Inc. | v205388_ex4-3.htm |
EX-5.1 - Asia Cork Inc. | v205388_ex5-1.htm |
EX-4.2 - Asia Cork Inc. | v205388_ex4-2.htm |
EX-23.1 - Asia Cork Inc. | v205388_ex23-1.htm |
EX-10.21 - Asia Cork Inc. | v205388_ex10-21.htm |
As
filed with the Securities and Exchange Commission on December 13,
2010
Registration
Number 333-164893
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO 4 TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ASIA
CORK INC.
(Name of
Registrant as Specified in Its Charter)
Delaware
|
2435
|
13-3912047
|
||
(State
or Other Jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
Incorporation
or Organization)
|
Classification
Code Number)
|
Identification
No.)
|
3
rd Floor, A Tower of Chuang Xin
Information
Building
No.
72 Second Keji Road, Hi Tech Zone
Xi’An
China
(011)
86 - 13301996766
(Address
and Telephone Number of Principal Executive Offices)
Steve
Schuster, Esq.
McLaughlin
& Stern, LLP
260
Madison Avenue
New York,
NY 10016
(212)
448-1100
Fax (212)
448-0066
(Name,
Address and Telephone Number of Agent for Service)
COPIES
TO:
Steve Schuster, Esq.
McLaughlin & Stern,
LLP
|
SUNNY J. BARKATS, ESQ
JSBarkats , PLLC
|
|
260
Madison Avenue
New
York, New York 10016
(212)
448 € 1100
Fax (212)
448 € 0066
|
110
E. 40 th
St., 9 th
Fl New York, NY 10016
(646)
502-7001
Fax
(646) 607-5544
|
Approximate Date of Proposed Sale to
the Public: As soon as practicable after the effective date of this
Registration Statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer
¨
|
Non-accelerated
filer
¨
|
Smaller
reporting company þ
|
Title of Each Class of Securities to Be
Registered
|
Amount to Be
Registered
|
Proposed Maximum
Aggregate
Offering Price
|
Amount of
Registration Fee (2)
|
|||||||||
Units,
each unit consisting of one share of Common Stock, $0.0001 par value per
share, and one warrant to purchase one share of Common
Stock
|
(1) | $ | 8,125,000 | $ | 579.31 | |||||||
Common
Stock included in the Units
|
$ | $ | (3) | |||||||||
Warrants
included in the Units
|
— | (3) | ||||||||||
Common
Stock issuable upon exercise of the warrants included in the
Units
|
— | (3) | ||||||||||
Warrants
issuable to the Underwriter to purchase Units (4)
|
— | (3) | ||||||||||
Units
issuable to the Underwriter upon exercise of the
Warrants(4)
|
— | |||||||||||
Warrants
which are part of the Units that are issuable upon exercise of the
Underwriters’ Warrants
|
— | (3) | ||||||||||
Common
Stock issuable upon exercise of the warrants included in the Underwriter
Units
|
— | (3) | ||||||||||
Common
Stock which is part of Units that comprise the Underwriter
Unit
|
— | (3) | ||||||||||
Common
Stock (5)
|
3,456,922 | $ | 1,555,614.90 | $ | 110.89 | (2) | ||||||
Common
Stock (6)
|
1,794,872 | $ | 807,692.40 | $ | 57.58 | (2) | ||||||
Common
Stock (7)
|
250,000 | $ | 112,500 | $ | 8.025 | (2) | ||||||
Total
Registration Fee
|
$ | $ | 755.80 | (8) |
(1)
|
In accordance with Rule
416(a), the Registrant is also registering hereunder an indeterminate
number of additional shares of Common Stock that shall be issuable
pursuant to Rule 416 pursuant to the anti-dilution provisions of the
Underwriters’ Warrants and warrants previously issued to selling
stockholders.
|
(2)
|
Estimated solely for the
purpose of calculating the registration fee pursuant to Rule 457(h), the
maximum offering price, per share and the registration fee were calculated
based upon the average of the high and low prices of the Common Stock on
December 10, 2010, as quoted on the Over the Counter Bulletin
Board.
|
(3)
|
In accordance with Rule 457(g)
under the Securities Act, no separate registration fee is
required.
|
(4)
|
Such Units are issuable upon
exercise of the certain warrants issued to each of Global Arena Capital
Corp. and Aegis Capital Corporation, the underwriters (the
“Underwriters”). We have agreed to issue, on the closing date
of this Offering, certain warrants to each of the Underwriters (the
“Underwriters’ Warrants”), exercisable at a rate of one Underwriters'
Warrant to purchase one Unit per every ten Units sold by the Registrant.
The price to be paid by the Underwriters for the Underwriters’ Warrants is
$.01 per Underwriters’ Warrants. The Underwriters will close the purchase
of its Underwriters’ Warrants on a date that is mutually acceptable to
such Underwriter and the Registrant; provided, however, that the closing
date will be on or before February 14, 2011. Assuming a maximum placement
at an offering price of $___ per Unit, on the closing date the
Underwriters would receive an aggregate of _____ Underwriters’ Warrants at
an aggregate purchase price of $____. The exercise price of the
Underwriters’ Warrants is equal to 120% of the price per Unit offered
hereby. Assuming a maximum placement and an Underwriters’
Warrant exercise price of $____ per Unit, we would receive, in the
aggregate, $____ upon the exercise of the Underwriters’ Warrant. The
Underwriters’ Warrants are exercisable for Units at the exercise price for
a period commencing on the date, which is six months after the closing
date and ending on the date, which is five years after the closing date.
Because the Units, the shares of the Registrant’s Common Stock and the
Warrants underlying the Underwriters’ Warrants are registered hereby, no
separate registration fee is
required.
|
i
(5)
|
Represents shares of the
Registrant’s Common Stock being registered for resale that have been or
may be acquired upon the conversion of promissory notes that have been
previously issued to selling stockholders (the “Promissory Notes”) named
in the Resale Prospectus. This amount represents the conversion
of $350,000 of the entire $700,000 of principal of the notes plus accrued
but unpaid interest through December 31, 2010 at a conversion rate of
$0.195 per share. Of this amount, no shares of Common Stock
have already been issued to the selling stockholders in connection with
the conversion of Promissory
Notes.
|
(6)
|
Represents shares of the
Registrant’s Common Stock being registered for resale that have been or
may be acquired upon the exercise of warrants that have been previously
issued to selling stockholders named in the Resale Prospectus. Of this
amount, no shares of Common Stock have already been issued to the selling
stockholders in connection with the exercise of
warrants.
|
(7)
|
Represents shares of the
Registrant’s Common Stock being registered for sale by a selling
stockholder.
|
(8)
|
Previously
paid.
|
THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPE CIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTIN G PURSUANT TO SAID SECTION 8(a) MAY
DETERMINE.
ii
This
Registration Statement contains two prospectuses, as set forth
below.
Public Offering Prospectus. A
prospectus (the “Public Offering Prospectus”) to be used for the public Offering
by the Registrant of up to Units
of the Registrant, each consisting of one share of Common Stock and one Warrant
to purchase one share of Common Stock through the Underwriters and such other
underwriters as may participate in the Offering (collectively, the
“Underwriters”) named on the cover page of the Public Offering Prospectus. We
are also registering the Units (including the securities comprising the Units)
issuable upon exercise of the warrants to be received by the Underwriter in this
Offering (the “Public Offering Prospectus”).
Resale
Prospectus. A prospectus to be used for the resale by selling
stockholders (the “Selling Stockholders”) of up to 5,501,794 shares of the
Registrant’s Common Stock (including shares that may be acquired upon the
exercise of warrants, and shares that may be acquired upon the conversion of
Promissory Notes that have been previously issued to selling stockholders named
in the Resale Prospectus) (the “Resale Prospectus”).
The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
|
•
|
It contains different outside and
inside front covers;
|
|
•
|
It contains different Offering
sections in the Prospectus Summary section on page
80;
|
|
•
|
It contains
different Use of Proceeds sections on page
82;
|
|
•
|
The Capitalization and Dilution
sections are deleted from the Resale
Prospectus;
|
|
•
|
A Selling Stockholders section
is included in the Resale Prospectus beginning on page
83;
|
|
•
|
References in the Public Offering
Prospectus to the Resale Prospectus will be deleted from the Resale
Prospectus;
|
|
•
|
The Underwriting section from
the Public Offering Prospectus on page 72 is deleted from the Resale
Prospectus and a Plan of Distribution is inserted in its place on page
85;
|
|
•
|
The Legal Matters section in
the Resale Prospectus on page 87 deletes the reference to counsel for the
Underwriters; and
|
|
•
|
The outside back cover of the
Public Offering Prospectus is deleted from the Resale
Prospectus.
|
The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
Resale Prospectus as compared to the Public Offering Prospectus.
The
Selling Stockholders named in the Resale Prospectus holding an aggregate of
5,501,794 shares of Common Stock, including, shares of Common Stock issuable
upon the exercise of warrants and shares of Common Stock underlying Promissory
Notes, have agreed that they will not sell any of such shares of Common Stock
for a period of nine months after the Offering is completed (except for 250,000
of the 5,501,794 shares which are subject to a restriction on sales for a period
of six months after the Offering is completed), without the Underwriters’
consent, when all of their shares will be released from the lock-up
restrictions.
None
of the references to the outstanding shares of our Common Stock in this
prospectus give effect to a reverse stock split that the Company will effectuate
concurrently with the date of this prospectus (the “Reverse Split”). The Reverse
Split will be in an amount to be ultimately agreed upon between the Board of
Directors of the Company and the Underwriters within a range of 1-for-10 to
1-for-30.
iii
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
|
Subject
to Completion
Preliminary
Prospectus Dated December 13, 2010
PROSPECTUS
ASIA
CORK, INC.
_____
Units
Each
Unit Consisting of
One
Share of Common Stock and One Warrant to Purchase One Share of Common
Stock
We are
offering ______ units (the “Units”) of Asia Cork, Inc., a Delaware corporation
(the “Company”) for aggregate gross proceeds of $8,125,000 (the “Offering”).
Each of the Units offered hereby consists of one share of our Common Stock,
$.0001 par value per share (the “Common Stock”), and one
warrant entitling the registered holder of the Unit to purchase one share of
Common Stock (the “Warrants”). The Warrants are exercisable to
purchase one share of Common Stock at $____ per share through January ___, 2016
(five years after the date of the closing). Each share of Common Stock and
Warrant will not be separately tradeable for a period of one year, unless sooner
as may be approved by the Underwriters, in its sole discretion. The
Warrants are subject to redemption commencing one year after the date hereof at
$.05 per Warrant on 20 days prior written notice provided the closing price of
the Common Stock for the twenty (20) consecutive trading days ending within
fifteen (15) days of the date of notice of redemption averages in excess of
$_____ per share (180% of the initial Offering price) See
“Description of Securities.” None of our officers, directors or
affiliates may purchase Units in this Offering.
We expect
that the Offering price of the Units will be $_____ per Unit.
We are
a reporting Company under the Securities Exchange Act of 1934, as
amended. Our Common Stock is quoted on the OTC Bulletin Board
maintained by the Financial Industry Regulatory Authority (“FINRA”) under the
symbol “AKRK.” The last reported sale price for our Common Stock on December 10,
2010 was $0.45 per share, as reported on the OTC Bulletin Board. We
have applied to have the Units and Common Stock listed on the NASDAQ Stock
Market LLC (“NASDAQ”) under the symbol “_____” on or promptly after the date of
this prospectus. Prior to the separate trading of the Common Stock and Warrants,
we will apply to have the Warrants comprising the units listed on
NASDAQ
Concurrently
with this Offering, there are being offered, pursuant to a Resale Prospectus, by
certain security holders (collectively, the “Selling Stockholders”), 5,501,794
shares of Common Stock (collectively, the “Selling Stockholders’ Securities”).
Each of the Selling Stockholders has agreed not to sell any of the Selling
Stockholders’ Securities for a period of nine months after the
closing of the Offering. (except for 250,000 shares which are subject to a
restriction on sales for a period of six months after the closing of the
Offering) without the prior consent of the Underwriters of the Offering. Sales
of the Selling Stockholders’ Securities in such offering (the “Concurrent
Offering”) will be subject to the prospectus delivery requirements and other
requirements of the Securities Act. The Concurrent Offering is not
underwritten by the Underwriters.
The purchase of the securities
involves a high degree of risk. See section entitled “ Risk Factors” beginning on page 12 for more
information on these risks.
Underwriter
Discount
|
Per
Unit (3)
|
Offering
|
Offering
|
|||||||||
Assumed
Public Offering Price
|
$ | (3) | ||||||||||
Discount
and Commission (1)
|
$ | |||||||||||
Proceeds
to us, before expenses (2)
|
$ | (3) |
(1) Does
not include additional compensation to the Underwriters in the form of (i) a
non-accountable expense allowance equal to 2.0% of the gross proceeds of this
Offering (of which $50,000 has been paid), (ii) the Underwriters’ Warrants to
purchase up to ten percent of the Units sold in the Offering (each Unit
consisting of one share of Common Stock and one Warrant at an exercise price
equal to $ per
Unit), and (iii) a $120,000 consulting agreement with Global Arena Capital
Corp. In addition, the Company has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended. See
"Underwriting."
(3) Includes
only the Units being offered hereby by the Company.
Global
Arena Capital Corp. and Aegis Capital Corporation have agreed to act as
co-managing underwriters in connection with this Offering. The Underwriters are
not purchasing the securities offered by us, and are not required to sell any
specific number or dollar amount of Units, but will assist us in this Offering
on a “best efforts” basis. We have agreed to pay the Underwriters a cash fee
equal to an aggregate of 9% of the gross proceeds of the Offering of Units by
us, as well as the Underwriters’ Warrants to purchase Units equal to up to 10%
of the aggregate number of Units sold in the Offering. The Underwriters’
Warrants will have terms substantially similar to the warrants included in the
Units offered hereby, except that the Underwriters’ Warrants will have an
exercise price equal to 120% of the public offering price per share of the
shares sold at the Closing. We estimate the total expenses of this Offering,
excluding the Underwriters’ fees, will be approximately $507,700. Because there
is no minimum Offering amount required as a condition to closing in this
Offering, the actual public Offering amount, Underwriters fees, and proceeds to
us, if any, are not presently determinable and may be substantially less than
the total maximum Offering amounts set forth above. See “Underwriting” beginning
on page 72 of this prospectus for more information on this Offering and the
Underwriters arrangements.
This
Offering will terminate on February 14, 2011, unless the Offering is fully
subscribed before that date or we, together with the Underwriters decide to
terminate the Offering prior to that date. In either event, the Offering may be
closed without further notice to you. All costs associated with the registration
will be borne by us.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
Global
Arena Capital
Corp. Aegis
Capital Corporation
The
Date of this Prospectus is: December ____, 2010
TABLE
OF CONTENTS
Page
|
||
Prospectus
Summary
|
1
|
|
Risk
Factors
|
5
|
|
Risks
Related To Our Business
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5
|
|
Risks
Related To Doing Business in China
|
8
|
|
Risks
Related to the Market of Our Stock
|
13
|
|
Use
of Proceeds
|
17
|
|
Dividend
Policy
|
17
|
|
Capitalization
|
18
|
|
Market
for Common Equity and Related Stockholder Matters
|
19
|
|
Dilution
|
19
|
|
Accounting
for the Share and Exchange
|
20
|
|
Description
of Business
|
21
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
40
|
|
Management
|
54
|
|
Certain
Relationships and Related Transactions
|
63
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
65
|
|
Description
of Securities
|
66
|
|
Shares
Eligible for Future Sale
|
71
|
|
Underwriting
|
73
|
|
Legal
Matters
|
76
|
|
Experts
|
76
|
|
Additional
Information
|
76
|
|
Financial
Statements
|
F-1
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not, and
the Underwriters have not, authorized any other person to provide you with
different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date. We do not undertake to update this prospectus, except as required by
law.
vi
Because
this is only a summary, it does not contain all of the information that may be
important to you. You should carefully read the more detailed information
contained in this prospectus, including our financial statements and related
notes. Our business involves significant risks. You should carefully consider
the information under the heading “Risk Factors” beginning on page
12.
As used
in this prospectus, unless otherwise indicated, the terms “we”, “our”, “us”,
“Company” and “Hanxin” refer to ASIA CORK, INC., a Delaware corporation,
formerly known as Hankersen International Corp. (“Hankersen”); its wholly-owned
subsidiary, Hanxin (Cork) International Holding Co., Ltd., a Company organized
in the British Virgin Islands (“Hanxin International”); its wholly-owned
subsidiary, Xi’An Cork Investments Consultative Management co., Ltd., a Company
organized in the People’s Republic of China (“Xi’An”); Xian Hanxin Technology
co., Ltd. (“Hanxin”), the subsidiary which it owns 92% equity interest and was
organized in the People’s Republic of China, and Cork Import
and Export Co., Ltd., a subsidiary in which Hanxin owns a 75% equity interest
Company and was organized in the People’s Republic of China (“Cork
I&E”). “China” or “PRC” refers to the People’s Republic of China. “RMB” or
“Renminbi” refers to the legal currency of China and “$” or “U.S. Dollars”
refers to the legal currency of the United States.
THE
COMPANY
Asia
Cork, Inc.
We are a
holding company whose primary business operations are conducted through our
wholly-owned subsidiary Hanxin International, and its subsidiaries, Hanxin and
Cork I&E. We are engaged in the development, manufacture and distribution of
cork wood floor, wall, sheets, rolls and other cork decorating materials in
China and other countries.
Our
Background History
Asia Cork
Inc. (f/k/a Hankersen International Corp.), was incorporated under the laws of
the State of Delaware on August 1, 1996. We were formed in connection with the
merger acquisition of Kushi Macrobiotics Corp. (“KMC”) with American Phoenix
Group, Inc. (“APGI”) in 1996. Prior to such acquisition, KMC had operated a
business of marketing a line of natural foods (the “Kushi Cuisine”). This
business was not successful and management determined that it would be in the
shareholder’s interest for KMC to operate a different business.
In August
2005, we, through Kushi Sub, Inc., a newly formed Delaware corporation and
wholly-owned subsidiary of us ("Acquisition Sub") acquired all the ownership
interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. We acquired Hanxin International in exchange for
24,000,000 shares of Common Stock and 1,000 shares of the Series A Preferred
Stock, which such shares converted into 29,530,937 shares of Common Stock.
Subsequent to the merger and upon the conversion of the Series A Preferred
Stock, the former shareholders of Hanxin International own 95% of the
outstanding shares of our Common Stock.
Hanxin
International has no other business activities other than owning 100% of Xi'An
Cork Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of
Xian Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both
Xi'An and Hanxin are People's Republic of China (PRC) corporations. Most of our
operating and business activities are conducted through
Hanxin. Hanxin is our principal operating subsidiary.
During
the year ended December 31, 2005, Hanxin acquired a 75% equity interest of Cork
Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation that engages in
cork trading businesses.
We are
a reporting Company under Section 13 of the Securities Exchange Act of 1934, as
amended. Our shares of Common Stock are not currently listed or
quoted for trading on any national securities exchange or national quotation
system but are quoted on the OTC Bulletin Board under the symbol “AKRK.”. We
have applied for the listing of our Units and Common Stock on NASDAQ on or
promptly after the date of this prospectus. Prior to the separate trading of the
Common Stock and Warrants, we will apply to have the Warrants comprising the
Units listed on NASDAQ
1
Merger
and Change of Name
On
July 11, 2008, the Company's wholly-owned subsidiary, Asia Cork Inc., was merged
into its parent, the Company, in order to change the name of the Company, after
approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving Company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had
no material assets. As permitted by Delaware General Corporation Law, the
Company assumed the name of its wholly owned subsidiary following the merger and
now operates under the name Asia Cork Inc.
Reverse
Stock Split
Concurrently
with the date of this prospectus, the Company will effectuate a reverse stock
split (the “Reverse Split”) in an amount to be ultimately agreed upon between
the Board of Directors of the Company and Global Arena Capital Corp. , however,
the Reverse Split will be within a range of 1-for-10 to 1-for-30. On September
2, 2010, the Board of Directors adopted a resolution seeking shareholder
approval of the Company to amend the Company’s certificate of incorporation to
affect the Reverse Split and thereafter, stockholders holding approximately 53%
of the outstanding shares of the Company’s Common Stock approved the Reverse
Split. The Company filed with the Securities and Exchange Commission
and circulated to its shareholders an Information Statement detailing the terms
of the Reverse Split. None of the references to the outstanding
shares of our Common Stock in this prospectus give effect to the Reverse
Split.
THE
OFFERING
Securities
we are Offering
|
_______
Units, each Unit consisting of one share of Common Stock and
one warrant to purchase one share of Common Stock(1)
|
|
Common
Stock:
|
||
Outstanding
Prior to Offering
|
39,370,772
shares (2)
|
|
Outstanding
After Offering
|
_________
shares
|
|
Warrants:
|
||
Outstanding
Prior to Offering
|
0
|
|
Outstanding
After Offering
|
____
(3)
|
|
Exercisability
|
Each
Warrant is exercisable for one share of Common Stock
|
|
Exercise
period
|
The
Warrants expire five years from the date of this prospectus and become
exercisable one year from the date of issuance. Each share of
Common Stock and Warrant will not be separately tradable for a period of
one year, unless sooner as may be approved by the representatives of the
Underwriters in their sole
discretion.
|
Redemption
|
The
Warrants are subject to redemption commencing one year after the date
hereof at $.05 per Warrant on twenty (20) days’ prior written notice,
provided the
closing price of the Common Stock for the twenty (20) consecutive trading
days ending within fifteen (15) days of the date
of notice of redemption averages in excess of $____ per share
(180% of the initial Offering price).
|
|
Offering
price
|
$
___ per Unit, consisting of $____ per share and $.25 per
Warrant
|
|
Use
of proceeds
|
We
intend to use the net proceeds of this Offering for general corporate
purposes, including, without limitation, increasing our working capital
and expanding both our domestic and overseas market share by increasing
our marketing efforts, expanding our sales channels through additional
distributors and increasing our production capacity. See “Use of Proceeds”
on page 17 for more information on the use of proceeds.
|
|
OTC
Bulletin Board symbol for our Common Stock
|
AKRK.OB
|
|
Lock-Up
Agreement
|
All
of our officers, directors and 5% stockholders have agreed that, for a
period of 18 months, they will be subject to a Lock-Up agreement
prohibiting any sales or hedging transactions of our securities owned by
them.
|
|
Risk
Factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 12.
|
(1)
|
Excludes up to _____ units
underlying warrants to be received by the Underwriters in this
Offering.
|
(2)
|
Based on 35,663,850 shares of
Common Stock issued and outstanding as of December 10, 2010
plus (i) 3,456,922 shares issuable to the Selling Stockholders upon
conversion of certain promissory notes (the Selling Stockholder Promissory
Notes “) and (ii) 250,000 shares issuable to a Selling Stockholder. Such
amount does not give effect to (i) the Reverse Split,(ii)
the ____shares of Common Stock included in the Units being
issued in the Offering, (iii) the _______ issuable upon exercise of the
Warrants, (iv) the ______ shares of Common stock issuable upon exercise of
the Underwriters’ Warrants to purchase up to 10% of the Units
issued in the Offering) and (v) 1,794,872 shares that may be issuable to
the Selling Stockholders upon exercise of their
warrants
|
(3)
|
Excludes the _____warrants
underlying warrants to be received by the Underwriters in this
Offering.
|
3
The
following tables summarize our consolidated financial data for the periods
presented. You should read the following financial information together with the
information under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and the
related notes to these consolidated financial statements appearing elsewhere in
this Prospectus. The selected consolidated statements of operations data for the
nine months financial period ended September 30, 2010 and 2009, and the selected
consolidated balance sheet data as of September 30, 2010 are derived from our
unaudited consolidated financial statements, which are included elsewhere
herein. The unaudited consolidated financial statements have been prepared on
the same basis as our audited financial statements and include, in the opinion
of management, all adjustments that management considers necessary for a fair
presentation of the financial information set forth in those
statements.
The
selected consolidated statements of operations data for the financial years
ended December 31, 2009, 2008 and 2007 and the selected consolidated balance
sheet data as of December 31, 2009 are derived from our consolidated financial
statements, and which for the periods ended December 31,l 2009 and 2008 are
included elsewhere herein, have been audited by MS Group CPA, LLC, an
independent registered public accounting firm, as indicated in their report.
Historical results are not necessarily indicative of the results to be expected
in future periods.
Year Ended December
31,
|
Nine Months Ended September
30,
|
|||||||||||||||||||
2007
|
2008
|
2009
|
2009
|
2010
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
Revenue
|
$ | 16,051 | $ | 21,378 | $ | 24,393 | $ | 17,056 | $ | 22,436 | ||||||||||
Cost
of sales
|
10,990 | 13,937 | 16,005 | 11,032 | 15,745 | |||||||||||||||
Gross
profit
|
5,061 | 7,441 | 8,388 | 6,024 | 6,691 | |||||||||||||||
Depreciation
and amortization
|
249 | 286 | 310 | 223 | 254 | |||||||||||||||
Selling
and distribution expenses
|
1,954 | 2,712 | 3,115 | 2,723 | 1,426 | |||||||||||||||
General
and administrative expenses
|
513 | 759 | 772 | 501 | 604 | |||||||||||||||
Loss
on disposal of fixed assets
|
342 | 159 | - | |||||||||||||||||
Other
income (expense)
|
23 | 74 | 136 | 79 | 98 | |||||||||||||||
Interest
income (expense)
|
(6 | ) | (275 | ) | (304 | ) | (259 | ) | (72 | ) | ||||||||||
Income
(loss) before income taxes
|
2,269 | 3,610 | 4,333 | 2,620 | 4,687 | |||||||||||||||
Income
taxes expenses
|
349 | 597 | 692 | 477 | 702 | |||||||||||||||
Net
income attributable to the Shareholders of the Company
|
$ | 1,762 | $ | 2,732 | $ | 3,345 | $ | 1,964 | $ | 3,665 | ||||||||||
Earnings
per Share — basic (US$) (1)
|
$ | 0.05 | $ | 0.08 | $ | 0.09 | $ | 0.06 | $ | 0.10 | ||||||||||
Earnings
per Share — diluted (US$) (2)
|
$ | 0.05 | $ | 0.08 | $ | 0.09 | $ | 0.06 | $ | 0.09 |
Note:
(1)
|
Figures in thousands and
assume there are shares of basic Common Stock outstanding after this
Offering was applied
retrospectively.
|
(2)
|
Figures in thousands and
assume there are shares of diluted Common Stock outstanding after this
Offering was applied
retrospectively.
|
4
As
at December 31,
|
As
of
September
30,
|
|||||||||||
(figures
in thousands)
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
(Unaudited)
|
||||||||||||
Balance
Sheet Data:
|
||||||||||||
Cash
and cash equivalents
|
$ | 24 | $ | 50 | $ | 1,637 | ||||||
Total
current assets
|
11,806 | 13,829 | 22,502 | |||||||||
Total
assets
|
22,348 | 26,265 | 32,236 | |||||||||
Short-term
borrowings
|
1,014 | 915 | 700 | |||||||||
Total
current liabilities
|
2,905 | 3,192 | 4,627 | |||||||||
Total
stockholders’ equity
|
17,641 | 20,975 | 25,192 |
RISK
FACTORS
Any
investment in our Units involves a high degree of risk. Investors
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our Units. Our
business, financial condition or results of operations could be materially
adversely affected by these risks if any of them actually occur. The
trading price could decline due to any of these risks, and an investor may lose
all or part of his investment. Some of these factors have affected
our financial condition and operating results in the past or are currently
affecting our Company. This prospectus also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks we face as described below and
elsewhere in this prospectus.
RISKS
RELATED TO OUR BUSINESS
If
we fail to obtain additional financing, we will be unable to execute our
business plan.
The
revenues from the production and sale of cork products and the projected
revenues from these products are not adequate to support our expansion and
product development programs. Despite our recent financing and the financing
described in this prospectus, we may need additional funds to obtain regulatory
approvals; file, prosecute, defend and enforce our intellectual property rights;
and market our products. Should such needs arise, we intend to seek additional
funds through public or private equity or debt financing, strategic transactions
and/or from other sources.
We cannot
assure you that future funding will be available on favorable terms or at all.
If additional funding is not obtained, we will need to reduce, defer or cancel
development programs, planned initiatives or overhead expenditures, to the
extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.
We
must be able to effectively improve our products; and if we are unable to
improve our products, our business may be adversely affected.
We are
seeking to improve our profitability by producing more finished cork products,
which generally have higher profit margins, as a percentage of total sales. If
we are unable to improve and develop our products, we may not be able to improve
our profit margins or improve our ability to compete effectively.
We
are dependent on raw materials. Any shortages of the necessary materials would
have a materially adverse effect on our business.
The
supply of cork raw material is the base of production. The shortfall of raw
material will impair the development and production of our products. The supply
of these raw materials can also be adversely affected by any material change in
the climate or other environmental conditions, which may have a material adverse
impact on the costs of raw materials. Our financial performance may be affected
by changes in production costs brought about by fluctuations in the prices of
our raw materials which may fluctuate due to changes in supply and demand
conditions. Any shortage in supply or upsurge in demand of our major raw
materials may lead to an increase in prices, which may adversely affect our
profitability due to increased production costs and lower profit
margins.
5
We are
dependent on the patents licensed to us from Fangshe Zhang, our Chairman and
principal shareholder. He owns 14 cork processing technology related
patents in China. Hanxin has an exclusive license to three patents in
consideration for annual payments and Hanxin has an exclusive right to use
another 11 patents for free. Hanxin also owns three patents
transferred from Mr. Zhang. As a result, our business activities related to
exploiting these patents are dependent on the license granted to us from him. In
the event that the license is terminated, such a result would have a material
adverse affect on the Company as it would prevent us from using them in our
business and deriving revenue associated therewith.
Our
overseas growth is dependent on the strategic plan on expanding in foreign
markets.
We plan
to expand into the foreign markets, especially the U.S. market, within the next
few years. We have established cooperation relationships with several large
building and decoration material dealers in the U.S. and Taiwan. Should there be
any economic turndown that significantly weakens the sales ability of these
dealers and other foreign wholesalers and retailers, we may not achieve our goal
of revenues and our strategic growth would be significantly and adversely
affected.
Due
To Fluctuations Any Quarter-To-Quarter Comparisons In Our Consolidated Financial
Statements May Not Be Meaningful
Our
business is subject to fluctuations, which may cause our operating results to
fluctuate from quarter to quarter. As a result, any comparisons from period to
period in our financial statements may not provide an accurate picture of our
financial condition. Further, this fluctuation may result in
volatility or have an adverse effect on the market price of our Common
Stock.
Changes
In The Extensive Regulations To Which Hanxin Is Subject Could Increase Its Cost
Of Doing Business Or Affect Its Ability To Grow.
The
governments of countries where Hanxin’s exports products, including, but not
limited to India, the United States, Germany and Japan, may, from time to time,
consider regulatory proposals relating to raw materials, market, and
environmental regulation, which, if adopted, could lead to disruptions in supply
and/or increases in operational costs, and hence indirectly affect Hanxin’s
profitability. To the extent that Hanxin increases its product prices as a
result of such changes, its sales volume and revenues may be adversely affected.
Furthermore, these governments may change certain regulations or impose
additional taxes or duties on certain Chinese imports from time to time. Such
regulations, if effected, may have a material adverse impact on Hanxin’s
operations revenue and/or profitability.
Our
Business Activities Are Subject To Certain Laws And Regulations And Our
Operation May Be Affected If We Fail To Have In Force The Requisite Licenses And
Permits.
We are
required to obtain various licenses and permits in order to conduct our business
of production and export of cork products. The business is also subject to
applicable laws and regulations. Any failure to comply with the
conditions stipulated in our licenses and permits may lead to their revocation
or non-renewal. Any failure to observe the applicable laws and regulations may
lead to the termination or suspension of some or all of our business activities
or penalties being imposed on us. The occurrence of any of these events may
adversely affect our business, financial condition and results of
operations.
We
Are Dependent On Our Customers’ Ability To Maintain And Expand Their Sales And
Distribution Channels. Should These Distributors Be Unsuccessful In maintaining
And Expanding Their Distribution Channels, Our Results Of Operation Will Be
Adversely Affected.
Demand
for our products from end-consumers and our prospects depend on the retail
growth and penetration rate of our products to end-consumers. Sales of our
products are conducted mainly through distributors, over whom we have limited
control. These distributors sub-distribute our products. We are thus dependent
on the sales and distribution channels of our distributors for broadening the
geographic reach of our products. Should these distributors be unable to
maintain and expand their distribution channels, our results of operations and
financial position will be adversely affected.
6
We take
advantage of favorable tax rates and other beneficial governmental policies
afforded to us as a result of the nature of our business. In the event that the
program offered to us is amended or rescinded or our business no longer meets
the eligibility requirements of the program, we may not be able to enjoy the
benefits of these programs and as a result may have to pay higher income taxes,
which may have a material adverse affect on us.
Further,
the Chinese government may adjust the current industrial policies and tax rates
with the growth of its political and economic environment, which may negatively
impact our business.
We
are controlled by principal shareholders, officers and directors, which may
limit our ability to conduct certain activities or take certain actions without
their consent.
Messrs.
Fangshe Zhang, our Chairman, and Pengcheng Chen, our Chief Executive Officer own
in the aggregate approximately 37 percent (37.33%) of our Common Stock. Both
were former stockholders of Hanxin International. As a result, such persons may
have the ability to control us and direct our affairs and business. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing change in control of us. See “Security Ownership Of Certain
Beneficial Owners And Management.” After giving effect to the Offering and the
conversion of the promissory notes held by certain Selling Stockholders (the
“Promissory Notes”), Messrs. Zhang and Chen will own, in the aggregate,
approximately 36% of our Common Stock.
We
Are Dependent On Certain Major Suppliers For Our Raw Materials. In The Event
That We Are No Longer Able To Secure Raw Materials From These Suppliers And Are
Unable To Find Alternative Sources of Supply At Similar Or More Competitive
Rates, Our Operations And Profitability Will Be Adversely Affected.
For the
production of our products, we rely on our major suppliers for a significant
portion of the supply of raw cork material. Although we purchase supplies from
approximately 23 suppliers, four suppliers accounted for about 40% of our supply
of raw material in 2009. In the event that we are unable to secure our raw
materials from these suppliers and we are unable to find alternative sources of
supply at similar or more competitive rates, our business and operations will be
adversely affected.
The
elimination of monetary liability against our directors, officers and employees
under Delaware law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures that could be a
drain on our resources by our Company and may discourage lawsuits against our
directors, officers and employees.
Our
Certificate of Incorporation and applicable Delaware law limits monetary
liability against our directors, officers and employees and provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney’s fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on behalf of us. Accordingly, we will have a much more limited
right of action against our directors than otherwise would be the case. We will
also bear the expenses of such litigation for any of our directors, officers,
employees, or agents, upon such person’s promise to repay us if it is ultimately
determined that any such person shall not have been entitled to indemnification.
This indemnification policy could result in substantial expenditures by us that
we would be unable to recoup. These provisions and
resultant costs may also discourage our Company from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our Company and stockholders.
7
We do not
plan to declare or pay any cash dividends on our shares of Common Stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an investment in our
securities if they require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell their
shares of the Company at or above the price they paid for them.
We
are dependent on key personnel, and the loss of any key employees, officers
and/or directors may have a materially adverse effect on our
operations.
Our
success is substantially dependent on the continued services of our executive
officers, particularly Fangshe Zhang, our Chairman, and Pengcheng Chen, our
Chief Executive Officer, and other key personnel who generally have extensive
experience in the cork industry and have been employed by us for substantial
periods of time. The loss of the services of any key employees, or our failure
to attract and retain other qualified and experienced personnel on acceptable
terms, could have a material adverse effect on our business and results of
operations.
The
extended payment terms to our major customers may result in a reduction in cash
flow.
In
connection with the expansion of our domestic market and to promote a series of
new products, the Company decided to extend the payment terms to major customers
in Beijing, Shanghai, Guangzhou and Sichuan Hanxin from six months to one year.
The extended payment terms contributed to an increase in our accounts receivable
as of September 30, 2010 to $9,511,618, compared to $5,176,239 as of December 31,
2009. The large amount of accounts receivable may cause losses as a
result of increased bad debt expenses in the event our customers fail to pay us
in time or at all. Reduced cash flow as a result of the extended
payment terms may affect our ability to purchase raw materials and may reduce
our production and sales.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Substantially
all of our assets are located in the PRC and substantially all of our revenues
are derived from our operations in China, and changes in the political and
economic policies of the PRC government could have a significant impact upon the
business we may be able to conduct in the PRC and accordingly on the results of
our operations and financial condition.
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business
activities. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the government of the PRC will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.
Our operations are subject to PRC
laws and regulations that are sometimes vague and uncertain. Any changes in such
PRC laws and regulations, or the interpretations thereof, may have a material
and adverse effect on our business.
We
conduct our business primarily through our affiliate Chinese entity, Xi'an
Hanxin. Our operations in China are governed by Chinese laws and regulations. We
are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The Chinese legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.
The legal
system in China is a system of civil laws, based on provisions and written
codes, therefore precedents and cases are not binding on the future decisions of
the courts. There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including, but not limited to, the laws
and regulations governing our business, or the enforcement and performance of
our arrangements with customers in the event of the imposition of statutory
liens, death, bankruptcy or criminal proceedings. Only after 1979 did the
Chinese government begin to promulgate a comprehensive system of laws that
regulate economic affairs in general, deal with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade,
and encourage foreign investment in China. Although the influence of
the law has been increasing, China has not developed a fully integrated legal
system and recently enacted laws and regulations may not sufficiently cover all
aspects of economic activities in China. Also, because these laws and
regulations are relatively new, and because of the limited volume of published
cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant
uncertainties. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. In addition, there have been
constant changes and amendments of laws and regulations over the past 30 years
in order to keep up with the rapidly changing society and economy in China.
Because government agencies and courts provide interpretations of laws and
regulations and decide contractual disputes and issues, their inexperience on
new business and new polices or regulations in certain less developed areas
causes uncertainty and may affect our business. In some
provincial areas, the government agencies and the courts are protectionist and
may not fully enforce contractual rights against local parties. In
certain areas, the intellectual property and trade secret protections are not as
effective as those in the other areas in China or in the U.S. in
general. Consequently, we cannot clearly foresee the future direction
of Chinese legislative activities with respect to either businesses with foreign
investment or the effectiveness on enforcement of laws and regulations in the
less developed areas in China. The uncertainties, including new laws and
regulations and changes of existing laws, as well judicial interpretation by
inexperienced officials in the agencies and courts in certain areas, may cause
possible problems to foreign investors.
8
Most of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and officers
are nationals and residents of China. All or substantially all of the assets of
these persons are located outside the United States and in the PRC. As a result,
it may not be possible to effect service of process within the United States or
elsewhere outside China upon these persons. In addition, uncertainty exists as
to whether the courts of China would recognize or enforce judgments of U.S.
courts obtained against us or such officers and/or directors predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof, or be competent to hear original actions brought in China against
us or such persons predicated upon the securities laws of the United States or
any state thereof.
We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental laws and
regulations may have a material adverse effect on our business and results of
operations.
Potential
liability in connection with environmental regulation arises from the
possibility that pollution will be caused by the dust generated when cork barks
are ground into fine granules, which is typical for the artificial board
industry. This problem is usually solved by installing dust removing facilities.
We believe that Hanxin has installed sufficient dust removing systems in its
workshops and has been effectively controlling its dust emission. The dust
removing systems have been designed by the Company. The cost for installing
these facilities is part of the cost for establishing the production
lines. Although such dust removing systems consume additional
electricity, the additional utility expense increased is minimal compared to the
total production expenses. We believe that we face no other issues
regarding compliance with environmental laws as our production procedure (1)
consumes no water and thus produces no waste water and (2) generates no solid
waste as all cork residue is sold as the raw material for feed or
fertilizer. Despite the foregoing, we cannot assure you that at all times we
will be in compliance with environmental laws and regulations or that we will
not be required to expend significant funds to comply with, or discharge
liabilities arising under, environmental laws, regulations and
permits.
We
may be affected by global climate change or by legal, regulatory, or market
responses to such change.
The
growing political and scientific sentiment is that increased concentrations of
carbon dioxide and other greenhouse gases in the atmosphere are influencing
global weather patterns. Changing weather patterns, along with the increased
frequency or duration of extreme weather conditions, could impact the
availability or increase the cost of key raw materials that we use to produce
our products. Additionally, the sale of our products can be impacted by weather
conditions.
Concern
over climate change, including global warming, has led to legislative and
regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For
example, proposals that would impose mandatory requirements on GHG emissions
continue to be considered by policy makers in the territories that we operate.
Laws enacted that directly or indirectly affect our production, distribution,
packaging, cost of raw materials, fuel, ingredients, and water could all impact
our business and financial results.
9
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which became
effective on January 1, 2008, amended and formalized workers’ rights concerning
overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the new law, the Company has had to reduce the number of
hours of overtime its employees can work, substantially increase the salaries of
its employees, provide additional benefits to its employees, and revise certain
other of its labor practices. The increase in labor costs has increased the
Company’s operating costs, which the Company has not always been able to pass
through to its customers. As a result, the Company has incurred certain
operating losses as its cost of manufacturing increased. In addition, under the
new law, employees who either have worked for the Company for 10 years or more
or who have had two consecutive fixed-term contracts must be given an
“open-ended employment contract” that, in effect, constitutes a lifetime,
permanent contract, which is terminable only in the event the employee
materially breaches the Company’s rules and regulations or is in serious
dereliction of his duty. Such non-cancelable employment contracts will
substantially increase its employment related risks and limit the Company’s
ability to downsize its workforce in the event of an economic downturn. No
assurance can be given that the Company will not in the future be subject to
labor strikes or that it will not have to make other payments to resolve future
labor issues caused by the new laws. Furthermore, there can be no assurance that
the labor laws will not change further or that their interpretation and
implementation will vary, which may have a negative effect upon our business and
results of operations.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to foreign exchange control and other regulations of China .
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reach 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China and a substantial majority of our revenues are
generated in China, a majority of our revenue being earned and currency received
are denominated in Renminbi (RMB). RMB is subject to the exchange control
regulation in China, and, as a result, we may unable to distribute any dividends
outside of China due to PRC exchange control regulations that restrict our
ability to convert RMB into U.S. Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Our funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our
cash obligations. Accordingly, if we do not receive dividends from our Chinese
operating subsidiary, our liquidity, financial condition and ability to make
dividend distributions to our stockholders will be materially and adversely
affected.
10
To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our Common Stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our Common Stock, the dollar equivalent
of our earnings from our subsidiaries in China would be reduced should the U.S.
Dollar appreciate against the Renminbi.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including U.S. Dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China’s current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. Dollar. Under the new policy the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
U.S. Dollar.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability. In order to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences .
As our
ultimate holding Company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties and other consequences that
may have a material adverse effect on our business, financial condition and
results of operations.
11
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also known as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed Company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed Company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make substantial
option grants to our officers and directors, most of who are PRC citizens.
Circular 78 may require our officers and directors who receive option grants and
are PRC citizens to register with SAFE. We believe that the registration and
approval requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that any of our equity compensation plans are
subject to Circular 78, failure to comply with such provisions may subject us
and participants of our equity incentive plan who are PRC citizens, including or
Chief Executive Officer, to fines and legal sanctions and prevent us from being
able to grant equity compensation to our PRC employees. In that case, our
ability to compensate our employees and directors through equity compensation
would be hindered and our business operations may be adversely
affected.
A
downturn in the economy of the PRC may slow our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business, especially if it results in either a decreased use of our products or
in pressure on us to lower our prices.
Our operations in the PRC are subject
to the laws and regulations of the PRC .
As our
products are exported from the PRC, we are subject to and have to operate within
the framework of the PRC legal system. Any changes in the laws or policies of
the PRC or the implementation thereof, for example in areas such as foreign
exchange controls, tariffs, trade barriers, taxes, export license requirements
and environmental protection, may have a material impact on our operations and
financial performance. The corporate affairs of our companies in the
PRC are governed by their articles of association and the corporate and foreign
investment laws and regulations of the PRC. The principles of the PRC laws
relating to matters such as the fiduciary duties of directors and other
corporate governance matters and foreign investment laws in the PRC are
relatively new. Hence, the enforcement of investors or shareholders' rights
under the articles of association of a PRC Company and the interpretation of the
relevant laws relating to corporate governance matters remain largely untested
in the PRC.
We cannot
predict what effect the interpretation of existing or new the PRC laws or
regulations may have on our businesses. If the relevant authorities find us in
violation of the PRC laws or regulations, they would have broad discretion in
dealing with such a violation, including, without limitation:
12
|
•
|
levying
fines;
|
|
•
|
revoking our business license,
other licenses or
authorities;
|
|
•
|
requiring that we restructure our
ownership or operations; and
|
|
•
|
requiring that we discontinue any
portion or all of our
business.
|
Our
subsidiaries, operations and significant assets are located outside the U.S.
Shareholders may not be accorded the same rights and protection that would be
accorded under the Securities Act. In addition, it could be difficult to enforce
a U.S. judgment against our Directors and officers.
Our
subsidiaries, operations and assets are located in the PRC. Our subsidiaries are
therefore subject to the relevant laws in the PRC. U.S. law may provide
shareholders with certain rights and protection which may not have corresponding
or similar provisions under the laws of the PRC. As such, investors in our
Common Stock may or may not be accorded the same level of shareholder rights and
protection that would be accorded under the Securities Act. In addition, all our
current executive directors are non-residents of the U.S. and the assets of
these persons are mainly located outside the U.S. As such, there may be
difficult for our shareholders to effect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against any of these
persons.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to continue to operate in
China may be affected by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.
Accordingly,
government actions in the future including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Sales
of our Common Stock by the Selling Stockholders in a concurrent Offering may
depress our stock price .
Commencing
nine months after the Offering, our Selling Stockholders (with the exception of
Brill Securities Inc. which may commence selling its 250,000 shares six months
after the Offering) may offer for sale, from time to time,
5,251,794 shares of our Common Stock. If we sell all ______Units we
are offering, we would have ________ shares outstanding (after giving effect to
the conversion of the Selling Stockholder Promissory Notes and after
giving effect to the exercise of the Selling Stockholder warrants and including
the shares issuable to the Selling Stockholders), _of which would be freely
tradable in the public. Sales of a substantial number of shares of our Common
Stock by the Selling Stockholders within a relatively short period of time could
have the effect of depressing the market price of our Common Stock and could
impair our ability to raise capital through the sale of additional equity
securities.
We
will issue warrants to our Underwriters in connection with the public
Offering.
We
will issue to the Underwriters for the Offering, as additional compensation, the
Underwriters’ Warrants to purchase one Unit for each ten Units sold in the
Offering, or up to a maximum of ____ warrants. The Underwriters’ Warrants may be
exercised at any time commencing one year from the date of this prospectus and
continuing for five years thereafter to purchase Units at an exercise price
equal to 120% of the Offering price of the Units in this
Offering. During the term of the Underwriters’ Warrants, our
Underwriters will have the opportunity to profit from an increase in the price
of the shares of Common Stock underlying the Underwriters’ Warrants. The
existence of the Underwriters’ Warrants may adversely affect the market price of
the shares if they become publicly traded on the terms on which we can obtain
additional financing. The holders of the Underwriters’ Warrants may exercise
their warrants at a time when we would, in all likelihood, be able to obtain
additional capital on terms more favorable than those contained in the
Underwriters’ Warrants. Please see “Underwriting” and “Description of
Securities” for additional information regarding the Underwriters’ Warrants and
our Common Stock and Warrants.
13
Specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our Common Stock. The Company’s Bylaws or
Certificate of Incorporation do not contain any other provisions that would have
the effect of delaying or preventing a change in control.
You
may be one of only a small number of investors in the Offering and, as a result,
a substantial percentage of the Offering proceeds may be used to pay for the
Offering’s expenses.
This is a
best efforts offering, which means that we are not required to sell any specific
number of Units or dollar amount of Units in this Offering. To the extent that
we sell significantly less than the total number of Units that we are offering
through this prospectus, you may be one of only a small number of investors in
this Offering and a substantial percentage of the Offering proceeds may be used
to pay for the Offering expenses, and not for our general corporate
purposes.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
If
we fail to maintain effective internal controls over financial reporting, the
price of our Common Stock may be adversely affected.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the Company’s internal controls over financial reporting in their annual
reports, including Form 10-K. We have established disclosure controls and
procedures effective for the purposes set forth in the definition thereof in
Exchange Act Rule 13a-15(e) as of December 31, 2009. Projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may
deteriorate.
14
The
trading price of our common shares is below $5 per share, thus we are deemed a
“penny stock” company and the open-market trading of our common shares will be
subject to the “penny stock” rules. The “penny stock” rules impose additional
sales practice requirements on broker-dealers who sell securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
securities and have received the purchaser’s written consent to the transaction
before the purchase. Additionally, for any transaction involving a penny stock,
unless exempt, the broker-dealer must deliver, before the transaction, a
disclosure schedule prescribed by the Securities and Exchange Commission
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny stocks.
These additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell our common shares, and may
result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other
securities.
The
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.
Our
common shares are thinly traded and you may be unable to sell at or near ask
prices or at all if you desire to liquidate your shares.
We
cannot predict the extent to which an active public market for our Common Stock
will develop or be sustained. Our common shares have historically been
sporadically or “thinly-traded” on the OTC Bulletin Board, meaning that the
number of persons interested in purchasing our common shares at or near bid
prices at any given time may be relatively small. This situation is attributable
to a number of factors, including the fact that we are a small Company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our Common Stock will
develop or be sustained, or that current trading levels will be
sustained. We have applied for listing the Units and Common Stock on
the NASDAQ, but cannot assure you that this listing or listing on any other
exchange will ever occur.
If
we do not meet the listing standards established by national securities exchange
markets such as NASDAQ and NYSE Amex LLC, our common stock may not become listed
for trading on one of those markets, which may restrict the liquidity of shares
held by our stockholders.
We
have applied for listing of our Units and Common Stock for trading on a national
securities exchanges promptly after our registration statement is declared
effective. The listing of our Units and Common Stock on a national
securities exchange may result in a more active public market for our common
stock, resulting in turn in greater liquidity of shares held by our
stockholders. National securities exchanges such as NASDAQ and NYSE
Amex LLC have established certain quantitative criteria and qualitative
standards that companies must meet in order to become and remain listed for
trading on these markets. We cannot guarantee that we will be able to
maintain all necessary requirements for listing; therefore, we cannot guarantee
that our common stock will be listed for trading on a national securities
exchange.
Our
shares are subject to significant price volatility, which may prevent you from
selling your stock at or above your purchase price if at all.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our stockholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer, which could better absorb those sales without adverse impact on
its share price. In addition, actual or anticipated variations in our
quarterly or annual operating results, adverse outcomes and additions or
departures of our key personnel may also add to the volatility in the price of
our common shares. The price at which you purchase our Common Stock
may not be indicative of the price that will prevail in the trading market. You
may be unable to sell your Common Stock at or above your purchase price if at
all, which may result in substantial losses to you.
15
Volatility
in our common share price may subject us to securities litigation.
The
market for our Common Stock has, when compared to seasoned issuers, price
volatility and we expect that our share price will continue to be more volatile
than a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a Company following
periods of volatility in the market price of its securities. We may, in the
future, be the target of similar litigation. Securities litigation could result
in substantial costs and liabilities and could divert management’s attention and
resources.
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
likely to increase general and administrative costs and expenses. In addition,
insurers are likely to increase premiums as a result of high claims rates over
the past several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
registration statement contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “anticipate”, “believe”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and “would” or
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial position or state other
forward-looking information. We believe that it is important to communicate our
future expectations to our investors. However, there may be events in the future
that we are not able to predict accurately or control. The factors listed above
in the section captioned “Risk Factors,” as well as any cautionary language in
this Prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our Common Stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this Prospectus could have a material adverse effect on
our business, results of operations and financial position. We do not intend or
assume any obligation to update or reverse these forward-looking statements in
light of developments which differ from those anticipated, unless as required by
law.
16
We
estimate that the net proceeds from the sale of the _________ Units in the
Offering will be approximately $7,393,750 if the maximum Offering is sold after
deducting the estimated underwriting discounts and commissions but before
estimated offering expenses.
Percentage
of
Net
Proceeds
(1)
|
||||
Acquisition
of Inventory and Marketing Expenses Related to Expansion of Domestic
Markets
|
____ | % | ||
____
|
% | |||
Purchase
of Equipment to Expand Production
|
____
|
% | ||
Working
Capital (2)
|
____
|
% | ||
Total
net proceeds
|
100 | %(1) |
(1) The
principal purposes of this Offering are to increase our working capital and to
expand both our domestic and oversea market shares by increasing our marketing
efforts, expanding our sales channels through additional distributors and
increasing our production capacity.
The
foregoing represents our best estimate of its allocation of the net proceeds of
this Offering based upon the current state of our business operations, its
current plans, and current economic and industry conditions and is subject to
reapportionment among the categories listed above or to new
categories. The amounts and timing of our actual expenditures will
depend on numerous factors, including the status of our development efforts,
sales and marketing activities, and the amount of cash generated or used by our
operations and competition. We may find it necessary or advisable to use
portions of the proceeds for other purposes, and we will have broad discretion
in the application of the net proceeds. Pending these uses, the proceeds will be
invested in short-term, investment grade, interest-bearing
securities.
DIVIDEND
POLICY
We do
not expect to declare or pay any cash dividends on our Common Stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our Common Stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that our board of directors considers
significant. We did not pay any cash dividends in the nine months ended
September 30, 2010 or the fiscal years ended December 31, 2009 and
2008.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reach 50% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China and a substantial majority of our revenues are
generated in China, a majority of our revenue being earned and currency received
are denominated in Renminbi (RMB). RMB is subject to the exchange control
regulation in China, and, as a result, we may unable to distribute any dividends
outside of China due to PRC exchange control regulations that restrict our
ability to convert RMB into US Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Our funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our
cash obligations. Accordingly, if we do not receive dividends from our Chinese
operating subsidiary, our liquidity, financial condition and ability to make
dividend distributions to our stockholders will be materially and adversely
affected.
17
The
following table sets forth our capitalization as of September 30, 2010
(Unaudited):
|
·
|
You
should read this table in conjunction with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our financial statements and related notes included
elsewhere in this prospectus.
Actual
|
||||||||
Due
to shareholder
|
$ | 181,187 | $ | |||||
Stockholders'
equity:
|
||||||||
Common
Stock, $0.0001 par value, 200,000,000 shares authorized, [35,663,850]
issued and outstanding on an actual basis, issued and outstanding on a pro
forma basis, and issued and outstanding on a pro forma as-adjusted
basis
|
3,566 | |||||||
Additional
paid-in capital
|
4,485,446 | |||||||
Additional
paid-in capital –stock warrant
|
279,386 | |||||||
Accumulated
other comprehensive income
|
3,209,301 | |||||||
Statutory
surplus reserve fund
|
3,406,136 | |||||||
Retained
earnings
|
13,808,249 | |||||||
Total
stockholders' equity
|
$ | 25,192,084 | $ | |||||
Total
capitalization
|
$ | 25,373,271 | $ |
18
MARKET
FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock is traded on Over-The-Counter Bulletin Board under the symbol
AKRK.OB. As of December 10, 2010, there were approximately 98 holders of record
of our Common Stock. We have applied for the listing of our Units and
Common Stock on the NASDAQ. The following table sets forth the range
of high and low bid information for the period from first quarter of 2008 to the
third quarter of 2010.
High
Bid
|
Low
Bid
|
|||||||
Period
|
||||||||
2010
|
||||||||
First
quarter
|
$
|
0.55
|
$
|
0.32
|
||||
Second
quarter
|
$
|
0.57
|
$
|
0.27
|
||||
Third
quarter
|
$
|
0.31
|
$
|
0.18
|
||||
2009
|
||||||||
First
quarter
|
$
|
0.21
|
$
|
0.11
|
||||
Second
quarter
|
$
|
0.26
|
$
|
0.10
|
||||
Third
quarter
|
$
|
0.28
|
$
|
0.20
|
||||
Fourth
Quarter
|
$
|
0.53
|
$
|
0.23
|
||||
2008
|
||||||||
First
quarter
|
$
|
0.20
|
$
|
0.09
|
||||
Second
quarter
|
$
|
0.43
|
$
|
0.07
|
||||
Third
quarter
|
$
|
0.30
|
$
|
0.21
|
||||
Fourth
quarter
|
$
|
0.244
|
$
|
0.11
|
The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Our
transfer agent is Olde Monmouth Stock Transfer, whose address is 200 Memorial
Parkway, Atlantic Highlands, NJ 07716, and their contact number is (732) 872
2727.
There are
no securities authorized for issuance under equity compensation
plans.
DILUTION
If you
invest in our Units, your interest will be diluted immediately to the extent of
the difference between the public Offering price per share you will pay in this
Offering and the net tangible book value per share of Common Stock immediately
after this Offering. Dilution results from the fact that the per common share
Offering price is substantially in excess of the book value per common share
attributable to the existing shareholders for our presently outstanding Common
Stock. Our net tangible book value as of September 30, 2010 was $25.19 million,
or $0.71 per share (unaudited) based on 35,663,850 shares of Common Stock
outstanding, before giving effect to the Reverse Split.
The
following table sets forth the estimated net tangible book value per common
share after the Offering and the dilution to persons purchasing common shares
based on the foregoing _______ Units maximum Offering
assumptions.
19
____
Units
Offering (1)
|
||||
Offering
price per common share
|
$ | |||
Net
tangible book value per common share before the Offering
(unaudited)
|
$ | |||
Increase
per common share attributable to payments by new investors
|
$ | |||
Pro
forma net tangible book value per common share after the
Offering
|
$ | |||
Dilution
per common share to new investors
|
$ |
(1)
|
Assumes net proceeds from
Offering of ____ Units (_____ shares of Common Stock and assuming no
exercise of the Warrants).
|
The
discussion and tables above is based on ______ shares of Common Stock issued and
outstanding as of ______, 2010, (excluding , (i) _______shares of Common Stock
included in the Units that are to be issued in the Offering (ii) excluding _____
shares of Common Stock issuable upon exercise of the warrants contained in the
Units and the Underwriters’ Warrants to purchase up to _____ shares of
Common Stock but (iii) including the shares issuable to the Selling
Stockholders. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of these securities could result in further dilution to
our stockholders.
ACCOUNTING
FOR THE SHARE EXCHANGE
On August
9, 2005, the Company completed the acquisition of all of the Common Stock of
Hanxin International pursuant to a Share Exchange Agreement. We acquired Hanxin
International in exchange for 24,000,000 shares of Common Stock and 1,000 shares
of the Series A Preferred Stock, which such shares of Common Stock as
converted into 29,530,937 shares of Common Stock. Subsequent to the merger and
upon the conversion of the Series A Preferred Stock, the former
shareholders of Hanxin International own 95% of the outstanding shares of
our Common Stock. As a result of this transaction, Hanxin International became a
wholly-owned subsidiary of the Company. The transaction is accounted for using
the reverse merger acquisition method of accounting in accordance with the FASB
issued ASC805, Business Combinations.
20
Overview
As used
in this prospectus, unless otherwise indicated, the terms “we,” “our,” “us,”
“Company” and “Asia Cork” refer to ASIA CORK, INC., a Delaware corporation,
formerly known as Hankersen International Corp (“HANKERSEN”).
Our
Corporate Structure
The
corporate structure of the Company is illustrated as follows:
Corporate
History
Asia Cork
Inc. (f/k/a Hankersen International Corp.), was incorporated under the laws of
the State of Delaware on August 1, 1996. The Company was formed in connection
with the merger acquisition of Kushi Macrobiotics Corp. (“KMC”) with American
Phoenix Group, Inc. (“APGI”) in 1996. Prior to such acquisition, KMC had
operated a business of marketing a line of natural foods (the “Kushi Cuisine”).
This business was not successful and management determined that it would be in
the shareholder’s interest for KMC to operate a different business.
In August
2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of Company us ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. The Company acquired Hanxin International in
exchange for 24,000,000 shares of Common Stock and 1,000 shares of the Series A
Preferred Stock, which such shares converted into 29,530,937 shares of Common
Stock. Subsequent to the merger and upon the conversion of the Series A
Preferred Stock, the former shareholders of Hanxin International currently own
95% of the outstanding shares of Company our Common Stock.
21
Kushi
Sub, the surviving entity of the merger with Hanxin International, has no other
business activities other than owning 100% of Xi'An Cork Investments
Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian Hanxin
Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An and
Hanxin are People's Republic of China (PRC) corporations. Most of the Company’s
operating and business activities are conducted through Hanxin.
During
the year ended December 31, 2005, Hanxin acquired a 75%
equity interest of Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC
corporation that engages in cork trading businesses.
On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc. was merged into
its parent, the Company as approved by the Board of Directors of the Company
pursuant to the Delaware General Corporation Law. The Company is the surviving
company of the merger and, except for the adoption of the new name, its
Certificate of Incorporation is otherwise unchanged. The wholly-owned subsidiary
was formed in July 2008 and had no material assets. The Certificate of Merger
was filed with the Secretary of State of Delaware on July 11, 2008.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly-owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s Common Stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB.”
Reverse
Stock Split and Change of Domicile
Concurrently
with the date of this prospectus, the Company will effectuate the Reverse
Split. The Reverse Split is a condition to the Offering. None of the
references to the outstanding shares of our Common Stock in this prospectus give
effect to the Reverse Split.
Business Overview
The
Company, through its subsidiaries, engages in the development, manufacture and
distribution of cork wood floor, wall, sheets, rolls and other cork decorating
materials, which are generally regarded as environmentally friendly. Located in
Xi’an, China, Asia Cork, Inc. is a rapidly growing leader in the industry of
cork-based building materials. Cork is a ‘green’ renewable resource harvested
only from the bark of the cork oak tree, thus leaving forests generally
undamaged.
Compared
to other similar products, cork products have the characteristics of their
impermeability, buoyancy, elasticity, and fire resistance.
The sustainability of production and the easy recycling of cork products
and by-products are two of its most distinctive aspects. The Company’s product
lines include raw cork materials, semi-finished cork products, finished cork
products, and by-products, including cork roll, cork paper, crafts and
ornaments, cork floorboards and wallboards.
The
average wholesale price of Hanxin cork floors is around $60/m2, while products
from Portugal are usually priced at 75/m2 on average. Hanxin enjoys significant
cost advantage as its production activities are all performed in China. Raw cork
materials, mainly cork granules in China, cost only 30~40% of the cost
of the raw materials from Portugal and, and the average labor cost in
China is around 20~10% of the cost in Europe, which gives Asia Cork a
pricing advantage and higher margin. The aforementioned data is assessed
by us from our industry experience, information from our clients or business
partners, and information generally available in the cork product
industry.
We have
the right to use 17 patents developed by Fangshe Zhang, our Chairman regarding
cork processing technologies. We own 3 patents, lease 3 patents, and have
exclusive right to use another 11 patents for free. We believe that these 17
patents give us competitive advantages in our product quality.
22
ZL01121762.0
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
ZL01131761.2
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
ZL01131763.9
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
3
patents subject to exclusive lease:
|
||
ZL02114508.3
|
Effective
date from Feb. 9th, 2002 to Feb. 8th, 2022
|
|
ZL02114507.5
|
Effective
date from Feb. 9th, 2002 to Feb. 8th, 2022
|
|
ZL02114510.5
|
Effective
date from Feb. 9th, 2002 to Feb. 8th,
2022
|
11
patents licensed exclusively on a royalty free basis:
|
||
ZL200410025960.x
|
Effective
date from Mar. 17th, 2004 to Mar. 16th, 2024
|
|
ZL200420041668.2
|
Effective
date from Mar. 17th, 2004 to Mar. 16th, 2014
|
|
ZL03241926.0
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL03241927.9
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL03241928.7
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL02261996.8
|
Effective
date from July 29th, 2002 to July 28th, 2012
|
|
ZL03262604.5
|
Effective
date from Aug. 11th, 2003 to Aug. 10th, 2013
|
|
ZL200420086143.0
|
Effective
date from Nov. 4th, 2004 to Nov. 3rd, 2014
|
|
ZL200420042256.0
|
Effective
date from July 27th, 2004, to July 26th,
2014
|
We sell
our products under the “Hanxin” brand to customers through sales agents.
All of our sales are to distributors in China, some of whom resell the products
or reprocess the products and sell their products overseas. Our products
are currently being exported to India, the United States, Japan, and Germany by
those unrelated national distributors and agents. Our objective is to
utilize our technology and cost advantages of being based in China in order
to become a leading cork product developer and manufacturer. We intend to
continue to develop new products, expand the market for cork floorboard,
wallboard and other products globally, and increase our sales revenue. In order
to achieve our objectives, we intend to, among other things, increase our sales
and marketing efforts, enhance production capacity, ensure our raw material
incoming source, acquire other cork manufacturing factories and other cork
exporting companies in China, continue expanding domestic market by establishing
sales network in China, export our cork products to overseas countries by our
own sales network, and establish our own cork plantation in China. Provided that
our expansion plans above mentioned can succeed, we expect that our production
capacity will increase substantially. There is no assurance that we will be able
to achieve these objectives.
23
Cork
Material and Cork Products
Cork
material is a green material, a subset of generic cork tissue that is harvested
for commercial use primarily from the cork oak tree. Cork is composed of Suberin
(please see below the compound structure of cork), hydrophobic substance, and
because of its impermeability, buoyancy, elasticity, and fire resistance, it is
used in a variety of products.
Compound
Structure of Cork
Source:
Universita' Cattolica, Italy
Honeycomb
structure of cork
Cork's
extraordinary properties derive from its distinctive cellular structure. A one
inch cube of natural cork contains more than 200 million tiny air-filled
pockets. Some 50% of cork is captive air, which results in excellent buoyancy,
compressibility, elasticity, a high degree of imperviousness to both air and
water penetration and low thermal conductivity. The following table shows the
physical properties, constitutive monomers and average content of the main
cork components:
24
Component
|
Properties
|
Monomers
|
Average
content
|
|||||
Suberin
|
Resilience
Impermeability
|
Fatty
acids
Alcohols
|
45 | % | ||||
Lignin
|
Resistance
to compression
|
Aromatic
alcohols
|
27 | % | ||||
Poly-saccharides
|
Resistance
to elongation
|
Monosaccharides
|
12 | % | ||||
Tannins
|
Ellagic
acid
Proanthocyanidins
|
6 | % | |||||
Waxes
|
Impermeability
|
Phenols
Fatty
acids
|
7 | % |
Source:
Universita' Cattolica, Italy
Due to
the special structure and constitution, cork is noted for the following
properties:
·
Environmentally
friendly – cork barks are harvested with no harmful chemicals used in the
harvesting process. Moreover, the cork production process uses no water, emits
no CO 2 or other gases, and produces no waste materials that cannot be
recycled. As a result, the cork products can be widely used even in
food-related industry, ranging from wine stoppers to the medium for growing
mushrooms.
·
No toxic
evaporation - Cork floor planks contains only 6 milligram formaldehyde every 100
gram, lower than the Chinese national standard of 9 milligram.
·
Durability
–Cork has a high friction coefficient. As a result, cork products have
outstanding durability and can be used for many years when properly
maintained.
·
Lightness and
Low Density – The cellular structure of cork makes it very lightweight,
resulting in cork's celebrated buoyancy.
·
Impermeability
– Cork is impermeable to both liquids and gases, giving it superior sealing
capabilities.
·
Elasticity –
Cork is pliable and rebounds well to original size and shape
·
Low
conductivity – Cork has one of the best insulating values of any natural
material, with very low conductivity of heat, sound or vibrations. This enables
cork to reduce heating and cooling costs and makes cork a good sound-proof
material for construction and decoration.
·
Fire
resistance – Cork has a high tolerance to heat.
·
Anti-moth – Cork
floor is fully resistant to damage by moths
The
distinct appearance of cork facilitates its use for decorating purposes, from
floor and wall tiles to wallpaper to decorative specialty uses. Cork’s
resilience helps cork products recover from compression or puncture. Longevity
under heavy usage is a cork trademark. With many special properties, cork
building material can be used to practical and aesthetic effect in diverse
environments, including retail stores, restaurants, offices, hotel rooms and
lobbies, clinics, resorts, universities, public buildings, houses of worship,
and many more public and private environments.
25
We produce
the following cork products:
•
Cork Granule: Cork granule
comes in varies sizes and is the early stage of cork material processing.
Granules of cork can also be mixed into concrete by natural resin glue
which is also environmental friendly. The composites made by mixing cork
granules and cement have low thermal conductivity, low density and good energy
absorption.
•
Cork Sheet and Roll: Cork
board and sheet/roll are of different thickness according to their usage, which
need advanced processing techniques and manufacturing requirements.
Production of cork sheet and cork roll cost more raw bark materials than that of
other base materials. Customers process them into cork art crafts and into
underlayment for wood floors, notepads and similar products.
•
Glue-down Floor: Glue-down
cork floor is made of two layers of cork and can be glued down to the flat
ground when being installed. The special features of cork material have enabled
it to be an ideal flooring material. With its elasticity, cork is a natural
floor cushion, being soft, comfortable and less tiring to walk on.
Cork flooring maintains warmth and is used for sound proofing.
Unlike other materials, it resists appearing “worn out”. Cork flooring can also
be crafted into many different designs and patterns, many of which are difficult
to achieve using other raw materials. We currently produce several series of
glue-down cork floor with different designs, colors and granules. This product
is of comparatively high profit margin and is currently our major
product.
• Floating Floor: Floating cork
floor is the high-end cork floor board. The tiles can interlock with each other
and are therefore fast and convenient to install. Different from glue-down floor
which is usually made of two layers which are both made completely by cork,
floating cork floor tiles consist of three layers. The surface layer is made of
about three millimeter thick cork with well designed pattern and color; the
middle layer made of about seven millimeter thick high density fiberboard, and
the under layer is made of about one millimeter thick cork sheet. Besides being
convenient and environmentally friendly to install, the thickness provides for
better comfort and a more luxurious feeling. This product produces the highest
profit margin among all our products f and we are gradually moving our focus
from sheet and roll to the production and sale of floating cork
floor.
The
specifications of cork floors we produce are listed below
Data
|
National
Standard
|
|||
Formaldehyde
emission
|
E=7
|
E≤9
|
||
Collision
sound
|
14-16dB
|
No
requirement on collision sound for normal
floorboard/wallboard
|
||
Heat
transmission coefficient
|
0.06mk
|
No
requirement on Heat transmission coefficient for normal
floorboard/wallboard*
|
||
Anti
static electricity
|
2.2kv
|
No
requirement on static electricity resistance for normal
floorboard/wallboard
|
||
Abrasion
resistance
|
5000
wear cycles
|
4000
wear cycles
|
||
Fire
resistant coefficient
|
22.2
|
No
requirement on fire resistance for normal
floorboard/wallboard
|
||
Fire
resistance rating
|
Level
B two
|
Divided
into 4 levels according to National Standard GB8624-1997
**
|
||
Chemical
resistance
|
Can
resist muriatic acid for one hour
|
No
requirement on chemical resistance for normal
floorboard/wallboard***
|
Source:
Tested by Han Xin Quality Control Department.
(Hanxin
Quality Control Department is an internal department of Hanxin)
*The
construction and decoration materials industry in China usually regards
materials with the heat transmission coefficient of 0.06 W/(m•K) as heat
insulating material, while materials with the heat transmission coefficient that
is equal to or less than 0.05 W/(m•K) as high-efficiency heat insulating
material, although there are no official standards to classify heat insulation
materials. The heat transmission coefficient of normal wood floorboard is
ranging from 0.070 to 0.233W/(m•K).
**National
Standard GB8624-1997 is the fire resistance rating system for general
construction materials. Construction materials are categorized into 4 levels as
follows:
A Non-flammable
B1 Flame
retardant
B2 Flammable
B3 Highly
flammable
***According
to ISO3810-1987, the international standard on cork floor, cork floor should be
able to resist muriatic acid for half an hour.
26
Our
quality control is done internally through Hanxin. Tests for quality control
systems are done for every batch of finished products. Only when test results of
the products meets the standards can those products be sold. These standards are
established by Hanxin, and are also applied by several other domestic cork
producers. All test standards are much higher than those of the national
standards for artificial boards. Based on these high standards, we believe the
quality of our products is superior in the industry.
27
•
Cork Wallboard: Wallboard is a
high-end decorative material. All of the wallboard products utilize
Hanxin’s special staining technology to create different colors. We produce 16
types of cork wallboard with different patterns. Besides giving a beautiful and
luxurious impression for the decorative use, cork wallboard also possesses
soundproof qualities, making it especially suitable for rooms and
structures that demand quiet.
•
Basic Board : Basic cork
board is similar as glue-down cork floor except that it has not been covered by
a UV membrane. Basic board can therefore be tailored to different uses
according to a customer’s specific needs, such as the underlayment for wood
floor or soundproof material.
28
As
of December 31, 2009, the sales percentage based on categories of
products for 2009 is as follows:
29
The sales
percentages based on categories of products in 2008 are as
follows:
Production
Procedures, Facilities, & Capacity
According
to the special characteristic of cork material produced in China, we have
designed a tailored production process and specified the operating requirements
in each step, which ensures the quality of our products and becomes our key
competitive edge. The basic manufacturing procedure is as follows:
From 2002
until 2008, we built five workshops in sequence on over 80 thousand square
meters of leased lands which are all located in the vicinity of Xi’an, Shaanxi
Province. All of the production procedures are performed in these workshops.
Workshop number one to number three were all established and started operation
before August 2003. The fourth workshop was built in June 2005 and started
operation in September 2005.
30
We have
two production lines installed in the first four workshops. One line is for the
production of floor plank and wallboard, the annual production of which is
approximately 300,000 square meters. The other line is for production of
cork sheets and semi-finished products, such as rolls of cork, the annual
production of which is approximately 60,000 boxes. Due to the unique
non-standard production procedures for our product, each production line
involves several workshops. The major function and output of the four workshops
are shown as the following:
No.
|
Functions
|
No. of
workers
|
Major product
|
Output (per shift, 2~3 shifts
every day)
|
||||
1
|
Cutting,
grinding, seasoning, film pressing, slicing, heated compounding, coating,
waxing, etc.
|
80~90
|
Cork
granule, sheet/role, wall boards
|
100
boxes
500
m 2 wall board
|
||||
2
|
Cutting,
grinding, film pressing, slicing, polishing, etc.
|
70~80
|
Cork
sheet/roll
|
100
boxes
|
||||
3
|
Inspection,
packaging, warehousing
|
Around
30
|
Not
applicable
|
Not
applicable
|
||||
4
|
|
Heated
pressing and compounding, edging, coating, inspection
|
|
70~80
|
|
Cork
floor boards
|
|
>300
m
2
|
The fifth
workshop has about 6,000 square meters of capacity. Construction commenced
in the third quarter 2007 and completed in September 2008. We planned to
establish a third production line to produce high-end cork floor planks in the
fifth workshop. We started to install production equipment in the fifth workshop
in October 2008. We expect that, upon fund availability, the
new facility will utilize the Company’s advanced patented technologies to
primarily produce floating cork floorboards of around 300,000 square
meters. However, due to the adverse market conditions we stopped
purchasing new production facilities for the fifth workshop after the completion
of part of the production line at the end of 2008. We have not determined when
the additional production lines will be completed. At present the fifth workshop
is used for part of the production procedure of the new high-end products and
for the warehouse of our final products.
Until
September 20, 2010, we hade an option to acquire Sichuan Hanxin Cork
Merchandises Co, Ltd. (“Sichuan Hanxin”), one of the major cork raw material
providers located in Sichuan Province China and our major supplier. On
September 20, 2009, we entered into an agreement (“Agreement”) with the two
shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The Agreement grants
us an option to acquire 100% of the shares of Sichuan Hanxin by September 20,
2010. The acquisition price would have been between 120%~150% of the net asset
value as shown in the audited financial statements as of December 31, 2009 of
Sichuan Hanxin as determined by an audit firm we designate. Since the
Company did not obtain financing and the closing conditions were not satisfied
as of September 20, 2010, the acquisition agreement terminated. Sichuan
Janxian agreed with us to apply the acquisition deposit of RMB9.3 million
(equivalent to $1,371,390) to the amounts owed by us for the purchase of cork
floor products from Sichuan Hanxin in 2010. We still intend to purchase
Sichuan Hanxin but there can be no assurance that the parties can agree upon
terms for such acquisition or that we will have sufficient capital to consummate
such acquisition.
In
order to intend to expand our production capacity and lower our production
costs, we signed a cooperation agreement with Sichuan Hanxin for the production
of cork floor boards on October 15, 2009. Sichuan Hanxin and we are cooperating
to build another production line for manufacturing the cork floor planks at
their location in Sichuan province. According to the Cork Floor Production
Cooperation Agreement, we provided a set of production equipment and Sichuan
Hanxin agreed to provide the workshop and supplementary equipment. We agreed to
prepay for raw materials and provide secondary raw materials to Sichuan Hanxin.
Nevertheless, Sichuan Hanxin shall be responsible for the production of cork
floor products according to our quality specifications and standards.. According
to the agreement, we have the exclusive right to sell the cork floor products
produced by this production line. This new cork floor production line is
expected to commence operation in 2011, with an annual production capacity of
approximately 200,000 square meters of products. Accordingly, we will be able to
increase our total annual output to 500,000 square meters. Producing the
finished product at Sichuan Hanxin allows us to produce product at a lower cost,
as we save the higher transportation costs associated with transporting raw
material as compared to finished product. Sichuan Hanxin also has existing
buildings with the capacity to house additional production
lines.
As of
September 30, 2010, we were operating at 98% of our maximum production
capacity. Our own production capacity cannot meet expanding market demand.
We are negotiating with several other mid-sized cork product manufacturers to be
original equipment manufacturer (“OEM”) and receive our support of technology
and standards. We have not yet entered into any OEM contracts, but expect
to develop long-term OEM cooperation with several manufacturers in the near
future to enlarge our production output in a more stable manner while saving the
cost of building new production facilities.
31
Raw
Materials
Cork is
the outer bark of a cork oak tree. During a harvest, the outer bark of a cork
oak’s trunk and major branches is carefully stripped by hand – no mechanical
stripping devices are allowed. Experienced cork strippers use a specialized cork
axe to slit the outer bark and peel it away from the tree. The cork bark is then
sorted by quality and thickness. The remaining cork (called “blocker waste,"
although it is perfectly good material!) is then ground up and processed to be
used in the production of agglomerated cork and cork & rubber compounds.
These materials are used in a variety of applications from construction and
gaskets and friction plates to sound proof materials.
A cork
tree regenerates its precious outer layer 9 or 10 times during its 150~200-year
lifetime. The first stripping of the cork bark occurs when the tree is between
15 years of age, with subsequent yields at 9 to 10 year intervals. Because of
the limited time of harvesting the cork tree during its life circle, access to
abundant natural resources of cork forest is a very important aspect of our
business. At present, the supply and price of raw materials have been stable.
There are
only two species of cork oak tree which can produce barks that are suitable for
manufacture of cork building materials, Quarks Suber and Quarks Variabilis.
Quarks Suber belongs to evergreen arbor tree, and is native to the western
Mediterranean area. On average, ten hectare Quarks Suber can shed cork about 150
kilograms every ten years, while high-quality Portugal Quarks Suber can produce
200 – 250, or even 500 kilograms every hectare. With its vast reservation of
over 700 thousand hectare, Portugal is the largest source of cork
products. The following graph shows the world distribution of Quarks Suber in
2006 .
Country
|
Forest Area Hectares
|
% of Worlds Forest Area
|
Production
Tons (000)
|
% of Total
Production
|
||||||||||||
Portugal
|
736,000 | 32 | % | 157 | 52 | % | ||||||||||
Spain
|
506,000 | 22 | % | 88 | 30 | % | ||||||||||
Algeria
|
414,000 | 18 | % | 17 | 6 | % | ||||||||||
Morocco
|
345,000 | 15 | % | 11 | 4 | % | ||||||||||
France
|
92,000 | 4 | % | 3 | 1 | % | ||||||||||
Tunisia
|
92,000 | 4 | % | 8 | 3 | % | ||||||||||
Italy
|
92,000 | 4 | % | 15 | 5 | % | ||||||||||
TOTAL
|
2,277,000 | 100 | % | 340 | 100 | % |
Source:
The Natural Cork Quality Council, US
Quarks
Variabilis is a kind of wide-leaved deciduous tree that mainly grows in China.
The wild forest area is about 1.2 million hectares. The most important growing
area is Shaanxi Province, especially the Qin Ba Mountain area whose reservation
occupies over 65% of the wild forest in China. Different from Quarks Suber, the
cork from Quarks Variabilis is completely wild grown, while trees of Quarks
Suber in Portugal are mainly grown on plantations.
32
Raw
material, namely bark of Quarks Variablilis is an important aspect of our
business. We have abundant access to the cork raw materials. We purchase
all raw materials, including bark, glue, PVC membrane, paint and other materials
from over 10 suppliers. None of the suppliers individually provide more than 15%
of our total purchase of raw materials. Three suppliers accounting for
approximately 40% of our supply of raw materials in 2008 and 2009 and we have
purchased product from each of our largest bark suppliers for more than three
years. We usually enter into one year purchase agreements with our
suppliers. We believe we have good relationships with our suppliers, and the raw
materials supply stays comparatively stable except for normal price
fluctuations. Commencing in the 4th quarter
of 2010, the market prices of raw materials and secondary materials began to
increase. It is estimated that raw materials have increased by 15% and parts of
the secondary raw materials (such as resin glue) have increased by over 20%. In
December 2010, the purchase agreements for raw materials were renewed with the
suppliers with the new market prices and as a result, the gross profit margin
will be affected. In anticipation of the increase in prices, the Company
purchased large amounts of raw materials which the Company believes will be
sufficient for approximately six months. The effect of the increase in prices of
raw materials shall have a greater impact during the second half of 2011. To
deal with this situation, the Company may increase its products’ sales prices in
2011 relative to the actual increase of raw materials and secondary raw
materials prices.
All our
workshops are located in Shaanxi PRC which accounts for more than 65% of total
bark production in PRC. Besides purchasing the barks from wild Quarks
Variablilis, we may also acquire lands to establish our own plantation for high
quality cork oak trees.
Our
major supplier, Sichuan Hanxin, obtained a three-year exclusive right
(from 2009 to 2011) from Mian Yang City Forestry Administration which is one of
the government bureaus in Mian Yang City Sichuan province to collect,
purchase, transport and process the cork bark raw material in four counties in
MianYang City. Sichuan Hanxin has the exclusive right to purchase cork
bark from designated areas each year in order to conserve the supply of cork and
allow the tress in harvested areas to regrow their bark. The MianYang Municipal
government passed a regulation on April 22, 2009 to protect the right of Sichuan
Hanxin, which gives Sichuan Hanxin an advantage in the development of its
business.
Pursuant
to our agreement with Shaanxi Shuta dated October 20, 2009, we agreed to
purchase from Shaanxi Shuta a land use right of 7,000 Mu (equal to 4,669,000
square meters) located in Baoji District, Shaanxi province. We plan to develop
our own cork forest on the land, which will help assure our raw material supply
at a lower cost. Shuta incurred RMB10,000,000 (equivalent to $1,474,
613) expenses in the process of the acquisition. The agreement
provides that in the event that we do not purchase the land by October 20, 2011,
we will be liable to pay RMB10,000,000 to Shuta as reimbursement for the
acquisition expenses. The parties anticipate that should we not purchase the
land by October 20, 2011, Shuta will not repay the RMB10 million loan
pursuant to Loan Agreement dated October 28, 2009 and the parties will have no
further obligation to each other regarding the loan or the land
purchase.
Our
Marketing Strategy
We sell
our products in China through sales agents, retail sellers, and our own sales
employees. The overseas markets primarily are approached through unrelated
overseas distributors and agents.
Domestic
market
Sales
Agents
ð
|
Strategic Cooperation Agreement
with Shaanxi Shuta
|
Shaanxi
Shuta is one of the largest wholesale distributors of cork floor boards and wall
boards in China. As of December 31, 2009, Shaanxi Shuta had over 10 wholesale
stores and four showrooms.
According
to our strategic cooperation agreement,, Shaanxi Shuta shall
|
·
|
Order three types of “Shuta
Brand” cork flooring plank products to be produced by Hanxin based on the
Shuta’s specification and
|
|
·
|
Order three types of “Shuta
Brand” flooring plank semi-finished products to be processed by
Hanxin.
|
33
As to the
“Shuta Brand” cork plank products, Shaanxi Shuta has the exclusive right to
distribute these products produced by Hanxin.
ð
|
Other Sales
Agents
|
In
addition to Shaanxi Shuta, we have distribution contracts with several other
companies to distribute our flooring plank and other products. In January 2009,
we entered into Distribution Agreements with Shanghai Yuanrui Limited., Suzhou
Juwang Ltd., Hangzhou Zhongheng Ltd. and Shanghai Tangyi Ltd. These
companies mainly distribute glue-down flooring planks and floating flooring
planks. We provide product warranties.
We
plan to increase the number of our distributors and enhance support for our
distributors by providing more high-quality and delicately designed samples, and
increasing our efforts in advertising our brand name and educating
consumers.
Our
Sales Team
We also
distribute products through our own sales team and established sales network of
regional distributors. Xi’An is the headquarters for our sales force,
with sales representatives in Beijing, Shanghai and Guangzhou. We plan to hire
more contracted sales representatives in two major cities: Jinan and Shenyang,
within the central and northeast regions of China to attempt to increase our
market reach. Besides our contracted sales representatives within the central
and northeast regions of China, we also have long term relationships with
over 50 independent sellers in many regions of China. We also seek to expand our
existing sales channel for semi-finished products and other cork products such
as decoration products, cork office equipment and cork art crafts. We
focus on educating the consumer about cork products through media
advertisement. We also may establish our own sales network
through a franchise store in China, in order to enhance the sales of
our end-products including cork floor and cork wall board.
International
market
Our
products have been sold internationally though unrelated national distributors
and agents. Our products are currently being exported to India, the United
States, Japan, and Germany by those unrelated national distributors and agents.
Commencing in May 2007, we began selling our products to overseas clients
directly through unrelated national distributors and agents. In 2011, we expect
to start our own oversea export sales network to Asian and North American
markets.
The
export destinations and percentage of our exports in 2009 were approximately as
follows:
Our
strategic plan is to aggressively explore foreign markets in the next several
years. We have established relationships with two building and decorative
material dealers in New Jersey. We do not have written agreements with
these distributors. As the construction industry recovers from the financial
crisis, and because foreign retailers actively search for suppliers with quality
products and lower prices, we intend to more directly penetrate foreign markets
and gradually establish our brand name worldwide.
34
As of
December 31, 2009, none of our customers accounted for more than 10% of our
sales.
Market
Opportunities and Competition
Market
Opportunities
As an
environmentally-friendly construction material, cork has an increased demand for
building and home improvement purposes from China’s rapidly-growing middle-class
population. Even though cork is priced at a 10-15% premium over hardwood
floorboards, significant market demand exists for the obvious advantages
mentioned above that only cork flooring possesses.
According
to National Bureau of Statistics of China, in 2009, the total sales of
commercial residential building were 937,130,000m2, with increase of 42.1%
compared to 2008. The decoration industry in China has also grown in recent
years. From the data of The First China Economic Census, released by National
Bureau of Statistics of China, in 2008, the total output of construction
decoration and installation industry was around RMB 1 trillion, while in 2 0 04,
this number was RMB430 billion, the annual compound growth rate was 23.5%.
Although the global financial shocks commencing in 2008 has had some negative
effect to the industry in China, based on the sharp rebound in 2009 we believe
that significant market opportunities exist. The above data is from
construction and decoration industry annual statistical reports released by
National Bureau of Statistics of China.
Chinese
consumers are gradually adopting a more proactive environmental stance.
According to the director of Interior Environment Supervision Center of China
Interior Decoration Association, over 50% of consumers express concerns over
environmental safety issue regarding interior decoration materials. Also, more
consumers are concerned about the environmental impact of the production
procedures for decoration materials. This growing concerns from consumers
creates great opportunity for cork decoration products, the harvesting and
manufacture process of which is much more environmental protective than that of
wooden and other compound floorings, as only the bark is harvested once every
nine years, leaving the forest undamaged.
In the
international market, cork building and decoration materials have been widely
recognized as environmentally friendly high-end products. Yet because of the
rareness of raw materials and the very limited output of cork floors and
wallboards compared to ordinary wood floors, cork decoration materials are not
yet fully advertised to and used by end users. We believe there is a much larger
potential market in the developed countries as a result of environmental
concerns from consumers in these countries who are more educated and informed.
In addition, the price of cork floors in these countries is similar to prices
for high quality wood floors and ceramic tiles.
We also
believe we will benefit should the recent financial shock incentivize more
distributors and retailers to search for less expensive supplies with
outstanding quality. We are able to offer products that can compete with
European products in quality and fashion design at only half to 2/3 of their
wholesale prices. We believe this will be a competitive
advantage.
Competition
International
Competition
The cork
industry is originated from Portugal, where the largest cork enterprises such as
Amorim are located. The cork industry has a long history in Portugal as
the country has the best Mediterranean climate for oak trees to produce high
quality bark. According to information from these large companies, their major
product is cork stopper used for wine bottles, which usually accounts for one
third of their total sales and even higher percentage of profit.
The
Portugal cork enterprises usually have their own cork oak plantations where cork
oak are grown and thinned by specialized personnel. As a result, the production
of cork from these plantations is quite limited and the market volume is heavily
dependent on the actual output capacity of these large companies. Spain is
also a significant producer of cork.
35
Domestic
Competition
While our
competition for international sales is primarily from Portuguese manufacturers,
our competitors within China are other local mid-sized cork manufacturers. These
companies’ major products are semi-finished cork boards, sheets and roles.
Compared to the competitors, Hanxin’s excels in its technology, experience, as
well as product quality and design. Hanxin’s patented technologies cannot be
easily circumvented for Chinese manufacturers to produce high quality cork floor
and wallboard, which form a high entry barrier for most of their competitors to
compete with Hanxin in the high-end cork floor and wallboard market. Thus the
competition between domestic cork manufacturers has not fully
developed.
We intend
to continue to focus our production from our semi-finished products to
higher-margin end products, where there is less domestic
competition.
Our
competitive strengths include the following:
|
·
|
Access to
abundant raw material
resources
|
There are
about 2.3million hectares of Quarks Suber cork forest worldwide; 32% in
Portugal, and 22% in Spain. However, in terms of production, China trailed
Portugal with an annual production of approximately 100,000 tons of Chinese cork
oak (Quarks Variabilis), which is abundant in the Shaanxi, Gansu, Henan, Hubei
and Sichuan provinces. The raw materials supply to Hanxin is stable and of much
lower price compared to that of European raw materials.
|
·
|
Experienced
Management Team
|
Our
senior management team has extensive business and industry experience in
cultivating and monitoring forests of oak cork trees, developing technologies in
the production of cork products, and marketing of cork products both in China
and overseas market.
|
·
|
Strategic
Alliance with Top Research
Institutions
|
We have
been striving to improve the quality of its products through research and
development (R&D) collaboration with educational institutions such as the
Northwest Sci-Tech University of Agriculture & Forestry. Senior professors
from this institution serve as technical consultants to equip us with the latest
technical advancements. In recent years, Hanxin has reduced research and
development efforts. Hanxin intends to strengthen its research and
development to develop new products should the sales improve.
Quality Control
We place
great emphasis on the quality of Hanxin’s products and quality control system.
In particular:
|
·
|
In March, 2005, Hanxin cork floor
was approved by State plywood Quality Supervision and Test Center for
formaldehyde emission, TS water immersion testing. (Certification
No. Floor
2005-65/66/6768)
|
|
·
|
In March, 2005, Hanxin cork
wallboard was approved by State plywood Quality Supervision and Test
Center for formaldehyde emission testing. (Certification No. Floor
2005-64)
|
|
·
|
In February 2005, Hanxin
cork floor passed material sound absorption testing by Acoustics Research
Center from Tong Ji
University
|
|
·
|
In October. 2003, Hanxin cork
floor was approved by Xi’an Institute of Supervision & Testing on
Product Quality in standard testing of GB18580, GB/T18102-2000,
GB/T18103-2000 with Certification
NO.G0300708.
|
|
·
|
In Nov. 2003, Hanxin cork
wallboard was approved by Xi’an Institute of Supervision & Testing on
Product Quality in standard testing of Q/HX01-2001 with Certification
NO.G0300742.
|
|
·
|
In October 2001, Hanxin’s
products and standards were certified by the Xi’an Quality Technology
Supervision Bureau, the governmental agency responsible for the inspection
of commodities being imported and exported to and from
China
|
36
Currently,
our ISO9000: 2000 and ISO14001 certifications are pending.
Intellectual
Property
We have
the right to use 17 patents regarding cork processing technologies. We own 3
patents, lease 3 patents from Mr. Fangshe Zhang, our Chairman and a
principal shareholder, and also have an exclusive right to use another 11
patents of Mr. Zhang without payment of any royalties. When our royalty
payments with respect to the three patents end in 2011, we will receive an
exclusive right to use these patents leased without payment of any
royalties. See “Certain Relationships and Related
Transactions.”
3
patents owned:
|
||
ZL01121762.0
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
ZL01131761.2
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
ZL01131763.9
|
Effective
date from Oct. 24th, 2001 to Oct. 23th, 2021
|
|
3
patents leased:
|
||
ZL02114508.3
|
Effective
date from Feb. 9th, 2002 to Feb. 8th, 2022
|
|
ZL02114507.5
|
Effective
date from Feb. 9th, 2002 to Feb. 8th, 2022
|
|
ZL02114510.5
|
Effective
date from Feb. 9th, 2002 to Feb. 8th, 2022
|
|
11
patents used for free:
|
||
ZL200410025960.x
|
Effective
date from Mar. 17th, 2004 to Mar. 16th, 2024
|
|
ZL200420041668.2
|
Effective
date from Mar. 17th, 2004 to Mar. 16th, 2014
|
|
ZL03241926.0
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL03241927.9
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL03241928.7
|
Effective
date from Jun. 19th, 2003 to Jun. 18th, 2013
|
|
ZL02261996.8
|
Effective
date from July 29th, 2002 to July 28th, 2012
|
|
ZL03262604.5
|
Effective
date from Aug. 11th, 2003 to Aug. 10th, 2013
|
|
ZL200420086143.0
|
Effective
date from Nov. 4th, 2004 to Nov. 3rd, 2014
|
|
ZL200420042256.0
|
Effective
date from July 27th, 2004, to July 26th,
2014
|
37
PRC
Government Regulations
Environmental
Regulations
The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution.
We do not
believe that the costs and effects of compliance with applicable environmental
laws are applicable to our business. Potential liability in connection
with environmental regulation arises from the possibility that pollution will be
caused by the dust generated when cork barks are ground into fine granules,
which is typical for the artificial board industry. This problem is
usually solved by installing dust removing facilities. We believe that
Hanxin has installed sufficient dust removing systems in its workshops and has
been effectively controlling its dust emission. The dust removing systems
have been designed by the Company. The cost for installing these
facilities is part of the cost for establishing the production lines.
Although such dust removing systems consume additional electricity, the
additional utility expense increased is minimal compared to the total production
expenses. We believe that we face no other issues regarding compliance
with environmental laws as our production procedure (1) consumes no water and
thus produces no waste water and (2) generates no solid waste as all cork is
sold as the raw material foe feed or fertilizer.
We have
not been named as a defendant in any legal proceedings alleging violation of
environmental laws. We have no reasonable basis to believe that there is any
threatened claim, action or legal proceedings against us that would have a
material adverse effect on our business, financial condition or results of
operations due to any non-compliance with environmental laws.
Patent
Protection in China
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets. The PRC is also a
signatory to most of the world’s major intellectual property conventions,
including:
|
·
|
Convention establishing the World
Intellectual Property Organization (WIPO Convention) (June 4,
1980);
|
|
·
|
Paris Convention for the
Protection of Industrial Property (March 19,
1985);
|
|
·
|
Patent Cooperation Treaty
(January 1, 1994);
and
|
|
·
|
The Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs) (November 11,
2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents, i.e., patents for inventions, utility
models and designs respectively. The Chinese patent system adopts the principle
of first to file. This means that, where more than one person files a patent
application for the same invention, a patent can only be granted to the person
who first filed the application. Consistent with international practice, the PRC
only allows the patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical applicability. For a
design to be patentable, it should not be identical with or similar to any
design which, before the date of filing, has been publicly disclosed in
publications in the country or abroad or has been publicly used in the country,
and should not be in conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in a people’s court.
38
PRC
law defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount ranging from one to three times of the license fee under a contractual
license. The infringing party may be also fined by the Administration of Patent
Management in an amount of up to three times the unlawful income earned by such
infringing party. If there is no unlawful income so earned, the infringing party
may be fined in an amount of up to RMB 500,000, or approximately
$73,195.
Tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a portion
of or a full refund of the VAT that it has already paid or borne. Our imported
raw materials that are used for manufacturing export products and are deposited
in bonded warehouses are exempt from import VAT.
Foreign
Currency Exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.
Dividend
Distributions
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Employees
As of
September 30, 2010, we had 270 employees, and believe our relationship with our
employees is good. All of our employees are based in China. There are no
collective bargaining contracts covering any of our employees and we believe
that we have good relations with our employees.
Properties
Hanxin
owns one property in Xi’An of approximately 10,360.3 square meters.. However, in
2007, we renovated the space and built an additional student dormitory. The
construction was completed in June 2008. The YuLerYuan Resort,
including the new student dormitory, was leased for $21,976 (equivalent to
RMB150,000) per month to the university nearby at YuLerYuan and this agreement
was extended to February 28, 2011.
Hanxin
also leases office space of about 436 square meters in Xi’an for approximately
$2,396 (equivalent to RMB16,352 included rent maintenance fee and
cleaning fee) per month. The lease for this office space expires on
December 31, 2008, and has been renewed for one more year until
December 31, 2010.
Hanxin
also leases the right to use four parcels of land which are all used as our cork
processing plant. One parcel is approximately 53,120 square meters. The
lease fee for this processing plant is about $1,465 (equivalent to RMB10,000)
per month, and the lease has been extended to October 2047.
39
The
second parcel of land is approximately 26,666 square meters. The lease fee for
this land use right is about $11,753 (equivalent to RMB80,000) per month, and
lease term will be expired on December 31, 2010. The landlord from this property
had forgiven us approximately $152,793 (equivalent to RMB1,040,000) rent for
years 2009 and 2008 international economic crisis, and we had equally allocated
this forgiveness to all lease periods.
The
third parcel of land is approximately 3,333 square meters. The lease fee for
this land use right is about $1,469 (equivalent to RMB10,000) per month, and the
lease term also will be expired on December 31, 2010. The landlord from this
property also had forgiven us approximately $22,037 (equivalent to RMB150,000)
rent for years 2009 and 2008 international economic crisis, and we had equally
allocated this forgiveness to all lease periods.
The
forth parcel of land is leased from Sichuan Hanxin. The lease fee for this land
is about $5,877 (equivalent to RMB40,000) per month, and the lease term is
expiring on October 2, 2011.
For the Quarter Ending
September 30,
|
Amount
|
|||
2011
|
$ | 114,048 | ||
2012
|
17,826 | |||
2013
|
17,630 | |||
2014
|
17,630 | |||
2015
|
17,630 | |||
Thereafter
|
564,157 | |||
Total
minimum rental payments required
|
$ | 748,921 |
Rent
and properties maintenance expenses amounted to $143,808 and $87,480 for the
nine months ended September 30, 2010 and 2009, respectively.
Legal
Proceedings
There are
no material pending legal proceedings to which the Company is a party or as to
which any of its property is subject, and no such proceedings are known to the
Company to be threatened or contemplated against it.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
The
following analysis of our consolidated financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, including footnotes.
This
prospectus contains forward-looking statements. The words “anticipated,”
“believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,”
“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. Consequently, all of the forward-looking statements made in
this prospectus are qualified by these cautionary statements and we cannot
assure you of the actual results or developments. We do not intend or
assume any obligation to update or revise these forward-looking statements in
light of developments which differ from those anticipated, unless as required by
law.
Overview
Business
Summary
The
Company, through its subsidiaries, engages in developing, manufacturing and
distribution of cork wood floor, wall and decorating products. The cork
industry is generally regarded as environmentally friendly. The sustainability
of production and the easy recycling of cork products and by –products are two
of its most distinctive aspects. For the years ended December 31, 2009 and 2008,
we sold all our products to our clients in China, and then part of our
China clients resold our products to their overseas clients. Approximately
75% of Hanxin’s products sold in 2009 and approximately 70% in 2010 were to the
end users in China by our own sales persons and domestic distributors and
agents, with the remaining sales being made to customers overseas through our
China clients who included unrelated distributors and sales agents.
Internationally, our products have been distributed into India, the United
States of America, Germany and Japan. The sales to the distributors, the sales
agent and directly to clients have no difference as reflected in accounting
policies, as the price and the means of delivery has no material differences.
All sales revenues are recognized when reception and inspection of goods are
finished by clients. We have the right to use 17 patents developed by
Fangshe Zhang, our Chairman regarding cork processing technologies. We own 3
patents, lease 3 patents, and have exclusive right to use another 11 patents for
free. We believe that these 17 patents give us a competitive advantage in
our product quality. With the patents we own and develop, we believe that we
will be able to keep our leading status in cork production industry in
China.
40
Foreign Exchange
Considerations
Even
though we are a U.S. Company, because all of our operations are located in the
PRC, we face certain risks associated with doing business in that country. These
risks include risks associated with the ongoing transition from state business
ownership to privatization, operating in a cash-based economy, dealing with
inconsistent government policies, unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, challenges in staffing
and managing operations in a communist country, differences in technology
standards, employment laws and business practices, longer payment cycles and
problems in collecting accounts receivable, changes in currency exchange rates
and currency exchange controls. We are unable to control the vast majority of
these risks associated both with our operations and the country in which they
are located and these risks could result in a significant decline in our
revenue.
Because
revenues from our operations in the PRC accounted for 100% of our consolidated
net revenues, how we report net revenues from our PRC-based operations is of
particular importance to understanding our financial statements. Transactions
and balances originally denominated in U.S. dollars are presented in their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in
determining comprehensive net income or loss. For foreign operations with the
local currency as the functional currency, assets and liabilities are translated
from the local currencies into U.S. dollars. Translation adjustments resulting
from the process of translating the local currency financial statements into
U.S. dollars are included in determining comprehensive income or
loss.
The
functional currency of our Chinese subsidiaries is the Chinese RMB, the local
currency. The financial statements of the subsidiaries are translated into U.S.
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the period for revenues, costs, and expenses. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented. Until 1994, the RMB experienced a gradual but significant devaluation
against most major currencies, including U.S. dollars, and there was a
significant devaluation of the RMB on January 1, 1994 in connection
with the replacement of the dual exchange rate system with a unified managed
floating rate foreign exchange system. Since 1994, the value of the RMB relative
to the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. dollar. Countries, including the United States, have argued that the RMB is
artificially undervalued due to China's current monetary policies and have
pressured China to allow the RMB to float freely in world markets.
On
July 21, 2005, the PRC reported that it would have its currency pegged to a
basket of currencies rather than only tying it to a fixed exchange rate to the
dollar. The PRC also increased the value of its currency 2% higher against the
dollar, effective immediately. If any devaluation of the RMB were to occur
in the future, returns on our operations in China, which are expected to be in
the form of RMB, will be negatively affected upon conversion to the U.S. dollar.
Although we attempt to have most future payments (mainly repayments of loans and
capital contributions) denominated in U.S. dollars, if the value of the RMB
increases, our product sales in China and in other countries may be negatively
affected.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates
based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
A summary
of significant accounting policies is included in Note 3 to the consolidated
financial statements. Management believes that the application of these policies
on a consistent basis enables us to provide useful and reliable financial
information about our operating results and financial condition.
We record
property and equipment at cost. Depreciation is provided using the straight-line
method over the estimated economic lives of the assets, which are from 1 to 35
years. Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred. We review the carrying value of
long-lived assets for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value.
Our
revenues from the sale of products are recognized when reception and inspection
of goods are finished by clients. Persuasive evidence of an arrangement is
demonstrated via purchase order from customer, product delivery is evidenced by
warehouse shipping log as well as bill of lading from the trucking Company and
no product return is allowed except defective or damaged products, the sales
price to the customer is fixed upon acceptance of purchase order, there is no
separate sales rebate, discounts, and volume incentives.
41
Revenue
recognition:
The
Company's revenues from the sale of products are recognized when reception and
inspection of goods are finished by clients , the sales price to the customer is
fixed and collectability is reasonably assured. Persuasive evidence of an
arrangement is demonstrated via purchase order from distributor, our customers,
product delivery is evidenced by warehouse shipping log as well as signed bill
of lading, or shipping documents from the trucking Company and no product return
is allowed except defective or damaged products, the sales price to the customer
is fixed upon acceptance of purchase order, there is no separate sales rebate,
discounts, and volume incentives.
The
Company’s PRC subsidiaries recognize their revenues net of value-added taxes
(“VAT”). The Company’s PRC subsidiaries are subject to VAT which is levied on
the majority of their products at the rate of 17% on the invoiced value of
sales. Output VAT is borne by customers in addition to the invoiced value of
sales and input VAT is borne by the Company's PRC subsidiaries in addition to
the invoiced value of purchases.
Income
taxes
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is
exempt from income taxes.
The
Company follows the FASB issued ASC 740 - Accounting for Income Taxes, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”, (“FIN 48”), codified in FASB ASC Topic 740, on
January 1, 2007. As a result of the implementation of FIN 48, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48, and the Company recognized no
material adjustments to liabilities or stockholders’ equity. When tax returns
are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset
or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits is classified as interest expense
and penalties are classified in selling, general and administrative expenses in
the statements of income. The adoption of FIN 48 did not have a material impact
on the Company’s financial statements. At September 30, 2010 and
December 31, 2009, the Company did not take any uncertain positions that would
necessitate recording of tax related liability.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
Recently
Adopted Accounting Pronouncements
On
February 25, 2010, the FASB issued Accounting Standards Update (“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 US GAAP. The FASB
believes these amendments remove potential conflicts with the SEC’s literature.
Subsequent events have been evaluated through the date the financial statements
were issued.
42
In
January 2010, FASB amended ASC 820, " Disclosures about Fair Value
Measurements ." The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years.
The Company has determined the adoption of this ASU does not have a
material impact on its financial statements.
In
December, 2009, FASB amended " Financial Reporting by Enterprises
Involved with Variable Interest Entities." 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. The Company has
determined the adoption of this rule does not have a material impact
on its financial statements.
Results
of Operations
NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2009
For The Nine Months Ended
September 30,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
(Decrease)/ Increase
|
||||||||||||||
Revenues
|
$ | 22,436,245 | $ | 17,056,777 | $ | 5,379,468 | 31.54 | % | ||||||||
Cost
of Goods Sold
|
15,744,727 | 11,032,415 | 4,712,312 | 42.71 | % | |||||||||||
Gross
Profit
|
6,691,518 | 6,024,362 | 667,156 | 11.07 | % | |||||||||||
Gross
Profit Percentage
|
29.82 | % | 35.32 | % | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
1,205,358 | 2,470,208 | (1,264,850 | ) | -51.20 | % | ||||||||||
Bad
debt
|
220,666 | 253,104 | (32,438 | ) | -12.82 | % | ||||||||||
Research
& development costs
|
110,187 | 73,181 | 37,006 | 50.57 | % | |||||||||||
General
and administrative expense
|
493,970 | 427,381 | 66,589 | 15.58 | % | |||||||||||
Total
Operating Expenses
|
2,030,181 | 3,223,874 | (1,193,693 | ) | -37.03 | % | ||||||||||
Income
From Operations
|
4,661,337 | 2,800,488 | 1,860,849 | 66.45 | % | |||||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
(expense), net
|
(72,269 | ) | (259,117 | ) | 186,848 | -72.11 | % | |||||||||
Other
income, net
|
98,134 | 78,760 | 19,374 | 24.60 | % | |||||||||||
Total
Other Income (Expense)
|
25,865 | (180,357 | ) | 206,222 | -114.34 | % | ||||||||||
Income from
Continuing Operations Before Taxes
|
4,687,202 | 2,620,131 | 2,067,071 | 78.89 | % | |||||||||||
Income
Tax Provision
|
702,063 | 477,030 | 225,033 | 47.17 | % | |||||||||||
Net
Income Before Noncontrolling Interest
|
3,985,139 | 2,143,101 | 1,842,038 | 85.95 | % | |||||||||||
Less:
Net income attributable to the noncontrolling
interest
|
319,663 | 179,190 | 140,473 | 78.39 | % | |||||||||||
Net Income
Attributable to Asia Cork Inc.
|
$ | 3,665,476 | $ | 1,963,911 | $ | 1,701,565 | 86.64 | % |
Revenues
For
the nine months ended September 30, 2010, our revenues were $22,436,245 as
compared to $17,056,777 for the nine months ended September 30, 2009, an
increase of $5,379,468 or 31.54%. The primary reason for the increase was that
our sales of major finished goods of boards increased for the nine months ended
September 30, 2010 as compared to the same period of 2009. Moreover, we
manufactured more series of products for wood materials commencing April 2010,
which caused the quantities of wood materials to increase significantly during
the nine months ended September 30, 2010. In addition, we sold secondary raw
materials in the amount of $1,189,002 to Sichuan Hanxin during the first quarter
of 2010. No such sales were made in the first quarter of 2009.
The
following table sets forth information regarding the sales of our principal
products during the nine months ended September 30, 2010 and
2009
43
For
The Nine Months Ended September 30
|
||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010 Less 2009
|
||||||||||||||||||||||||||||||||||
Product
Name
|
Quantities
(Square
Meter)
|
Amount
|
Sale
%
|
Quantities
(Square
Meter)
|
Amount
|
Sale
%
|
Quantity
(square
meter)
|
Amount
|
Sale
%
|
|||||||||||||||||||||||||||
Wood
Materials
|
2,684,477
|
7,035,666
|
31.2
|
%
|
737,150
|
4,220,428
|
25
|
%
|
1,947,327
|
2,815,238
|
67
|
%
|
||||||||||||||||||||||||
Boards
|
230,989
|
2,448,256
|
11.1
|
%
|
113,717
|
1,024,081
|
6
|
%
|
117,272
|
1,424,175
|
139
|
%
|
||||||||||||||||||||||||
Floors
|
599,206
|
11,731,326
|
52.3
|
%
|
586,085
|
11,747,160
|
69
|
%
|
13,121
|
(15,834
|
)
|
0
|
%
|
|||||||||||||||||||||||
Secondary
raw Materials
|
-
|
1,189,002
|
5.3
|
%
|
-
|
-
|
0
|
%
|
-
|
1,189,002
|
0
|
%
|
||||||||||||||||||||||||
Others
|
-
|
31,995
|
0.1
|
%
|
-
|
65,108
|
0
|
%
|
-
|
(33,113
|
)
|
-51
|
%
|
|||||||||||||||||||||||
Total
|
3,514,672
|
22,436,245
|
100
|
%
|
1,436,952
|
17,056,777
|
100
|
%
|
2,077,720
|
5,379,468
|
32
|
%
|
The
increase in quantities per square meter, as reflected in the table, is primarily
attributable to the fact that we increased orders from our new and existing
major customer. We increased sales volume of our products from
1,436,952 for the nine months ended September 30, 2009 to 3,514,672 during the
nine months ended September 30, 2010.
The
following table sets forth information regarding the average unit sales price
per square meter of our principal products during the nine months ended
September 30, 2010 and 2009
The
decrease in average sales price per square meter, as reflected in the table, is
primarily because we sold more lower unit sales price products of wood materials
in the current period rather than a decrease in the sales price of major
products of wood materials. Despite slightly lower unitt sales price for boards
commencing October 2009, we sold more products of wood materials during the nine
months ended September 30, 2010. Therefore, the average sales price per square
meter declined significantly for the nine months ended September 30,
2010.
44
The
following table sets forth information regarding the average cost per square
meter of our principal products during the nine months ended September 30, 2010
and 2009
|
Average Cost Per Square
Meter
|
Basic Change
Per Square
|
||||||||||
Product Name
|
2010
|
2009
|
Meter
|
|||||||||
Wood
Materials
|
$
|
2.10
|
4.06
|
(1.96
|
)
|
|||||||
Boards
|
5.99
|
5.95
|
0.04
|
|||||||||
Floors
|
11.60
|
11.52
|
0.08
|
|||||||||
Overall
Average Products
|
4.48
|
7.68
|
(3.20
|
)
|
The
decrease in average cost per square meter, as reflected in the table, is
primarily because we sold more lower unit cost products of wood materials for
the nine months ended September 30, 2010 as compared to the same periods of
2009.
The
following table sets forth information regarding the sales and costs of
secondary raw materials during the nine months ended September 30, 2010 and
2009
For T
he Nine Months Ended September 30, 2010
|
||||||||||||||||||||||||
Total
Quantities
|
Sales
Amount
|
Unit
Sales
Price
|
Costs
Amount
|
Gross
Profit
|
Unit
Costs
Price
|
|||||||||||||||||||
Secondary
Raw Materials
|
567,673
|
$
|
1,189,002
|
2.09
|
$
|
1,171,147
|
$
|
17,855
|
2.06
|
Because
it is difficult to control the application amount of secondary raw materials in
the course of manufacturing cork floor product in Sichuan Hanxin, and in order
to avoid too much cash flow into the secondary raw materials, in January 2010,
the Company entered into a sales agreement with Sichuan Hanxin to sell secondary
raw materials without any profit. Additional information is disclosed in Note 4
of the Company’s financial statements.
Commencing
in the 4th quarter
of 2010, the market prices of raw materials and secondary materials began to
increase. It is estimated that raw materials have increased by 15% and parts of
the secondary raw materials (such as resin glue) have increased by over 20%. In
December 2010, the purchase agreements for raw materials were renewed with the
suppliers with the new market prices and as a result, the gross profit margin
will be affected. In anticipation of the increase in prices, the
Company purchased large amounts of raw materials which the Company believes will
be sufficient for approximately six months. The effect of the increase in prices
of raw materials shall have a greater impact during the second half of 2011. To
deal with this situation, the Company may increase its products’ sales prices in
2011 relative to the actual increase of raw materials and secondary raw
materials prices.
45
Operating
Expenses
For
the nine months ended September 30, 2010, total operating expenses were
$2,030,181 as compared to $3,223,874 for the nine months ended September 30,
2009, an decrease of $1,193,693 or 37.03%. This decrease was attributable to
a decrease in selling expenses. The decrease in selling expenses was
primary attributable to a decline in commission fees. An increase in
freight costs was also associated with our increased revenue. However the amount
of the potential increase was reduced by a change in the commission rate from
10% to 2% starting the fourth quarter of 2009. The increase in general and
administrative expenses was primarily attributable to increases in employee
salaries and professional fees for the nine months ended September 30, 2010 as
compared to the same period in 2009.
For
the nine months ended September 30, 2010, bad debt reserve amounted to $220,666
as compared to $253,104 for nine months ended September 30, 2009, a decrease of
$32,438 or 12.82%. The reason for the decrease is primarily attributable to an
increase in bad debt allowance from 0.5% to 5% of the outstanding accounts
receivable commencing as of July 2009.
For
the nine months ended September 30, 2010, research and development costs
amounted to $110,187 as compared to $73,181 for the nine months ended September
30, 2009, an increase of $37,006 or 50.57%. The reason is primarily due to the
Company engaging an unrelated party in August 2009 to develop a project focused
on cork material carbonizing in order to acquire advanced technical procedures
for future manufacturing.
Other
Income (expense)
For
the nine months ended September 30, 2010, other income net amounted to $25,865as
compared to other expense net of $180,357 for the nine months ended September
30, 2009, a increase of $206,222 or114.34%. Other income for the nine months
ended September 30, 2010 and 2009 is related to the income received from the
leasing of our Yu Ler Yuan Resort.
For
the nine months ended September 30, 2010, net interest expense was $72,269 as
compared to net interest expenses of $259,117 for nine months ended September
30, 2009, a decrease of $186,848, or 72.11%. In June 2008, the Company issued
convertible notes and common stock purchase warrants resulting in aggregate
gross proceeds of $700,000. The notes matured one year from the date of issuance
and bore interest at an annual rate of 18%, payable at maturity in USD. Since
the notes were not paid at maturity, the annual interest rate increased to 24%.
On July 6, 2010, the Company and those investors entered in to an amendment
agreement. Pursuant to the amendment agreement, the maturity date was extended
to October 31, 2010 and the interest rate under the note remained at 18% per
annum from the issuance date through the maturity date. On October
31, 2010, a second amendment agreement was entered into between the Company and
the noteholders whereby the maturity date was extended again to February 28,
2011 and the interest rate under the notes remained at 18% per annum from the
issuance date through the maturity date. Upon the closing of the
concurrent Offering, the Company shall: (1) pay the investors cash by
wire transfer in an amount equal to $350,000 (50% of the outstanding principal
amount of the notes) and (2) the investors shall receive, upon conversion of the
balance due under the note, such whole number of fully paid and non-assessable
shares of the securities that is equal to the quotient of the sum of (i)
$350,000 and (ii) all accrued a unpaid interest thereon, divided by fifty
percent of the offering price per share of Common Stock included in the
Units. In the event that the closing shall not occur by February 28,
2011, the interest rate under the note shall increase to 24% per annum, accruing
from the first anniversary of the issuance of the note. As a result, the Company
recalculated interest expense from 24% to 18% for the nine months ended
September 30, 2010, which caused the interest expense declined significantly for
the nine months ended September 30, 2010.
Income
Tax
Net
income taxes expense increased by $225,033 to $702,063 for the nine months ended
September 30, 2010 as compared to $477,030 for the nine months ended September
30, 2009. This increase was primarily due to an increase in net income before
income taxes in the first three quarters of 2010 as compared to the same period
in 2009.
46
Years Ended December 31,
2009 and 2008
Revenues
For the
year ended December 31, 2009 our revenues were $24,393,625 as compared to $21,
378,041 for the year ended December 31, 2008, an increase of $3,015,584 or
approximately 14.11%. The primary reason for the increase is
the significant improvement in the market condition for home
and commercial renovation in China and the success of our marketing efforts,
increased sales of our major finished goods (wood materials, floors, and boards)
increased as compared to the sales quantities in year 2008. For the
year ended December 31, 2009, our revenues from wood materials, boards, and
floor sales were $1,567,272, $349,730, and $1,542,369 respectively more than the
revenue from sales of those items during the year ended December 31,
2008.
The
following table sets forth information regarding the sales of our principal
products during the years ended December 31, 2009 and 2008.
For the Year Ended December 31
|
||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2009 Less 2008
|
||||||||||||||||||||||||||||||||||
Product
Name
|
Quantities
(Square
Meter)
|
Amount
|
Sale
%
|
Quantities
(Square
Meter)
|
Amount
|
Sale
%
|
Quantity
(square
meter)
|
Amount
|
Sale
%
|
|||||||||||||||||||||||||||
Wood
Materials
|
1,128,943
|
$
|
6,412,040
|
26
|
%
|
902,660
|
$
|
4,844,768
|
23
|
%
|
226,283
|
$
|
1,567,272
|
32
|
%
|
|||||||||||||||||||||
Boards
|
180,819
|
1,716,013
|
7
|
%
|
154,251
|
1,366,283
|
6
|
%
|
26,568
|
349,730
|
26
|
%
|
||||||||||||||||||||||||
Floors
|
809,238
|
16,189,786
|
66
|
%
|
735,601
|
14,647,417
|
69
|
%
|
73,637
|
1,542,369
|
11
|
%
|
||||||||||||||||||||||||
Mechanical
and Electric
|
-
|
10,666
|
0
|
%
|
-
|
438,269
|
2
|
%
|
-
|
(427,603
|
)
|
0
|
%
|
|||||||||||||||||||||||
Others
|
-
|
65,120
|
0
|
%
|
-
|
81,304
|
0
|
%
|
-
|
-16,184
|
-20
|
%
|
||||||||||||||||||||||||
Total
|
2,119,000
|
$
|
24,393,625
|
100
|
%
|
1,792,512
|
$
|
21,378,041
|
100
|
%
|
326,488
|
$
|
3,015,584
|
14
|
%
|
The
following table sets forth information regarding the average unit sales price
per square meter of our principal products during the years ended December 31,
2009 and 2008
Average Unit Sales Price
Per Square Meter
|
Basic Change
Per
Square
|
|||||||||||
Product Name
|
2009
|
2008
|
Meter
|
|||||||||
Wood
Materials
|
$
|
5.68
|
$
|
5.37
|
$
|
0.31
|
||||||
Boards
|
9.49
|
8.86
|
0.63
|
|||||||||
Floors
|
20.01
|
19.91
|
0.10
|
|||||||||
Overall
Average Products
|
11.51
|
11.93
|
(0.42
|
)
|
The
decrease in average sales price per square meter, as reflected in the table,
is primarily attributable to our selling higher quantities of lower
unit priced products of wood materials in the year ended December 31,
2009. Despite the fact that we received slightly lower unit sales price for
boards commencing from October 2009, we sold more products of wood
materials during the current periods. Therefore, the average sales price per
square meter declined for the year ended December 31, 2009 as compared to the
year ended December 31, 2008.
Cost
of Sales and Gross Profit
For the
year ended December 31, 2009, cost of sales amounted to $16,005,148 or 65.61% of
net revenues as compared to cost of sales of $13,937,361 or 65.19% of net
revenues for the year ended December 31, 2008, a percentage increase of
0.42%. The increase was primarily as a result of
slightly increase manufacturing costs which following with the increased lease
fees for the year ended December 31, 2009, compared to the
last year. Accordingly, the gross margin had been slightly reduced
0.42% in year 2009 as compared to prior year. Even though we had less gross
margin in year 2009 as compared to 2008, but we increased significant sales
revenues in year 2009 which had increased our gross profit in amount of $947,797
to $8,388,477 for the year ended December 31, 2009 as compared to $7,440,680 for
the year ended December 31, 2008.
The
following table sets forth information regarding the average cost per square
meter of our principal products during the years ended December 31, 2009 and
2008
Average Cost Per Square
Meter
|
Basic Change
Per
Square
|
|||||||||||
Product Name
|
2009
|
2008
|
Meter
|
|||||||||
Wood Materials
|
4.05
|
3.85
|
$
|
0.20
|
||||||||
Boards
|
6.07
|
5.96
|
0.11
|
|||||||||
Floors
|
11.67
|
11.62
|
0.05
|
|||||||||
Overall
Average Products
|
7.55
|
7.78
|
(0.23
|
)
|
The
decrease in average cost per square meter, as reflected in the table, is
relatively primarily attributable to the facts that we sold much more quantities
lower unit cost products of wood materials in the current year as compare to the
same periods of 2009.
Operating
Expenses
For the
year ended December 31, 2009, total operating expenses were $3,887,070 as
compared to $3,630,355 for the year ended December 31, 2008, an increase of
$256,715 or 7.07%.
47
Included
in this increase were:
For the
year ended December 31, 2009, selling expenses amounted to $2,869,612 as
compared to $2,701,225 for the year ended December 31, 2008, an increase of
$168,387 or 6.23%. For the year ended December 31, 2009, we experienced a
significant increase in freight expenses of $327,530 with our increased revenue.
In 2009 the Company had hoped to develop additional new customers, however, the
customer base did not increase as high as the Company expected. As a result, the
Company changed the commission rate from 10% to 2% in the fourth quarter of
2009. Accordingly, the increased freight expenses were offset by reduced
commission expenses for the year ended December 31, 2009.
For the
year ended December 31, 2009, bad debt expenses amounted to $245,341 as compared
to $10,539 for the year ended December 31, 2008, an increase of $234,802 or
2227.93%. The reason for the increase is primarily attributable to improved bad
debt allowance from 0.5% to 5% of the outstanding accounts receivable commencing
from July 2009.
For the
year ended December 31, 2009, general and administrative expenses were reduced
to $589,130, a decrease of $170,097 or 22.40% compared to $759,227 for the year
ended December 31, 2008. The decrease in general and administrative costs was
primarily attributable to decreased consulting fees, advisory fees and USA
capital market fund raising and public relationship advisory charges in the
current year.
For the
year ended December 31, 2009, research and development costs amounted to
$182,987. The reason is primarily due to the Company engaging an unrelated party
in August 2009 to develop a project focused on cork material carbonizing in
order to acquire advanced technical procedures for future
manufacturing.
Other
Income (Expense)
For the
year ended December 31, 2009, other expense amounted to $167,866 as
compared to other expense of $201,014 for the year ended December 31,
2008. Other (expense) income, net for the years ended December 31,
2009 and 2008 were primarily related to net rental income $130, 276 and $159,495
respectively from the leasing of our Yu Ler Yuan Resort. These rental net
incomes had been offset by the franchise taxes accrued and credited in 2009 and
2008.
For the
year ended December 31, 2009, net interest expense was $303,882 as compared
to net interest expense of $275,105 for the year ended December 31, 2008, an
increase of $28,777. This increase was primarily attributable to the Company
issuing a convertible note for certain investors in the aggregate price [a;
amount of $700,000 (approximately RMB4.8 million)] in June 2008, and which
accrued interest at a rate of 18% per year. The note was due in June
2009, however, the Company was unable to repay it. Therefore the
interest rate was increased to 24% from 18% commencing as of June 2009.
Accordingly, the Company has incurred more interest expense for the year
ended December 31, 2009, as compared to the year ended December 31,
2008.
Income
Tax
The net
income taxes increased by $95,086 to $692,539 for the year ended December 31,
20009 as compared to $597,453 for the year ended December 31, 2008 . This
increase was due to an increase in net income before income taxes in
2009, however, this amount was offset with deferred income taxes benefits
$33,308 in year 2009.
Net
Income
Our net
income during the year ended December 31, 2009 was $3,345,410 compared to
2,732,154 for the year ended December 31, 2008. Such an increase was primarily
due to our increased revenues during the year ended December 31, 2009, compared
to the same period of 2008.
Noncontrolling
Interest
For the
year ended December 31, 2009, the Company reported a noncontrolling
interest in income of subsidiary of $295,592 as compared to $279,704 for the
year ended December 31, 2008. The minority interests in income of
subsidiaries were attributable to Hanxin and Cork I&E, which we allocated to
the minority stockholders, and reduced our net income.
48
Nine Months Ended September
30, 2010 and 2009
Operating
working capital (cash and equivalents plus accounts receivable plus inventory
less accounts payable and accrued expenses) increased by $8,511,502
from $9,665,058 as of December 31, 2009 to $18,176,560 as of
September 30, 2010. The increase was primarily due to an increase in inventories
and accounts receivable in the amount of $3,360,855 and $4,335,379 during the
current year, respectively. At the same time, we had an increase in accounts
payable and accrued expenses in the amount of $771,672.
Cash
provided by operating activities was $441,775 for the nine months ended
September 30, 2010 as compared to $1,455,045 for the nine months ended September
30, 2009. The decrease in cash provided by operating activities for the nine
months ended September 30, 2010 was a result of an increase of accounts
receivable.
Investing
activities for the nine months ended September 30, 2010 was $1,297,319 of net
cash provided as compared to $708,962 of net used for the nine months ended
September 30, 2009. The provision of cash for the nine months ended
September 30, 2010 was primarily attributable to proceeds from the withdrawal of
a deposit for the purchase of fixed assets from an unrelated
agent.
Financing
activities for the nine months ended September 30, 2010 was $186,026 of net cash
used, as compared to $224,132 used for the nine months ended September 30, 2009.
The use of cash for the nine months ended September 30, 2010 and 2009 were
primarily attributable to repayment of a loan from an unrelated
party.
In
June 2008, the Company issued convertible notes and common stock purchase
warrants resulting in aggregate gross proceeds of $700,000. The notes matured
one year from the date of issuance and bore interest at an annual rate of 18%,
payable at maturity in USD. Since the notes were not paid at maturity, the
annual interest rate increased to 24%. Upon the closing of a financing of at
least $2,000,000, the promissory notes were convertible into shares of common
stock at a 50% discount to the price per share of common stock sold in such
financing. Each holder also has the option to either be paid the
principal and interest due under the promissory note or, convert the note
into shares of common stock at a conversion price of $0.228 per share. The
warrants are exercisable at any time after the consummation of such financing
through the fourth anniversary of the consummation of such financing. The
interest payable regarding the convertible notes has been accrued and recorded
as of September 30, 2010. The PromissoryNnotes are secured by common stock
pledged by Pengcheng Chen, our Chief Executive Officer and Fangshe Zhang, our
Chairman.
On
July 6, 2010, the Company and those investors entered in to an amendment
agreement. Pursuant to the amendment agreement, the maturity date was extended
to October 31, 2010 and the interest rate under thePromissory Notes remained at
18% per annum from the issuance date through the maturity date. On
October 31, 2010, a second amendment agreement was executed that extended the
maturity date to February 28, 2011. Upon the closing of the
concurrent Offering, the Company shall: (1) pay the investors cash by
wire transfer in an amount equal to $350,000 (50% of the outstanding principal
amount of the notes) and (2) the investors shall receive, upon conversion of the
balance due under the note, such whole number of fully paid and non-assessable
shares of the securities that is equal to the quotient of the sum of (i)
$350,000 and (ii) all accrued a unpaid interest thereon, divided by fifty
percent of the offering price per share of Common Stock included in the
Units. In the event that the closing shall not occur by February 28,
2011, the interest rate under the Promissory Note shall increase to 24% per
annum, accruing from the first anniversary of the issuance of the
notes.
We
have approximately $17.88 million of net working capital (total current
assets less total current liabilities). This increase was primarily because our
accounts receivable balance increased from improvements in credit sales for the
nine months ended September 30, 2010, despite our extension of the payment terms
by our major customers to one year commencing July 2010. We have been improving
collection of our accounts receivable as our customers gradually recover from
the financial crisis in 2009, For the nine months ended September 30, 2010,as a
result of the extended payment terms to
ours major customers,
we generated total sales
revenues of $11,002,498, and the balance of accounts
receivable was $9,511,618 an increase of $4,335,379 during the nine months ended
September 30, 2010, which accounts for 39.4% of
the total sales
revenue. In the same period, we had collected
$5,225,707 of the total accounts
receivable. Simultaneously, in order to reduce the risk
in collections, we hope to control payment terms of
those major customers during the fourth quarter of 2010. Based on the
foregoing, we
believe
that it has sufficient resources to finance its operations for the coming year
provided it keeps the current payment terms and maintains collection of accounts
receivable .
49
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulated amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of a
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China, all of our revenue and currency received are
denominated in Renminbi (RMB). RMB is subject to the exchange control
regulations in China, and, as a result, we may unable to distribute any
dividends outside of China due to PRC exchange control regulations that restrict
our ability to convert RMB into U.S. Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiaries could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. The funds of Hanxin and CIE may not be
readily available to us to satisfy obligations which have been incurred outside
the PRC, which could adversely affect our business and prospects or our ability
to meet our cash obligations. Accordingly, if we do not receive dividends from
our Chinese operating subsidiaries, we may not have sufficient cash flow to fund
our corporate overhead and regulatory obligations in the United States and may
be unable to pay dividends on our shares of capital stock.
Years Ended December 31,
2009 and 2008
Operating
working capital (cash plus accounts receivable plus inventory less accounts
payable and accrued interest) increased by $3,324,803 from $6,340,255 as of
December 31, 2008 to $9,665,058 as of December 31, 2009. The increase
was primarily due to an increase in accounts receivable of $220,234 from
$4,956,005 at December 31, 2008 as compared to $5,176,239 at
December 31, 2009, an increase in inventory of $3,215,328 from $2,756,011
at December 31, 2008 as compared to $5,971,339 at December 31, 2009,
and an increase in accounts payable and accrued expenses of $137,103 from
$1,395,366 at December 31, 2008 as compared to $1,532,469 at
December 31, 2009. The net increase in working capital was primarily due to
increased sales from our customers and increased inventories to assure
manufacture during the year ended December 31, 2009.
Cash
provided by operating activities was $988,865 for the year ended December 31,
2009 as compared to ($364,209) used for the year ended December 31, 2008. This
increase in cash provided in operating activities was a result of a primary
increase of net income for the year ended December 31, 2009.
Net cash
used in investing activities increased $435,461 to $738,193 for the year ended
December 31, 2009 from $302,732 for the year ended December 31,
2008. This change was primarily due to the payments for
unrelated parties and construction in progress for amounts of $1,465, 738 and
$207,282 in year ended December 31, 2008. These amounts were offset
by the proceeds from the rescission of the purchase of intangible assets in the
amount of $1,370,877 in 2008.
Financing
activities for the year ended December 31, 2009 was $224,109 net cash used as
compared to $568,084 net cash provided for the year ended December 31, 2008.
This change was primarily attributable to the acquisition of a convertible note
in the amount of $700,000 from USA investors in June, 2008.
Occasionally
we have borrowed short-term loans from local banks to fund our
operations. On November 30, 2007, the Company obtained a short-term
loan of RMB3.9 million (equivalent at that time to $534,642) from Xian Xitaoyuan
Credit Bank by pledging the Company's building in YuLerYuan as collateral,. The
Company paid the principal of RMB3.9 million and all accrued interest on June
30, 2008. On the same day, the Company borrowed RMB3 million (equivalent to
$439,722) from the same bank. This loan was fully paid when due on June 29,
2009.
On
November 10, 2005, Hanxin signed the Entrust Purchase Agreement to purchase a
factory’s fixed assets through an unrelated agent. Hanxin has paid deposits of
$2,021,380 (equivalent to RMB 13,800,000) to the agent as of December 31, 2009.
The agency agreement has no firm commitment on the purchase but it states a
maximum price of RMB 50,000,000 that Hanxin is willing to pay for the fixed
assets. The deposit is fully refundable if the purchase does not close by June
30, 2010. However, there is no assurance that the deposits will be returned to
Hanxin.
In 2008,
to assist the operation of our customer Shaanxi Shuta, we loaned
RMB10 million (equivalent to $1,464,916) to Shaanxi Shuta for one year
starting from October 27, 2008. One day subsequent to the due date of the
loan, October 28, 2009, Hanxin signed another loan agreement with Shaanxi Shuta
and loaned the same amount of RMB10 million to Shaanxi Shuta again for two years
term from October 27, 2009 to October 27, 2011. This loan is non-interest
bearing and unsecured
Pursuant
to our agreement with Shaanxi Shuta dated October 20, 2009, we agreed to
purchase from Shaanxi Shuta undeveloped land of 7,000 Mu (equal to 4,669,000
square meters) located in Baoji District, Shaanxi province. We plan to develop
our own cork forest on the land, which will help assure our raw material supply
at a lower cost. Shuta incurred approximately RMB10,000,000 expenses
in the process of the acquisition. The agreement provides that in the event that
we do not purchase the land by October 20, 2011, we will be liable to pay
RMB10,000,000 to Shaanxi Shuta as reimbursement for the acquisition expenses.
The parties anticipate that should we not purchase the land by October 20, 2011,
Shaanxi Shuta will not repay the loan and the parties will have no further
obligation to each other regarding the loan or the land purchase.
With
approximately $10.6 million of net working capital (total current assets
less total current liabilities), improvements in our collections of accounts
receivable and positive cash flow from operations as of December
31, 2009. Despite our cash and equivalents had been represented less
at the end of year 2009, approximately 1% of our account receivable outstanding
exceeded six months at December 31, 2009. In order to ensure sufficient cash and
equivalents, we will actively collect the outstanding accounts receivable in the
near future. As a result, we believe we have sufficient resources to finance our
operations for the coming year.
50
Off-Balance
Sheet Arrangements
None.
OPERATING
RISK
(a)
Country risk
Our
revenues are mainly derived from the sale of wood floors, boards, and basis
materials products in the Peoples Republic of China (PRC). We expect to expand
our sales to the countries outside the PRC by our own sales network, however,
there are no assurances that we will be able to achieve such an expansion
successfully in the future. Therefore, a downturn or stagnation in the economic
environment of the PRC and the countries that our products are sold by unrelated
distributor or agents could have a material adverse effect on our financial
condition.
(b)
Product risk
In
addition to competing with other Chinese companies, we could have to compete
with larger US and European companies who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel if access is allowed into the PRC market. If U.S. and
European companies do gain access to the PRC markets, they may be able to offer
products at a lower price. There can be no assurance that we will remain
competitive should this occur.
(c)
Exchange risk
We cannot
guarantee that the current exchange rate will remain steady, therefore there is
a possibility that we could post the same amount of profit for two comparable
periods and because of a fluctuating exchange rate actually post higher or lower
profit depending on exchange rate of Chinese Renminbi converted to US dollars on
that date. The exchange rate could fluctuate depending on changes in the
political and economic environments without notice.
(d)
Political risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC allows a Chinese
corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, our ability to operate the PRC
subsidiaries could be affected.
(e) Key
personnel risk
Our
future success depends on the continued services of executive management in
China. The loss of any of their services would be detrimental to us and could
have an adverse effect on business development. We do not currently maintain
key-man insurance on their lives. Future success is also dependent on the
ability to identify, hire, train and retain other qualified managerial and other
employees. Competition for these individuals is intense and
increasing.
(f)
Performance of subsidiaries risk
All of
our revenues are derived via the operations of our Chinese subsidiaries.
Economic, governmental, political, industry and internal Company factors outside
of our control affect each of the subsidiaries. If the subsidiaries do not
succeed, the value of the assets and the price of our Common Stock could
decline. Some of the material risks relating to the partner companies include
the fact that the subsidiaries are located in China and have specific risks
associated with that and the intensifying competition for our products and
services and those of the subsidiaries.
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
Federal
Income Tax Aspects of Investment in us
The
discussion contained herein has been prepared by us and is based on existing law
as contained in the Code, amended United States Treasury Regulations (“Treasury
Regulations”), administrative rulings and court decisions as of the date of this
Registration Statement. No assurance can be given that future legislative
enactments, administrative rulings or court decisions will not modify the
legal basis for statements contained in this discussion. Any such development
may be applied retroactively to transactions completed prior to the date
thereof, and could contain provisions having an adverse effect upon us
and the holders of the Common Stock. In addition, several of the issues
dealt with in this summary are the subject of proposed and temporary Treasury
Regulations. No assurance can be given that these regulations will be finally
adopted in their present form.
Basis
in Common Stock
The tax
basis that a Shareholder will have in his Common Stock will equal his cost in
acquiring his Common Stock. If a Shareholder acquires Common Stock at different
times or at different prices, he must maintain records of those transactions so
that he can accurately report gain or loss realized upon disposition of the
Common Stock.
51
Distributions
made by us with respect to the Common Stock will be characterized as dividends
that are taxable as ordinary income to the extent of our current or accumulated
earnings and profits (“earnings and profits”), if any, as determined for U.S.
federal income tax purposes. To the extent that a distribution on the Common
Stock exceeds the holder’s allocable share of our earnings and profits,
such distribution will be treated first as a return of capital that will reduce
the holder’s adjusted tax basis in such Common Stock, and then as taxable gain
to the extent the distribution exceeds the holder’s adjusted tax basis in
such Common Stock. The gain will generally be taxed as a long-term capital gain
if the holder’s holding period for the Common Stock is more than one
year.
The
availability of earnings and profits in future years will depend on future
profits and losses which cannot be accurately predicted. Thus, there can be no
assurance that all or any portion of a distribution on the Common Stock will be
characterized as a dividend for general income tax purposes. Corporate
shareholders will not be entitled to claim the dividends received deduction
with respect to distributions that do not qualify as dividends. See the
discussion regarding the dividends received deduction below.
Redemption
of Common Stock
We do not
have the right to redeem any Common Stock. However, any redemption of Common
Stock, with the consent of the holder, will be a taxable event to the redeemed
holder.
We do not
believe that the Common Stock will be treated as debt for federal income tax
purposes. However, in the event that the Common Stock is treated as debt for
federal tax purposes, a holder generally will recognize gain or loss upon the
redemption of the Common Stock measured by the difference between the amount of
cash or the fair market value of property received and the holder’s tax basis in
the redeemed Common Stock. To the extent the cash or property received are
attributable to accrued interest, the holder may recognize ordinary income
rather than capital gain. Characterization of the Common Stock as debt would
also cause a variety of other tax implications, some of which may be
detrimental to either the holders, us, or both (including, for example, original
issue discount treatment to the Investors). Potential Investors should consult
their tax advisors as to the various ramifications of debt characterization for
federal income tax purposes.
Other
Disposition of the Common Stock
Upon the
sale or exchange of shares of Common Stock, to or with a person other than us, a
holder will recognize capital gain or loss equal to the difference between the
amount realized on such sale or exchange and the holder’s adjusted basis in such
stock. Any capital gain or loss recognized will generally be treated as a
long-term capital gain or loss if the holder held such stock for more than one
year. For this purpose, the period for which the Common Stock was held
would be included in the holding period of the Common Stock received upon a
conversion.
State,
Local and Foreign Taxes
In
addition to the federal income tax consequences described above, prospective
investors should consider potential state, local and foreign tax consequences of
an investment in the Common Stock.
ERISA
Considerations for Tax-Exempt Investors/Shareholders
General
Fiduciary Requirements
Title I
of ERISA includes provisions governing the responsibility of fiduciaries to
their Qualified Plans. Qualified Plans must be administered according to these
rules. Keogh plans that cover only partners of a partnership or self-employed
owners of a business are not subject to the fiduciary duty rules of ERISA, but
are subject to the prohibited transaction rules of the Code.
52
ERISA
Section 404(a)(1) requires a fiduciary of a Qualified Plan to “discharge
his duties with respect to a plan solely in the interest of the participants and
beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to
participants and their beneficiaries, and (ii) defraying reasonable expenses of
administering the plan; (B) with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims; (C) by diversifying the investments of a plan
so as to minimize the risk of large losses, unless under the circumstances
it is clearly prudent not to do so; and (D) in accordance with the documents and
instruments governing the plan.” Fiduciaries who breach the duties that ERISA
imposes may suffer a wide variety of legal and equitable remedies, including (i)
the requirement to restore qualified plan losses and to pay over any fiduciary’s
profits to the qualified plan; (ii) removal as fiduciary of the qualified plan;
and (iii) liability for excise taxes that Section 4975 of the Code
imposes
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
FINANCIAL
STATEMENTS AND SUPPLEMENT DATA
The
information required by Item 8 appears after the signature page to this
report.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
53
ITEM
9B. OTHER INFORMATION
None.
MANAGEMENT
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE GOVERNANCE
The
following table sets forth the names, ages, principal offices and positions and
the date each such person became a director or executive officer. Executive
officers are elected annually by our Board of Directors. Each executive officer
holds his office until he resigns, is removed by the Board or his successor is
elected and qualified. Directors are elected annually by our stockholders at the
annual meeting. Each director holds his office until his successor is elected
and qualified or his earlier resignation or removal.
Name
|
Age
|
Positions Held
|
||
Fangshe
Zhang
|
52
|
Chairman/Director
|
||
Pengcheng
Chen
|
34
|
CEO/Director
|
||
Yi
Tong
|
38
|
Chief
Financial Officer
|
||
Shengli
Liu
|
42
|
Chief
Operating Officer/Vice Manager/Director
|
||
Tianbao
Guo
|
61
|
Chief
Technical Officer
|
||
Genshe
Bai
|
50
|
Director
|
||
Genhu
Yang
|
56
|
Director
|
||
Xiaodong
Wen
|
41
|
Director
|
||
Tao
Wang
|
39
|
Director
|
The
directors named above will serve until the annual meeting of our stockholders.
Thereafter, directors are elected for one-year terms at the annual stockholders’
meeting. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement, of which none currently exists.
There is no arrangement or understanding between our directors and officers and
any other person pursuant to which any director or officer was or is to be
selected as a director or officer.
54
Biographical
Information
Mr. Fangshe
Zhang, Chairman/Director
Mr. Zhang
founded Hanxin in 2001 and has acted as its Chairman of the Board of Directors
since its inception. Prior to forming Hanxin, Mr. Zhang was the general
manager of Xi’an Dong Da Terrestrial Heat Heating Co., Ltd., a Company whose
primary business was the development of terrestrial heat. Mr. Zhang is a
technical expert in cork processing technology, holding more than fourteen
patents in China. The Board believes that Mr. Zhang has the
experience, qualifications, attributes and skills necessary to serve on the
Board because of his expertise in the cork processing industry, his having
provided leadership and strategic direction to the Company and his unparalleled
knowledge of the Company and its business. Mr. Zhang is not a
member of the Board of any other public company or any investment company,
neither has he been a member of the boards of directors of such companies for
the past five years.
Mr. Pengcheng
Chen, CEO/Director
Mr. Chen
is our Chief Executive Officer and a director since 2004, and has worked at
Hanxin since 2002. From 1997 to 1998 he worked for Xi'an
Tangcheng Hotel as an assistant general manager. From 1998 to 2000 he served as
general manager of Xi'an Qingye Virescence Co. Ltd, a gardening engineering
Company. The Board believes that Mr. Chen has the experience, qualifications,
attributes and skills necessary to serve on the Board because of his experience
in the cork processing industry, his having provided leadership and strategic
direction to the Company and his unparalleled knowledge of the Company and its
business. Mr.
Chen is not a member of the Board of any other public company or any investment
company, neither has he been a member of the boards of directors of such
companies for the past five years.
Mr. Shengli
Liu, Chief Operating Officer/Vice Manager/Director
Mr. Liu
has served as our Chief Operating Officer and Vice Manager since October 2009,
has been a director since 2004, and worked for Hanxin since 2002. From 1997 to
2002 he was the director for the 12th section of Xikang railway project of China
Railway 18th Bureau Group Co., Ltd. From 1989 to 1997 he worked as a manager in
the metals division of the Xi'an Commodity Bureau. The Board believes that Mr.
Liu has the experience, qualifications, attributes and skills necessary to serve
on the Board because of his experience in the industry, his having provided
leadership and strategic direction to the Company and his unparalleled knowledge
of the Company and its business. Mr. Liu is not a member
of the Board of any other public company or any investment company, neither has
he been a member of the boards of directors of such companies for the past five
years.
55
Mr. Tong
has served as our Chief Financial Officer since February 2004. Mr. Tong was
a director from 2004 through October 2009. Mr. Tong has
previously worked for several financial institutions. From May 2003 to
February 2004, he served as chief representative of Federal International
Finance Inc., Canada. From August 2001 to May 2003 he worked as a
senior manager for China Dragon Securities Co., Ltd. and from April 2001 to
August 2001 he worked as project manager of China Eagle Securities Co.,
Ltd.
Mr. Tianbao
Guo, Chief Technical Officer
Mr. Guo
has been our Chief Technical Officer since October 2009, and he has worked for
Hanxin since 2005. Before joining Hanxin he worked in Xi’an Forestry Chemicals
factory as engineer beginning 1982 and had become the president of that factory
in 1992. The Board believes that Mr. Guo has the experience,
qualifications, attributes and skills necessary to serve on the Board because of
his experience in the biotech industry, his having provided leadership and
strategic direction to the Company and his unparalleled knowledge of the Company
and its business.
Mr. Bai is not a member of the Board of any other public company or any
investment company, neither has he been a member of the boards of directors of
such companies for the past five years.
Mr. Genshe
Bai, Director
Mr. Bai
has been an independent director since 2002. From 1996 to 2002, he worked as the
general manager of Xi’an Commodity Development Co., Ltd., a Company engaged in
the purchase and sale of commodities. From 1980 through 1996, Mr. Bai
worked as a manager of the auditing department for Xi’an Commodity Bureau, a
governmental agency responsible for the regulation of
commodities. The Board believes that Mr. Bai has the experience,
qualifications, attributes and skills necessary to serve on the Board
because of his auditing experience and experience working with the government,
his having provided leadership and strategic direction to the Company and his
unparalleled knowledge of the Company and its business. Mr. Bai is not a member
of the Board of any other public company or any investment company, neither has
he been a member of the boards of directors of such companies for the past five
years.
Mr.
Genhu Yang, Director
Mr. Yang
has been an independent director since December 2009. He obtained his bachelor
degree in Materials Science in Xi’an Science and Technology University in 1980.
He has been a technician in the Xi’an Wood Company and Xi’an Forestry Chemicals
Factory for12 years. He had been awarded the 3rd Price of Technological
Invention by Xi’an Science and Technology Counsel. The Board believes that Mr.
Yang has the experience, qualifications, attributes and skills necessary to
serve on the Board because of his experience in the cork processing industry,
his having provided leadership and strategic direction to the Company and his
unparalleled knowledge of the Company and its business. Mr. Yang is not a member
of the Board of any other public company or any investment company, neither has
he been a member of the boards of directors of such companies for the past five
years.
56
Mr.
Xiaodong Wen has been an independent director since December 2009. He has a MBA
degree in New York University of U.S. and a bachelor degree in Law in Beijing
University of International Business and Economics. Mr. Wen had been working in
Solomon Brothers from 1993 to 1995 in the area of issuance and listing of ABS,
MBS, and junk bond. From 1995 to 1999, he worked for Nomura Securities and First
Pacific Rim, Inc to be in charge of the investment banking and consulting
business in Asia-pacific areas. Mr. Wen founded Shanghai Genes Capital
Investment and Consulting Company in 2001 and has worked there as the Executive
Director. In January 2009 he established another Company, Dayang Tiancheng
Holding Company where he also works as the Executive Director. Mr.
Wen has over 15 years of professional experience in capital markets, especially
in public Offerings and private equity in Hong Kong and the U.S. for Chinese
companies. The Board believes that Mr. Wen has the experience, qualifications,
attributes and skills necessary to serve on the Board because of his experience
in the finance industry, his having provided leadership and strategic direction
to the Company and his unparalleled knowledge of the Company and its
business. Mr. Wen
is not a member of the Board of any other public company or any investment
company, neither has he been a member of the boards of directors of such
companies for the past five years.
Mr.
Tao Wang, Director
Mr. Tao
Wang has been an independent director and chairman of the Audit Committee since
December 2009. He is a CPA in China and has been working as professional auditor
since 1995. He established Shaanxin Zhixin Auditing Firm in 2001, a local
auditing firm in Shaaxi Province, where he currently works. Mr.
Wang has extensive experience both in finance and management. The Board believes
that Mr. Wang has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his experience in the finance
industry, his having provided leadership and strategic direction to the Company
and his unparalleled knowledge of the Company and its business. Mr. Wang is not a
member of the Board of any other public company or any investment company,
neither has he been a member of the boards of directors of such companies for
the past five years.
Significant
employees
Other
than the officers described above, we do not expect any other individuals to
make a significant contribution to our business.
Family
Relationships
There are
no family relationships among our officers, directors, persons nominated for
such positions, or significant shareholders.
57
Involvement
in Certain Legal Proceedings
None of
our directors, executive officers, or control persons has been involved in any
of the following events during the past ten years:
|
·
|
Any bankruptcy petition filed by
or against any business of which such person was a general partner or
executive officer either at the time of bankruptcy or within two years
prior to that time;
|
|
·
|
Any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor
offenses);
|
|
·
|
Being subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities;
or
|
|
·
|
Being found by a court of
competent jurisdiction (in a civil violation), the SEC or the Commodity
Future Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated.
|
|
·
|
Being the subject of, or a party
to, any Federal or State judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or vacated,
relating to an alleged violation of: any Federal or State securities or
commodities law or regulation; or any law or regulation respecting
financial institutions or insurance companies including, but not limited
to, a temporary or permanent injunction, order of disgorgement or
restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition order; or any law or
regulation prohibiting mail or wire fraud or fraud in connection with any
business entity. This violation does not apply to any settlement of a
civil proceeding among private litigants;
or
|
|
·
|
Being the subject of, or a party
to, any sanction or order, not subsequently reversed, suspended or
vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)), any registered entity
(as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C.
1(a)(29)), or any equivalent exchange, association, entity or organization
that has disciplinary authority over its members or persons associated
with a member.
|
Board
Committees
The Board
of Directors is composed of seven directors, Mr. Fangshe Zhang, Mr. Pengcheng
Chen, Mr. Shengli Liu, Mr. Genshe Bai, Mr. Genhu Yang, Mr. Xiaodong Wen, and Mr.
Tao Wang. In determining whether a director is independent, we evaluate whether
such member has a material relationship with the Company which would interfere
with the director’s exercise of independent judgment The last four
directors are independent directors, who (i) have not taken any positions inside
the Company except for being the independent directors, (ii) . (ii) been
compensated for serving as directors, (iii) have not and currently do not have
any business relationships with the Company, (iv) are not involved with any
other company by which any of the Company’s officers serve on the compensation
committee of such other companies and (v) have not worked on any audit related
matters with the Company . All board action requires the approval of a majority
of directors in attendance at a meeting at which a quorum is
present.
In
December, 2009, we established an Audit Committee of the Board with the
responsibility for assisting the Board in fulfilling its oversight role
regarding the Company’s financial reporting process, its system of internal
control and its compliance with applicable laws, regulations and Company
policies. Tao Wang, Genshe Bai, and Xiaodong Wen were elected to be
members of the Audit Committee and shall serve the Committee until their
successors are duly elected and qualified.
In
December 2009, we also established a Governance Committee and a Compensation
Committee, and elected Genshe Bai and Xiaodong Wen as members of each
Committee.
The Audit
Committee is primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The Governance Committee is primarily responsible
for nominating directors and setting policies and procedures for the nomination
of directors. The Governance Committee is also responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The Compensation Committee is primarily responsible
for reviewing and approving our salary and benefit policies (including
equity plans), including compensation of executive officers.
Code
of Ethics
The
Company has a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act
of 2002 on January 24, 2008, which is applicable to all directors, officers and
employees of the Company. The Code is designed to deter wrongdoing and to
promote:
|
·
|
Honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional
relationships;
|
|
·
|
Full, fair, accurate, timely and
understandable disclosure in reports and documents that we file with, or
submit to, the SEC, and in other public communications that we
made;
|
|
·
|
Compliance with applicable
governing laws, rules and
regulations;
|
|
·
|
The prompts internal reporting of
violations of the Code to the appropriate person or persons;
and
|
|
·
|
Accountability for adherence to
this Code.
|
This Code
requires the highest standard of ethical conduct and fair dealing of its
Directors and employees While, per Sarbanes-Oxley, this policy is intended to
only cover the actions of the CFO, we expect our other officers, directors and
employees to also review the Code and abide by its provisions. We believe that
our reputation is a valuable asset and must continually be guarded by all
associated with us so as to earn the trust, confidence and respect of our
suppliers, customers and stockholders. Our CFO is committed to conducting
business in accordance with the highest ethical standards. The CFO must comply
with all applicable laws, rules and regulations. Furthermore, the CFO must not
commit an illegal or unethical act, or instruct or authorize others to do
so.
59
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Background
and Compensation Philosophy
Our
Compensation Committee consists of Genshe Bai and Xiaodong Wen , both
independent directors The Compensation Committee and , prior to its
establishment, our board of directors determined the compensation to be paid to
our executive officers based on our financial and operating performance and
prospects, and contributions made by the officers’ to our
success. Each of the named officers will be measured by a series of
performance criteria by the board of directors, or the compensation committee on
a yearly basis. Such criteria will be set forth based on certain
objective parameters such as job characteristics, required professionalism,
management skills, interpersonal skills, related experience, personal
performance and overall corporate performance.
Our board
of directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee will make an independent
evaluation of appropriate compensation to key employees, with input from
management. The Compensation Committee has oversight of executive
compensation plans, policies and programs.
Elements
of Compensation
Before
2009 we provided our executive officers solely with a base salary to compensate
them for services rendered. Our policy of compensating our executives
with a cash salary has served us well. To better attract and retain
executive talent, and to stimulate executive activeness, we believe it is
necessary at this time to provide our executives discretionary bonuses and
equity incentives in order for us to continue to be successful. We plan to
distribute bonus, and to allocate Company stocks and stock options to our
executive officers commencing in 2010, the actual amount of which shall be based
on considerations of the board of directors. We shall also issue certain amount
of Company stock options to the executive officers on an annual basis commencing
from 2010. We plan to grant our CEO Pengcheng Chen shares of stock, stock
options or stock awards as compensation for his contribution to the Company as
he had successfully lead the Company through the worldwide financial crisis
since 2008. Notwithstanding the foregoing, our compensation program
for our executive officers and all other employees is designed such that it will
not incentivize unnecessary risk-taking.
Base
Salary
The base
salaries paid to Fangshe Zhang, Pengcheng Chen, Yi Tong, Yi Zhang, and Pingjun
Zhang during 2009, 2008 and 2007 are listed in the compensation table
below. All such amounts were paid in cash. The value of
base salary reflects each executive’s skill set and the market value of that
skill set in the sole discretion of our board of directors and/or our executive
officers. The board of directors assesses the executive's skill set
by considering their education, professional certificates, working experiences
and length, and their contributions to the Company. The average salaries of the
management professionals of the local labor market are taken as reference to
decide the salary of the Company's management staff. In 2009 the base salary was
increased.
Discretionary
Bonus
The Board
of Directors has decided to provide our executive officers with discretionary
bonuses at the end of each fiscal year. Our Compensation Committee and board of
directors review the grant of bonuses on a yearly basis based on
our financial and operating performance and prospects, the level of compensation
paid to similarly situated executives in comparably sized companies and
contributions made by the officers’ to our success. The Company plans to issue
stocks and stock options as part of bonus to the executive officers. The basic
principle for such equity compensation plan is based upon the increase in
operating profit of the Company at the year end. If the operating profit of the
current year exceeds that of the former year by over 30%, the executive
officers shall be granted between 500,000 and 600,000 shares of Company stock
and around 1,000,000 stock options in total. The exercise price of the options
shall be the price on the last day of the operational year, which shall be Dec.
31 of the operational year in the Company's case. The Compensation
Committee and Board of Directors reviews the grant of bonuses on a yearly basis
based on our financial and operating performance and prospects, the level of
compensation paid to similarly situated executives in comparably sized companies
and contributions made by the officers resulting in our success. The Board
of Directors, in a meeting in August 2009, approved a distribution to the
executive officers of bonuses in an aggregate amount of RMB250,000 (USD $36,599)
if the net profit exceeded 2008 by 20% and RMB500,000 (USD $73,196) if the net
profit exceeded 2008 by 30% at the end of year. A total amount of USD
$33,406 was ultimately distributed to the executive officers at the end of 2009
as the increase of net profit exceeded 20% as compared to 2008.
60
Equity
Incentives
We have
not established equity based incentive program and have not granted stock based
awards as a component of compensation. We are planning to adopt and establish an
equity incentive plan, as our board of directors has determined that it is in
the best interests of our stockholders and the Company. The incentive program
includes issuing stock and options to executive officers for services rendered
in 2009, and to issue certain amount of options to executive officers every year
starting from 2010.
Retirement
Benefits
Our
executive officers are not presently entitled to Company-sponsored retirement
benefits.
Perquisites
We have
not provided our executive officers with any material perquisites and other
personal benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.
Deferred
Compensation
We do not
provide our executives the opportunity to defer receipt of annual
compensation.
Summary
Compensation Tables
The
following table discloses executive compensation received for the fiscal year
ended December 31, 2009 as well as the preceding three years.
SUMMARY
COMPENSATION TABLE
Annual Compensation
|
Long-Term
Compensation Awards
|
|||||||||||||||||||||
Name and Principal Position
|
Year
|
Salary
|
Cash Bonus
|
Restricted
Stock
Award
|
Securities
Underlying
Options
|
Total
Compensation
|
||||||||||||||||
Fangshe
Zhang,
|
2009
|
$
|
5,226
|
$
|
7,319
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
12,545
|
|||||||||||
Chairman
|
2008
|
$
|
3,013
|
$
|
-0-
|
$
|
- 0
-
|
$
|
-0
-
|
$
|
3,013
|
|||||||||||
2007
|
$
|
3,971
|
$
|
3,945
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
7,916
|
||||||||||||
Pengcheng
Chen,
|
2009
|
$
|
7.850
|
$
|
5,592
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
13,442
|
|||||||||||
Chief
Executive Officer
|
2008
|
$
|
5,
182
|
$
|
0
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
5,182
|
|||||||||||
2007
|
$
|
6,143
|
$
|
3,945
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
10,088
|
||||||||||||
Yin
Tong,
|
2009
|
$
|
5,621
|
$
|
8,783
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
14,404
|
|||||||||||
Chief
Financial Officer
|
2008
|
$
|
3,013
|
$
|
0
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
3,013
|
|||||||||||
2007
|
$
|
3,656
|
$
|
13,151
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
16,807
|
||||||||||||
Shengli
Liu,
|
2009
|
$
|
6,697
|
$
|
5,856
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
12,553
|
|||||||||||
Chief
Operating Officer
|
2008
|
$
|
4,764
|
$
|
-0-
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
4,764
|
|||||||||||
2007
|
$
|
4,445
|
$
|
1,315
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
5,760
|
||||||||||||
Tianboa
Guo,
|
2009
|
$
|
5,878
|
$
|
5,856-
0 -
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
11,734
|
|||||||||||
Chief
Technical Officer
|
2008
|
$
|
3,148
|
$
|
-0-
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
3,148
|
|||||||||||
2007
|
$
|
4,734
|
$
|
1,315
|
$
|
- 0
-
|
$
|
- 0
-
|
$
|
6,049
|
61
Outstanding
Equity Awards
EMPLOYEE STOCK OPTION
PLAN
COMPENSATION OF INDEPENDENT
DIRECTORS
No
compensation had been paid to any director solely in connection with their role
as a director.
Employment
Agreements
We have
employment contracts with four of our executive officers, Pengcheng Chen, our
CEO, Yi Tong, our CFO, Tianbao Guo, our CTO, and Shengli Liu, our COO and Vice
Manager. The terms of the contracts are one year subject to renewal. Our
employment contract with Yi Tong was signed on April 1, 2009, and the other
three executive officers’ contracts were signed on October 9, 2009. According to
the employment agreements, the base salaries to Pengcheng Chen, , Tianbao Guo,
and Shengli Liu for one year term ended October 9, 2010 are RMB 109,200
(equivalent to $15,986), RMB85,200 (equivalent to $12,472), and RMB 84,000
(equivalent to $12,297), respectively.. The base salary payable to Yi Tong for
the one year term ended April 20, 2010 was RMB91,200 (equivalent to $13,351). To
better attract and retain executive talent, and to stimulate performance we
intend to provide our executives with discretionary bonuses and equity
incentives. We plan to distribute bonus, and to issue Common Stocks and/or stock
options to our executive officers for services rendered in 2009. The amount of
such equity awards will be determined by the Compensation Committee and the
Board of Directors. Currently the Company does not have specific
rules for calculating the bonus for executive officers. The actual bonuses are
determined through discussions during the meetings of board of directors and
Compensation Committee. The board of directors and Compensation Committee
determines the amount of bonus for each executive officer annually, based mainly
on three factors, the contribution to the Company made by the officer, the
officer's length of service and the operating result of the
Company.
Director
Compensation
The
Company did not and does not currently have an established policy to provide
compensation to members of its board of directors for their services in that
capacity. The Company intends to develop such a policy in the near
future.
Indemnifications
of Directors and Executive Officers and Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the
law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws
or state or federal environmental laws.
62
Our
Certificate of Incorporation provides for the indemnification of our directors,
officers, employees, and agents, under certain circumstances, against attorney’s
fees and other expenses incurred by them in any litigation to which they become
a party arising from their association with or activities on behalf of us. We
will also bear the expenses of such litigation for any of its directors,
officers, employees, or agents, upon such person’s promise to repay us
therefore if it is ultimately determined that any such person shall not have
been entitled to indemnification. This indemnification policy could result in
substantial expenditures by us which it will be unable to recoup.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the closing of the Share Exchange, we have not entered into
any indemnification agreements with our directors or officers, but may choose to
do so in the future. Such indemnification agreements may require us, among other
things, to:
|
●
|
indemnify officers and directors
against certain liabilities that may arise because of their status as
officers or directors;
|
|
●
|
advance expenses, as incurred, to
officers and directors in connection with a legal proceeding, subject to
limited exceptions; or
|
|
●
|
obtain directors’ and officers’
insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Loan
to Related Parties
As of
September 30, 2010, amounts due to stockholder/officer are unsecured,
non-interest bearing and due on demand. The total net amount due to the
stockholder/officer was $181,187 which represented the net amount lent by Mr.
Pencheng Chen, the Chief Executive Officer of the Company to
us.
Patent
License Agreement and Patent Assignment Agreement
Mr. Fangshe
Zhang, our Chairman and a principal shareholder leases us three cork processing
technology related patents in China under operating lease agreements that expire
on April 16, 2011. During the years ended December 31, 2009 and
December 31, 2008 respectively, we paid him license fees for these patents
in the aggregate amount of $351,334 and $345,444. In addition, we paid him
patent license fees in amount of $264,499 and $263,685 for the nine
months ended September 30, 2010 and 2009, respectively.
63
The
following is a schedule of future minimum rental payments required under these
operating leases as of September 30, 2010.
For
The Nine Months Ending September 30, 2010,
|
Amount
|
|||
2011
|
$
|
190,991
|
||
Total
minimum rental payments required
|
$
|
190,991
|
Review
Approval or Ratification of Transactions with Related Persons
All
ongoing and future transactions between us and any of our officers and directors
and their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by the Corporate Governance
and Nominating Committee (whose members are “independent” directors) and by a
majority of our disinterested “independent” directors (to the extent we have
any) or the members of our board who do not have an interest in the transaction,
in either case who had access, at our expense, to our attorneys or independent
legal counsel. We will not enter into any such transaction unless our
disinterested “independent” directors) determine that the terms of such
transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not
enter into a business combination or invest alongside any of our directors,
officers, any affiliate of ours or of any of our directors or officers or a
portfolio company of any affiliate of our directors or officers.
Potential
Conflicts of Interests
Save as
disclosed below and under the section “Interested Person Transactions”, during
the past three financial years:
|
a)
|
None of our directors, executive
officers or controlling shareholder or their affiliates had any interest,
direct or indirect, in any material transaction to which we are a
party.
|
|
b)
|
None of our directors, executive
officers or controlling shareholder or their affiliates had any interest,
direct or indirect, in any Company that carries the same business or
similar trade which competes materially and directly with our existing
business.
|
|
c)
|
None of our directors, executive
officers or controlling shareholder or their affiliates had any interest,
direct or indirect, in any enterprise or Company that is our major
customer or supplier of goods or
services.
|
|
d)
|
None of our directors, executive
officers or controlling shareholder or their affiliates has had any
interest, direct or indirect, in any material transaction we have
undertaken within the last three
years.
|
64
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this report are deemed outstanding even if they have not
actually been exercised. Those shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other
person.
The
following table sets forth, as of December 10, 2010, information with respect to
the beneficial ownership of our outstanding Common Stock by (i) each director
and executive officer of us, (ii) all directors and executive officers of us as
a group, and (iii) each shareholder who was known by us to be the beneficial
owner of more than 5% of our outstanding Common Stock. Except as otherwise
indicated, the persons or entities listed below have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them. The
table is based on 35,663,850 shares outstanding, before giving effect to the
Reverse Split, the shares of Common Stock included in the Units issuable in the
Offering and the shares of Common Stock issuable to the Selling
Stockholders.
Name and Address of Beneficial Owner of Shares
|
Position
|
Number of
shares held by
Owner
|
Percent of
Class
|
||||||
Pengcheng
Chen (1)
|
CEO/Director
|
7,911,450
|
(1)
|
22.18
|
%
|
||||
Fangshe
Zhang (2)
|
Chairman
|
5,402,900
|
(2)
|
15.15
|
%
|
||||
Yi
Tong
|
CFO
|
––
|
––
|
||||||
Shengli
Liu
|
Chief
Operating Officer/Vice Manager/Director
|
800,000
|
2.24
|
%
|
|||||
Tianbao
Guo
|
Chief
Technical Officer
|
––
|
––
|
||||||
Genshe
Bai
|
Director
|
1,200,000
|
3.37
|
%
|
|||||
Genhu
Yang
|
Director
|
800,000
|
2.24
|
%
|
|||||
Xiaodong
Wen
|
Director
|
—
|
—
|
||||||
Tao
Wang
|
Director
|
—
|
—
|
||||||
Executive
Officers & Directors as a Group
|
16,114,363
|
45.18
|
%
|
(1) Having
an address at No. 23, Tiyu Street, Chang’an District, Xi’an,
China.
(2)
Having an address at No. 5,
Beisan Street, Beida Village, Dongda Town, Chang'an County, Xi'an,
China.
65
DESCRIPTION
OF SECURITIES
Preferred
Stock
We are
authorized to issue up to 5,000,000 shares of $.0001 par value preferred stock.
We have no shares of preferred stock outstanding. Under our Amended Certificate
of Incorporation, our board of directors has the power, without further action
by the holders of the Common Stock, to determine the relative rights,
preferences, privileges and restrictions of the preferred stock, and to issue
the preferred stock in one or more series as determined by the board of
directors. The designation of rights, preferences, privileges and restrictions
could include preferences as to liquidation, redemption and conversion rights,
voting rights, dividends or other preferences, any of which may be dilutive of
the interest of the holders of the Common Stock.
The
issuance of any preferred stock could diminish the rights of holders of our
Common Stock, and therefore could reduce the value of such Common Stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict our ability to merge with, or sell assets to, a third party.
The ability of our board of directors to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change-in-control, which in turn could prevent the stockholders from
recognizing a gain in the event that a favorable offer is extended and could
materially and negatively affect the market price of our Common Stock. The
Company’s Bylaws or Certificate of Incorporation do not contain any other
provisions that would have the effect of delaying or preventing a change in
control.
Common
Stock
We are
authorized to issue 200,000,000 shares of Common Stock, $0.0001 par value per
share, of which 35,663,850 shares are issued and outstanding as of December 10,
2010, before giving effect to the Reverse Split, the shares of Common Stock
included in the Units issuable in the Offering, and the shares of Common Stock
issuable to the Selling Stockholders. Each outstanding share of Common Stock is
entitled to one vote, either in person or by proxy, on all matters that may be
voted upon by their holders at meetings of the stockholders.
Holders
of our Common Stock:
|
(i)
|
have equal ratable rights to
dividends from funds legally available therefore, if declared by our board
of directors;
|
|
(ii)
|
are entitled to share ratably in
all of the Company’s assets available for distribution to holders of
Common Stock upon our liquidation, dissolution or winding
up;
|
|
(iii)
|
do not have preemptive,
subscription or conversion rights or redemption or sinking fund
provisions; and
|
|
(iv)
|
are entitled to one
non-cumulative vote per share on all matters on which stockholders may
vote at all meetings of our
stockholders.
|
66
The
holders of shares of our Common Stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
We have
never paid or declared dividends. However, holders of our Common Stock are
entitled to dividends if declared by our board of directors out of funds legally
available. We do not, however, anticipate the declaration or payment of any
dividends in the foreseeable future. We intend to retain earnings, if any, to
finance the development and expansion of our business. Future dividend policy
will be subject to the discretion of our board of directors and will be
contingent upon future earnings, if any, our financial condition, capital
requirements, general business conditions and other factors. Therefore, we
cannot assure you that any dividends of any kind will ever be paid.
Warrants
The
Warrants expire five years from the date of this Prospectus and become
exercisable one year from the date of issuance. Warrants are not separately
tradable for a period of one year after issuance, unless sooner as may be
approved by the Underwriters, in its sole discretion. During the exercise
period, each Warrant will entitle the holder thereof to purchase one share of
Common Stock at an exercise price of $___ per share (120% of the Offering
price). Warrants may be exercised by surrendering the Warrants to the warrant
agent and paying the exercise price. No fractional shares of Common Stock will
be issued in connection with the exercise of Warrants. Upon exercise, the
Company will pay to the holder the value of any such fractional shares based
upon the market value of the Common Stock at such time. We are required to keep
available a sufficient number of authorized shares of Common Stock for issuance
to permit exercise of the Warrants.
The
Warrants are redeemable by the Company at a price of $.05 per Warrant commencing
one year after the completion of the Offering and prior to their expiration,
provided that (i) prior notice of not less than twenty (20) days is given to the
holders of the Warrants, and (ii) the closing sale price of the Common Stock as
reported on the national exchange on which the shares of Common Stock are
listed, or if the shares of Common Stock are not listed on a national securities
exchange, the closing bid price on the OTCBB for 20 consecutive trading days,
ending on the tenth day prior to the date on which the Company gives notice of
redemption, has been at least $____, 180% of the Offering price of the Shares.
The holders of the Warrants shall have the exercise rights until the close of
the business day preceding the date fixed for redemption.
The
Warrants will expire at 5:00 p.m., New York time, on the fifth anniversary of
the effective date of this Prospectus. Holders of the Warrants as such will not
have any of the rights or privileges as shareholders of the Company prior to the
exercise of the Warrants. In the event a holder of Warrants fails to exercise
the Warrants prior to their expiration, the Warrants will expire and the holder
thereof will have no further rights with respect thereto. A holder of Warrants
as such will not have any rights, privileges, or liabilities as a shareholder of
the Company. In the event of the liquidation, dissolution or winding up of the
Company, holders of the Warrants as such are entitled to participate in the
distribution of our assets.
67
Purchasers
of the Warrants will have the rights to exercise the Warrants to purchase shares
of Common Stock only if a current registration statement relating to such shares
is then in effect and only if the shares are qualified for sale under the
securities laws of the jurisdictions in which the various holders of the
Warrants reside. We have undertaken to maintain the effectiveness of
the Registration Statement of which this Prospectus is a part or to file and
maintain the effectiveness of another registration statement so as to permit the
purchase of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. The Warrants may be
deprived of any value if this Registration Statement or another registration
statement covering the shares issuable upon the exercise thereof is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Warrants reside.
If a
warrant holder seeks to exercise the Warrant but the Company is unable to issue
the shares underlying such Warrant that are registered under the Securities
Act pursuant to a current Registration Statement, then the Company would be
obligated to pay the warrantholder the difference between the market value of
the Common Stock on the date of exercise (based on the volume weighted average
price of the Common Stock) and the exercise price. The volume
weighted average price of the Common Stock for a day is a measure of the price
at which the majority of a given day’s trading for such stock took place.
It is calculated by determining the dividend of: (a) the total number of the
shares traded on that day multiplied by the price per share; and (b) the total
number of shares traded for such day.
For the
life of the Warrants, a holder thereof is given the opportunity to profit from a
rise in the market price of the Common Stock. In addition, the Company may find
it more difficult to raise equity capital if it should be needed for the
business of the Company while the Warrants are outstanding. At any
time when the holders of Warrants might be expected to exercise them, the
Company would, in all likelihood, be able to obtain additional equity capital on
terms more favorable than those provided in the Warrants.
Underwriters'
Warrants
On the
closing date, the Company will be obligated to issue Underwriters’ Warrants for
a nominal amount, which entitles the holder to purchase up to ____
Units (representing 10% of the total Units sold in the Offering) at a price of
$.01 per Unit. At the closing of this Offering the Company will issue
the Underwriters’ Warrants. Underwriters’ Warrants will be
exercisable, in whole or in part, for a period of five years, commencing on the
date, which is six months after the closing date. The Underwriters have been
granted certain registration rights with respect to such warrant and the
underlying Common Stock. See "Underwriting."
68
Delaware
Anti-Takeover Law and Charter and Bylaw Provisions
We are
subject to Section 203 of the Delaware General Corporation Law. This provision
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
•
|
prior to such date, the board of
directors approved either the business combination or the transaction that
resulted in the stockholder becoming an interested
stockholder;
|
|
•
|
upon consummation of the
transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
•
|
on or subsequent to such date,
the business combination is approved by the board of directors and
authorized at an annual meeting or special meeting of stockholders and not
by written consent, by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
|
Section
203 defines a business combination to include:
|
•
|
any merger or consolidation
involving the corporation and the interested
stockholder;
|
|
•
|
any sale, transfer, pledge or
other disposition of 10% or more of the assets of the corporation
involving the interested
stockholder;
|
|
•
|
subject to certain exceptions,
any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
|
|
•
|
any transaction involving the
corporation that has the effect of increasing the proportionate share of
the stock of any class or series of the corporation beneficially owned by
the interested stockholder;
or
|
|
•
|
the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the
corporation.
|
69
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our Company, including changes
a stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, will:
|
•
|
provide our board of directors
with the ability to alter its bylaws without stockholder
approval;
|
|
•
|
provide for an advance notice
procedure with regard to the nomination of candidates for election as
directors and with regard to business to be brought before a meeting of
stockholders; and
|
|
•
|
provide that vacancies on our
board of directors may be filled by a majority of directors in office,
although less than a quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by them,
and to discourage some types of transactions that may involve an actual or
threatened change in control of our Company. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure our
Company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in our
management.
Transfer
Agent
Our
transfer agent is Olde Monmouth Stock Transfer Co., Inc., 200 Memorial
Parkway, Atlantic Highlands, NJ 07716, and their contact number is
(732)-872-2727.
Listing
Our
shares of Common Stock are currently quoted on the Over-The –Counter Bulletin
Board under the symbol “AKRK.” We have applied to have our Units and
the Common Stock and Warrants issued as part of the Units approved for listing
on the NASDAQ under the trading symbol “AKRK.”
70
SHARES
ELIGIBLE FOR FUTURE SALE
As
of December 10, 2010, we had 35,663,850 outstanding shares of Common Stock
(without giving effect to the Reverse Split, the shares of Common Stock issued
in the Offering, or the shares of Common Stock issuable to the Selling
Stockholders) Of such shares, are considered “restricted” securities within
the meaning of the Securities Act of 1933, including shares owned by
affiliates. Upon completion of this Offering, we will have
outstanding an aggregate of ______ shares of Common Stock, assuming no
exercise of the Underwriters’ Warrants. All of the
restricted shares will be freely tradable without restriction or
further registration under the Securities Act, except that any shares owned or
shares purchased by our “affiliates,” as that term is defined in Rule 144 of the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 and the Lock-Up Agreements described below .
Shares
covered by this Prospectus
All of
the shares being registered in this Offering may be sold without restriction
under the Securities Act.
Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the three
months preceding a sale and who has beneficially owned shares of our Common
Stock for at least six months, including the holding period of any prior owner,
except if the prior owner was one of our affiliates, would be entitled to sell
all of their shares, provided the availability of current public information
about the Company during the six months following satisfaction of the six-month
holding period requirement.
Affiliates
that have held restricted securities for at least twelve months may sell such
restricted securities in accordance with the traditional conditions of Rule 144,
including the public information requirement, the volume limitations, manner of
sale provisions and notice requirements. In particular, an affiliate who has
beneficially owned shares of our Common Stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed 1% of the number of shares of our Common Stock then
outstanding.
No
prediction can be made as to the effect, if any, that future sales of shares, or
the availability of shares for future sales, will have on the market price of
our Common Stock prevailing from time to time. The sale of
substantial amounts of our Common Stock in the public market, or the perception
that such sales could occur, could harm the prevailing market price of our
Common Stock. Any substantial sale of Common Stock pursuant to any
resale prospectus by the Selling Stockholders or Rule 144 may have an adverse
effect on the market price of our Common Stock by creating an excessive
supply.
71
Lock-Up
Agreements and Registration
Our
directors and officers and any other holder of more than five percent (5%) of
the outstanding shares of Common Stock (or securities exercisable for or
convertible into shares of Common Stock), at the effective date of this
Prospectus, have entered into customary "lock-up” agreements in favor
of the Underwriters pursuant to which such persons and entities
agreed, for a period of eighteen (18) months after the Offering is completed,
that they shall neither publicly offer, issue, sell, contract to sell, encumber,
grant any option for the sale of or otherwise dispose of any securities of our
Company without the Underwriters’ prior written consent, and any sale of such
securities shall be executed by the Underwriters, except for the issuance of
shares of Common Stock upon the exercise of outstanding options,
warrants and options which may be issued pursuant to an Incentive Compensation
Plan reasonably acceptable to the Underwriters. In addition, the
Selling Stockholders have entered into customary “lock-up” agreements
in favor of the Underwriters pursuant to which such persons and entities (other
than Brill Securities Inc.) shall agree, for a period of nine months
after the Offering is completed, that they shall neither publicly offer, issue,
sell, contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriters’ prior written
consent. The aforementioned restriction on Brill Securities Inc.
shall be for a period of six months after the Offering.
We
have been advised by our Underwriters, that they have no present intention and
there are no agreements or understandings, explicit or tacit, relating to the
early release of any locked-up shares. The Underwriters may, however, consent to
an early release from the lock-up period if, in its opinion, the market for the
Common Stock would not be adversely impacted by sales. The release of any
lock-up would be considered on a case-by-case basis. Factors that the
Underwriters may consider in deciding whether to release shares from the lock-up
restriction include the length of time before the lock-up expires, the number of
shares involved, the reason for the requested release, market conditions, the
trading price of our securities, historical trading volumes of our securities
and whether the person seeking the release is an officer, director or affiliate
of us.
72
We
have engaged the Underwriters to conduct this Offering on a “best
efforts" basis. Because the Offering is on a “best efforts” basis,
the Underwriters are not required to sell any specific number or
dollar amount of Units and are not obligated to purchase any Unit if any
such Unit is not sold to the public. We have agreed to indemnify our
Underwriters against certain civil liabilities. None of our officers, directors
or affiliates may purchase Units in this Offering. Unless sooner withdrawn or
canceled by either us or the Underwriters, the Offering will continue until the
earlier of (i) a date mutually acceptable to us and the
Underwriters and (ii) February 14, 2011 (either the “Offering
Termination Date”). This Offering is not subject to the sale of a minimum number
of Units. To the extent that we sell significantly less than the total number of
Units that we are offering through this prospectus, you may be one of only a
small number of investors in this Offering and a substantial percentage of the
Offering proceeds may be used to pay for the Offering expenses, and not for our
general corporate purposes. Furthermore, because there is no minimum offering
amount required as a condition to closing in this Offering, the actual public
offering amount, Underwriters’ fee and net proceeds to us, if any, in this
Offering are not presently determinable and may be substantially less than
Offering amounts set forth in this prospectus. The Underwriters have
the right to reject any order in whole or in part. We will not be able to use
such proceeds in China, however, until we complete certain remittance procedures
in China. On the closing date, we will issue Units to the investors and
Underwriters’ Warrants to the Underwriters to purchase up to ____ Units in the
aggregate (representing 10% of the total Units sold in the Offering). The
Company and the Underwriters reserves the right to have multiple closings until
the earlier of the total amount of Units have been sold and the Offering
Termination Date. For purposes of the Offering, references to
“Closing Date” shall refer to the initial closing and any additional
closings. Interested investors must pay in full for all Units such
interested investor will purchase at the time of investment. Payment for the
Units may be made by wire transfer to the relevant Underwriter no less than
four (4) business days before the closing date.
Pursuant
to that certain Underwriting Agreement by and between the Underwriters and us
(the “Underwriting Agreement”) and the agreement amongst the Underwriters and
such other underwriters as may participate in the Offering, the obligations
of each Underwriter to solicit offers to purchase the Units and of interested
investors solicited by each Underwriter to purchase the Units are subject to
approval of certain legal matters by counsel to each Underwriter. The
Underwriters’ ability to complete this “best efforts” transaction
is dependent upon the existence of stable U.S. trading markets. As such,
the Underwriters’ obligations under the Underwriting Agreement are also subject
to various conditions which are customary in transactions of this type,
including that, as of the closing of the Offering, there shall not have
occurred (i) a suspension or material limitation in trading in securities
or the publication of quotations on the NASDAQ Capital Market; (ii) a
general moratorium on commercial banking activities in the State of New York or
China; (iii) the engagement by the United States or China in hostilities
which have resulted in the declaration of a national emergency or war if any
such event would have a material adverse effect, in the Underwriters’s
reasonable judgment, as to make it impracticable or inadvisable to proceed
with the solicitation of offers to consummate the Offering with respect to
interested investors solicited by the Underwriters on the terms and conditions
contemplated herein.
73
We have
agreed to indemnify each Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments either Underwriter may be required to make in respect of those
liabilities.
Each
Underwriter is offering the Units, subject to prior sale, when, as and if
issued to and accepted by it, subject to conditions contained in the
Underwriting Agreement, such as the receipt by the Underwriters of officers’
certificates and legal opinions. Each Underwriter reserves the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part in the event (i) our representations or warranties are incorrect or
misleading or we fail to fulfill our agreements with the Underwriters;
(ii) a material adverse change occurs affecting our business, management,
property, assets, results of operations, condition or prospects;
(iii) trading is suspended on any national securities exchange;
(iv) war is declared; (v) a banking moratorium is declared in New York
or the U.S.; or (vi) any laws, regulations, court or administrative order
or other governmental or agency act causes the Underwriters to believe that our
business or the U.S. securities markets will be materially adversely affected.
The Underwriters’ discretion in this regard is broad.
Each
Underwriter intends to offer the Units to its retail customers only in states in
which we are permitted to offer the Units. We have relied on an exemption to the
blue sky registration requirements afforded to “covered securities”. Securities
listed on the NASDAQ Capital Market or AMEX are “covered securities.” If we were
unable to meet the NASDAQ Capital Market’s listing standards, then we would be
unable to rely on the covered securities exemption to blue sky registration
requirements and we would need to register the Offering in each state in which
we planned to sell shares. Consequently, we will not complete this Offering
unless we meet the NASDAQ Capital Market’s listing
requirements.
In
connection with this Offering, each Underwriter or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses and electronically distributed prospectuses that are
printable in Adobe PDF format will be used in connection with this
Offering.
Pricing of
Securities
Each
Underwriter has advised us that it proposes to offer the Units directly to the
public at the public Offering price set forth on the cover page of this
prospectus. This price should not be considered an indication of the
actual value of the Units and are subject to change as a result of market
conditions and other factors. No variation in those terms will change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus.
74
Our
Common Stock is quoted on the OTC Bulletin Board under the symbol “AKRK.OB”. On
December 10, 2010, the last reported sales price of our Common Stock was $.45
before giving effect to the Reverse Split to be effected concurrently to the
effectiveness of the registration statement of which this prospectus is a part.
The public Offering price for the Units was determined by negotiation between us
and the Underwriters. The principal factors considered in determining the public
Offering price of the shares included:
|
•
|
the information in this
prospectus and otherwise available to the
Underwriters;
|
|
•
|
the history and the prospects for
the industry in which we will
compete;
|
|
•
|
the valuation of our Company
based on, among other factors, the offering prices of our
recent private
Offerings;
|
|
•
|
our current financial condition
and the prospects for our future cash flows and
earnings;
|
|
•
|
the general condition of the
economy and the securities markets at the time of this
Offering;
|
|
•
|
the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
|
|
•
|
the public demand for our
securities in this Offering.
|
We cannot
be sure that the public Offering price will correspond to the price at which our
shares will trade in the public market following this Offering or that an active
trading market for our shares will develop and continue after this
Offering.
Foreign
Regulatory Restrictions on Purchase of our Shares
We have
not taken any action to permit a public Offering of our shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. People outside the United States who come into
possession of this prospectus must inform themselves about and observe any
restrictions relating to this Offering of our shares and the distribution of
this prospectus outside the United States.
75
Commissions
and Discounts
Underwriters
Each
Underwriter has advised us that it proposes to offer the Common Stock to the
public at the initial public Offering price on the cover page of this
prospectus. The following table shows the public Offering price, Underwriters’
fee to be paid by us to the Underwriters and the proceeds, before expenses, to
us.
Per Common
share
|
Units Offering
|
|||||||
Assumed
public Offering price
|
$ | $ | 8,125,000 | |||||
Placement
discount
|
$ | $ | 731,250 | |||||
Proceeds
to us, before expenses
|
$ | $ | 7,393,750 |
We
expect our total cash expenses for this Offering to be approximately $507,700,
exclusive of the above commissions but inclusive of paying the Underwriters a
non-accountable expense allowance of 2% of the amount of the Offering, or
$162,500 ( exclusive of shares registered under Rule 462(b)). The
Offering will terminate upon the earlier of: (i) a date mutually acceptable
to us and the Underwriters, and (ii) February 14, 2011. On the closing
date, we will issue Units to the investors and Underwriters’ Warrants to our
Underwriters.
Underwriters'
Warrants
On the
closing date, we will be obligated to issue Underwriters’ Warrants to the
Underwriters for a nominal amount, which entitles the holder to purchase up to
_____ Units (representing 10% of the total Units sold) at a price of $.01 per
Unit. At the closing of this Offering, we will issue the
Underwriters’ Warrants. The Underwriters’ Warrants will be
exercisable, in whole or in part, for a period of five years, commencing on the
date, which is six months after the closing date. The Underwriters have been
granted certain registration rights with respect to such Underwriters’ Warrants
and the underlying Common Stock. See "Underwriting."
LEGAL
MATTERS
The
validity of the Common Stock, the Units and the Warrants offered by this
prospectus will be passed upon for us by McLaughlin & Stern LLP, New York,
NY. The law firm of JSBarkats, PLLC, is acting as counsel for the
Underwriters.
EXPERTS
The
consolidated financial statements of ASIA CORK, INC. for the years ended
December 31, 2009 and 2008have been audited by MS Group CPA LLC Certified Public
Accountants PC, an independent registered public accounting firm, as set forth
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
ADDITIONAL
INFORMATION
We
filed with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933, as amended, for the Units in this Offering. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedules that were filed with the registration statement.
For further information with respect to us and our Common Stock, we refer you to
the registration statement and the exhibits and schedules that were filed
with the registration statement. Statements contained in this prospectus about
the contents of any contract or any other document that is filed as an exhibit
to the registration statement are not necessarily complete, and we refer you to
the full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is www.sec.gov
.
We file
periodic reports under the Securities Exchange Act of 1934, as amended,
including annual, quarterly and special reports, and other information with the
Securities and Exchange Commission. These periodic reports and other information
are available for inspection and copying at the regional offices, public
reference facilities and website of the Securities and Exchange Commission
referred to above.
76
ASIA
CORK, INC. AND SUBSIDIARIES
FINANCIAL
STATEMENTS
CONTENTS
|
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
||
Consolidated
Financial Statements:
|
|||
Consolidated
Balance Sheets
|
F-3
|
||
Consolidated
Statements of Operations
|
F-4
|
||
Consolidated
Statements of Comprehensive Income
|
F-5
|
||
Consolidated
Statements of Changes In Stockholders’ Equity
|
F-6
|
||
Consolidated
Statements of Cash Flows
|
F-7
|
||
Notes
to Consolidated Financial Statements
|
F-8
to F-28
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and stockholders of
Asia Cork
Inc.
We have
audited the accompanying consolidated balance sheets of Asia Cork Inc. and its
subsidiaries (“the Company”) as of December 31, 2009 and 2008 and the related
consolidated statements of operations, comprehensive income, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2009 and
2008. The financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Asia Cork Inc. and its
subsidiaries as of December 31, 2009 and 2008 and the results of their
operations and their cash flows for the years ended December 31, 2009 and 2008
in conformity with accounting principles generally accepted in the United States
of America.
/s/ MS
Group CPA LLC
MS Group
CPA LLC
Edison,
New Jersey
March 19,
2010
F-2
ASIA
CORK INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets:
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$
|
49,949
|
$
|
23,605
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $269,259 and
$23,787, respectively
|
5,176,239
|
4,956,005
|
||||||
Inventories
|
5,971,339
|
2,756,011
|
||||||
Advance
to suppliers
|
2,468,733
|
2,562,357
|
||||||
Loan
to unrelated party
|
29,295
|
1,465,738
|
||||||
Deferred
income taxes assets
|
3,064
|
7,757
|
||||||
Prepayments
and other current assets
|
130,065
|
34,718
|
||||||
Total
Current Assets
|
13,828,684
|
11,806,191
|
||||||
Property
and Equipment - Net
|
5,317,088
|
4,813,629
|
||||||
Deposit
for Purchase of Fixed Assets
|
2,021,380
|
2,022,719
|
||||||
Deposit
for Acquisition
|
1,362,234
|
1,465,738
|
||||||
Non-Refundable
Deposit for Purchase of Land Use Right
|
1,464,768
|
-
|
||||||
Investment
- At Cost
|
2,050,675
|
2,052,034
|
||||||
Intangible
Assets- Net
|
165,647
|
171,178
|
||||||
Deferred
Income Taxes Assets
|
54,591
|
16,586
|
||||||
Total
Assets
|
26,265,067
|
22,348,075
|
||||||
Liabilities
and Equity:
|
||||||||
Liabilities
:
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
1,532,469
|
1,395,366
|
||||||
Loan
payable
|
215,321
|
439,722
|
||||||
Convertible
note, net
|
700,000
|
574,276
|
||||||
Customer
deposits
|
10,112
|
10,118
|
||||||
Taxes
payable
|
534,393
|
275,224
|
||||||
Due
to stockholder/officer
|
177,582
|
177,699
|
||||||
Other
current liabilities
|
22,528
|
33,027
|
||||||
Total
Current Liabilities
|
3,192,405
|
2,905 ,432
|
||||||
Total Liabilities
|
3,192,405
|
2,905,432
|
||||||
Equity:
|
||||||||
Asia
Cork Inc. Stockholders' Equity:
|
||||||||
Series
A preferred stock, $0.0001 par value, 5,000,000 shares authorized, zero
shares issued and outstanding, respectively.
|
-
|
-
|
||||||
Common
Stock, $0.0001 par value, 200,000,000 shares authorized, 35,663,850
issued and outstanding
|
3,566
|
3,566
|
||||||
Additional
paid-in capital
|
4,485,446
|
4,485,446
|
||||||
Additional
paid-in capital-stock warrant
|
279,386
|
279,386
|
||||||
Reserve
funds
|
2,808,865
|
2,236,716
|
||||||
Retained
earnings
|
10,740,044
|
7,966,783
|
||||||
Accumulated
other comprehensive income
|
2,657,741
|
2,668,724
|
||||||
Total
Asia Cork Inc. Stockholders' Equity
|
20,975,048
|
17,640,621
|
||||||
Noncontrolling
Interest
|
2,09 7,614
|
1,802,022
|
||||||
Total
Equity
|
23,072,662
|
19,442,643
|
||||||
Total
Liabilities and Equity
|
$
|
26,265,067
|
$
|
22,348,075
|
See notes
to consolidated financial statements.
F-3
ASIA
CORK INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
For The Years Ended December
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$
|
24,393,625
|
$
|
21,378,041
|
||||
Cost
of Goods Sold
|
16,005,148
|
13,937,361
|
||||||
Gross
Profit
|
8,388,477
|
7,440,680
|
||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
2,869,612
|
2,701,225
|
||||||
Bad
debt expenses
|
245,341
|
10,539
|
||||||
Research
& development costs
|
182,987
|
-
|
||||||
General
and administrative expenses
|
589,130
|
759,227
|
||||||
Loss
on disposal of fixed assets
|
-
|
159,364
|
||||||
Total
Operating Expenses
|
3,887,070
|
3,630,355
|
||||||
Income
From Operations
|
4,501,407
|
3,810,325
|
||||||
Other
Income (Expenses or Loss)
|
||||||||
Interest
expenses, net
|
(303,882
|
)
|
(275,105
|
)
|
||||
Other
income , net
|
136,016
|
74,091
|
||||||
Total
Other Expenses or Loss
|
(167,866
|
)
|
(201,014
|
)
|
||||
Income
from Continuing Operations Before Taxes
|
4,333,541
|
3,609,311
|
||||||
Provision
for Income Taxes
|
692,539
|
597,453
|
||||||
Net
Income Before Noncontrolling Interest
|
3,641,002
|
3,011,858
|
||||||
Less:
Net income attributable to the noncontrolling interest
|
295,592
|
279,704
|
||||||
Net
Income Attributable to Asia Cork Inc.
|
$
|
3,345,410
|
$
|
2,732,154
|
||||
Earnings
Per Share:
|
||||||||
-
Basic
|
$
|
0.09
|
$
|
0.08
|
||||
-
Diluted:
|
$
|
0.09
|
$
|
0.08
|
||||
Weighted
Common Shares Outstanding
|
||||||||
- Basic
|
35,663,850
|
35,514,406
|
||||||
- Diluted:
|
38,734,025
|
36,469,571
|
See
notes to consolidated financial statements.
F-4
ASIA
CORK INC. AND SI BSIDIDARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND
2008
For
The Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
Income Before Noncontrolling Interest
|
$
|
3,641,002
|
$
|
3,011,858
|
||||
Other
Comprehensive (Loss) Income:
|
||||||||
Foreign
Currency Translation (Loss) Income
|
(10,983
|
)
|
1,103,758
|
|||||
Comprehensive
Income
|
3,630,019
|
4,115,616
|
See notes
to consolidated financial statements.
F-5
ASIA
CORK INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Asia
Cork Inc. Stockholders' Equity
|
||||||||||||||||||||||||||||||||||||
Common
Stock
|
||||||||||||||||||||||||||||||||||||
No.
of
Shares
|
Amount
|
Additional
Paid-
in
Capital
|
Additional
in
Capital
Stock
Warrant
|
Reserve
Funds
|
Retained
Earnings
/
(Accumulated
Deficit)
|
Other
Comprehensive
Income
(Expense)
|
Noncontrolling
Interest
|
Total
|
||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
35,413,850
|
$
|
3,541
|
$
|
4,396,772
|
$
|
-
|
$
|
1,741,715
|
$
|
5,729,630
|
$
|
1,564,966
|
$
|
1,522,318
|
$
|
14,958,942
|
|||||||||||||||||||
Patent
rights donated by chairman
|
-
|
-
|
4,199
|
-
|
-
|
-
|
-
|
-
|
4,199
|
|||||||||||||||||||||||||||
Issued
convertible note with stock warrant in June, 2008
|
-
|
-
|
-
|
279,386
|
-
|
-
|
-
|
-
|
279,386
|
|||||||||||||||||||||||||||
Issued
new Common Stocks on July 31, 2008 for
service received
|
150,000
|
15
|
43,485
|
-
|
-
|
-
|
-
|
-
|
43,500
|
|||||||||||||||||||||||||||
Issued
new Common Stocks on August 14, 2008 for
service received
|
100,000
|
10
|
40,990
|
-
|
-
|
-
|
-
|
-
|
41,000
|
|||||||||||||||||||||||||||
Net
income for year ended December 31, 2008
|
-
|
-
|
-
|
-
|
-
|
2,732,154
|
-
|
279,704
|
3,011,858
|
|||||||||||||||||||||||||||
Appropriation
of reserve funds
|
-
|
-
|
-
|
-
|
495,001
|
(495,001
|
)
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
1,103,758
|
-
|
1,103,758
|
|||||||||||||||||||||||||||
Balance,
December 31, 2008
|
35,663,850
|
$
|
3,566
|
$
|
4,485,446
|
$
|
279,386
|
$
|
2,236,716
|
$
|
7,966,783
|
$
|
2,668,724
|
$
|
1,802,022
|
$
|
19,442,643
|
|||||||||||||||||||
Net
income for year ended December 31, 2009
|
-
|
-
|
-
|
-
|
-
|
3,345,410
|
-
|
295,592
|
3,641,002
|
|||||||||||||||||||||||||||
Appropriation
of reserve funds
|
-
|
-
|
-
|
-
|
572,149
|
(572,149
|
)
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Foreign
currency translation loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(10,983
|
)
|
-
|
(10,983
|
)
|
|||||||||||||||||||||||||
Balance,
December 31, 2009
|
35,663,850
|
$
|
3,566
|
$
|
4,485,446
|
$
|
279,386
|
$
|
2,808,865
|
$
|
10,740,044
|
$
|
2,657,741
|
$
|
2,097,614
|
$
|
23,072,662
|
See notes
to consolidated financial statements.
F-6
ASIA
CORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
For
The Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Income
|
$
|
3,345,410
|
$
|
2,732,154
|
||||
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||
Provided
by (Used in) Operating Activities
|
||||||||
Depreciation
and amortization
|
310,067
|
286,352
|
||||||
Bad
debt adjustment
|
245,341
|
10,539
|
||||||
Issued
Common Stock to pay legal fees
|
-
|
43,500
|
||||||
Net
income attributable to noncontrolling interest
|
295,592
|
279,704
|
||||||
Losses
on disposal of fixed assets
|
-
|
159,364
|
||||||
Deferred
income taxes benefit
|
(33,308
|
)
|
(23,905
|
)
|
||||
Consulting
fee adjusted from deferred
|
19,680
|
21,320
|
||||||
Interest
expenses for discount on convertible note
|
130,649
|
153,662
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(469,314
|
)
|
(2,215,522
|
)
|
||||
Inventories
|
(3,219,284
|
)
|
(1,657,504
|
)
|
||||
Advance
to suppliers
|
91,988
|
(21,350
|
)
|
|||||
Prepayments
and other current assets
|
(115,113
|
)
|
3,320
|
|||||
Accounts
payable and accrued expenses
|
138,118
|
348,540
|
||||||
Customer
deposits
|
-
|
10,118
|
||||||
Taxes
payable
|
259,523
|
(510,352
|
)
|
|||||
Other
current liabilities
|
(10,484
|
)
|
15,851
|
|||||
Net
Cash Provided by (Used in) Operating Activities
|
988,865
|
(364,209
|
)
|
|||||
Cash
Flows From Investing Activities
|
||||||||
Proceeds
from withdraw deposit for purchase of intangible assets
|
-
|
1,370,877
|
||||||
Proceeds
from withdraw deposit for acquisition
|
102,602
|
-
|
||||||
Payment
for purchase of equipment
|
(811,481
|
)
|
(589
|
)
|
||||
Payment
for unrelated party
|
(29,314
|
)
|
(1,465,738
|
)
|
||||
Payment
for construction in progress
|
-
|
(207,282
|
)
|
|||||
Net
Cash Used in Investing Activities
|
(738,193
|
)
|
(302,732
|
)
|
||||
Cash
Flows From Financing Activities
|
||||||||
Proceeds
from the loan
|
215,321
|
439,722
|
||||||
Repayment
to the loan
|
(439,430
|
)
|
(571,638
|
)
|
||||
Proceeds
from convertible note
|
-
|
700,000
|
||||||
Net
Cash (Used in) Provided by Financing Activities
|
(224,109
|
)
|
568,084
|
|||||
Net
Increase (Decrease) in Cash and Equivalents
|
26,563
|
(98,857
|
)
|
|||||
Effect
of Exchange Rate Changes on Cash
|
(219
|
)
|
(244,934
|
)
|
||||
Cash
and Equivalents at Beginning of Period
|
23,605
|
367,396
|
||||||
Cash
and Equivalents at End of Period
|
$
|
49,949
|
$
|
23,605
|
||||
SUPPLEMENT
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
Cash
paid for Interest
|
$
|
27,848
|
$
|
52,418
|
||||
Cash
paid for Income taxes
|
$
|
427,308
|
$
|
794,835
|
||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
||||||||
Construction
in process transferred out to property
|
$
|
-
|
$
|
3,385,406
|
||||
Shareholder
donated intangible assets into the Company without payment
|
$
|
-
|
$
|
4,199
|
||||
Issued
Common Stock for legal fees and part of consulting fees
|
$
|
-
|
$
|
84,500
|
See notes
to consolidated financial statements.
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Asia Cork
Inc. (f/k/a Hankersen International Corp.) (the "Company") was incorporated on
August 1, 1996, under the laws of the State of Delaware. Until August 2005, the
Company had no operations and the sole purpose of the Company was to locate and
consummate a merger or acquisition with a private entity.
On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc., was merged into
its parent, the Company, in order to change the name of the Company, after
approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving Company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had
no material assets.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s Common Stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB
In August
2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of the Company ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. The Company acquired Hanxin International in
exchange for shares of Common Stock and shares of the Series A Preferred
Stock of the Company. The capitalizations are described in further detail
in Note 18 to the accompanying consolidated financial statements.
Subsequent
to the merger and upon the conversion of the Series A Preferred Stock, the
former shareholders of Hanxin International will own 95% of the outstanding
shares of the Company's Common Stock. As a result of the ownership interests of
the former shareholders of Hanxin International, for financial statement
reporting purposes, the merger was treated as a reverse acquisition, with Hanxin
International deemed the accounting acquirer and Kushi deemed the accounting
acquiree. Historical information of the surviving Company is that of Hanxin
International.
Hanxin
International has no other business activities but owns 100% of Xi'An Cork
Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian
Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An
and Hanxin are People's Republic of China (“PRC”) corporations. Most of the
Company’s activities are conducted through Hanxin.
During
the year ended December 31, 2005, Hanxin acquired 75% equity interest
of Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation engages
in cork trading businesses.
Hanxin is
engaged in developing, manufacturing and marketing of cork wood floor, wall and
decorating materials. Its products are sold to customers in China and oversea
customers in India, the United States of America, Germany and Japan through the
distributors or agents.
2.
BASIS OF PRESENTATION
Principle
of consolidation
The
accompanying consolidated financial statements present the financial position,
results of operations and cash flows of the Company and all entities in which
the Company has a controlling voting interest. The consolidated financial
statements also include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such entities are
required to be consolidated in accordance with accounting principles generally
accepted in the United States (“US GAAP”). These consolidated financial
statements include the financial statements of Asia Cork Inc. and its
subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation.
The
accompanying consolidated financial statements are prepared in accordance with
US GAAP. This basis of accounting differs from that used in the statutory
accounts of some of the Company’s subsidiaries, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises with foreign investment in the PRC (“PRC GAAP”).
Necessary adjustments were made to the Subsidiary’s statutory accounts to
conform to US GAAP to be included in these consolidated financial
statements.
F-8
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
recognition
In
accordance with the ASC Topic 605, “ Revenue Recognition” , the
Company's revenues from the sale of products are recognized when reception and
inspection of goods are finalized by clients. Persuasive evidence of an
arrangement is demonstrated via purchase order from distributor, our customers,
product delivery is evidenced by warehouse shipping log as well as signed bill
of lading from the trucking Company and no product return is allowed except
defective or damaged products, the sales price to the customer is fixed upon
acceptance of purchase order, there is no separate sales rebate, discounts, and
volume incentives.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of its products at the rate of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases.
Rental
income recognition
Rental
income from operating leases related to our entertainment facility and the newly
constructed student dormitory is recognized on a straight-line basis over the
lease period. The Company recognized $263,501 and $250,447 rental income for the
years ended December 31, 2009 and 2008, respectively.
Cost of
revenue
Cost of
revenue consists of purchase cost of raw materials, packaging materials, direct
labor, depreciation and manufacturing overheads, which are directly attributable
to the manufacture of processed cork products.
Advertising
costs
Advertising
costs are booked as expenses as incurred. The Company incurred $0 and $1,539 for
the years ended December 31, 2009 and 2008, respectively.
Shipping
and handling costs
Shipping
and handling costs which associated with the purchase of products from vendors
are classified as cost of sales and recognized when the related sale is
recognized. The Company incurred $0 and $524 for the years ended
December 31, 2009 and 2008, respectively.
Research
and development costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. Research and development are expensed when
incurred in the development of new products or processes including significant
improvements and refinements of existing products. Such costs mainly relate to
labor and material cost. The amounts charged in 2009 and 2008 were $182,987 and
$0 respectively.
Cash
and equivalents
The
Company considers all highly liquid temporary cash investments with an original
maturity date of three months or less from when purchased, to be cash
equivalents.
Inventories
The
Company values inventories, consisting of finished goods, work in progress, raw
materials, packaging material, and other, at the lower of cost or market. Cost
is determined on the weighted average cost method.
Advances to
suppliers
In order
to make sure bark suppliers had enough fund to collect barks from the workers in
the mountain, the Company usually advances the payment to bark suppliers during
the seasons. Advances to suppliers are recognized and payment based
on the signed agreement with the suppliers. The advances to suppliers
are reversed when the Company received raw materials from the
suppliers. Nearly none of the advances were outstanding for more than
six months. Based upon the historical records, the Company did not
incur any losses for the advances to suppliers. Hereby the Company
had not recorded the allowance for advances to suppliers for the years ended
December 31, 2009 and 2008. The amounts of advances were $2,468,733
and $2,562,357 as of December 31, 2009 and 2008.
F-9
Property
and equipment
Property
and equipment are recorded at cost. Expenditures for major additions and
betterments are capitalized. Maintenance and repairs are charged to operations
as incurred. Depreciation of property and equipment is computed by the
straight-line method over the assets estimated useful lives. Leasehold
improvements are amortized over the lesser of the lease term or the asset's
useful lives. Upon sale or retirement of plant and equipment, the related cost
and accumulated depreciation are removed from the accounts and any gain or loss
is reflected in the Company’s Consolidated Statements of
Operations.
Impairment
of long-lived assets
The
Company evaluates the recoverability of its other long-lived assets, including
amortizing intangible assets, if circumstances indicate impairment may have
occurred pursuant to ASC 360-10-5, “ Impairment or Disposal of Long-Lived
Assets ” . This analysis is performed by comparing the respective
carrying values of the assets to the current and expected future cash flows, on
an undiscounted basis, to be generated from such assets. If such analysis
indicates that the carrying value of these assets is not recoverable, the
carrying value of such assets is reduced to fair value through a charge to the
Company’s Consolidated Statements of Operation.
Intangible
assets
With the
adoption of ASC 740, intangible assets with a definite life are amortized on a
straight-line basis. Intangible assets with a definite life are tested for
impairment whenever events or circumstances indicate that a carrying amount of
an asset (asset group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the estimated
undiscounted cash flows used in determining the fair value of the asset. The
amount of the impairment loss to be recorded is calculated by the excess of
the asset’s carrying value over its fair value. Fair value is generally
determined using a discounted cash flow analysis. Costs related to internally
develop intangible assets are expensed as incurred.
Comprehensive
income (loss)
ASC 220,
“ Reporting Comprehensive
Income ”, established standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of
general purpose financial statements. ASC 220 defines comprehensive income to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, ASC 220 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. The Company’s
only current component of comprehensive income is the foreign currency
translation adjustment.
Concentration
of credit risk
The
Company's financial instruments consist primarily of cash, which is invested in
money market accounts, accounts receivable. The Company considers the book value
of these instruments to be indicative of their respective fair value. The
Company places its temporary cash investments with high credit quality
institutions to limit its exposure. Almost all of the Company's sales are credit
sales which are primarily to customers whose ability to pay is dependent upon
the industry economics prevailing in their respective areas; however,
concentrations of credit risk with respect to trade accounts receivable is
limited due to generally short payment terms. The Company also performs ongoing
credit evaluations of its customers to help further reduce credit
risk.
Related
Parties
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
Fair
value of financial instruments
The
carrying amounts reported in the balance sheet for cash and equivalents,
accounts receivable, inventories, advances to suppliers, prepayments and other
current assets, accounts payable, accrued expenses, loan payable, taxes payable,
and other current liabilities approximate fair value based on the
short-term maturity of these instruments. The Company's loans payable
approximates the fair value of such instruments based upon management's best
estimate of interest rates that would be available to the Company for similar
financial arrangements on December 31, 2009.
Contribution to
retirement
Contributions
to retirement plans, which are defined contribution plans, are charged to
general and administrative expenses in the accompanying consolidated statements
of operation as the related employee service is provided.
Income
taxes
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is exempt
from income taxes.
The
Company follows ASC 740 - Accounting for “ Income Taxes ”, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
F-10
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
Basic
and diluted net income per share
The
Company accounts for net income per common share in accordance with ASC 260,
“Earnings per Share” (“EPS”). ASC 260 requires the disclosure of the
potential dilution effect of exercising or converting securities or other
contracts involving the issuance of Common Stock. Basic net income per share is
determined based on the weighted average number of common shares outstanding for
the period. Diluted net income per share is determined based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised into Common Stock.
Stock-based
compensation
The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50 “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the services
received. Fair value is measured as the value of the Company’s Common
Stock on the date that the commitment for performance by the counterparty has
been reached or the counterparty’s performance is
complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Estimates, by their nature, are based on judgment and available information.
Accordingly, actual results could differ from those estimates.
Segment
reporting
ASC Topic
280, “ Segment Reporting”
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. For the years ended December 31, 2009 and 2008, the
Company operates and manages its business as a single operating
segment.
New
accounting pronouncements
In
November 2009, the FASB issued ASU 2009-16, “ Transfers and Servicing
(Topic 860) – Accounting
for Transfers of Financial Assets ,” which requires more information
about transfers of financial assets, including securitization transactions, and
where entities have continuing exposure to the risks related to transfer of
financial assets. It eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures. The provisions are effective January 1,
2010, for a calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a material
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “
Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force) ” which amends ASC 605-25, “ Revenue Recognition:
Multiple-Element Arrangements .” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated
financial statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25, “
Revenue Recognition;
Multiple-Element Arrangements .” These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to
allocate revenue in an arrangement using estimated selling prices of
deliverables in the absence of vendor-specific objective evidence or third-party
evidence of selling price. These amendments also eliminate the use of the
residual method and require an entity to allocate revenue using the relative
selling price method. The amendments significantly expand the disclosure
requirements for multiple-deliverable revenue arrangements. These
provisions are to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. The Company is currently
evaluating the impact of these amendments to its consolidated financial
statements.
F-11
In August
2009, the FASB issued an update of ASC Topic 820, “ Measuring Liabilities at Fair
Value ”. The new guidance provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to
be applied by nongovernmental entities. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of ASC 105, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become nonauthoritative. ASC 105 is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. Adoption of ASC 105 is not expected to have a material
impact on the Company’s results of operations or financial
position.
In
June 2009, the FASB issued ASC 810, “ Amendments to FASB Interpretation
No. 46(R)”
, which improves
financial reporting by enterprises involved with variable interest entities. ASC
810 addresses (1) the effects on certain provisions of FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities
, as a result of the elimination of the qualifying special-purpose entity
concept in SFAS 166 and (2) concerns about the application of certain key
provisions of FIN 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provide timely and useful information
about an enterprise’s involvement in a variable interest entity. ASC 810 shall
be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods
within the first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited. Adoption of ASC 810 is
not expected to have a material impact on the Company’s results of operations or
financial position.
In
May 2009, the FASB issued ASC 855, “ Subsequent Events ”, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. An entity should apply the requirements of ASC 855
to interim or annual financial periods ending after June 15, 2009. Adoption
of ASC 855 did not have a material impact on the Company’s results of operations
or financial position.
4.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
Company generally provides its major customers with short term credit pursuant
to which the customers are required to make payment between three months and six
months after delivery, depending on the customer’s payment history. During the
fourth quarter of 2008, due to adverse market conditions for home and commercial
renovation and decoration, the Company’s accounts receivable as of
December 31, 2008 were $4,979,792, and which included accounts receivable
outstanding in excess of six months of $1,551,836 (equivalent to RMB
10,587,400). Commencing in April 2009, not only adverse market conditions
were eliminated gradually, but also the management of the Company enhanced
actively to collect in accounts receivable. As a result, most of accounts
receivable balances at December 31, 2008 were collected during the third quarter
of 2009. In year 2009 the total revenues resulted from a combination of
increased orders by existing and new clients as the Company continued to
successfully increase sales to customers and expand customer base, the Company’s
accounts receivable balance increased during 2009. As of December 31,
2009 the accounts receivable balance was $5,445,498 (equivalent to
RMB37,176,525).
F-12
The
accounts receivable amounts included in the consolidated balance sheets for the
years ended December 31, 2009 and 2008 were as follows:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Shaanxi
Shuta Cork Products Co., Ltd
|
$
|
478,940
|
$
|
749,548
|
||||
Distributors
who had owed the Company more than USD146,477 (equivalent to RMB1
million)
|
1,951,810
|
1,864,437
|
||||||
Distributors
or Customers who had owed the Company equal or less than USD146,477
(equivalent to RMB1 million)
|
3,014,748
|
2,365,807
|
||||||
Sub-total
|
5,445,498
|
4,979,792
|
||||||
Less:
Allowance for doubtful accounts
|
269,259
|
23,787
|
||||||
Accounts
receivable, net
|
$
|
5,176,239
|
$
|
4,956,005
|
The total
amounts sold to the customers (who had balance of accounts receivable of the
Company more than $146,477 (equivalent to RMB1 million) as of December 31, 2009
and 2008) were $4,304,770 and $3,729,110 for the years ended December 31, 2009
and 2008, respectively. The ratios sold to the major customers were
represented 17.6% and 17.4% of total sales in the years ended December 31, 2009
and 2008. Since the total revenues generated from more customers, none of the
Company’s customers accounted for more than 10% of total sales for the years end
December 31, 2009 and 2008, respectively.
The
following is a summary of the status of allowance for doubtful accounts as of
December 31, 2009and 2008
Period
|
Amount
|
Period
|
Amount
|
|||||||
As
of March 31, 2009
|
$
|
22,940
|
As
of March 31, 2008
|
$
|
13,057
|
|||||
As
of June 30, 2009
|
28,290
|
As
of June 30, 2008
|
15,571
|
|||||||
As
of September 30, 2009
|
277,100
|
As
of September 30, 2008
|
22,429
|
|||||||
As
of December 31,2009
|
269,259
|
As
of December 31,2008
|
23,787
|
The
Company uses the allowance method to estimate the uncollectible portion of its
account receivables. Based on the percentage of outstanding receivable approach,
the Company should recorded bad debt expense in the debit and the related credit
to the allowance account at closing day. The Company’s subsidiary, Hanxin
maintains a reserve for uncollectible accounts of 0.5% of accounts receivable.
During the third quarter of 2009, the Company increased the amount of its
reserve from 0.5% to 5.0% of accounts receivable due to a high level of
increasing accounts receivable from its major customer as a result of the
increase in sales to both existing and new customers. Consequently, the Company
recognized more allowance for doubtful accounts from September 30, 2009 to
December 31, 2009, respectively.
Accounts
receivable aging as of December 31, 2009 and 2008 consisted of the
following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Less
than 90 days
|
$
|
3,778,740
|
$
|
1,185,856
|
||||
91days-180days
|
1,606,436
|
2,242,100
|
||||||
181days-365days
|
-
|
1,310,794
|
||||||
More
than 365days
|
60,322
|
241,042
|
||||||
Total
|
$
|
5,445,498
|
$
|
4,979,792
|
The
Company’s accounts receivable with ages of less than 91 days represented 69% and
24% of the total receivables as of December 31, 2009 and 2008,
respectively.
F-13
Accounts
receivable turnover for the year ended December 31, 2009 and 2008 consisted of
the following:
For
the Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
receivable turnover
|
1.85
|
1.16
|
Since
there were significantly increased credit sales in year 2009 as compared to year
2008, and the increased credit sales amount were significantly greater than the
average accounts receivable increased amount in year 2009 as compared to year
2008. As a result, the accounts receivable turnover in year 2009 was greater
than the turnover in year 2008.
5.
INVENTORIES
|
The
barks and wood particles are most raw materials to manufacture cork planks.
The wood particles consisted of grinded barks. During the course of
manufacture, the Company made use of reproducible oak barks. Since the growth
cycle of oak barks takes long periods of time, the Company generally purchased
significant barks and wood particles in order to ensure productions. Moreover,
the barks usually were picked in autumn. In order to have sufficient
raw materials used in manufacture for the coming year, the Company
purchased enormous amount of barks and wood particles as of December 31,
2009.
On
October 15, 2009, in order to expand annual output, the Company entered into an
agreement to cooperating with Sichuan Hanxin Cork Merchandises Co, Ltd.
(“Sichuan Hanxin”) to build another production line for manufacturing the cork
floor planks located in Sichuan province. Pursuant to the agreement,
the Company provided a set of production equipment, and Sichuan Hanxin
agreed to provide the workshop and supplementary equipments. Also the
Company shall prepay raw materials payment and provide secondary raw materials
to Sichuan Hanxin. Nevertheless, Sichuan Hanxin shall be responsible for the
production of cork floor products in accordance with the quality specifications
and standards set by the Company. According to the agreement, we have exclusive
right to sell the cork floor products produced from this production
line. As a result, in order to perform the agreement, the Company
purchased huge secondary raw materials as of December 31, 2009.
Inventories
on December 31, 2009 and 2008 consisted of the following:
As
of December 31,2009
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
||||||||
Tree
skins
|
$
|
2,026,925
|
$
|
1,361,452
|
||||
Wood
Particles
|
1,097,599
|
520,075
|
||||||
Secondary
raw materials
|
1,639,893
|
-
|
||||||
Other
raw materials
|
29,188
|
191,974
|
||||||
Subtotal
|
4,793,605
|
2,073,501
|
||||||
Work
in progress
|
202,495
|
210,526
|
||||||
Finished
goods
|
961,765
|
427,459
|
||||||
Packaging
and other
|
13,474
|
44,525
|
||||||
Total
|
$
|
5,971,339
|
$
|
2,756,011
|
F-14
Inventories
turnover for the years ended December 31, 2009 and 2008 consisted of the
following:
For
the Year Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Inventory
turnover
|
3.53
|
7.13
|
In order
to ensure productions in the coming year, significant raw materials inventories
were increased as of December 31, 2009 as compared to year 2008 and the total
cost of goods sold increased amount was significantly less than the average
inventories increased amount in year 2009 as compared to year
2008. As a result, the inventory turnover figure for the year ended
December 31, 2009 was less than the amount in the same period of
2008.
6.
ADVANCE TO SUPPLIERS
The
supply of cork raw material is our basis of production. Since the growth cycle
of tree skins used in manufacturing need sufficient growth. In order to acquire
sufficient tree skins and ensure production in the future, the Company generally
signs purchase agreements with some unrelated parties at the beginning of every
year. Pursuant to the agreements, the Company is required to pay its
suppliers in advance. As of December 31, 2009, nearly none of these advances
were outstanding more than six months. The Company did not incur
losses in connection with advances to suppliers as of December 31,
2009. As such, the Company had not recorded the allowance for
advances to supplier for the year ended December 31, 2009, and the net amount of
advances to suppliers was $2,468,733 and $2,562,357 as of December 31, 2009 and
2008 respectively.
7.
LOAN TO UNRELATED PARTY
In
September 2009 the Company made a loan to Xian Tianlun Bath Co., Ltd (“Xian
Tianlun”) in the amount of RMB 0.2 million (equivalent to $29,295) for the
period from September 27, 2009 to September 26, 2010 with an interest rate of 7%
per year. As of December 31, 2009, the Company loaned RMB0.2 million (equivalent
to $29,295) to Xian Tianlun. Xian Tianlun is an unrelated third party to the
Company, and the loan was unsecured.
8.
PROPERTY AND EQUIPMENT - NET
As of
December 31, 2009 and 2008, property and equipment consisted of the
following:
As
of December 31,
|
||||||||||||
Estimated
Life
|
2009
|
2008
|
||||||||||
Building
and improvements
|
27-35
|
$
|
2,471,084
|
$
|
2,472,721
|
|||||||
Constructed
student dormitory
|
30
|
2,420,620
|
2,422,224
|
|||||||||
Manufacturing
equipments
|
1-8
|
1,624,987
|
838,766
|
|||||||||
Office
furniture and equipments
|
5
|
31,120
|
31,141
|
|||||||||
Vehicles
|
2-8
|
12,518
|
12,527
|
|||||||||
Machinery
improvements
|
3
|
80,563
|
80,616
|
|||||||||
Subtotal
|
6,640,892
|
5,857,995
|
||||||||||
Less:
Accumulated depreciation
|
1,323,804
|
1,044,366
|
||||||||||
Total
|
$
|
5,317,088
|
$
|
4,813,629
|
For the
years ended December 31, 2009 and 2008, depreciation expenses amounted to
$304,653 and $281,185, respectively. Loss on disposal of fixed assets for the
years ended December 31, 2009 and 2008 were $0 and $159,364,
respectively.
As of
December 31, 2009 and 2008, operation related properties consisted of the
following:
As
of December 31,
|
||||||||||||
Estimated
Life
|
2009
|
2008
|
||||||||||
Buildings
and improvements
|
30-35
|
$
|
1,551,588
|
$
|
1,552,616
|
|||||||
Manufacturing
equipments
|
1-8
|
1,598,728
|
787,768
|
|||||||||
Office
furniture and equipments
|
5
|
31,120
|
31,141
|
|||||||||
Vehicle
|
8
|
12,518
|
12,527
|
|||||||||
Machinery
improvements
|
3
|
80,563
|
80,615
|
|||||||||
Subtotal
|
3,274,517
|
2,464,667
|
||||||||||
Less:
Accumulated depreciation
|
935,210
|
744,492
|
||||||||||
Total
|
$
|
2,339,307
|
$
|
1,720,175
|
For the
years ended December 31, 2009 and 2008, depreciation expenses for operation
related properties amounted to $191,096 and $209,176, respectively. Losses on
disposal of operation related properties for the years ended December 31,
2009 and 2008 were $0 and $159,364, respectively.
F-15
As of
December 31, 2009 and 2008, investment related properties consisted of the
following:
As
of December 31,
|
||||||||||||
Depreciation
Properties:
|
Estimated
Life
|
2009
|
2008
|
|||||||||
Buildings
and improvements
|
28
|
$
|
919,497
|
$
|
920,106
|
|||||||
Student
dormitory
|
30
|
2,420,619
|
2,422,224
|
|||||||||
Machinery
and equipments
|
5
|
26,259
|
50,998
|
|||||||||
Subtotal
|
3,366,375
|
3,393,328
|
||||||||||
Less:
Accumulated depreciation
|
388,594
|
299,874
|
||||||||||
Total
Investment depreciation properties
|
2,977,781
|
3,093,454
|
For the
years ended December 31, 2009 and 2008, depreciation expenses for investment
related properties amounted to $113,557 and $72,009, respectively.
On
September 27, 2001, the Company purchased certain investment entertainment
facilities called YuLerYuan Resort which included certain buildings, machinery,
equipments, and the right to use a parcel of land of approximately 10,360.3
square meters for 40 years. The purchase price of the land use right is being
amortized over the term of the right while other facilities is being
depreciated over the estimated life of properties. The Company renovated the
space and built an additional student dormitory in 2007. The constructions were
completed in June 2008. Although the construction had been completed, Hanxin did
not acquire the occupation certificates and ownership certificates with respect
to the dormitory. The Company built a student dormitory in YuLerYuan Resort
in 2007. The construction was completed in June 2008. Although the construction
had been completed, as of June 30, 2010, Hanxin had not acquired the occupation
certificates and ownership certificates with respect to the dormitory. Since the
process for obtaining these certificates in self-constructed building is more
complicated than obtaining a certificate for pre-existing structures in PR China
, it has taken the
Company longer to process the application. In order to pass the inspection from
the authorities, the Company spent additional funds to install fire-fighting
equipment in the building during the second quarter of 2010. The installation of
fire fighting equipments was not completed until the ended of July
2010.
Hanxin
expects to receive these certificates by the third quarter of 2010. However,
there is no assurance that the certificates will be received by then. The
failure to obtain them will ultimately result in not being able to use the
facilities for their intended purposes which may have a material adverse effect
on our business. The YuLerYuan Resort including new student dormitory was leased
for $21,958 (equivalent to RMB150,000) per month to the university nearby
YuLerYuan Resort and this agreement was renewed on Mar. 1st, 2010, and was
extended to Feb. 28th, 2011.
The
amortization schedule for the land use right in YuLerYuan Resort shown in Note
13 “Intangible Asset – Net”
9.
DEPOSIT FOR PURCHASE OF FIXED ASSETS
Hanxin
intended to purchase a factory’s fixed assets through an unrelated agent who
handled the negotiations for the Company, and both parties signed the Entrust
Purchase Agreement on November 10, 2005. Hanxin had paid deposits
$2,021,380 (equivalent to RMB 13,800,000) to the agent as of December 31,
2009, and the same deposit was valued at $2,022,719 (equivalent to RMB
13,800,000) as of December 31, 2008. The agency agreement has no firm
commitment on the purchase but it stated a maximum price of RMB 50,000,000 that
the Company is willing to pay for the fixed assets. Due to the dissension within
the factory’s creditors, the agent could not close this purchase agreement on
time. As a result, Hanxin had a supplementary agreement with this agent on
September 27, 2009. Pursuant to the terms of a supplementary agreement with
this agent, the agreement was extended and as a result, Hanxin expects to fully
collect the deposit which had paid to the agent if the purchase is not completed
by June 30, 2010. However, there is no assurance that the
deposits will be returned to Hanxin by then.
F-16
10. DEPOSIT
FORACQUISITION
Hanxin
intended to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan
Hanxin”), one of its cork raw material providers located in Sichuan Province
China, and signed a strategic cooperation agreement with Sichuan Hanxin on
March 26, 2007. The purchase price of Sichuan Hanxin was not to exceed
$2,925,536 (RMB20 million) based upon the agreement. As of
December 31, 2009, Hanxin had paid a $1,362,234 (equivalent to
RMB9.3 millions) deposit to Sichuan Hanxin.
On
September 20, 2009, Hanxin entered into an agreement (“Agreement”) with the
two shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The Agreement
grants Hanxin an option to acquire 100% of the shares of Sichuan Hanxin by
September 20, 2010. The acquisition price shall be between 120% and 150% of the
net asset value as shown in the audited financial statements as of December 31,
2009 of Sichuan Hanxin as determined by an audit firm Hanxin designates. The
amount of the premium over the net asset value is subject to agreement by the
parties, but cannot exceed 150%. Exercise of the option is subject to a
satisfactory financing arrangement, due diligence and requisite corporate
approvals. In the event that any of the closing conditions are not satisfied by
September 20, 2010, the agreement will terminate except that the breaching
party shall be liable to pay a penalty of RMB 10 million (equivalent to
$1,464,768). According to the agreement, Hanxin shall pay 30% of the acquisition
price within 10 days from the date of fulfillment of all closing conditions, 30%
within 60 days from the fulfillment date, and 40% within 10 days from completing
the transfer of all assets and shares of Sichuan Hanxin. As of
December 31, 2009, Hanxin had paid a deposit of $1,362,234 (equivalent to
RMB9.3 millions) to Sichuan Hanxin. Since the Company did not
acquire any financing, and none of the closing conditions were satisfied as of
September 20, 2010, the acquisition agreement between the Company and Sichuan
Hanxin had been terminated. In addition, the Company purchased enormous amounts
of cork floor products from Sichuan Hanxin since April 2010. It incurred a huge
amount of costs due to Sichuan Hanxin. As a result, after negotiation
by both parties, the acquisition deposit of RMB9.3 million (equivalent to
$1,362,234 ) had been fully offset the due debt resulted from
purchase cork floor products from Sichuan Hanxin.
11. NON-REFUNDABLE
DEPOSIT FOR PURCHASE OF LAND USE RIGHT
In order
to ensure sufficient raw material production base in the future, the Company
plans to purchase the right to use a parcel of land of planting oak from Shaanxi
Shuta Cork Products Co., Ltd (“Shuta”) in the Baoji district Shaanxi
Province of the PRC in 2007 (oak leather used to produce the Company's main raw
material). The Company prepaid in amounts of RMB10 million
(equivalent to $1,464,768) to Shuta. However, the Company terminated the
agreement with Shuta in August, 2008. Despite the deposit in amounts of RMB10
million had been fully refunded back to the Company in August and September
2008. However, due to affect adversely financial crisis all over the
world during the fourth quarter of 2008, the Company’s financing plans were
failed during the fourth quarter of 2008 and first quarter of 2009, and the
Company was regretted to terminate the land use right purchase deal from Shuta.
In year 2008, based upon Hanxin’s sale and manufacturing strategies Shaanxi
Shuta opened cork retail chain stores exclusively selling Hanxin’s products but
Hanxin could not achieve its 500,000 square meters floor and board production
plan in year 2008 and had delayed many purchase orders from Shaanxi Shuta; thus
Shaanxi Shuta had to readjust its year 2008 sales strategies and incurred heavy
losses. In order to avoid losing a very important distribution channel and to
assist Shaanxi Shuta to recover from this situation, Hanxin had loaned
RMB10 million (equivalent to $1,464,768) to the Shaanxi Shuta for one year
term starting from October 27, 2008. This loan is non-interest
bearing and unsecured. One day subsequent to the due date of the loan, October
28, 2009, Hanxin signed another loan agreement with Shaanxi Shuta and loaned the
same amount of RMB10 million to Shaanxi Shuta again for the term from October
27, 2009 to October 27, 2011. This loan is also non-interest bearing and
unsecured.
Hanxin
would like to purchase the land use right in Baoji District Shaanxi Providence
from Shaanxi Shuta as soon as its financing situation allowable, since the price
of the land use right is going up, and Hanxin do need a parcel of land use right
to plan the Portugal type of cork trees to secure its cork materials in the
future. Therefore, on October 20, 2009, Hanxin signed a forgiveness memo with
Shaanxi Shuta to express its sincerity to acquire 7,000 Mu (equal to 4,669,000
square meters) land use right located in Baoji District Shaanxi Providence from
Shaanxi Shuta within two years starting from October 20, 2009. In consider
of the expenditure of Shaanxi Shuta in acquired the land use right for Hanxin,
Hanxin agree to purchase this land use right within two years in the same amount
of RMB37.8 million listed in prior agreement in 2008. In the event that
Hanxin does not purchase the land by October 20, 2011, Hanxin will be liable to
pay Shaanxi Shuta all upfront operation costs approximately RMB10 million
(equivalent to $1,464,768) that Shaanxi Shuta had paid to acquire the land use
right from the Baoji District government. The parties anticipate that should
Hanxin does not purchase the land by October 20, 2011, Shaanxi Shuta will not
repay the RMB10 million loan pursuant to Loan Agreement dated October 28,
2009 and the parties will have no further obligation to each other regarding the
loan or the land purchase. Therefore, the Company reclassified all of these loan
amounts as Non-Refundable deposits for purchase of land use right
commencing as of October 20, 2009.
Even
though Shaanxi Shuta is one of major customers of Hanxin in years ended December
31, 2009 and 2008, but the total amounts sold to Shaanxi Shuta in year 2009 and
2008 were only represented 2.63% and 3.30% of total sales of Hanxin, one of the
Company’s subsidiaries in China, in the years ended December 31, 2009 and 2008,
respectively. Also, Shaanxi Shuta does not have the ability, directly or
indirectly, to control the Company or exercise significant influence over the
Company in making financial and operational decisions. Furthermore, Shaanxi
Shuta is not subject to common control or common significant influence.
Accordingly, Shaanxi Shuta is not deemed a related party of the Company for the
years ended December 31, 2009 and 2008.
F-17
12.
|
INVESTMENT
– AT COST
|
On
June 28, 2005, the Company purchased a 12% equity interest of Shaanxi
DeRong Technology Information Development Co. Ltd. (“DeRong”), a PRC
corporation, for $2,050,675 (equivalent to RMB 14,000,000). DeRong owns a cork
tree forest plantation in China. The investment is stated at cost.
13.
|
INTANGIBLE
ASSETS
|
On
September 27, 2001, the Company purchased the right to use a parcel of land
for 40 years in YuLerYuan Resort. The purchase price is being amortized over the
term of the use right. In addition, during the quarter ended June 30, 2008,
the Company acquired ownership of three patent rights from its major stockholder
and Chairman, Mr. Fang She Zhang, at no cost. These three patent rights are
used as part of a vital technique for the production of the Company’s products.
The application and filing costs of these three patent rights were $4,199
(equivalent to RMB28,800). as of June 30, 2008. On December 31, 2009 and
2008, intangible assets, less accumulated amortization consisted of the
following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Intangible
assets
|
$
|
208,194
|
$
|
208,332
|
||||
Less:
Accumulated amortization
|
42,547
|
37,154
|
||||||
Total
|
$
|
165,647
|
$
|
171,178
|
For the
years ended December 31, 2009 and 2008, amortization expense amounted to
$5,414 and $5,167, respectively.
F-18
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Intangible
assets
|
$
|
4,219
|
$
|
4,221
|
||||
Less:
Accumulated amortization
|
477
|
159
|
||||||
Total
|
$
|
3,742
|
$
|
4,062
|
For the
years ended December 31, 2009 and 2008, amortization expenses for operation
related intangible assets amounted to $318 and $159, respectively.
As of
December 31, 2009 and 2008, investment related intangible assets consisted of
the following:
As of December 31,
|
||||||||||||
Amortization Property:
|
Estimated Life
|
2009
|
2008
|
|||||||||
Land
use right
|
40
|
203,975
|
204,110
|
|||||||||
Less:
Accumulated amortization
|
42,070
|
36,994
|
||||||||||
Total
amortization properties
|
161,905
|
167,116
|
For the
years ended December 31, 2009 and 2008, amortization expenses for investment
related intangible assets amounted to $5,096 and $5,008
respectively
F-19
The
amortization expenses for the next five years are as follows:
For the Year Ending December 31,
|
Total
Amount
|
Operation
Related
|
Investment
Related
|
|||||||||
2010
|
$
|
5,414
|
$
|
318
|
$
|
5,096
|
||||||
2011
|
5,414
|
318
|
5,096
|
|||||||||
2012
|
5,414
|
318
|
5,096
|
|||||||||
2013
|
5,414
|
318
|
5,096
|
|||||||||
2014
|
5,414
|
318
|
5,096
|
14.
|
LOAN
PAYABLE
|
Loans
payable as of December 31, 2009 and 2008 consisted of the
following:
Loan
payable is comprised of the following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
On
November 30, 2007, the Company obtained a short-term loan RMB3.9 million
(equivalent at that time to $534,642 ) from Xian Xitaoyuan Credit Bank by
pledging the Company's building in YuLerYuan with bank, The loan interest
is 8.37‰ per month. The Company had paid principal RMB3.9 million back to
bank on June 30, 2008. On the same day, the Company
borrowed RMB3 million (equivalent to $439,722 ) from the same
bank with new interest rate 9.967‰ per month and new due date on June 30,
2009. This RMB3 million loan had been fully paid off on June 29,
2009.
|
$
|
-
|
$
|
439,722
|
||||
Commencing
from September 24, 2009, the Company borrowed certain short-term
loans from Mr. Yang Liu, an unrelated party. These short-term loans were
in amounts of RMB1.47 million (equivalent to $215,321) as of December 31,
2009. The interest rate of these loans is 7.4% per year, and all due on
September 24, 2010.
|
215,321
|
-
|
||||||
Total
Loan Payable
|
$
|
215,321
|
$
|
439,722
|
F-20
15.
|
CONVERTIBLE
NOTE AND WARRANTS
|
On June 4
and June 12, 2008, the Company consummated an Offering of convertible promissory
notes and Common Stock purchase warrants for aggregate gross proceeds of
$700,000. The notes mature one (1) year from the date of issuance and bear
interest at an annual rate of 18%, payable at maturity in USD. Upon the
successful closing of an equity or convertible debt financing for a minimum of
$2,000,000 ("Financing"), the promissory notes will be convertible into shares
of Common Stock at a 50% discount to the price per share of Common Stock sold in
the Financing. Since the Financing is not achieved within the one year term of
the promissory notes, each investor has the option to be paid the principal and
interest due under the promissory note or convert the note into shares of
Common Stock at a conversion price of $0.228 per share.
The
warrants are exercisable at any time after the consummation of the Financing
through the fourth anniversary of the consummation of the Financing (the
"Financing Expiration Date"). Each holder is entitled to purchase the number of
shares of Common Stock equal to the initial principal amount of such investor's
promissory note DIVIDED BY the lowest cash purchase price paid for the Company's
Common Stock (or the conversion price or exercise price if the Financing
consists of convertible securities or warrants, respectively) in the Financing
(the "Financing Based Conversion Price") at an exercise price equal to the
Financing Based Conversion Price. Since the Financing did not occur within 12
months of the issuance of the warrant, the warrant is exercisable from and after
such date and through the fourth anniversary of the issuance date of the
warrant. In such event, the holder is entitled to purchase the number of shares
of Common Stock equal to 50% of the initial principal amount of the promissory
note DIVIDED BY $0.228 at an exercise price equal to $0.228, subject to certain
adjustments as set forth in the warrant. The interest payable regarding the
convertible notes has been accrued and recorded as of December 31,
2008. The different amount between the option price in declared date and
warrant conversion price $0.228 time total entitled warrant shares had been
charged directly to discount on convertible note, and the sum was add to
additional paid-in capital-stock warrant in amount of $279,386 as of December
31, 2008.
Since the
notes were not paid at maturity in June 2009, the annual interest rate payable
since the maturity date increased to 24%. The interest payable regarding the
convertible notes has been accrued and recorded as of December 31, 2009 and
2008. However, the extension of due date for notes is still under negotiation as
of April 30, 2010, but there can be no assurance that the holders of the
convertible notes will agree to extend the due date or the terms of such
extension.
Since
warrants issued with convertible note are basically long-term options to buy
Common Stock at fixed price. The Company allocated the proceeds from the
Offering of convertible promissory notes and Common Stock purchase warrants
between the two securities, and recorded the convertible promissory notes and
Common Stock purchase warrants by incremental method, The different amounts
between the market price of Common Stock on the stock warrants grant date and
warrant conversion price $0.228 for total entitled warrant shares had been
carried on the balance sheet as a “discount on convertible note, and the sum
also been carried on the balance sheet as an “additional paid-in capital-stock
warrant” in amount of $279,386 as of December 31, 2009 and 2008,
respectively.
F-21
If the
investors exercise the warrants in the future, the Company will debit the total
proceeds received and “Additional Paid-in Capital – Stock Warrant”, and credit
the “Common Stock” and “Additional Paid-in Capital in Excess of Par”. However,
if the investors fail to exercise the warrants in the future, the Company will
write off them by debit “Additional Paid-in Capital –Stock Warrant” for 279,386,
and credits “Additional Paid-In Capital from Expired Warrants” for a like
amount.
The
Company’s obligations under the promissory notes are secured by an aggregate of
7,630,814 shares of Common Stock pledged by Mr. Pengcheng Chen, the Company’s
Chief Executive Officer, Mr. Fangshe Zhang, the Company’s Chairman (the “Escrow
Shares”). In the event that subsequent to the issuance of the Convertible Notes,
the value of the Escrow Shares is less than 150% of the outstanding principal
amount of the promissory notes for 10 consecutive trading days, then the holder
of the promissory notes shall have the right to give the Company notice (the
“Investor Notice”) to deposit or cause to be deposited additional Escrow
Shares such that the value of the Escrow Shares based upon the volume
weighted average price per share for the 20 trading days preceding the date of
the Investor Notice, is equal to 150% of the outstanding principal amount of the
promissory notes. The Company agreed to deposit or cause to be deposited
such additional Escrow Shares within 30 days of the date of the Investor Notice.
To the extent the Escrow Shares are not sufficient to meet the threshold of 150%
of the outstanding principal amount of the promissory notes within 30 days after
the Investor Notice, the Company shall grant to investors a security interest on
the Company’s tangible assets to the extent permitted under applicable
law.
Net of
convertible note as of December 31, 2009 and 2008 consisted of the
following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Convertible
note
|
$
|
700,000
|
$
|
700,000
|
||||
Less:
Discount on convertible note
|
-
|
125,724
|
||||||
Convertible
note, net
|
$
|
700,000
|
$
|
574,276
|
F-22
16.
|
TAXES
PAYABLE
|
The
Company and its U. S. subsidiary will file consolidated Federal income tax and
state franchise tax annual report individually. Its PRC subsidiaries file income
tax returns under the Income Tax Law of the PRC concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws. The Company’s BVI
subsidiary is exempt from income taxes.
Per PRC
Income Tax Law, any new foreign owned corporation is exempt from income tax for
the first two years of existence, and then receives a 50% exemption of income
tax for the next three years if it is a non high-tech corporation or 15% tax
rate for corporation qualified by State Science and Technology Commission as
"High Tech Manufacturing Enterprise" located in State "High Tech Zone" approved
by China State Council. Hanxin is qualified as a High Tech Manufacturing
Enterprise. Based on this regulation, Hanxin was exempt from income tax in year
2003 and 2004 and its income has been subject to a 15% tax starting from January
1, 2005. CIE is not “High Tech Manufacturing Enterprise” approved by China State
Council, thus its income is subject to 33% tax rate. Commencing from January,
2008, based on the new regulation in the PR, CIE’s income is subject to 25% tax
rate.
On
December 31, 2009 and 2008, taxes payable consisted the
following:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Value-added
taxes
|
$
|
144,664
|
$
|
177,287
|
||||
Corporate
income taxes provision
|
373,542
|
74,888
|
||||||
Local
taxes and surcharges
|
12,973
|
13,491
|
||||||
Franchise
taxes
|
3,214
|
9,558
|
||||||
Total
|
$
|
534,393
|
$
|
275,224
|
The
deferred income taxes assets results from loss on disposition of fixed assets
that are no deductible and bad debt allowance are deductible when the bad debt
is incurred
The
components of the provisions for income taxes were as follows:
For Th e Years Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Current
taxes:
|
||||||||
Current
income taxes in P.R. China
|
$
|
725,847
|
$
|
621,358
|
||||
Deferred
taxes benefits
|
33,308
|
23,905
|
||||||
Total
provision for income taxes
|
$
|
692,539
|
$
|
597,453
|
F-23
The
following is a reconciliation of the statutory taxes rate to the effective taxes
rate for the years ended December 31, 2009 and 2008:
For the Years Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
U.S.
statutory corporate income taxes rate
|
34
|
%
|
34
|
%
|
||||
PRC
taxes rate difference
|
(9
|
)%
|
(9
|
)%
|
||||
Net
effect of taxes exemption/non-taxable income/non-deductible
expenses
|
(10
|
)%
|
(8
|
)%
|
||||
Valuation
allowance
|
1
|
%
|
-
|
|||||
Effective
taxes rate
|
16
|
%
|
17
|
%
|
The taxes
effect of temporary differences that give rise to the Company’s deferred taxes
assets as of December 31, 2009 and 2008 were as follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
income taxes assets :
|
||||||||
Bad
debt allowance
|
$
|
40,389
|
$
|
-
|
||||
Losses
on disposal of fixed assets
|
17,266
|
24,343
|
||||||
Total
deferred income taxes assets
|
$
|
57,655
|
$
|
24,343
|
||||
Reported
as:
|
||||||||
Current
deferred income taxes assets
|
$
|
3,064
|
$
|
7,757
|
||||
Long-term
deferred income taxes assets
|
54,591
|
16,586
|
||||||
Net
deferred income taxes assets
|
$
|
57,655
|
$
|
24,343
|
F-24
17.
|
DUE
TO STOCKHOLDERS/OFFICERS
|
Amounts
due to a stockholder/officer are unsecured, non-interest bearing and do not have
a set repayment date. As of December 31, 2009 and 2008, the total net amounts
due to the stockholder/officer were $177,582 and $177,699, respectively, which
represented the net amounts lent by to the Company.
18.
|
STOCKHOLDERS
EQUITY
|
On
August 9, 2005, the Company acquired Hanxin International in exchange for
(i) 24,000,000 shares of the Company’s Common Stock and (ii) 1,000 shares of the
Company’s Series A Preferred Stock,
In
November 2005, the Company filed and circulated to its shareholders the
Information Statement which permitted the Company, among other things, to (i)
amend its Certificate of Incorporation to increase its authorized shares of
Common Stock to 200,000,000 shares; (ii) approve one for six reverse split as to
all outstanding shares of Common Stock of the Company, effective as to holders
of record of shares of Common Stock on December 9, 2005, (iii) approve a
stock option, SAR and stock bonus plan for the directors, officers, employees
and consultants of the Company. A certificate of amendment officially increasing
the authorized shares of Common Stock and approving the reverse stock split was
filed with the State of Delaware on December 13, 2005.
On
September 1, 2006, the 1,000 shares Series A preferred stock were
converted into 29,530,937 shares of the Company’s Common Stock. Subsequently,
the Company issued additional 118,123 shares in October 2006 to reflect an
under-issuance to a stockholder of the shares of Common Stock issued upon
conversion of the preferred stock.
In
May 2008, the board of directors of the Company authorized, and on
July 31, 2008 the Company issued, 150,000 shares of the Company’s Common
Stock to its attorney for services rendered. In June 2008, the board of
directors of the Company authorized, and on August 14 2008 the Company
issued, 100,000 shares of the Company’s Common Stock to HAWK Associates, Inc
(“Hawk”), its investor relations firm for services rendered pursuant to the
agreement. Accordingly the Company has 35,663,850 shares of issued and
outstanding Common Stock as of December 31, 2008. Since there were no
unregistered shares issued in year 2009, the total shares of issued outstanding
were 35,663,850 as of December 31, 2009.
In
June 2008, the Company was assigned ownership of three patent rights from
its major shareholder, Mr. Fang She Zhang. These patents were assigned
without any payment due to Mr. Zhang. The application and filing costs of
these three patents was RMB28,800 (equivalent to $4,199). In connection
therewith, the Company recorded $4,199 of intangible assets, and same amount of
additional paid in capital as of December 31, 2008.
F-25
19.
|
BASIC
AND DILUTED EARNING PER SHARE
|
The
following table sets forth the computation of basic and diluted net income per
share:
The
following table sets forth the computation of basic and diluted net income per
share:
For The Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Basic:
|
||||||||
Numerator:
|
||||||||
Net
income for basic calculation
|
$
|
3,345,410
|
$
|
2,732,154
|
||||
Denominator:
|
||||||||
Weighted
average common shares
|
35,663,850
|
35,514,406
|
||||||
Denominator
for basic calculation
|
35,663,850
|
35,514,406
|
||||||
Net
income per share — basic
|
$
|
0.09
|
$
|
0.08
|
||||
Diluted:
|
||||||||
Numerator:
|
||||||||
Net
income for basic calculation
|
$
|
3,345,410
|
$
|
2,732,154
|
||||
Effect
of dilutive securities issued
|
271,906
|
218,541
|
||||||
Net
income for diluted calculation
|
$
|
3,617,316
|
$
|
2,950,695
|
||||
Denominator:
|
||||||||
Denominator
for basic calculation
|
35,663,850
|
35,514,406
|
||||||
Weighted
average effect of dilutive securities:
|
||||||||
Warrants
|
-
|
-
|
||||||
Convertible
debt
|
3,070,175
|
955,165
|
||||||
Denominator
for diluted calculation
|
38,734,025
|
36,469,571
|
||||||
Net
income per share — diluted
|
$
|
0.09
|
$
|
0.08
|
20.
|
LEASE
COMMITMENTS
|
The
Company leases its office space, and production facilities and lands under
operating lease agreements that are expiring on December 31, 2010 and
October, 2047 respectively. The following is a schedule of future minimum rental
land payments required under these operating leases as of December 31,
2009.
For The Year Ending December 31,
|
Amount
|
|||
2010
|
$
|
191,171
|
||
2011
|
70,309
|
|||
2012
|
17,577
|
|||
2013
|
17,577
|
|||
2014
|
17,577
|
|||
Thereafter
|
577,119
|
|||
Total
minimum rental payments required
|
$
|
891,330
|
Rent and
properties maintenance expenses amounted to $199,515 and $189,451 for the years
ended December 31, 2009 and 2008, respectively.
The
Company also leases three patent rights from its Chairman, Mr. Fangshe
Zhang, under operating lease agreements that expire on April 16, 2011. The
following is a schedule of future minimum rental payments required under these
operating leases as of December 31, 2009.
Amount
|
||||
2010
|
$
|
351,544
|
||
2011
|
103,510
|
|||
Total
minimum rental payments required
|
$
|
455,054
|
Patent
lease expenses amounted to $351,334 and $345,444 for the years ended
December 31, 2009 and 2008, respectively.
F-26
21.
|
RESERVE
FUND AND DIVIDENDS
|
Under
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior years'
losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at least
10% of net income after taxes, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's registered capital;
(iii) allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory Common Welfare
Fund", which is established for the purpose of providing employee facilities and
other collective benefits to employees in China; and (iv) allocations to any
discretionary surplus reserve, if approved by shareholders.
As of
December 31, 2009 and 2008, the Company's PRC subsidiaries established and
segregated in retained earnings an aggregate amount of $2,808,865 and $2,236,716
for the Statutory Surplus Reserve and the Statutory Common Welfare
Fund.
The
Company has not declared or paid cash dividends or made distributions in the
past.
22.
|
CHINA
CONTRIBUTION PLAN
|
Under the
PRC Law, full-time employees of the Company’s subsidiaries in the PRC are
entitled to staff welfare benefits including medical care, welfare subsidies,
unemployment insurance and pension benefits through a China government-mandated
multi-employer defined contribution plan. The Company is required to contribute
these benefits based on certain percentages of the employees’ salaries. The
total contributions made for such employee benefits were $ 1,589 and $1,070
for the years ended December 31, 2009 and 2008, respectively.
23.
|
CONCENTRATIONS
OF BUSINESS AND CREDIT RISK
|
Financial
Risks:
The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
Concentrations
Risks:
For the
years ended December 31, 2009 and 2008, none of the Company’s customers
accounted for more than 10% of its sales.
F-27
Major
Suppliers:
The
Following summaries purchases of raw materials from major suppliers (each 10% or
more of purchases):
Purchased
from
|
Percentage of
|
|||||||||||
Year Ended December 31,
|
Major
Suppliers
|
Number of
Suppliers
|
Total
Purchased
|
|||||||||
2009
|
$
|
2,126,978
|
1
|
12.03
|
%
|
|||||||
2008
|
$
|
5,589,794
|
3
|
39.09
|
%
|
Geographical
Risks:
Substantially
all of the Company’s operations are carried out through its subsidiary located
in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the economy of the PRC. The Company’s
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in the United States. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may be
adversely affected by, among other things, changes in the political, economic
and social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, changes in the PRC's cork manufacture industry
and regulatory rules and policies, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of
taxation.
24.
|
OTHERS
|
On
August 4, 2009, the Company signed (later extended and amended) an exclusive
financial advisor agreement with the Underwriters to have the Underwriters act
as the Lead or Managing or Co-Underwriter or Investment Banker in connection
with the proposed public Offering (the “Offering”) consisting of one share of
Common Stock and one Common Stock Purchase Warrant (the “Units”), of the Company
its successors, subsidiaries, affiliates or assigns on a “a best-efforts
offering”. The engagement period of this agreement is from August 4, 2009 to May
31, 2010, which has been extended by mutual consent.
F-28
Asia
Cork Inc. and Subsidiaries
Consolidated
Balance Sheets
September 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Assets:
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$
|
1,636,889
|
$
|
49,949
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $499,200 and
$269,259, respectively
|
9,511,618
|
5,176,239
|
||||||
Inventories
|
9,332,194
|
5,971,339
|
||||||
Advance
to suppliers
|
1,839,855
|
2,468,733
|
||||||
Loan
to unrelated party
|
-
|
29,295
|
||||||
Deferred
income taxes assets
|
10,879
|
3,064
|
||||||
Prepayments
and other current assets
|
170,929
|
130,065
|
||||||
Total
Current Assets
|
22,502,364
|
13,828,684
|
||||||
Property
and Equipment - Net
|
2,219,047
|
2,339,307
|
||||||
Construction
in Progress
|
-
|
-
|
||||||
Deposit
for Purchase of Fixed Assets
|
-
|
2,021,380
|
||||||
Deposit
for Acquisition
|
-
|
1,362,234
|
||||||
Non-Refundable
Deposit for Purchase of Land Use Right
|
1,494,509
|
1,464,768
|
||||||
Investment
Properties - Net
|
3,836,647
|
3,139,686
|
||||||
Investment
- At Cost
|
2,092,313
|
2,050,675
|
||||||
Intangible
Assets- Net
|
3,574
|
3,742
|
||||||
Deferred
Income Tax Assets
|
87,973
|
54,591
|
||||||
Total
Assets
|
32,236,427
|
26,265,067
|
||||||
Liabilities and Equity:
|
||||||||
Liabilities:
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
2,304,141
|
1,532,469
|
||||||
Loan
payable
|
-
|
215,321
|
||||||
Convertible
note, net
|
700,000
|
700,000
|
||||||
Customer
deposit
|
223,471
|
10,112
|
||||||
Taxes
payable
|
1,071,805
|
534,393
|
||||||
Due
to stockholders/officers
|
181,187
|
177,582
|
||||||
Other
current liabilities
|
146,462
|
22,528
|
||||||
Total
Current Liabilities
|
4,627,066
|
3,192,405
|
||||||
Total
Liabilities
|
4,627,066
|
3,192,405
|
||||||
Equity:
|
||||||||
Asia
Cork Inc. Stockholders' Equity:
|
||||||||
Common
stock, $0.0001 par value, 200,000,000 shares authorized, 35,663,850 issued
and outstanding
|
|
|
3,566
|
|
|
|
3,566
|
|
Additional
paid-in capital
|
4,485,446
|
4,485,446
|
||||||
Additional
paid-in capital stock warrant
|
279,386
|
279,386
|
||||||
Reserve
funds
|
3,406,136
|
2,808,865
|
||||||
Retained
earnings
|
13,808,249
|
10,740,044
|
||||||
Accumulated
other comprehensive income
|
3,209,301
|
2,657,741
|
||||||
Total
Asia Cork Inc. Stockholders' Equity
|
25,192,084
|
20,975,048
|
||||||
Noncontrolling
Interest
|
2,417,277
|
2,097,614
|
||||||
Total
Equity
|
27,609,361
|
23,072,662
|
||||||
Total
Liabilities and Equity
|
$
|
32,236,427
|
$
|
26,265,067
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-29
Asia
Cork Inc. and Subsidiaries
Consolidated
Statements of Operations (Unaudited)
For The Three Months
Ended
September 30,
|
For The Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
|
|
|
|
|||||||||||||
Revenues
|
$
|
11,002,498
|
$
|
10,151,002
|
$
|
22,436,245
|
$
|
17,056,777
|
||||||||
Cost
of Goods Sold
|
7,552,944
|
6,481,710
|
15,744,727
|
11,032,415
|
||||||||||||
Gross
Profit
|
3,449,554
|
3,669,292
|
6,691,518
|
6,024,362
|
||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
615,035
|
1,555,095
|
1,205,358
|
2,470,208
|
||||||||||||
Bad
debt
|
61,897
|
248,574
|
220,666
|
253,104
|
||||||||||||
Research
& development costs
|
309
|
73,181
|
110,187
|
73,181
|
||||||||||||
General
and administrative expense
|
79,425
|
154,946
|
493,970
|
427,381
|
||||||||||||
Total
Operating Expenses
|
756,666
|
2,031,796
|
2,030,181
|
3,223,874
|
||||||||||||
Income
From Operations
|
2,692,888
|
1,637,496
|
4,661,337
|
2,800,488
|
||||||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
income (expense), net
|
13,065
|
(41,752
|
)
|
(72,269
|
)
|
(259,117
|
)
|
|||||||||
Other
income , net
|
32,890
|
26,260
|
98,134
|
78,760
|
||||||||||||
Total
Other Income (Expense)
|
45,955
|
(15,492
|
)
|
25,865
|
(180,357
|
)
|
||||||||||
Income
from Continuing Operations Before Taxes
|
2,738,843
|
1,622,004
|
4,687,202
|
2,620,131
|
||||||||||||
Provision
for Income Taxes
|
407,187
|
293,830
|
702,063
|
477,030
|
||||||||||||
Net
Income Before Noncontrolling Interest
|
2,331,656
|
1,328,174
|
3,985,139
|
2,143,101
|
||||||||||||
Less:
Net income attributable to the noncontrolling
interest
|
185,440
|
105,714
|
319,663
|
179,190
|
||||||||||||
Net
Income Attributable to Asia Cork Inc.
|
$
|
2,146,216
|
$
|
1,222,460
|
$
|
3,665,476
|
$
|
1,963,911
|
||||||||
Earnings
Per Share - Basic and Diluted:
|
||||||||||||||||
-
Basic
|
$
|
0.06
|
$
|
0.03
|
$
|
0.10
|
$
|
0.06
|
||||||||
-
Diluted:
|
$
|
0.05
|
$
|
0.03
|
$
|
0.09
|
$
|
0.06
|
||||||||
Weighted
Common Shares Outstanding - Basic and Diluted
|
||||||||||||||||
-
Basic
|
35,663,850
|
35,663,850
|
35,663,850
|
35,663,850
|
||||||||||||
-
Diluted:
|
40,269,113
|
38,734,025
|
40,269,113
|
38,734,025
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-30
Asia
Cork Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
For Nine Months Ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Net
Income Before Noncontrolling Interest
|
$
|
3,985,139
|
$
|
2,143,101
|
||||
Other
Comprehensive (Loss) Income:
|
||||||||
Foreign
Currency Translation Income (Loss)
|
551,560
|
(9,141
|
)
|
|||||
Comprehensive
Income
|
$
|
4,536,699
|
$
|
2,133,960
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-31
Asia
Cork Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net Income
|
$ | 3,665,476 | $ | 1,963,911 | ||||
Adjustments
to Reconcile Net Income to Net Cash Provided by (Used in) Operating
Activities
|
||||||||
Depreciation
and amortization
|
254,462 | 223,137 | ||||||
Bad
debt adjustment
|
220,666 | 253,104 | ||||||
Losses
on disposal of inventories
|
1,980 | - | ||||||
Net
income attributable to noncontrolling interest
|
319,663 | 179,190 | ||||||
Deferred
income tax benefits
|
(39,347 | ) | 5,326 | |||||
Consulting
fees adjusted from deferred
|
- | 19,680 | ||||||
Interest
expenses for discount on convertible note
|
- | 130,649 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(4,366,101 | ) | (623,217 | ) | ||||
Inventories
|
(3,177,121 | ) | (4,556,205 | ) | ||||
Advance
to suppliers
|
665,492 | 1,759,846 | ||||||
Prepayments
and other current assets
|
(37,462 | ) | (299,182 | ) | ||||
Accounts
payable and accrued expenses
|
2,088,053 | 950,760 | ||||||
Customer
Deposit
|
208,912 | 600,055 | ||||||
Taxes
payable
|
516,083 | 852,225 | ||||||
Other
current liabilities
|
121,019 | (4,234 | ) | |||||
Net
Cash Provided by Operating Activities
|
441,775 | 1,455,045 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Proceeds
from withdraw deposit for purchase of fixed assets
|
2,021,380 | - | ||||||
Proceeds
from withdraw deposit for acquisition
|
- | 102,601 | ||||||
Payment
for purchase of equipment
|
(724,061 | ) | (811,563 | ) | ||||
Net
Cash Provided by(Used in) Investing Activities
|
1,297,319 | (708,962 | ) | |||||
Cash
Flows From Financing Activities
|
||||||||
Proceeds
from the loan
|
29,295 | 215,343 | ||||||
Repayment
to the loan
|
(215,321 | ) | (439,475 | ) | ||||
Net
Cash Used in Financing Activities
|
(186,026 | ) | (224,132 | ) | ||||
Net Increase
in Cash and Equivalents
|
1,553,068 | 521,951 | ||||||
Effect
of Exchange Rate Changes on Cash
|
33,872 | 1,798 | ||||||
Cash
and Equivalents at Beginning of Period
|
49,949 | 23,605 | ||||||
Cash
and Equivalents at End of Period
|
$ | 1,636,889 | $ | 547,354 | ||||
SUPPLEMENT
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
Interest
expenses paid
|
$ | 7,968 | $ | 27,843 | ||||
Income
taxes paid
|
$ | 634,275 | $ | 134,505 | ||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND
|
||||||||
FINANCING
ACTIVITIES:
|
||||||||
Offset
debt by the deposits of acquisition
|
$ | 1,362,234 | $ | - |
The
accompanying notes are an integral part of these
unaudited consolidated financial
statements.
F-32
Asia
Cork Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
1.
|
BASIS
OF PRESENTATION
|
a)
|
Interim
financial statements:
|
The
unaudited consolidated financial statements of Asia Cork Inc.(f/k/a Hankersen
International Corp.) and subsidiaries (the "Company") have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for annual financial statements. However, the information included in
these interim financial statements reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the consolidated financial position and
the consolidated results of operations. Results shown for interim periods are
not necessarily indicative of the results to be obtained for a full year. The
consolidated balance sheet information as of December 31, 2009 was derived from
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-K. These interim financial statements should be read in
conjunction with that report.
The
unaudited consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.
b)
|
Description
of business and reverse merger:
|
Asia
Cork Inc. (f/k/a Hankersen International Corp.) (the "Company") was incorporated
on August 1, 1996, under the laws of the State of Delaware. Until August 2005,
the Company had no operations and the sole purpose of the Company was to locate
and consummate a merger or acquisition with a private entity.
On
July 11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc., was merged
into its parent, the Company, in order to change the name of the Company, after
approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had
no material assets.
As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB
F-33
In August
2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of the Company ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. The Company acquired Hanxin International in
exchange for shares of common stock and shares of the Series A Preferred Stock
of the Company. The capitalizations are described in further detail in Note 18
to the accompanying consolidated financial statements.
Subsequent
to the merger and upon the conversion of the Series A Preferred Stock, the
former shareholders of Hanxin International will own 95% of the outstanding
shares of the Company's common stock. As a result of the ownership interests of
the former shareholders of Hanxin International, for financial statement
reporting purposes, the merger was treated as a reverse acquisition, with Hanxin
International deemed the accounting acquirer and Kushi deemed the accounting
acquiree. Historical information of the surviving company is that of Hanxin
International.
Hanxin
International has no other business activities but owns 100% of Xi'An Cork
Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian
Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An
and Hanxin are People's Republic of China (“PRC”) corporations. Most of the
Company’s activities are conducted through Hanxin.
During
the year ended December 31, 2005, Hanxin acquired a 75% equity interest of Cork
Import and Export Co. Ltd. (“CIE”), a PRC corporation engaged in the cork
trading business.
Hanxin
is engaged in developing, manufacturing and marketing of cork wood floor, wall
and decorating materials. Its products are sold to customers in China and
oversea customers in India, the United States of America, Germany and Japan
through the distributors or agents.
c)
|
Use
of estimates
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Significant estimates in 2010 and 2009 include the estimated useful lives and
fair values of the assets. Actual results could differ from those
estimates.
d)
|
Revenue
recognition
|
In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company's revenues from the sale of products are recognized when reception and
inspection of goods are finalized by clients, the sales price to the customer is
fixed and collectability is reasonably assured. Persuasive evidence of an
arrangement is demonstrated via purchase order from distributor, our customers,
product delivery is evidenced by warehouse shipping log as well as signed bill
of lading from the trucking company and no product return is allowed except
defective or damaged products, the sales price to the customer is fixed upon
acceptance of purchase order, there is no separate sales rebate, discounts, and
volume incentives.
F-34
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of its products at the rate of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases.
e) Reclassifications
Certain
amounts reflected in the consolidated financial statements for the year ended
December 31, 2009 have been reclassified to conform to the presentation for the
nine months ended September 30, 2010.
f) Stock-Based
Compensation
The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”. The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received. Fair value is measured as the
value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete. The fair value of the equity instrument
is charged directly to compensation expense and additional paid-in
capital.
g) Basic
and diluted net income per share
The
Company accounts for net income per common share in accordance with ASC 260,
“Earnings per Share”
(“EPS”). ASC 260 requires the disclosure of the potential dilution effect of
exercising or converting securities or other contracts involving the issuance of
common stock. Basic net income per share is determined based on the weighted
average number of common shares outstanding for the period. Diluted
net income per share is determined based on the assumption that all dilutive
convertible shares and stock options were converted or exercised into common
stock.
h) Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.
F-35
i) Income
taxes
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and state franchise tax annual report individually. The Company's PRC
subsidiaries file income tax returns under the Income Tax Law of the People's
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws. The Company's BVI subsidiary is exempt
from income taxes.
The
Company follows ASC 740 - Accounting for “Income Taxes”, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-36
j) Non-Controlling
Interest
Effective
January 1, 2009, the Company adopted FASB ASC Topic 810, “Consolidation,” which
established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance.
The
net income (loss) attributed to the NCI was separately designated in the
accompanying statements of operations and comprehensive income. Losses
attributable to the NCI in a subsidiary may exceed the NCI’s interests in the
subsidiary’s equity. The excess attributable to the NCI is attributed to those
interests. The NCI shall continue to be attributed its share of losses even if
that attribution results in a deficit NCI balance.
k) Recent
Accounting Pronouncements
In
April 2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” or ASU 2010-17. This update
provides guidance on the recognition of revenue under the milestone method,
which allows a vendor to adopt an accounting policy to recognize all of the
arrangement consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU does not have a material impact on
the Company’s consolidated 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. ASU 2010-13
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 this ASU to
have a material impact on the Company’s consolidated financial
statements.
F-37
In
March 2010, the FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded
Credit Derivatives. Embedded credit-derivative features related only to the
transfer of credit risk in the form of subordination of one financial instrument
to another are not subject to potential bifurcation and separate accounting, as
clarified by recently issued FASB guidance. Other embedded credit-derivative
features are required to be analyzed to determine whether they must be accounted
for separately. This update provides guidance on whether embedded
credit-derivative features in financial instruments issued by structures such as
collateralized debt obligations (CDOs) and synthetic CDOs are subject to
bifurcation and separate accounting. The guidance is effective at the beginning
of a company’s first fiscal quarter beginning after June 15, 2010. The Company
does not expect the adoption of this ASU to have a material impact on the
Company’s consolidated financial statements.
In
March 2010, the 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 years beginning after November 15, 2009. The adoption of this ASU does
not have a material impact on the Company’s consolidated financial
statements.
On
February 25, 2010, the FASB issued Accounting Standards Update (“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 US GAAP. The FASB
believes these amendments remove potential conflicts with the SEC’s literature.
Subsequent events have been evaluated through the date the financial statements
were issued.
2. ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
Company generally provides its with short term credit pursuant to which the
customers are required to make payment between three months and six months after
delivery, depending on the customer’s payment history. Beginning in April 2010,
the Company manufactured new series of wood materials products. In purpose of
expanding the domestic market in Beijing, Shanghai and Guangzhou, and to promote
market share of new series of wood materials products, the Company chose the
long-term customers in three areas which had good credit history and background.
Commencing from May 2010, the Company determined that the payment term of those
major customers in three areas were extended from six month to one year. Despite
the fact that the payment terms were extended, the Company recognizes its
revenues upon reception of good by the customer in full amount. Moreover the
Company does not change revenue recognition policy. The total revenues had been
raised up for the nine months ended September 30, which resulted from the
extension of payment terms of major customers. At the same time, in order to
reduce the risk in collection, the Company plans to control payment term of
those major customers within the nine months during the quarter ended December
31, 2010.For the nine months ended September 30, 2010 the total
revenues resulted from a combination of increased orders by existing and new
clients as the Company continued to successfully increase sales to customers and
expand its customer base, the Company’s accounts receivable balance increased
significantly as of September 30, 2010. As of September 30, 2010 the accounts
receivable balance was $10,010,818 (equivalent to
RMB66,983,983).
F-38
The
accounts receivable amounts included in the consolidated balance sheets as of
September 30, 2010 and December 31, 2009 were as follows:
September 30,
2010 |
December 31,
2009 |
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Shaanxi
Shuta Cork Products Co., Ltd
|
$
|
756,286
|
$
|
478,940
|
||||
Distributors
who had owed the Company more than USD149,451 (equivalent to RMB1
million)
|
5,187,785
|
1,951,810
|
||||||
Distributors
or Customers who had owed the Company equal or less than USD149,451
(equivalent to RMB1 million)
|
4,066,747
|
3,014,748
|
||||||
Sub-total
|
10,010,818
|
5,445,498
|
||||||
Less:
Allowance for doubtful accounts
|
499,200
|
269,259
|
||||||
Accounts
receivable, net
|
$
|
9,511,618
|
$
|
5,176,239
|
The
total amounts sold to the customers who had a balance of accounts receivable
more than $149,451 (equivalent to RMB1 million) were $20,021,878 and $3,849,557
for the nine months ended September 30, 2010 and 2009, respectively. They
represented 32% and23 % of total sales in the nine months ended September 30,
2010 and 2009. Except for Sichuan Hanxin, none of the customers accounted for
more than 10% of total sales for the nine months ended September 30, 2010 and
2009, respectively.
The
following is a summary of the status of allowance for doubtful accounts as of
September 30, 2010 and 2009
Period
|
Amount
|
Period
|
Amount
|
||||||
As
of January 1, 2010
|
$ | 269,259 |
As
of January 1, 2009
|
$ | 23,787 | ||||
As
of March 31,2010
|
265,789 |
As
of March 31,2009
|
22,940 | ||||||
As
of June 30, 2010
|
430,875 |
As
of June 30, 2009
|
28,290 | ||||||
As
of September 30, 2010
|
499,200 |
As
of September 30, 2009
|
277,100 |
The
Company uses the allowance method to estimate the uncollectible portion of its
account receivables. Based on the percentage of outstanding receivable approach,
the Company should recorded bad debt expense in the debit and the related credit
to the allowance account at closing day. The Company’s subsidiary, Hanxin
maintains a reserve for uncollectible accounts of 0.5% of accounts receivable.
During the third quarter of 2009, the Company increased the amount of its
reserve from 0.5% to 5.0% of accounts receivable due to an increase in accounts
receivable from major customers as well as new customers. Commencing the second
quarter of 2010, the payment to the Company by its major customers was extended
to one year in order to expand its revenues. As a result, the allowance for
doubtful account increased significantly as of September 30,
2010.
F-39
Accounts
receivable aging as of September 30, 2010 and December 31, 2009 consisted of the
following:
|
September 30,
2010
|
December 31,
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Less
than 90 days
|
$
|
6,184,104
|
$
|
3,778,740
|
||||
91days-180days
|
2,755,223
|
1,606,436
|
||||||
181days-365days
|
1,071,491
|
-
|
||||||
More
than 365days
|
-
|
60,322
|
||||||
Total
|
$
|
10,010,818
|
$
|
5,445,498
|
The
Company’s accounts receivable with ages of less than 90 days represented
approximately 62% and 69% of the total receivables as of September 30, 2010 and
December 31, 2009, respectively
Accounts
receivable turnover for the nine months ended September 30, 2010 and 2009
consisted of the following:
|
For The Nine Months
Ended September 30,
|
|||||||
2010
|
2009
|
|||||||
Accounts
receivable turnover
|
1.62
|
1.33
|
Since
there were significantly increased credit sales, and the increased credit sales
amounts were significantly greater than the average accounts receivable
increased amount for the nine months ended September 30, 2010 as compared to the
same period in 2009, the accounts receivable turnover figure for the nine months
ended September 30, 2010 was greater than the turnover in the same period of
2009.
3. INVENTORIES
The
barks and wood particles are the primary raw materials utilized to manufacture
cork planks. The wood particles consist of grinded barks. During the
course of manufacture, the Company makes use of reproducible oak barks. Since
the growth cycle of oak barks takes long periods of time, the Company generally
purchases barks and wood particles in advance in order to ensure production.
Moreover, the barks are usually picked in autumn. In order to have
sufficient raw materials, the Company purchased a significant amount of barks
and wood particles as of September 30, 2010.
F-40
On
October 15, 2009, in order to expand output, the Company entered into an
agreement with Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan Hanxin”) to
build a production line for manufacturing cork floor planks in Sichuan
Province. Pursuant to the agreement, the Company would provide a set
of production equipment, prepay raw materials, provide secondary raw materials
to Sichuan Hanxin and have the exclusive right to sell the cork floor products
produced from this production line. Sichuan Hanxin would provide the workshop
and supplementary equipment. Sichuan Hanxin shall be responsible for
the production of cork floor products in accordance with the quality
specifications and standards set by the Company. Therefore, in order to fulfill
the agreement, the Company purchased a significant amount of secondary raw
materials as of December 31, 2009
Since
the Company considered that: 1) it is hard to control the application amount of
secondary raw materials in the course of manufacturing cork product in Sichuan
Hanxin; 2) avoid too much cash flow into raw materials; 3) Sichuan Hanxin is one
of the major cork raw materials providers, the Company intended to change from
providing raw material and only payment processing charges to directly purchase
cork floor products from Sichuan Hanxin.
In
order to maintain the friendly relationship, prompt the production level of
Sichuan regarding to reduction defective production rate and control the
application amount of raw materials, the Company agreed to provide the raw
materials to Sichuan Hanxin and only pay processing charges to Sichuan Hanxin
for the first batch of cork floor products, Thereafter the Company needn’t
prepay raw materials to Sichuan Hanxin, and the Company directly purchased cork
floor products from Sichuan Hanxin upon the contracted price by both
sides.
Pursuant
to the negotiation by both sides, in January 2010, the Company entered into a
sales agreement with Sichuan Hanxin to sell secondary raw materials in amount of
$1,391,133 (equivalent to RMB 9,468,901). Sichuan Hanxin purchased the secondary
raw materials to manufacture cork floors products for the Company. As of
September 30, 2010, Sichuan Hanxin paid $1,391,133 to the Company for the raw
materials it purchased. See more information in Note 4.
Inventories
as of September 30, 2010 and December 31, 2009, consisted of the
following:
September 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Raw
materials
|
|
|
||||||
Tree
skins
|
$ | 1,084,760 | $ | 2,026,925 | ||||
Wood
Particles
|
12,422 | 1,097,599 | ||||||
Secondary
raw materials
|
3,751,242 | 1,639,893 | ||||||
Other
raw materials
|
- | 29,188 | ||||||
Subtotal
|
4,848,424 | 4,793,605 | ||||||
Work
in progress
|
1,964,106 | 202,495 | ||||||
Finished
goods
|
2,092,091 | 961,765 | ||||||
Packaging
and other
|
427,573 | 13,474 | ||||||
Total
|
$ | 9,332,194 | $ | 5,971,339 |
Inventories
turnover for the nine months ended September 30, 2010 and 2009 consisted of the
following:
|
For The Nine
Months Ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
Inventory
turnover
|
2.40
|
2.12
|
F-41
In
order to ensure productions in the future, inventories of significant raw
materials increased as of September 30, 2010 as compared to the same period in
2009, and the total cost of goods sold was significantly more than the average
inventories for the nine months ended September 30, 2010 as compared to the same
period of 2009. Therefore, the inventories turnover figure for the nine months
ended September 30, 2010 was more than the amount in the same period of
2009.
4.
|
SPECIAL
TRANSACTIONS TO SICHUAN HANXIN
|
During
the nine months ended September 30, 2010, the Company sold secondary raw
materials to Sichuan Hanxin. The amount of sales listed below:
|
For The Nine Months Ended
September 30,
|
|||||||
|
2010
|
2009
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Total
revenues
|
$
|
22,436,245
|
$
|
17,056,777
|
||||
Revenues
from Sichuan Hanxin
|
1,189,002
|
-
|
||||||
Total
revenues excluded Sichuan Hanxin
|
$
|
21,247,243
|
$
|
17,056,777
|
The
general VAT tax rate of 17% was applicable by the Company for nine months ended
September 30, 2010 and 2009. The total revenues were represented in the amount
excluding VAT, whereas, the accounts receivable were represented in the amount
including VAT. In addition, the functional currencies of the
Company’s PRC subsidiaries are Chinese Yuan and the accounts receivable were
translated into U.S dollars by using period-end rates whereas the total revenues
were translated into U.S dollars by using average rates.
5. ADVANCE
TO SUPPLIERS
The
supply of cork raw material is our basis of production. In order to acquire
sufficient tree skins and ensure production, the Company generally signs
purchase agreements with unrelated parties at the beginning of every
year. Pursuant to the agreements, the Company is required to pay its
suppliers in advance. As of September 30, 2010, most of these advances were
outstanding for less than one year. The Company did not incur losses
in connection with advances to suppliers as of September 30, 2010. As
such, the Company has not recorded an allowance for advances to suppliers for
the nine months ended September 30, 2010, and the net amount of advances to
suppliers was $1,839,855 as of September 30, 2010 and $2,468,733 as of December
31, 2009.
F-42
6.
|
LOAN
TO UNRELATED PARTY
|
In
September 2009 the Company made an unsecured loan to Xian Tianlun Bath Co., Ltd
(“Xian Tianlun”) in the amount of RMB 0.2 million (equivalent to
$29,295). This loan matures on September 26, 2010 and accrues
interest at a rate of 7% per year. As of September 30, 2010, this loan had been
repaid fully.
7. PROPERTY
AND EQUIPMENT-NET
As of
September 30, 2010 and December 31, 2009, property and equipment consisted of
the following:
|
September 30,
2010 |
December 31,
2009
|
||||||||||
|
Estimated Life
|
(Unaudited)
|
(Audited)
|
|||||||||
Buildings
and improvements
|
30-35
|
$
|
1,583,092
|
$
|
1,551,588
|
|||||||
Manufacturing
equipments
|
1-8
|
1,631,190
|
1,598,728
|
|||||||||
Office
furniture and equipments
|
5
|
31,752
|
31,120
|
|||||||||
Vehicle
|
8
|
12,773
|
12,518
|
|||||||||
Machinery
improvements
|
3
|
82,197
|
80,563
|
|||||||||
Subtotal
|
3,341,004
|
3,274,517
|
||||||||||
Less:
Accumulated depreciation
|
1,121,957
|
935,210
|
||||||||||
Total
|
$
|
2,219,047
|
$
|
2,339,307
|
For
the nine months ended September 30, 2010 and 2009, depreciation expenses
amounted to $164,912 and $133,926 respectively.
8. DEPOSIT
FOR PURCHASE OF FIXED ASSETS
Hanxin
intended to purchase a factory’s fixed assets through an unrelated agent who
handled the negotiations for the Company, and both parties signed the Entrust
Purchase Agreement on November 10, 2005. Hanxin had paid deposits
$2,021,380 (equivalent to RMB 13,800,000) as of December 31, 2009. The
agency agreement has no firm commitment on the purchase but it stated a maximum
price of RMB 50,000,000 that the Company is willing to pay for the fixed assets.
Due to the dissension within the factory’s creditors, the agent could not close
this purchase agreement on time. As a result, Hanxin had a supplementary
agreement with this agent on September 27, 2009. Pursuant to the terms of
such agreement, the agreement was extended and as a result, Hanxin would fully
collect the deposit which it had paid to the agent if the purchase was not
completed by June 30, 2010. Since various issues within the
factory’s creditors were not resolved during the second quarter of 2010, the
agent was unable to fulfill this agreement. Therefore, the deposit was returned
to Hanxin in June 2010 by the unrelated agent.
F-43
9. DEPOSIT
FOR ACQUISITION
Hanxin
intended to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan
Hanxin”), one of its cork raw material providers located in Sichuan Province
China, and signed a strategic cooperation agreement with Sichuan Hanxin on
March 26, 2007. The purchase price of Sichuan Hanxin was not to exceed
RMB20 million (equivalent to $2,949,226) based upon the agreement. As of
June 30, 2010, Hanxin had paid RMB9.3 million (equivalent to
$1,371,390) deposits to Sichuan Hanxin.
On
September 20, 2009, Hanxin entered into an agreement with the two
shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The agreement grants
Hanxin an option to acquire 100% of the shares of Sichuan Hanxin by September
20, 2010. The acquisition price shall be between 120% and 150% of the net asset
value as shown in the audited financial statements as of December 31, 2009 of
Sichuan Hanxin. The amount of the premium over the net asset value is subject to
agreement by the parties, but shall not exceed 150%. Exercise of the option is
subject to a satisfactory financing arrangement, due diligence and requisite
corporate approvals. In the event that any of the closing conditions are not
satisfied by September 20, 2010, the agreement will terminate except that the
breaching party shall be liable to pay a penalty of RMB 10 million (equivalent
to $1,474,613). According to the agreement, Hanxin shall pay 30% of the
acquisition price within 10 days from the date of fulfillment of all closing
conditions, 30% within 60 days from the fulfillment date, and 40% within 10 days
from completing the transfer of all assets and shares of Sichuan
Hanxin. Since the Company did not acquire any financing, and none of
the closing conditions were satisfied as of September 20, 2010, the acquisition
agreement between the Company and Sichuan Hanxin has been terminated. In
addition, the Company purchased cork floor products from Sichuan Hanxin since
April 2010. It incurred a huge amount of costs due to Sichuan
Hanxin. As a result, after negotiation by both parties, the
acquisition deposit of RMB9.3 million (equivalent to $1,362,234 as of
December 31, 2009) has fully offset the due debt resulting from the purchase of
cork floor products from Sichuan Hanxin.
10. NON-REFUNDABLE
DEPOSIT FOR PURCHASE OF LAND USE RIGHT
In
order to ensure a sufficient raw material production base, the Company plans to
purchase the right to use a parcel of land of planting oak from Shaanxi Shuta
Cork Products Co., Ltd (“Shuta”) in the Baoji district Shaanxi
Province of the PRC in 2007 (oak leather is used to produce the company's main
raw material). The Company prepaid RMB10 million (equivalent to
$1,494,509) to Shuta. However, the Company terminated the agreement with Shuta
in August, 2008. The deposit was refunded to the Company in August
and September 2008. In the first quarter of 2009 the Company
terminated the land use right purchase deal with Shuta. In 2008, based upon
Hanxin’s sale and manufacturing strategies Shuta opened cork retail chain stores
exclusively selling Hanxin’s products. In 2008 Hanxin was not able to achieve
its 500,000 square meters floor and board production plan and delayed purchase
orders from Shuta. Accordingly, Shuta had to readjust its year 2008 sales
strategies and incurred heavy losses. In order to avoid losing an important
distribution channel, Hanxin loaned RMB10 million (equivalent to
$1,494,509) to Shuta for a one year term commencing
October 27, 2008. This loan is non-interest bearing and
unsecured. On October 28, 2009, Hanxin signed a new loan agreement
with Shuta extending the term of the loan from October 27, 2009 to October 27,
2011.
F-44
Hanxin
would like to purchase the land use right in Baoji District Shaanxi Providence
from Shaanxi Shuta as soon as it obtains sufficient financing. Hanxin believes
that the price of the land is rising and needs the land use right for Portugal
type production of cork trees. Therefore, on October 20, 2009, Hanxin signed a
forgiveness memo with Shuta to express its desire to acquire 7,000 Mu (equal to
4,669,000 square meters) land use rights on or before October 20, 2011 for a
purchase price of RMB37.8 millions, The purchase price is the same amount
as provided in the prior agreement. In the event that Hanxin does not purchase
the land by October 20, 2011, Hanxin will be liable to pay Shuta all upfront
operation costs approximately RMB10 million (equivalent to $1,494,509) that
Shuta had paid to acquire the land use right from the Baoji District government.
The parties anticipate that if Hanxin does not purchase the land by October 20,
2011, Shuta will not repay the RMB10 million loan and the parties will have
no further obligation to each other. Accordingly, the Company reclassified all
of these loan amounts as Non-Refundable deposits for the purchase of land use
right commencing as of October 20, 2009.
Even
though Shuta is one of the major customers of Hanxin, for the nine months ended
September 30, 2010 and in year ended December 31, 2009, the total amount sold to
Shuta only represented 3.12% and 2.63% of total sales of Hanxin, respectively.
Shuta does not have the ability, directly or indirectly, to control the Company
or exercise significant influence over the Company in making financial and
operational decisions. Shuta is not subject to common control or common
significant influence. Accordingly, Shuta is not deemed a related party of the
Company for the nine months ended September 30, 2010 and the year ended December
31, 2009.
11. INVESTMENT
PROPERTIES – NET
On
September 27, 2001, the Company purchased certain investment entertainment
facilities called YuLerYuan Resort which included certain buildings, machinery,
equipment, and the right to use a parcel of land of approximately 10,360.3
square meters for 40 years. The purchase price of the land use right is being
amortized over the term of the right while other facilities are being
depreciated over the estimated life of properties. The Company renovated the
space and built an additional student dormitory in 2007. The construction was
completed in June 2008. In order to pass the inspection from the authorities in
China and obtain the ownership certificates, the Company spent additional funds
to install fire-fighting equipments in the building starting the second quarter
of 2010. As of September 30, 2010, the installation of fire fighting equipments
had been completed. At the same time, the Company obtained the ownership
certificates with respect to the dormitory. The YuLerYuan Resort including the
new student dormitory was leased for $22,037 (equivalent to RMB150,000) per
month to the university nearby YuLerYuan Resort and this agreement was renewed
on March 1, 2010, and was extended to February 28th, 2011.
F-45
As of
September 30, 2010 and December 31, 2009, Investment Properties consisted of the
following
September 30,
2010
|
December 31,
2009
|
|||||||||||
Estimated
Life
|
(Unaudited)
|
(Audited)
|
||||||||||
Depreciation
Properties:
|
||||||||||||
Buildings
and improvements
|
28
|
$
|
938,166
|
$
|
919,497
|
|||||||
Student
dormitory
|
30
|
3,193,831
|
2,420,619
|
|||||||||
Machinery
and equipments
|
5
|
26,792
|
26,259
|
|||||||||
Subtotal
|
4,158,789
|
3,366,375
|
||||||||||
Less:
Accumulated depreciation
|
483,433
|
388,594
|
||||||||||
Total
depreciation properties
|
3,675,356
|
2,977,781
|
||||||||||
Amortization
Property:
|
||||||||||||
Land
use right
|
40
|
208,117
|
203,975
|
|||||||||
Less:
Accumulated amortization
|
46,826
|
42,070
|
||||||||||
Total
amortization properties
|
161,291
|
161,905
|
||||||||||
Total
Investment Properties, Net
|
$
|
3,836,647
|
$
|
3,139,686
|
For
the nine months ended September 30, 2010 and 2009, depreciation and amortization
expenses for these investment entertainment facilities amounted to $89,310 and
$88,973 respectively.
The
amortization expenses of land use right for the next five years are as
follows:
For the Quarter Ending September 30,
|
Amount
|
|||
2011
|
$
|
5,115
|
||
2012
|
5,115
|
|||
2013
|
5,115
|
|||
2014
|
5,115
|
|||
2015
|
5,115
|
F-46
12. INVESTMENT
– AT COST
On
June 28, 2005, the Company purchased a 12% equity interest of Shaanxi DeRong
Technology Information Development Co. Ltd. (“DeRong”), a PRC corporation, for
$2,092,313 (equivalent to RMB 14 million). DeRong owns a cork tree forest
plantation in China. The investment is long term and is stated at
cost.
13. INTANGIBLE
ASSETS-NET
During
the quarter ended June 30, 2008, the Company acquired ownership of three
patent rights from its major stockholder and Chairman, Mr. Fang She Zhang
for no consideration. These three patent rights are used as part of a vital
technique for the production of the Company’s products. The application and
filing costs of these three patent rights were $4,231 (equivalent to RMB28,800).
As of September 30, 2010 and December 31, 2009, intangible assets, less
accumulated amortization consisted of the following:
|
September 30, 2010
|
December 31,
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Intangible
assets
|
$
|
4,304
|
$
|
4,219
|
||||
Less:
Accumulated amortization
|
730
|
477
|
||||||
Total
|
$
|
3,574
|
$
|
3,742
|
For
the nine months ended September 30, 2010 and 2009, amortization expense amounted
to $240 and $238 respectively.
The
amortization expenses for the next five years are as follows:
For the Quarter Ending September 30,
|
Amount
|
|||
2011
|
$
|
319
|
||
2012
|
319
|
|||
2013
|
319
|
|||
2014
|
319
|
|||
2015
|
319
|
F-47
14. LOAN
PAYABLE
Loan
payable as of September 30, 2010 and December 31, 2009 consisted of the
following:
|
September 30,
2010
|
December 31,
2009
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
Commencing
September 24, 2009, the Company borrowed certain short-term loans from Mr.
Yang Liu, an unrelated party. These short-term loans were in amounts of
RMB1.47 million (equivalent to $215,321) as of December 31, 2009. The
interest rate of these loans is 7.4% per year, and the term of the debt
was from September 24, 2009 till September 24, 2010. The Company only
repaid this short-term loans in the first quarter of
2010
|
$
|
-
|
$
|
215,321
|
||||
Total
Loan Payable
|
$
|
-
|
$
|
215,321
|
15. CONVERTIBLE
NOTES
In
June 2008, the Company consummated an offering of convertible promissory notes
and common stock purchase warrants for aggregate gross proceeds of $700,000. The
notes matured in June 2009 and bore interest at an annual rate of 18%, payable
at maturity in USD. Upon the successful closing of an equity or convertible debt
financing for a minimum of $2,000,000 ("Financing"), the promissory notes will
be convertible into shares of common stock at a 50% discount to the price per
share of Common Stock sold in the Financing. Since the Financing was not
achieved within the one year term of the promissory notes, each investor has the
option to be paid the principal and interest due under the promissory note or
convert the note into shares of common stock at a conversion price of $0.228 per
share.
The
warrants are exercisable at any time after the consummation of the Financing
through the fourth anniversary of the consummation of the Financing (the
"Financing Expiration Date"). Each holder is entitled to purchase the number of
shares of common stock equal to the initial principal amount of such investor's
promissory note divided by the lowest cash purchase price paid for the Company's
common stock (or the conversion price or exercise price if the Financing
consists of convertible securities or warrants, respectively) in the Financing
(the "Financing Based Conversion Price") at an exercise price equal to the
Financing Based Conversion Price. Since the Financing did not occur within 12
months of the issuance of the warrant, the warrant is exercisable from and after
such date and through the fourth anniversary of the issuance date of the
warrant. In such event, the holder is entitled to purchase the number of shares
of common stock equal to 50% of the initial principal amount of the promissory
note divided by $0.228 at an exercise price equal to $0.228, subject to certain
adjustments as set forth in the warrant. Since the notes were not paid at
maturity in June 2009, the annual interest rate payable since the maturity date
increased to 24%. On July 6, 2010, the Company and those investors entered in to
an amendment agreement. Pursuant to the amendment agreement, the maturity date
was extended to October 31, 2010 and the interest rate under the note remained
at 18% per annum from the issuance date through the maturity
date.
F-48
On
October 31, 2010, a second amendment agreement was entered into between the
Company and the noteholders whereby the maturity date was extended again to
February 28, 2011 and the interest rate under the notes remained at 18% per
annum from the issuance date through the maturity date. The Company
has filed a registration statement with respect to a proposed public offering
with the Securities and Exchange Commission (the “Registration Statement”), with
respect to certain Units consisting of Common Stock and warrants . Upon the
closing of the proposed offering, the Company shall: (1) pay the
investors cash by wire transfer in an amount equal to $350,000 (50% of the
outstanding principal amount of the notes) and (2) the investors shall receive,
upon conversion of the balance due under the note, such whole number of fully
paid and non-assessable shares of the securities that is equal to the quotient
of the sum of (i) $350,000 and (ii) all accrued a unpaid interest thereon,
divided by fifty percent of the offering price per share of Common Stock
included in the Units. . In the event that the closing shall not
occur by February 28, 2011, the interest rate under the note shall increase to
24% per annum, accruing from the first anniversary of the issuance of the note.
The interest payable has been accrued and recorded as of September 30, 2010 and
December 31, 2009
Since
the warrants issued with convertible notes are basically long-term options to
buy common stock at a fixed price, the Company allocated the proceeds from the
offering of convertible promissory notes and common stock purchase warrants
between the two securities utilizing the incremental method, The
difference between the market price of the common stock on the issuance date of
the warrants and the warrant exercise price of $0.228 has
been carried on the balance sheet as a “discount on convertible note, and the
sum also been carried on the balance sheet as an “additional paid-in
capital-stock warrant” in the amount of $279,386 as of September 30, 2010 and
December 31, 2009, respectively.
If the
investors exercise the warrants, the Company will reflect the proceeds received
and increase “Additional Paid-in Capital – Stock Warrant”, and “Common Stock”
and “Additional Paid-in Capital in Excess of Par”. However, if the investors do
not exercise the warrants, the Company will reduce “Additional Paid-in Capital
–Stock Warrant” for $279,386, and increase “Additional Paid-In Capital from
Expired Warrants” for a like amount.
The
Company’s obligations under the promissory notes are secured by an aggregate of
7,630,814 shares of common stock pledged by Mr. Pengcheng Chen, the Company’s
Chief Executive Officer, Mr. Fangshe Zhang, the Company’s Chairman (the “Escrow
Shares”). In the event that subsequent to the issuance of the Convertible Notes,
the value of the Escrow Shares is less than 150% of the outstanding principal
amount of the promissory notes for 10 consecutive trading days, then the holder
of the promissory notes shall have the right to give the Company notice (the
“Investor Notice”) to deposit or cause to be deposited additional Escrow Shares
such that the value of the Escrow Shares based upon the volume weighted average
price per share for the 20 trading days preceding the date of the Investor
Notice, is equal to 150% of the outstanding principal amount of the promissory
notes. The Company agreed to deposit or cause to be deposited such additional
Escrow Shares within 30 days of the date of the Investor Notice. To the extent
the Escrow Shares are not sufficient to meet the threshold of 150% of the
outstanding principal amount of the promissory notes within 30 days after the
Investor Notice, the Company shall grant to investors a security interest on the
Company’s tangible assets to the extent permitted under applicable
law.
F-49
The
following is a summary of the status of outstanding warrants as of September 30,
2010:
Warrants
Outstanding
|
Weighted
Average
Exercise Price
|
Average
Remaining
Life in years
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding,
January 1, 2010
|
1,535,088
|
$
|
0.228
|
2.5
|
$
|
0.122
|
||||||||||
Granted
|
-
|
|||||||||||||||
Forfeited
|
-
|
-
|
-
|
-
|
||||||||||||
Exercised
|
-
|
-
|
-
|
-
|
||||||||||||
Outstanding,
September 30, 2010
|
1,535,088
|
$
|
0.228
|
1.75
|
$
|
0.018
|
16. TAX
PAYABLE
The
Company and its U. S. subsidiary will file consolidated Federal income tax and
state franchise tax annual report individually. Its PRC subsidiaries file income
tax returns under the Income Tax Law of the PRC concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws. The Company’s BVI
subsidiary is exempt from income taxes.
Per
PRC Income Tax Law, any new foreign owned corporation is exempt from income tax
for the first two years of existence, and then receives a 50% exemption of
income tax for the next three years if it is a non high-tech corporation or 15%
tax rate for corporation qualified by State Science and Technology Commission as
"High Tech Manufacturing Enterprise" located in State "High Tech Zone" approved
by China State Council. Hanxin is qualified as a High Tech Manufacturing
Enterprise. Based on this regulation, Hanxin was exempt from income tax in 2003
and 2004 and its income has been subject to a 15% tax starting from January 1,
2005. CIE is not “High Tech Manufacturing Enterprise”, thus its income is
subject to 33% tax rate. Commencing January 2008, CIE’s income is subject to a
25% tax rate.
F-50
On
September 30, 2010 and December 31, 2009, taxes payable consisted the
following:
|
September 30,
2010
|
December 31,
2009
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
Value-added
tax
|
$ | 541,109 | $ | 144,664 | ||||
Corporate
income tax provision
|
488,263 | 373,542 | ||||||
Local
taxes and surcharges
|
39,219 | 12,973 | ||||||
Franchise
tax
|
3,214 | 3,214 | ||||||
Total
|
$ | 1,071,805 | $ | 534,393 |
The
deferred income taxes assets results from a loss on disposition of fixed assets
that are not deductible and bad debt allowance which is deductible when the bad
debt is incurred.
The
components of the provisions for income taxes were as follows:
For The Nine Months Ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
taxes:
|
|
|
||||||
Current
income taxes in P.R. China
|
$ | 741,410 | $ | 471,704 | ||||
Deferred
taxes (valuation ) benefit
|
(39,347 | ) | 5,326 | |||||
Total
provision for income taxes
|
$ | 702,063 | $ | 477,030 |
The
following is a reconciliation of the statutory taxes rate to the effective taxes
rate for the nine months ended September 30, 2010 and 2009:
|
For The Nine Months Ended
September 30,
|
|||||||
|
2010
|
2009
|
||||||
U.S.
statutory corporate income taxes rate
|
34
|
%
|
34
|
%
|
||||
PRC
taxes rate difference
|
(9
|
)%
|
(9
|
)%
|
||||
Net
effect of taxes exemption/non-taxable income/non-deductible
expenses
|
(11
|
)%
|
(7
|
)%
|
||||
Valuation
allowance
|
1
|
%
|
-
|
|||||
Effective
taxes rate
|
15
|
%
|
18
|
%
|
F-51
The
taxes effect of temporary differences that give rise to the Company’s deferred
taxes assets as of September 30, 2010 and December 31, 2009 were as
follows:
September 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Deferred
income taxes assets :
|
|
|
||||||
Bad
debt allowance
|
$ | 74,880 | $ | 40,389 | ||||
Loss
carryforward
|
9,065 | - | ||||||
Loss
on disposition of fixed assets
|
14,907 | 17,266 | ||||||
Total
deferred income taxes assets
|
$ | 98,852 | $ | 57,655 | ||||
|
||||||||
Reported
as:
|
||||||||
Current
deferred income taxes assets
|
$ | 10,879 | $ | 3,064 | ||||
Long-term
deferred income taxes assets
|
87,973 | 54,591 | ||||||
Net
deferred income taxes assets
|
$ | 98,852 | $ | 57,655 |
17. DUE
TO STOCKHOLDERS/OFFICERS
Amounts
due to stockholders/officers are unsecured, non-interest bearing, and do not
have a set repayment date. As of September 30, 2010 and December 31,
2009, the total net amounts due to the stockholders/officers were $181,187 and
$177,582, respectively which represented the net amounts lent to the
Company by Mr. Pengcheng Chen, the Chief Executive Officer of the
Company.
18. STOCKHOLDERS
EQUITY
On
August 9, 2005, the Company acquired Hanxin International in exchange for (i)
24,000,000 shares of the Company’s common stock and (ii) 1,000 shares of the
Company’s Series A Preferred Stock, which were converted into 177,185,642 shares
of the Company’s common stock, without taking into effect a reverse stock split
as described below.
In
November 2005, the Company filed and circulated to its shareholders the
Information Statement which permitted the Company, among other things, to (i)
amend its Articles of Incorporation to increase its authorized shares of common
stock to 200,000,000 shares; (ii) approve a one for six reverse split, (iii)
approve a stock option, SAR and stock bonus plan for the directors, officers,
employees and consultants of the Company. A certificate of amendment officially
increasing the authorized shares of common stock and approving the reverse stock
split was filed with the State of Delaware on December 13,
2005.
F-52
On
September 1, 2006, the 1,000 shares Series A preferred stock were converted into
29,530,937 shares of the Company’s common stock. Subsequently, the Company
issued an additional 118,123 shares in October 2006 to reflect an under-issuance
to a stockholder of the shares of common stock issuable upon conversion of the
preferred stock As a result the total amount of issued and outstanding shares of
the Company’s common stock was 35,413,850 as of June 30, 2008.
In May
2008, the board of directors of the Company authorized, and on July 31, 2008 the
Company issued, 150,000 shares of the Company’s common stock to its attorney for
services rendered. In June 2008, the board of directors of the Company
authorized, and on August 14 2008 the Company issued, 100,000 shares of the
Company’s common stock to HAWK Associates, Inc (“Hawk”), its investor relations
firm for services rendered pursuant to the agreement. Accordingly the Company
has 35,663,850 shares of issued and outstanding common stock as of September 30,
2010.
In
June 2008, the Company was assigned ownership of three patent rights from its
major shareholder, Mr. Fangshe Zhang. These patents were assigned
without any payment due to Mr. Zhang. The application and filing costs of these
three patents were RMB28,800 (equivalent to $4,199). In connection therewith,
the Company recorded $4,199 of intangible assets, and same amount of additional
paid in capital as of June 30, 2008.
19. BASIC
AND DILUTED EARNING PER SHARE
The
following table sets forth the computation of basic and diluted net income per
share:
For Three Months Ended
September 30,
|
For Nine Months Ended
September 30,
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||||
Basic:
|
|
|
|
|
|||||||||||
Numerator:
|
|
|
|
|
|||||||||||
Net income
for basic calculation
|
$ | 2,146,216 | $ | 1,222,460 | $ | 3,665,476 | $ | 1,963,911 | |||||||
Denominator:
|
|||||||||||||||
Weighted
average common shares
|
35,663,850 | 35,663,850 | 35,663,850 | 35,663,850 | |||||||||||
Denominator
for basic calculation
|
35,663,850 | 35,663,850 | 35,663,850 | 35,663,850 | |||||||||||
Net
income per share — basic
|
$ | 0.06 | $ | 0.03 | $ | 0.10 | $ | 0.06 | |||||||
Diluted:
|
|||||||||||||||
Numerator:
|
|||||||||||||||
Net income
for basic calculation
|
$ | 2,146,216 | $ | 1,222,460 | $ | 3,665,476 | $ | 1,963,911 | |||||||
Effect
of dilutive securities issued
|
- | 37,910 | 77,645 | 222,521 | |||||||||||
Net
income for diluted calculation
|
$ | 2,146,216 | $ | 1,260,370 | $ | 3,743,121 | $ | 2,186,432 | |||||||
Denominator:
|
|||||||||||||||
Denominator
for basic calculation
|
35,663,850 | 35,663,850 | 35,663,850 | 35,663,850 | |||||||||||
Weighted
average effect of dilutive securities:
|
|||||||||||||||
Convertible
debt
|
3,070,175 | 3,070,175 | 3,070,175 | 3,070,175 | |||||||||||
Warrants
|
1,535,088 | 1,535,088 | - | ||||||||||||
Denominator
for diluted calculation
|
40,269,113 | 38,734,025 | 40,269,113 | 38,734,025 | |||||||||||
Net
income per share — diluted
|
$ | 0.05 | $ | 0.03 | $ | 0.09 | $ | 0.06 |
F-53
20.
|
COMMITMENTS
|
The
Company leases its office space, and production facilities and lands under
operating lease agreements that are expiring on December 31, 2010 and
October, 2047 respectively. The following is a schedule of future minimum rental
land payments required under these operating leases as of September 30,
2010.
For the Quarter Ended September 30,
|
Amount
|
|||
2011
|
$
|
114,048
|
||
2012
|
17,826
|
|||
2013
|
17,630
|
|||
2014
|
17,630
|
|||
2015
|
17,630
|
|||
Thereafter
|
564,157
|
|||
Total
minimum rental payments required
|
$
|
748,921
|
Rent
and properties maintenance expenses amounted to $143,808 and $87,480 for the
nine months ended September 30, 2010 and 2009, respectively.
The
Company also leases three patent rights from its Chairman, Mr. Fangshe Zhang,
under operating lease agreements that expire on April 16, 2011. The following is
a schedule of future minimum rental payments required under these operating
leases as of September 30, 2010.
For the Quarter Ended September 30,
|
Amount
|
|||
2011
|
$
|
190,991
|
||
Total
minimum rental payments required
|
$
|
190,991
|
Patent
lease expenses amounted to $264,499 and $263,685 for the nine months ended
September 30, 2010 and 2009, respectively.
21.
|
CONCENTRATIONS
OF BUSINESS AND CREDIT RISK
|
Financial
Risks:
The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
F-54
Concentrations
Risks:
For
the nine months ended September 30, 2010 and 2009, except for special sales to
Sichuan Hanxin, none of the Company’s customers accounted for more than 10% of
its sales.
Major
Suppliers:
The
following summarizes purchases of raw materials from major suppliers (each 10%
or more of purchases):
|
Purchases from
|
Number of
|
Percentage
|
|||||||||
For The Nine Months Ended September 30,
|
Major Suppliers
|
Suppliers
|
of Total
|
|||||||||
2010
|
$
|
7,654,065
|
2
|
46.56
|
%
|
|||||||
2009
|
$
|
3,308,935
|
2
|
23.29
|
%
|
Geographical
Risks:
Substantially
all of the Company’s operations are carried out through its subsidiaries located
in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the economy of the PRC. The Company’s
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in the United States. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may be
adversely affected by, among other things, changes in the political, economic
and social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, changes in the PRC's cork manufacture industry
and regulatory rules and policies, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of
taxation.
22.
|
SUBSEQUENT
EVENTS
|
On
October 26, 2010, the Company agreed to issue to Brill Securities (the
“Placement Agent”), 250,000 shares of Common Stock (the “Shares”) in
consideration for the Placement Agent’s services in selling the promissory notes
and warrants in the Financing in 2008. The shares were
issued pursuant to the Placement Agent Agreement executed between the Company
and the Placement Agent in 2008 and such Shares are in lieu of any
other compensation which may be owed with respect to such Financing, including
the warrants specified in the Placement Agent Agreement. The Company
agreed to register such Shares under the Registration Statement for the offering
of certain Units (the “Offering”), at its expense, and use its best efforts to
cause such Registration Statement to become effective, provided the parties
acknowledged that there is no assurance that the Offering will occur and that
the Registration Statement will be declared effective by the
SEC.
F-55
On
October 31, 2010, a second amendment agreement was entered into between the
Company and the holders of the convertible promissory notes in the principal
amount of $700,000 sold in the Financing in 2008, whereby the maturity date was
extended again to February 28, 2011 and the interest rate under the notes
remained at 18% per annum from the issuance date through the maturity
date. In the event that the closing of the Company’s proposed
Offering does not occur by February 28, 2011, the interest rate under the note
shall increase to 24% per annum, accruing from the first anniversary of the
issuance of the note.
The
Noteholders and Placement Agent agreed that upon the closing of the
Offering, they will not, without the prior written consent of the underwriter of
the Offering, sell, assign, pledge, hypothecate or otherwise dispose of,
directly or indirectly, any of their shares of Common Stock, or other
distribution of stock, or grant of options, rights or warrants with respect to
any such shares of Common Stock, for a period of nine (9) months following
the closing of the Offering (six months with respect to the Placement
Agent).
F-56
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of Common Stock being registered.
Securities
and Exchange Commission registration fee (1)
|
$
|
755.80
|
||
FINRA
Filing Fee (1)
|
4,500
|
|||
NASDAQ
Listing Fee (1)
|
50,000
|
|||
AMEX
Listing Fee (1)
|
50,000
|
(1)
|
||
Transfer
Agent Fees
|
5,000
|
|||
Accounting
fees and expenses
|
75,000
|
|||
Legal
fees and expenses
|
150,000
|
|||
Blue
Sky/Underwriter’s counsel fees and expenses
|
10,000
|
|||
Miscellaneous
(2)
|
162,500
|
|||
Total
|
$
|
507,755.80
|
(1)
|
All amounts are estimates other
than the Commission’s registration fee, FINRA filing fee and NASDAQ
listing fee.
|
(2)
|
Includes non-accountable expense
allowance payable to the Underwriters of two percent (2%) of the gross
proceeds of the Offering.
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our board of directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not
entitled to be indemnified under the bylaws or otherwise. We are not, however,
required to advance any expenses in connection with any proceeding if a
determination is reasonably and promptly made by our board of directors by a
majority vote of a quorum of disinterested board members that (i) the party
seeking an advance acted in bad faith or deliberately breached his or her duty
to us or our stockholders and (ii) as a result of such actions by the party
seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
applicable sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
77
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of this prospectus, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
•
|
indemnify officers and directors
against certain liabilities that may arise because of their status as
officers or directors;
|
|
•
|
advance expenses, as incurred, to
officers and directors in connection with a legal proceeding, subject to
limited exceptions; or
|
|
•
|
obtain directors’ and officers’
insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
78
Shares
of Common Stock
ASIA
CORK, INC.
PROSPECTUS
Until ,
2011, all dealers that effect transactions in these securities, whether or not
participating in this Offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
Underwriters and with respect to their unsold allotments or
subscriptions.
December ,
2010
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
|
PROSPECTUS
|
SUBJECT
TO COMPLETION, PRELIMINARY PROSPECTUS DATED December ___,
2010
|
Shares
of Common Stock
ASIA
CORK, INC.
This
prospectus relates to the resale (this “Resale Prospectus”) by the investors
(the “Selling Stockholders”) of up to 5,501,794 shares (the “Shares”) of
Common Stock, $.0001 par value per share Asia Cork, Inc., a Delaware corporation
(the “Company”). The Shares are sometimes collectively referred to as the
“Selling Stockholders Securities”. No underwriting agreements have been entered
into by the Selling Stockholders with respect to the Securities offered hereby.
We will not receive any proceeds from the sales by the Selling Stockholders, but
we will receive funds from the exercise of warrants held by Selling
Stockholders, if exercised.
Concurrently
with this Offering (the “Selling Stockholders’ Offering”), the Company offered,
by separate Prospectus (the “Concurrent Offering”), up to ____Units, each
Unit consisting of one share of the Company’s Common Stock and
one warrant to purchase one share of Common Stock, and to the Underwriters,
to purchase Common Stock Underwriters up to ten percent of the Units sold. The
concurrent Offering and the Selling Stockholders Offering are collectively
referred to as the “Offerings.”
Our
shares of Common Stock are currently quoted on the Over-The-Counter Bulletin
Board under the symbol AKRK. We have applied for the listing of the Unites
and Common Stock on the NASDAQ Stock Market LLC
(“NASDAQ”).
The
shares of Common Stock issuable upon conversion of the promissory notes issued
to the Selling Stockholders (the “ Promissory Notes”) and exercise of the
warrants issued to the Selling Stockholders in June 2008 are the Selling
Stockholders Securities being offered for resale pursuant to this Resale
Prospectus.
The
Selling Stockholders have entered into customary “lock-up” agreements in favor
of the Underwriters pursuant to which such persons and entities shall agree
(with the exception of Brill Securities Inc.), for a period of nine (9) months
after the Offering is completed, that they shall neither publicly offer, issue,
sell, contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriters’ prior written
consent. The aforementioned restriction on Brill Securities Inc.
shall be for a period of six (6) months after the Offering is
completed.
The
Selling Stockholders may sell Common Stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions or a combination of such methods of sale directly or
through brokers.
The
Selling Stockholders and any participating broker-dealers may be deemed to be
“Underwriters” within the meaning of the Securities Act of 1933, as amended (the
“Securities Act”) and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
Securities Act. The Selling Stockholders have informed us that they do not have
any agreement or understanding, directly or indirectly, with any person to
distribute their Common Stock.
The
purchase of the securities involves a high degree of risk. See section entitled
“Risk Factors” beginning on page 12.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The
Date of this Prospectus is: ______________, 2010
79
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE
OF CONTENTS
Page
|
||
Prospectus
Summary
|
1
|
|
Risk
Factors
|
5
|
|
Cautionary
Statement Regarding Forward-Looking Statements
|
16
|
|
Use
of Proceeds
|
17
|
|
Dividend
Policy
|
17
|
|
Market
for Common Equity and Related Stockholder Matters
|
19
|
|
Accounting
for the Share and Exchange
|
20
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
40
|
|
Description
of Business
|
21
|
|
Management
|
54
|
|
Certain
Relationships and Related Transactions
|
63
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
65
|
|
Description
of Securities
|
66
|
|
Shares
Eligible for Future Sale
|
71
|
|
Selling
Stockholders
|
83
|
|
Plan
of Distribution
|
85
|
|
Legal
Matters
|
76
|
|
Experts
|
76
|
|
Additional
Information
|
76
|
|
Financial
Statements
|
F-1
|
|
Part
II Information Not Required in the Prospectus
|
77
|
|
Signatures
|
94
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that
date.
80
[RESALE
PROSPECTUS ALTERNATE PAGE]
THE
OFFERING
Common
Stock offered by Selling
Stockholders
|
5,501,794
shares (1)
|
Common
Stock outstanding
|
39,370,772shares (2)
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the Common Stock by the
Selling Stockholders
|
(1)
|
Before giving effect to the
Reverse Stock Split. Includes (i) 1,794,872 shares of Common Stock that
are issuable upon the exercise of outstanding warrants (ii) 3,456.922
shares of Common Stock that are issuable upon the conversion of
outstanding Promissory Notes and (iii) 250,000 shares of Common Stock that
may be issuable as consideration for services rendered for consulting
services in connection with a financing transaction of the Company in
2008.
|
(2)
|
Based on 35,663,850 shares of
Common Stock issued and outstanding as of December 10, 2010 plus (i)
3,456,922 shares issuable to the Selling Stockholders upon conversion of
the promissory notes and (ii) 250,000 shares issuable to a Selling
Stockholder but without giving effect to (i) the Reverse Split,(ii) the
______ shares of Common Stock included in the Units being issued in the
Offering, (excluding the shares issuable upon exercise of the Warrants,
and the Underwriters’ Warrants to purchase up to 10% of the Units issued
in the Offering) and (iii) 1,794,872 shares that may be issuable to the
Selling Stockholders upon exercise of their
warrants
|
Selling
stockholders holding an aggregate of 5,501,794 shares of Common Stock underlying
the Selling Stockholders’ Promissory Notes and Warrants have agreed not to sell
any of these shares until 9 months after the date of this prospectus (with the
exception of Brill Securities Inc. which has agreed not to sell its 250,000
shares until 6 months after the date of this prospectus) when all of their
shares will be released from the lock-up restrictions
81
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of Common Stock by the
Selling Stockholders, but we will receive funds from the exercise of warrants
held by Selling Stockholders, if exercised.
82
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
The
following table provides, as of the date of this prospectus, information
regarding the beneficial ownership of our Common Stock held by each of the
selling stockholders, including:
•
|
the number of shares owned by
each stockholder prior to this
Offering;
|
•
|
the percentage owned by each
stockholder prior to completion of the
Offering;
|
•
|
the total number of shares that
are to be offered for each
stockholder;
|
•
|
the total number of shares that
will be owned by each stockholder upon completion of the Offering;
and
|
•
|
the percentage owned by each
stockholder upon completion of the
Offering.
|
83
Name of Selling Shareholder
|
Number of Shares of
Common Stock
Beneficially
Owned Prior
to Offering
|
Percentage of
Shares of Common
Stock Beneficially
Owned Prior
to the Offering (1)
|
Number of
Shares of Common
Stock Registered
for Sale Hereby
|
Number of
Shares of
Common
Stock
Beneficially
Owned After
Completion
of the
Offering (2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering (2)
|
|||||||||||||||
ANCORA
GREATER
|
1,875,641 | 4.6 | % | 1,875,641 | 0 | 0 | ||||||||||||||
CHINA
FUND, L.P. (3)
|
0 | 0 | ||||||||||||||||||
IDAHO
CORK, LLC(4)
|
750,256 | 1.8 | % | 750,256 | 0 | 0 | ||||||||||||||
PIPE
EQUITY
|
1,875,641 | 4.5 | % | 1,875,641 | 0 | 0 | ||||||||||||||
PARTNERS,
LLC (5)
|
0 | 0 | ||||||||||||||||||
SILVER
ROCK II, LTD. (6)
|
750,256 | *1.8 | % | 750,256 | 0 | 0 | ||||||||||||||
BRILL
SECURITIES INC.(7)
|
250,000 | * | 250.000 | 0 | 0 |
* Less
than one percent
(1) Based
on 41,165,644shares of Common Stock outstanding as of the date of this
prospectus which includes 35,663,850 shares issued and outstanding and an
aggregate of 5,501,794 shares issuable to the Selling Stockholders but
before giving effect to (i) the Reverse Split and (ii) the _____ shares of
our Common Stock to be offered by us in a public Offering concurrently herewith
(excluding the Underwriters’ Warrants)
(2) Represents
the amount of shares that will be held by the Selling Stockholders after
completion of this Offering based on the assumption that all shares registered
for sale hereby will be sold. However, the selling stockholders may offer all,
some or none of the shares pursuant to this prospectus, and to our knowledge
there are currently no agreements, arrangements or understandings with respect
to the sale of any of the shares that may be held by the selling stockholders
after completion of this Offering.
(3) Includes
1,234,615 shares issuable upon conversion of a promissory note and 641,026
shares issuable upon exercise of warrants. John P. Micklitsch
has voting and investment control over the securities held by Ancora Greater
China Fund, L.P.
(4) Includes
493,846 shares issuable upon conversion of a promissory note and 256,410 shares
issuable upon exercise of warrants. Gary Reed, as manager, has voting and
investment control over the securities held by Idaho Cork, LLC.
(5) Includes
1,234,615 shares issuable upon conversion of a promissory note and 641,026
shares issuable upon exercise of warrants. James Mitchell Hull
has voting and investment control over the securities held by Pipe Equity
Partners LLC
(6) Includes
493,846 shares issuable upon conversion of a promissory note and 256,410 shares
issuable upon exercise of warrants. Rima Salam , the sole
shareholder, has voting and investment control over the securities held by
Silverrock II, Ltd.
(7) Consisting
of 250,000 shares that may be issuable as consideration for services rendered as
placement agent in connection with a private placement to the Selling
Securityholders in June 2008. Robert Brown, the majority
shareholder, has voting and investment control over the securities held by Brill
Securities Inc.
We
will not receive any of the proceeds from the sale of any shares by the Selling
Stockholders but we will receive funds from the exercise of warrants held by
Selling Stockholders, if exercised. We have agreed to bear expenses incurred by
the Selling Stockholders that relate to the registration of the shares being
offered and sold by the selling stockholders that relate to the registration of
the shares being offered and sold by the Selling Stockholders, including the SEC
registration fee and legal, accounting, printing and other expenses of this
Offering.
None
of the Selling Stockholders have held any position, office or other material
relationship with the Company or any of its predecessors or affiliates, other
than Brill Securities Inc. which acted as placement agent in the offering of the
securities to the Selling Stockholders in June 2008. Brill Securities
is a broker-dealer and is acting as an underwriter with respect to the shares
that it is offering for resale.
The
shares being offered by the Selling Stockholders include 3,456,922 shares issued
to the Selling Securityholders upon conversion of $350,000 in the principal
amount of convertible promissory notes issued to the Selling Securityholders in
June 2008, and all accrued and unpaid interest thereon, and 1,794,872 shares
issuable upon the exercise of Common Stock purchase warrants issued to the
Selling Securityholders in June 2008. The convertible promissory notes and
warrants were issued to the Selling Securityholders for aggregate gross proceeds
of $700,000. The securities were issued to the Selling Stockholders pursuant to
Rule 506 of Regulation D promulgated under the Securities
Act.
To the
extent that any successor(s) to a Selling Stockholder wishes to sell the
securities covered by this prospectus, the Company shall be required to file a
supplement to this prospectus identifying any successor Selling
Stockholder(s).
84
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
Selling Stockholders of our Common Stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. If there is no public market established for our
securities, the Selling Stockholders will sell at a fixed price that is equal to
the price at which we sell shares in our public Offering pursuant to the
registration statement of which this prospectus is a part. The Selling
Stockholders may sell Common Stock from time to time in the principal market on
which the stock is traded at the prevailing market price or in negotiated
transactions or a combination of such methods of sale directly or through
brokers.
In
addition, the Selling Stockholders have agreed to enter into customary
“lock-up” agreements in favor of the Underwriters pursuant to which such
persons and entities shall agree, for a period of nine months after the Offering
is completed, that they shall neither publicly offer, issue, sell, contract to
sell, encumber, grant any option for the sale of or otherwise dispose of any
securities of the Company without the Underwriters’ prior written
consent. The aforementioned restriction on Brill Securities Inc. with
respect to its 250,000 shares of Common Stock shall be for a period of six
months after the Offering.
The
Selling Stockholders may use any one or more of the following methods when
selling shares:
|
•
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
•
|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
•
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
•
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
•
|
privately negotiated
transactions;
|
|
•
|
settlement of short sales entered
into after the date of this
prospectus;
|
|
•
|
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
|
|
•
|
a combination of any such methods
of sale;
|
|
•
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise; or
|
|
•
|
any other method permitted
pursuant to applicable law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
85
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating to
its sales of shares to exceed what is customary in the types of transactions
involved. The maximum commission or discount to be received by any FINRA member
or independent broker-dealer, however, will not be greater
than percent ( %) for
the sale of any securities being registered hereunder pursuant to Rule 415 of
the Securities Act.
The
Underwriters and the Underwriters are underwriting the sale of up to ______Units
consisting of Common Stock and a Common Stock purchase warrant Common Stock to
be offered by us in a public Offering concurrently herewith. The maximum
commission or discount to be received in total by each Underwriter will not be
greater than nine percent (9%) for the sale of any securities being
registered hereunder. Additionally, any securities acquired by any participating
FINRA members during the 180-day period preceding the date of the filing of the
prospectus with the Commission will be subject to lock-up restrictions under
FINRA Rule 5110(g), unless an exemption is available under FINRA Rule
5110(g)(2). FINRA Rule 5110(g) provides that such securities shall not be sold
during our Offering or sold, transferred, assigned, pledged or hypothecated, or
be the subject of any hedging, short sale, derivative, put or call transaction
that would result in the effective economic disposition of the securities by any
person for a period of 180 days immediately following the date of effectiveness
of sales of our public Offering.
In
connection with the sale of our Common Stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this Resale Prospectus, which shares
such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “Underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
Selling Stockholders may be deemed to be “Underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this Resale
Prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this Resale Prospectus. Each
selling stockholder has advised us that they have not entered into any
agreements, understandings or arrangements with any Underwriter or broker-dealer
regarding the sale of the resale shares. There is no Underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.
We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144 under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our Common Stock for a period of two (2)
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our Common Stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this Resale Prospectus to each purchaser at or prior to the
time of the sale.
86
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the Common Stock offered by this Resale Prospectus will be passed
upon for us by McLaughlin &Stern LLP, New York, New York.
EXPERTS
The
consolidated financial statements of Asia Cork, Inc. as of December 31, 2009 and
2008 have been audited by MS Group CPA LLC, an independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the shares of Common Stock in this
Offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedules that were filed with the
registration statement. For further information with respect to us and our
Common Stock, we refer you to the registration statement and the exhibits
and schedules that were filed with the registration statement. Statements
contained in this prospectus about the contents of any contract or any other
document that is filed as an exhibit to the registration statement are not
necessarily complete, and we refer you to the full text of the contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules that were filed with the
registration statement may be inspected without charge at the Public Reference
Room maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of the
website is www.sec.gov
.
We file
periodic reports under the Securities Exchange Act of 1934, as amended,
including annual, quarterly and special reports, and other information with the
Securities and Exchange Commission. These periodic reports, and other
information, are available for inspection and copying at the regional offices,
public reference facilities and website of the Securities and Exchange
Commission referred to above.
87
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE DISTRIBUTION
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of Common Stock being registered.
Securities
and Exchange Commission registration fee (1)
|
$ | 755.80 | ||
FINRA
Filing Fee (1)
|
4,500 | |||
NASDAQ
Listing Fee (1)
|
50,000 | (1) | ||
AMEX
Listing Fee (1)
|
50,000 | (1) | ||
Transfer
Agent Fees
|
5,000 | (1) | ||
Accounting
fees and expenses
|
75,000 | (1) | ||
Legal
fees and expenses
|
150,000 | (1) | ||
Blue
Sky/Underwriter’s counsel fees and expenses
|
10,000 | (1) | ||
Miscellaneous
|
162,500 | (1) (2) | ||
Approximate
Total
|
$ | 507,755.80 | (1) |
(1)
|
All amounts are estimates other
than the Commission’s registration fee, FINRA filing fee, NASDAQ and AMEX
listing fee.
|
(2)
|
Includes non-accountable expense
allowance payable to the Underwriter of two percent of the gross proceeds
of the Offering.
|
88
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Our certificate of
incorporation provides that, pursuant to Delaware law, our directors shall not
be liable for monetary damages for breach of the directors’ fiduciary duty of
care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director’s
duty of loyalty to us or our stockholders, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of the law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our board of directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our board of directors by a majority vote of a
quorum of disinterested board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of this prospectus, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
•
|
indemnify officers and directors
against certain liabilities that may arise because of their status as
officers or directors;
|
|
•
|
advance expenses, as incurred, to
officers and directors in connection with a legal proceeding, subject to
limited exceptions; or
|
|
•
|
obtain directors’ and officers’
insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
89
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
On
June 4 and June 12, 2008, the Company consummated an Offering of convertible
promissory notes and Common Stock purchase warrants for aggregate gross
proceeds of $700,000. On October 26, 2010, the Company agreed to
issue 250,000 shares of Common Stock to Brill Securities, Inc., the placement
agent in such offering, in lieu of issuing 1,000,000 warrants at an exercise
price of $.01 which the placement agent claimed were due under the placement
agent agreement executed in 2008 with respect to such offing. The securities
were issued to accredited investors pursuant to Rule 506 of Regulation D
promulgated under the Securities Act.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Index:
Exhibit
No.
|
Exhibit Description
|
|
1.1
|
Form
of Underwriting Agreement (2)
|
|
2.1
|
Spin
- Off Agreement, dated September 19, 1996, between us and Kushi
Macrobiotics Corp.( Incorporated by reference to the like numbered exhibit
to our Registration Statement
on Form 10-SB))
|
|
2.2
|
Amended
and Restated Agreement and Plan of Merger by and among Kushi Macrobiotics
Corp. and American Phoenix Group, Inc. and the Registrant dated
August 12, 1996 (Incorporated by reference to the like
numbered exhibit to our Registration Statement
on Form 10-SB.)
|
|
2.3
|
Agreement
and Plan of Merger, dated as of July 11, 2005, by and among Kushi
Natural Foods Corporation, Kushi Sub, Inc., Hanxin (Cork) International
Holding Co., Ltd., Xi’An Cork Investments Consultative Management Co. and
Xian Hanxin Science and Technology Co., Ltd. (Incorporated by reference to
our report on Form 8-K filed on August 9,
2005.)
|
|
2.4
|
Amendment
to Agreement and Plan of Merger dated as of September 30, 2005.
(Incorporated by reference to our report on Form 8-K/A filed on
January 18, 2006.)
|
|
2.5
|
Agreement
of Merger between Hankersen International Corp. and Asia Cork Inc. dated
as of July 10, 2008. (Filed with the Commission on Form 8-K dated July 18,
2008 as Exhibit 1.1.)
|
|
2.6
|
Certificate
of Merger filed with the Secretary of State of Delaware effective July 10,
2008. (Filed with the Commission on Form 8-K dated July 18, 2008 as
Exhibit 1.2.)
|
|
3(a)
|
Certificate
of Incorporation (Incorporated by reference to the like
numbered exhibit to our Registration Statement
on Form 10-SB)
|
|
3(b)
|
Bylaws
(Incorporated by reference to the like numbered exhibit to our
Registration Statement on Form 10-SB.)
|
|
4.1
|
Specimen
Stock Certificate (Incorporated by reference to the like numbered exhibit
to our Registration Statement
on Form 10-SB.)
|
|
4.2
|
Form
of Warrant to purchase shares of common stock to be issued to the
investors in the Offering (1)
|
|
4.3
|
Form
of Warrant to purchase Units to be issued to the Underwriter of the
Offering (1)
|
|
4.4
|
Form
of Warrant Agreement between the Company and Olde Monmouth Stock Transfer
Co., Inc.
(1)
|
|
10.2
|
Form
of Warrant to Purchase Common Stock issued by the Registrant dated as of
June 4, 2008 and June 12, 2008. (Filed with the Commission on Form
8-K dated June 20, 2008 as Exhibit 1.2.)
|
|
10.3
|
Securities
Purchase Agreement between the Registrant and the Investors dated as of
May 29, 2008. (Filed with the Commission on Form 8-K dated June 20, 2008
as Exhibit 1.3.)
|
|
10.4
|
Addendum
1 to the Securities Purchase Agreement between the Registrant and certain
Investors dated as of June 12, 2008. (Filed with the Commission
on Form 8-K dated June 20, 2008 as Exhibit 1.4.)
|
|
10.5
|
Escrow
Agreement between the Registrant and the Escrow Agent dated as of May
2008. (Filed with the Commission on Form 8-K dated June 20, 2008 as
Exhibit 1.5.)
|
|
10.6(a)
|
Patent
Transfer Agreement dated August 11, 2008 between the Registrant and
Fangshe Zhang. (3)
|
|
10.6(b)
|
Patent
Lease Agreement dated April 15, 2006 between the Registrant and Fangshe
Zhang. (3)
|
|
10.6(c)
|
Patent
License Agreement dated August 11, 2008 between the Registrant and Fangshe
Zhang. (3)
|
|
10.7
|
Cancellation
Agreement dated August 19, 2008 between Shaanxi Shuta Wood Products Co.,
Ltd. and the Registrant. (Filed with the Commission on Form 8-K dated
October 8, 2008 as Exhibit 1.1.)
|
|
10.8
|
Loan
Agreement dated as of October 27, 2008 between the Registrant and
Shaanxi Shuta Wood Products Co., Ltd (Incorporated by reference to
the Form 10-K dated April 16, 2009 as Exhibit
10.1.)
|
|
10.9
|
Cork
Floor Production Cooperation Agreement dated October 15, 2009 between the
Registrant and Sichuan Hanxin Cork Merchandises Co., Ltd.
(3)
|
|
10.10
|
Loan
Agreement dated as of October 28, 2009 between the Registrant and
Shaanxi Shuta Wood Products Co. Ltd. (3)
|
|
10.11
|
Memo
on Land Purchase Agreement date October 20, 2009 between the Registrant
and Shaanxi Shuta Wood Products Co., Ltd. (3)
|
|
10.12
|
Employment
Contract dated October 9, 2009 between the Registrant and Pengcheng Chen
(3)
|
|
10.13
|
Employment
Contract dated April 1, 2009 between the Registrant and Yi Tong
(3)
|
|
10.14
|
Employment
Contract dated October 9, 2009 between the Registrant and Tianbao Guo
(3)
|
90
10.15
|
Employment
Contract dated October 9, 2009 between the Registrant and Shengli
Liu
|
|
10.16
|
Loan
Agreement dated November 10, 2004 between Pengchen Chen and Xi’an Hanxin
Science and Technology, Ltd. (3)
|
|
10.17
|
Loan
Agreement dated September 24, 2009 between Yang Liu and Xi'an HanXin
Science and Technology Co. Ltd. (3)
|
|
10.18
|
Form
of Lock-Up Agreement (3)
|
|
10.19
|
Amendment
Agreement dated July 6, 2010 between Selling Stockholders and the
Registrant (3)
|
|
10.20
|
Amendment
Agreement dated October 31, 2010 between Selling Stockholders and the
Registrant (3)
|
|
10.21
|
Financial
Advisory Agreement between the Company and Global Arena Capital Corp.
(1)
|
|
14.1
|
Charter
for the Audit Committee (Filed with the Commission on Form 8-K dated
December 24, 2009 as Exhibit 99.1)
|
|
14.2
|
Charter
for the Compensation Committee (Filed with the Commission on Form 8-K
dated December 24, 2009 as Exhibit 99.3)
|
|
14.3
|
Charter
for the Corporate Governance and Nominating Committee (Filed
with the Commission on Form 8-K dated December 24, 2009 as Exhibit
99.2)
|
|
14.4
|
Code
of Ethics (3)
|
|
20.1
|
Information
Statement filed with the Securities and Exchange Commission on August 26,
2004 (Filed with the Commission on Schedule 14 C Information Statement
dated October 18, 2005 (Preliminary) and November 8, 2005
(Definitive)
|
|
23.1
|
Consent
of MS Group CPA LLC, Certified Public Accountants, P.C.
|
|
23.2
|
Consent
of McLaughlin & Stern LLP (1).
|
|
24.1
|
Power
of Attorney (included on signature
page).
|
|
(1)
|
Filed
herewith
|
|
(2)
|
To be filed by
amendment
|
|
(3)
|
Previously
filed with (i) S-1 filed on February 12, 2010 (ii) with Amendment 1 to S-1
filed on June 22, 2010 (iii) with Amendment 2 to S-1 filed on September
20, 2010 or (iv) with Amendment 3 to S-1 filed on November 9,
2010.
|
91
ITEM
17. UNDERTAKINGS
The
undersigned registrant hereby undertakes with respect to the securities being
offered and sold in this Offering:
The
undersigned Registrant hereby undertakes o file, during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement:
i. To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933 as amended;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
Offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b);
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change in
such information in registration statement.
iv. That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the Offering of such
securities at that time shall be deemed to be the initial bona fide Offering
thereof.
To remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
Offering.
For
determining liability of the undersigned registrant under the Securities Act to
any purchaser in the initial distribution of the securities, the undersigned
registrant undertakes that in a primary Offering of securities of the
undersigned registrant pursuant to this registration statement, regardless of
the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to the
purchaser:
i. in any
preliminary prospectus or prospectus of the undersigned registrant relating to
the Offering required to be filed pursuant to Rule 424;
ii. any
free writing prospectus relating to the Offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
iii. the
portion of any other free writing prospectus relating to the Offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
iv. any
other communication that is an offer in the Offering made by the undersigned
registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by the registrant of expenses incurred and paid by a director, officer
or controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered hereby, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
92
The
undersigned Registrant hereby undertakes that it will:
(i) for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as
part of this registration statement as of the time the Commission declared it
effective.
(ii) for
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that Offering of the
securities at that time as the initial bona fide Offering of those
securities.
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an Offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
93
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Xi’An, the People’s
Republic of China, on the 13th day
of December 2010.
ASIA
CORK, INC.
|
|||
By:
|
/s/Pengcheng
Chen
|
||
Name: Pengcheng
Chen
|
|||
Title: Chief
Executive Officer (Principal Executive Officer)
|
By:
|
/s/
Yi Tong
|
||
Name: Yi
Tong
|
|||
Title: Chief Financial
Officer (Principal
Financial
Officer/Principal Accounting Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature
|
Title
|
Date
|
||
*
|
December
13, 2010
|
|||
Fangshe
Zhang
|
Chairman
of the Board
|
|||
/s/ Pengcheng Chen
|
December
13, 2010
|
|||
Pengcheng
Chen
|
Chief
Executive Officer (Principal Executive Officer) and
Director
|
|||
/s/ Yi Tong
|
|
|
December
13, 2010
|
|
Yi
Tong
|
Chief
Financial Officer (Principal Financial Officer/
Principal
Accounting Officer)
|
|||
December
13, 2010
|
||||
Shengli
Liu
|
Chief
Operating Officer and Director
|
|||
*
|
December
13, 2010
|
|||
Tianbao
Guo
|
Chief
Technical Officer
|
|||
*
|
December
13, 2010
|
|||
Gengshe
Bai
|
Director
|
|||
*
|
December
13, 2010
|
|||
Genhu
Yang
|
Director
|
|||
*
|
December
13, 2010
|
|||
Xiaodong
Wen
|
Director
|
|||
*
|
December
13, 2010
|
|||
Tao
Wang
|
Director
|
*by:
|
/S/ Pengcheng
Chen
|
||
Pengcheng
Chen. Atty in Fact
|
|||
December
13, 2010
|
94
Exhibit No.
|
Exhibit Description
|
|
1.1
|
Form
of Underwriting Agreement (2)
|
|
2.1
|
Spin
- Off Agreement, dated September 19, 1996, between us and Kushi
Macrobiotics Corp (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.1.)
|
|
2.2
|
Amended
and Restated Agreement and Plan of Merger by and among Kushi Macrobiotics
Corp. and American Phoenix Group, Inc. and the Registrant dated
August 12, 1996 (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 10.2)
|
|
2.3
|
Agreement
and Plan of Merger, dated as of July 11, 2005, by and among Kushi
Natural Foods Corporation, Kushi Sub, Inc., Hanxin (Cork) International
Holding Co., Ltd., Xi’An Cork Investments Consultative Management Co. and
Xian Hanxin Science and Technology Co., Ltd. (Filed with the Commission on
Form 8-K dated August 10, 2005 as Exhibit 2.1.)
|
|
2.4
|
Amendment
to Agreement and Plan of Merger dated as of September 30, 2005.
(Filed with the Commission on Form 8-K/A dated January 18, 2006 as Exhibit
2.2.)
|
|
2.5
|
Agreement
of Merger between Hankersen International Corp. and Asia Cork Inc. dated
as of July 10, 2008. (Filed with the Commission on Form 8-K dated July 18,
2008 as Exhibit 1.1.)
|
|
2.6
|
Certificate
of Merger filed with the Secretary of State of Delaware effective July 10,
2008. (Filed with the Commission on Form 8-K dated July 18, 2008 as
Exhibit 1.2.)
|
|
3(a)
|
Certificate
of Incorporation (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 3 (A).)
|
|
3(b)
|
Bylaws
(Filed with the Commission on Form 10-SB Registration Statement dated
March 27, 2000 as Exhibit 3 (B).)
|
|
4.1
|
Specimen
Stock Certificate (Filed with the Commission on Form 10-SB Registration
Statement dated March 27, 2000 as Exhibit 4.)
|
|
4.2
|
Form
of Warrant to purchase shares of common stock to be issued to the
investors in the Offering (1)
|
|
4.3
|
Form
of Warrant to purchase Units to be issued to the Underwriter of the
Offering (1)
|
|
4.4
|
Form
of Warrant Agreement between the Company and Olde Monmouth Stock Transfer
Co., Inc.
(1)
|
|
10.2
|
Form
of Warrant to Purchase Common Stock issued by the Registrant dated as of
June 4, 2008 and June 12, 2008. (Filed with the Commission on Form
8-K dated June 20, 2008 as Exhibit 1.2.)
|
|
10.3
|
Securities
Purchase Agreement between the Registrant and the Investors dated as of
May 29, 2008. (Filed with the Commission on Form 8-K dated June 20, 2008
as Exhibit 1.3.)
|
|
10.4
|
Addendum
1 to the Securities Purchase Agreement between the Registrant and certain
Investors dated as of June 12, 2008. (Filed with the Commission on
Form 8-K dated June 20, 2008 as Exhibit 1.4.)
|
|
10.5
|
Escrow
Agreement between the Registrant and the Escrow Agent dated as of May
2008. (Filed with the Commission on Form 8-K dated June 20, 2008 as
Exhibit 1.5.)
|
|
10.6(a)
|
Patent
Transfer Agreement dated August 11, 2008 between the Registrant and
Fangshe Zhang. (3)
|
|
10.6(b)
|
Patent
Lease Agreement dated April 15, 2006 between the Registrant and Fangshe
Zhang.(3)
|
|
10.6(c)
|
Patent
License Agreement dated August 11, 2008 between the Registrant and Fangshe
Zhang. (3)
|
95
10.7
|
Cancellation
Agreement dated August 19, 2008 between Shaanxi Shuta Wood Products Co.,
Ltd. and the Registrant. (Filed with the Commission on Form 8-K dated
October 8, 2008 as Exhibit 1.1.) (3)
|
|
10.8
|
Loan
Agreement dated as of October 27, 2008 between the Registrant and
Shaanxi Shuta Wood Products Co., Ltd (Filed with the Commission on
Form 10-K dated April 16, 2009 as Exhibit 10.1.) (3)
|
|
10.9
|
Cork
Floor Production Cooperation Agreement dated October 15, 2009 between the
Registrant and Sichuan Hanxin Cork Merchandises Co., Ltd.
(3)
|
|
10.10
|
Loan
Agreement dated as of October 28, 2009 between the Registrant and
Shaanxi Shuta Wood Products Co. Ltd,
|
|
10.11
|
Memo
on Land Purchase Agreement date October 20, 2009 between the Registrant
and Shaanxi Shuta Wood Products Co., Ltd. (3)
|
|
10.12
|
Employment
Contract dated October 9, 2009 between the Registrant and Pengcheng Chen
(3)
|
|
10.13
|
Employment
Contract dated April 1, 2009 between the Registrant and Yi Tong
(3)
|
|
10.14
|
Employment
Contract dated October 9, 2009 between the Registrant and Tianbao Guo
(3)
|
|
10.15
|
Employment
Contract dated October 9, 2009 between the Registrant and Shengli Liu
(3)
|
|
10.16
|
Loan
Agreement dated November 10, 2004 between Pengcheng Chen and Xi’an Hanxin
Science and Technology Co., Ltd. (3)
|
|
10.17
|
Loan
Agreement dated September 24, 2009 between Yang Liu and Xi'an HanXin
Science and Technology Co. Ltd. (3)
|
|
10.18
|
Form
of Lock-Up Agreement (2)
|
|
10.19
|
Amendment
Agreement dated July 6, 2010 between Selling Stockholders and the
Registrant (3)
|
|
10.20
|
Amendment
Agreement dated October 31, 2010 between Selling Stockholders and the
Registrant (3)
|
|
10.21
|
Financial
Advisory Agreement between the Company and Global Arena Capital Corp.
(1)
|
|
14.1
|
Charter
for the Audit Committee (Filed with the Commission on Form 8-K dated
December 24, 2009 as Exhibit 99.1)
|
|
14.2
|
Charter
for the Compensation Committee (Filed with the Commission on Form 8-K
dated December 24, 2009 as Exhibit 99.3)
|
|
14.3
|
Charter
for the Corporate Governance and Nominating Committee (Filed
with the Commission on Form 8-K dated December 24, 2009 as Exhibit
99.2
|
|
14.4
|
Code
of Ethics (3)
|
|
20.1
|
Information
Statement filed with the Securities and Exchange Commission on August 26,
2004 (Filed with the Commission on Schedule 14 C Information Statement
dated October 18, 2005 (Preliminary) and November 8, 2005
(Definitive)
|
|
23.1
|
Consent
of MS Group CPA LLC, Certified Public Accountants, P.C.
(1)
|
|
23.2
|
Consent
of McLaughlin & Stern LLP (1)
|
|
24.1
|
Power
of Attorney (included on signature
page).
|
|
(1)
|
Filed
herewith
|
|
(2)
|
To be filed by
amendment
|
|
(3)
|
Previously filed with (i) S-1
filed on February 12, 2010 (ii) with Amendment 1 to S-1 filed on June 22,
2010 (iii) with Amendment 2 to S-1 filed on September 20, 2010
or (iv) with Amendment 3 to S-1 filed on November 9,
2010
|
96