Attached files
file | filename |
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EX-32 - PERPETUAL TECHNOLOGIES, INC. | v206730_ex32.htm |
EX-3.2 - PERPETUAL TECHNOLOGIES, INC. | v206730_ex3-2.htm |
EX-3.1 - PERPETUAL TECHNOLOGIES, INC. | v206730_ex3-1.htm |
EX-31.1 - PERPETUAL TECHNOLOGIES, INC. | v206730_ex31-1.htm |
EX-31.2 - PERPETUAL TECHNOLOGIES, INC. | v206730_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark
One)
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
|
For
the fiscal year ended September 30, 2010
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
|
For
the transition period from ________ to __________
File
number: 000-53010
CHINA
SLP FILTRATION TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
|
84-1465393
|
|
(State or Other Jurisdiction
of Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
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Shishan
Industrial Park
Nanhai
District
Foshan
City
Guangdong
Province, PRC
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code: (011) 86-757-86683197
Securities registered pursuant to
Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Title of each class
|
Common Stock, par value $0.001 per share
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No
þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
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
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No
þ
The
aggregate market value of the registrant’s common stock, $0.001 par value
per share, held by non-affiliates of the registrant on March 31, 2010, was
approximately $2,784,751. As our common stock is not publicly
traded this is based on as assumed value of $2.45 per
share. Shares of the registrant’s common stock held by
each officer and director and each person known to the registrant to own 10% or
more of the outstanding voting power of the registrant have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a determination for other purposes.
As of
December 28, 2010 there were 15,265,714 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: None
CHINA
SLP FILTRATION TECHNOLOGY, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
TABLE OF
CONTENTS
PART
I
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2
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|||
ITEM
1
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BUSINESS
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2
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||
ITEM
1A
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RISK
FACTORS
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22
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||
ITEM
1B
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UNRESOLVED
STAFF COMMENTS
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39
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ITEM
2
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PROPERTIES
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39
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ITEM
3
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LEGAL
PROCEEDINGS
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39
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ITEM
4
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(REMOVED
AND RESERVED)
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39
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PART
II
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40
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|||
ITEM
5
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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40
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||
ITEM
6
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SELECTED
FINANCIAL DATA
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43
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ITEM
7
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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43
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ITEM
7A
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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51
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ITEM
8
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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51
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ITEM
9
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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51
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ITEM
9A
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CONTROLS
AND PROCEDURES
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52
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ITEM
9B
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OTHER
INFORMATION
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53
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PART
III
|
54
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|||
ITEM
10
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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54
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ITEM
11
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EXECUTIVE
COMPENSATION
|
61
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ITEM
12
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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65
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||
ITEM
13
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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67
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ITEM
14
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
69
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PART
IV
|
71
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|||
ITEM
15
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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71
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i
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
OTHER
INFORMATION CONTAINED IN THIS REPORT
This
annual report contains forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things, (a)
our projected sales, profitability and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and (e)
our anticipated needs for working capital. They are generally identifiable by
use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,”
“potential,” “projects,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend” or the negative of these words or other
variations on these words or comparable terminology. In particular, these
include statements relating to future actions, future performance, sales
efforts, expenses, the outcome of contingencies such as legal proceedings, and
financial results.
Any or
all of our forward-looking statements in this annual report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” and matters described in this annual report generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur and you
should not place undue reliance on these forward-looking
statements.
1
PART
I
Item
1. Business
Overview
We are a
manufacturer of nonwoven fabric in the PRC. Nonwovens are synthetic
fabrics, such as felt or polyester, which are neither woven nor knitted,
but instead made from long fibers, bonded together by chemical, mechanical, heat
or solvent treatment.
Our total
revenues for the year ended September 30, 2010 were approximately $19.95
million, an increase of $8.1 million, or approximately 68%, compared to total
revenues of $11.85 million for the prior year. Our net income was approximately
$2.22 million, a decrease of $0.22 million, or approximately 9%, from
approximately $2.45 million for the prior year.
We
currently manufacture two types of polyester, or PET, nonwoven
fabrics. Our PET nonwoven fabrics are used in a wide range of
products, including filtration products, road construction materials, home
furnishings, automobile interior insulation and industrial
packaging.
We sell
our nonwoven fabrics primarily to PRC-based manufacturers that incorporate our
fabric products into end products which are sold to customers operating in the
heavy industrial, automotive, construction and home furnishing industries. Given
the broad range of applications for our products, we are not dependent on
any single industry sector or customer to generate revenues. We have many active
customers and our two largest clients in 2010, were Dalian Jier Linke Geotextile
Material Co., Ltd. and Chendu Sanya Building Material Co., Ltd. which accounted
for approximately 19% of our revenues. Our two largest customers in 2009,
Chengdu Sanya and Xiantao Ruixin, accounted for approximately 18% of our
revenues.
Although
we intend to continue to generate revenues from the sale of PET nonwovens, the
key component to our growth strategy is the successful commercialization and
sale of polyphenylene-sulfide fiber, or PPS, nonwoven fabric. PPS nonwoven
fabric is a heat resistant, corrosion-proof and flame retardant nonwoven fabric
and can be used in many different applications, including as the material for
dust filter bags for pollutant dust removal in smoke stacks in coal-fired power
plants, garbage incinerators and cement factories. We recently developed a
manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS
nonwoven fabric, which is the key product line around which our long-term growth
strategy is centered. We believe that this manufacturing process is
proprietary and have applied for a process patent in the PRC and intend to apply
for a process patent in the US and Europe.
We
believe that although PPS filtration materials have been used since 1979 in bag
filters that are attached to smoke stacks in many of the coal-fired boilers
operating in Europe and the United States, less than 10% of the coal fired
power plants operating in the PRC are equipped with dust removal filtration bags
and less than 10% of the filtration bags in use were made from PPS fiber.
(Source “China Power
Industry”, issue 4, 2006, page 36.)
Under
recently adopted PRC environmental regulations that are being imposed on
operators of coal-fired power plants, garbage incinerators and cement factories,
which came into effect in January 1, 2010, carbon and other emissions are
required to be less than 50 milligrams per cubic meter by the end of
2010. Some of the larger, more developed cities, for example
Beijing and Tianjin, have adopted even more stringent rules requiring that
emissions be less than 30 milligrams per cubic meter. (Source "Electric Power," May,
2008.)
We
believe, based on an article published in China Nonwoven & Industrial
Textile (CNIT) in 2010, that less than 10% of the coal-fired boilers in China
were equipped with dust removal filtration bags and less than 10% of the
filtration bags in use are made from PPS fiber.
2
Filtration
bags offer these and other plant operators a cost effective way of meeting these
new emission and dust pollutant standards in the PRC because the installation of
bag filters is a significantly cheaper method of achieving compliance with these
regulations than installing costly pollutant dust removal equipment such as
engineered scrubbing systems, the installation of which would we believe be cost
prohibitive for many of these smaller coal fired power plants and other
polluters.
Based on
laboratory tests which we conducted internally, we believe that our PPS nonwoven
fabric is superior to other high temperature filtration materials currently
available because it is lighter, thicker, stronger, has higher air permeability
and filtration efficiency and is significantly cheaper to
produce. As nonwovens are sold by weight, our product will also
be cheaper as it is lighter. Due to the superior
characteristics of our PPS product coupled with the demand created by these new
regulations, we believe that our PPS material will ultimately replace other high
temperature filtration materials currently available in the market place, such
as PTFE (or Teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole
fiber), PMIA and PSA and the demand for our PPS nonwovens will be
significant.
Comparison-Our PPS Product to Other Filtration Materials
Our PPS
Product
|
PPS
needle
punching
felting
|
Metamax
needle
punching
felting
|
P84
needle
punching
felting
|
PTFE
needle
punching
felting
|
|||||||||||||||||
Gram
weight(g/m2)(1)
|
450 | 500 | 500 | 500 | 800 | ||||||||||||||||
Thickness
(mm) (2)
|
2.2 | 1.8 | 2 | 2 | 2.5 | ||||||||||||||||
Air
permeability (L/m2/s) (3)
|
300~400
|
200~300
|
200~400
|
200~300
|
200~300
|
||||||||||||||||
Break
strength (N/5cm)(4)
|
Vertical
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1400 | 1250 | 1300 | 1100 | 3260 | |||||||||||||||
Horizontal
|
1250 | 1350 | 1460 | 1200 | 3300 | ||||||||||||||||
Break
elongate(%)
(5)
|
Vertical
|
25 | 40 | 50 | 25 | 10 | |||||||||||||||
Horizontal
|
30 | 60 | 55 | 35 | 15 | ||||||||||||||||
Working
temperature (6)
|
Continuous
|
190 | 190 | 204 | 260 | 260 | |||||||||||||||
Moment
|
220 | 220 | 240 | 280 | 300 | ||||||||||||||||
Price
of fiber (in K USD$) (7)
|
$ | 14.68 | $ | 20.56 | $ | 22.03 | $ | 55.80 | $ | 41.12 | |||||||||||
Materials
saved (%) (8)
|
0.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | 43.8 | % | |||||||||||
Filtration
Efficiency (mg/cbm) (9)
|
<30
|
50~100
|
50~100
|
50~100
|
50~100
|
(1) Gram
weight: (g/m2) means grams per meter squared. The higher the gram per
meter squared weight, the heavier the fabric/material.
(2)
Thickness (mm): the higher the millimeter figure, the thicker
the material.
(3) Air
permeability: (L/m2/s) means liters per meter squared per
second. The more liters that pass per second, the higher the
permeability of the fabric/material.
(4) Break
strength: (N/5cm) is a unit of measure to demonstrate breakage
strength. 1 N ≈ 0.1 KG so that N/5cm = .02. So, a 1400
value = 28. The higher the value, the stronger the
material.
(5) Break
elongate (%) refers to the amount of stretching of a fabric/material before
breakage expressed as a percentage. So, a 25% value indicates the
material can be stretched 25% prior to breakage.
(6)
Working temperature means the continuous operating temperature that a
fabric/material can operate in.
(7) Price
of fiber (in K USD$) = Price of the fabric/material expressed as K USD$ ($1,000)
per metric ton.
(8) Materials
saved (%) = Referencing the SLP PPS Product as the denominator, the amount of
material that can be saved by utilizing the more efficient PPS material as
compared to the other materials.
(9) Filtration
Efficiency (mg/cbm) = milligrams per cubic meter. The ability of the
fabric/material to eliminate airborne particles. This figure is the
minimum size of particles.
We plan
to begin commercial production of our PPS nonwoven fabric using our patent
pending process in the early part of 2011 with the addition of three high tech
production lines with annual output capacity of 3,600 tons. Although
prototype bag filters made of our PPS product have been tested in laboratories,
they have not been tested on site by any potential end user and we do not expect
to develop prototypes for testing by any end user prior to beginning commercial
production.
Our manufacturing facility, which uses manufacturing equipment
imported from Germany, is located in Foshan City, Guangdong Province, PRC and
occupies more than 10,000 square meters. We currently have three production
lines for PET nonwovens with total annual capacity of 8,000 tons of nonwoven
fabric.
3
Recent
Events
Reverse
Merger
On
February 12, 2010, we acquired control of Foshan SLP Special Materials Company,
Limited (“Foshan”), our PRC-based operating company through a “reverse merger”
transaction. Upon completion of the reverse merger transaction, we
ceased to be a shell company (as that term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934 (the “Exchange Act”)).
Private
Placement Transaction
On
February 12, 2010, we completed a financing transaction in which we raised gross
proceeds of $4,140,000 through a private placement of convertible notes and
warrants to certain accredited investors.
For more
information about the private placement, you should read the section of this
report entitled “Our History and Corporate Structure.”
Name
Change
On March
24, 2010, we changed our name from Perpetual Technologies to China Filtration
Technology, Inc.
On June
1, 2010, we changed our name from China Filtration Technology, Inc. to China SLP
Filtration Technology, Inc.
Planned
Initial Public Offering
On July
8, 2010, we filed a registration statement on Form S-1 with the Securities
Exchange Commission (File No: 333-168028) to register for sale to the public
4,166,677 shares of our common stock. Such registration statement is
hereinafter referred to as the Public Offering Registration Statement. The
Public Offering Registration Statement is currently being reviewed by the SEC
and has not been declared effective. We intend to use the net proceeds of that
offering to purchase polyphenylene-sulfide fiber, or PPS, manufacturing
equipment. We cannot assure you that our planned public offering will
be successful and we cannot be certain that additional funding will be available
on acceptable terms, if at all.
Executive
Offices
Our
executive offices are located at Shishan Industrial Park, Nanhai District,
Foshan City, Guangdong Province, PRC and our telephone number is (011)
757-86683197. Our corporate website is www.silepu.com. Information contained on,
or accessed through, our website is not intended to constitute and shall not be
deemed to constitute part of this report.
4
Our
Industry
We
operate in the nonwoven segment of the technical textiles industry which is one
of the fastest growing sectors of the textile industry worldwide.
Since
1985, the global market size of the technical textiles sector has grown at an
average growth rate of 3.8% per year. Total consumption of technical textiles in
2008 reached 19.6 million tons and has been projected to reach 33.8 million tons
in 2010 on a worldwide basis. (Source: Textile
Lead).
The
nonwoven fabric industry in the PRC is large and growing, driven primarily by
China’s continued economic development. China has experienced rapid economic and
industrial growth in the past 30 years. China’s output of iron and steel,
cement, coal, fertilizer and power generation all currently rank as first or
second in the world (Source:
US Department of Commerce and US Department of the Interior). China’s
consumption of raw materials currently ranks second in the world (Source: Report from the EIA Energy
Information Administration). Due to outdated technology and equipment in
China’s chemical, raw materials and energy industries, China has encountered
problems of inefficient utilization of energy and resources, as well as heavy
pollution due to accelerated urbanization. Reducing emission pollution has been
a focus for the Chinese Central Government for several years and is expected to
remain a focus moving forward. As China’s government imposes stricter policies
on environmental protection, industrial gas and dust emission limits have become
stricter. We believe this creates a significant market opportunity for the
commercialization of our PPS nonwovens materials.
China now
manufactures about 20% of the world’s nonwovens and this market share is
expected to reach 25% by 2015 according to statistics released by INDA (Association of the Nonwoven
Fabrics Industry) in North America and EDANA (European Disposables and Nonwovens
Association) in Europe.
Currently
in the PRC, there are estimated 500-600 nonwovens manufacturers producing
nonwovens on an estimated 1,000 to 1,500 lines. (Source: Chinese Technical Textiles
and Nonwovens Industry, 2009).
We
believe that there is a significant gap between the nonwovens industry in China
and the nonwovens industry in Europe and the United States in terms of technical
level, quality level, and competitiveness. China’s nonwovens market is still
emerging and we believe has a large capacity to develop and expand and we
believe that the following factors will contribute to growth in the nonwovens
industry in China and our ability to grow as a company:
·
|
Lack
of market segments: Nonwoven
products are used in a variety of applications. Existing markets are
expanding and new markets are emerging. China’s nonwoven
industry production capacity is still concentrated on normal traditional
products, such as polyester wadding, interlining, geo-textile, hygiene,
packaging materials and normal filtration materials. Many companies lack
clear market focus and are competing in the same market segments which
have caused capacity concentration and fierce
competition.
|
·
|
Strength
for market and product development is not substantial: In
China, market demand for higher technology based PET spun-bond
product is currently over 40 million cubic meters. These products are
currently all imported, mainly from Freudenberg
(Taiwan). Some of the domestic Chinese companies have
been trying to develop these products but, to date, no such products have
been launched. If these products are developed at a lower cost
in the domestic market, then the Chinese domestic market for highly
technical nonwovens will
expand.
|
5
Our
Growth Strategy
Our
growth strategy centers around the following strategic initiatives:
·
|
Commence
production of our PPS nonwoven fabric product. We plan to commence
production of PPS nonwoven fabric using our patent pending manufacturing
process in the early part of 2011 for sale to PRC-based operators of
coal-fired power plants, garbage incinerators and other manufacturers that
need to comply with recently adopted PRC environmental
regulations.
|
·
|
Expand
our manufacturing facilities. In order to commence
production of PPS nonwoven fabric, we plan to significantly expand our
manufacturing facilities and acquire three new production lines to
manufacture PPS nonwoven material. This will increase our total
annual manufacturing capacity from 8,000 tons to 11,600 tons of nonwoven
material.
|
·
|
Develop,
protect and commercialize our proprietary technology. We hold
a number of authorized patents and have a patent application
currently pending in the PRC for our PPS nonwoven manufacturing
process which we believe is entitled to patent protection. We
intend to apply for a process patent for this process in North America and
Europe. We intend to capitalize on our proprietary
technology by developing and commercializing our products for numerous
applications and believe our proprietary technology gives us a competitive
advantage and acts as a barrier to entry for our
competitors.
|
·
|
Commence
marketing and sale of our PPS products to coal fired power plants.
To capitalize on
China’s “green movement”, we plan to focus our sales efforts for our PPS
nonwoven material on coal-fired power plants as we believe it is currently
the most suitable and largest market for PPS filtration materials. The
sales to the coal-fired power plants will be made directly using our
existing sales team. We also expect to double the size of our
outside sales force to cover the PPS products and
market.
|
Our
Competitive Strengths
We
believe our competitive strengths are as follows:
·
|
We
offer high quality products with low production costs. We manufacture our products
using what we believe to be proprietary, low cost manufacturing processes
with quality manufacturing equipment which allows us to offer PET and PPS
nonwoven products which have lower operational and production costs than
our competitors’ products.
|
·
|
We
believe our PPS material is a superior product. We believe, based on
laboratory tests which we conducted internally, that our PPS nonwoven
fabric is superior to other currently available types of PPS fabric
because it is lighter, thicker, stronger, has higher air permeability and
filtration efficiency and significantly cheaper to produce and will
ultimately replace other high temperature filter materials, such as PTFE
(or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber),
PMIA and PSA. Similar to most new product offerings, widespread market
acceptance of our PPS products for use in dust bag filters by coal fired
power plants and other intended users is uncertain before a product is
launched.
|
·
|
Our
proprietary manufacturing processes present a significant barrier to entry
for our potential competitors. We hold a number
of authorized patents and have a patent application currently
pending in the PRC, including a process patent for the manufacture of
PPS nonwovens, and we intend to apply for a process patent in North
America and Europe for our PPS nonwoven manufacturing process.
Additionally, we have made significant investments in research and
development and we believe these proprietary processes could give us a
competitive advantage over our competitors and act as a barrier to
entry.
|
6
·
|
We
have efficient production and operations management. As a result of our manufacturing
equipment and proprietary manufacturing processes, we believe that we
exceed industry standards in productivity, reduction of variability and
delivery lead time for our existing products. This results in fewer
product warranty claims and greater customer
satisfaction.
|
Our
Products and Market
We
currently manufacture two types of polyester, or PET, nonwoven fabrics: (i) PET
continuous filament spun-bond thermal calendared nonwoven fabric, which we began
manufacturing in 2006; and (ii) PET filament spun-bond needle-punched
geo-membrane and waterproof fabrics, which we began manufacturing in
2009.
In our
operations and in this report, we use a variety of technical terms to describe
our products based on the manufacturing process used or raw material included in
our products. Some of these terms are described below:
“Continuous
filament” refers to strands of polymer (plastic) that are continuous as opposed
to chopped or cut to certain length.
“Spun
Bond” refers to a process of melting polymer pellets melted producing continuous
filaments that are cooled and stretched. The filaments are then cut and laid on
a moving belt to form a web.
“Thermal
Calendered” refers to a process for using heat to bond nonwoven
fabric. A calendar is a machine consisting of cylinders or rolls that
are stacked and heated to precise temperature. The nonwoven material
is passed through (pressed) the cylinders and the polymer based material is
bonded using heat and the partial melting of the polymer (plastic).
“Needlepunched”
refers to a process where precision cut fibers are distributed onto and across a
mesh substrate that is moving. The fibers are then needled (bound together
mechanically) by an oscillating needle board (the needle board consists of
thousands of evenly spaced needles). The fibers are mechanically bonded by
barbed needles entangling the fibers. The density of the fabric is controlled by
the number of needle boards used.
“Geo-membranes”
refers to types of nonwoven fabric that are permeable fabrics which are designed
and applied to be permeable in one direction only. Geo membranes
provide a waterproof barrier that allows moisture to penetrate (drain) from one
direction while limiting or eliminating the penetration (drainage) from the
opposite direction.
Polyester
(PET) filament spun-bond thermal calendared nonwoven fabrics.
Our
polyester (PET) filament spun-bond thermal calendared nonwoven fabric is made
from polyester and performs effectively in high temperatures. It is
anti-corrosive, has a long lifespan (between 1 to 2 years for filtration, 5 to
10 years for automotive applications, and 5 years for other applications) and
maintains its shape and penetration. This nonwoven is used for filtration and
water-drainage, packing and automobile interior decoration and
insulation.
Polyester (PET)
filament spun-bond needle-punched geo-membrane and waterproof
materials.
Geo-membranes
are used in engineering, heavy construction, building and pavement construction,
hydrogeology and environmental engineering. Geo-membranes are permeable fabrics
which have the ability to separate, filter, reinforce, protect and/or drain.
These products have a wide range of applications and are currently used in many
civil engineering applications including the construction of roads, airfields,
railroads, embankments, retaining structures, reservoirs, canals, dams, soil
bank protection and coastal engineering.
7
Our
geo-membrane products are made from polyester and are primarily used in the
construction industry to improve soil strength and for roof waterproofing.
Geo-membranes can be used as a cost-effective alternative to improve soil
strength instead of the conventional manner of soil nailing which is a technique
for stabilizing slopes and for constructing retaining walls from the top down.
With the use of geo-membrane, steep slopes can be planted with vegetation to
enhance the aesthetic value. In addition, our geo-membrane product line is used
for roof waterproofing based on its excellent water resistant qualities and
performance.
In
February 2009, we installed a production line with annual capacity of 4,000 tons
for the production of polyester (PET) filament, needle-punched, geo-membrane and
waterproof materials.
PPS
nonwoven fabric product
Our
growth strategy centers around the production and commercialization of our PPS
nonwoven products which are manufactured using a proprietary continuous
filament, spun-bond, needle-punched manufacturing process which we recently
developed.
Although
PPS filtration materials have been used since 1979 in bag filters that are
attached to smoke stacks in nearly 80% of the coal-fired boilers operating in
Europe and the United States, the use of bag filters made from PPS fabric is not
currently widespread in China. (Source “China Power Industry”,
issue 4, 2006, page 36 and
http://www.resinda.com/product2.asp?brand_id=10&series_id=57)
Our
proprietary PPS manufacturing process involves a PPS slice purification
technique designed to get sufficiently pure raw materials to produce PPS
filtration materials. As part of this process we have developed web
formation techniques so that filaments can be used to increase strength and
short fibers are no longer necessary. PPS nonwovens made from
filaments are stronger than PPS nonwovens made from short fibers.
Our PPS
material is produced by the filament spun-bond needle-punched
method. Our product can bear temperatures of up to 230 degrees
Celsius and is resistant to degradation caused by exposure to acid, alkali
or oxidization. In comparison to other high temperature
filtration materials, our product has a longer life (3 years at 190 - 230
degrees Celsius), is stronger (because we use filaments rather than short
fibers), and has lower operation and production costs.
Market
Demand for PPS Products
Under PRC
environmental regulations that became effective on January 1, 2010 and which are
being imposed on operators of coal-fired power plants, garbage incinerators and
cement factories, carbon and other emissions are required to be less than 50
milligrams per cubic meter by the end of 2010. Some of the larger,
more developed cities, for example Beijing and Tianjin, have adopted even more
stringent rules requiring that emissions be less than 30 milligrams per cubic
meter. (Source: "Electric Power”
May, 2008).
We
believe, based on an article published in China Nonwoven & Industrial
Textile (CNIT) in 2001, that less than 10% of the coal-boilers in China were
equipped with dust removal filtration bags and of the filtration bags in use
less than 10% are made from PPS fiber.
Initially,
we intend to market our PPS nonwovens to the coal-fired power plants in the PRC
as we believe that this is the largest and most immediately accessible market
for our PPS filtration materials. After we have established a foothold in that
market, we intend to begin marketing our PPS nonwovens to cement factories and
waste incinerators.
PTFE (or
teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and
PSA are other materials that are also used to make needle-punched felt that is
suitable for high temperature applications such as in bag filters for coal-fired
power plants. In comparison to these other high temperature filter
materials, we believe, based on laboratory testing, that our PPS nonwoven fabric
is stronger, has lower production and operating costs, and has higher filtration
efficiency.
8
Due to
the characteristics of our PPS product coupled with the demand created by these
new regulations, we believe that our PPS material will ultimately replace other
high temperature filtration materials currently available in the market place,
such as PTFE (or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole
fiber), PMIA and PSA and become a widely used filtration material
for use in high temperature environments such as coal-fired power plants,
garbage incinerators and cement factories.
Although
prototype bag filters made of our PPS product have been tested in laboratories,
they have not been tested on site by any potential end user and we do not expect
to develop prototypes for testing by any end user prior to beginning commercial
production.
We have
been supported by the Chinese SEPA (State Environmental Protection Agency) in
the development and application of our PPS fabric for the coal-fired power
plants. Our PPS fabric utilized in the bag filter application is the
recommended solution to the carbon emissions standard by SEPA. Mr. Su Lei,
one of our directors, is a government official within SEPA and has direct
responsibility for implementing the recently introduced carbon emission
standards at coal fired power plants. With the support of Mr. Su, we
have introduced our material as the solution to the carbon emissions control
problem to dozens of coal-fired power plants in China. All of these
meetings resulted in interest in our PPS fabric and the majority of the
coal-fired power plants we have met with have given us indications of specific
purchasing interests as soon as we produce the PPS fabric material in our new
facility.
Our
Manufacturing Facility and Production Lines
Our
manufacturing facility is located in Foshan City, Guangdong Province, PRC and
has over 10,000 square meters of operating space on 33,074 square meters of
land. Our land use rights for this facility expire in October 2052. We use
manufacturing equipment imported from Germany.
We
currently operate three spun-bond production lines. Two of these production
lines are thermal calendared lines with annual capacity of 4,000 tons of
polyester filament, thermal calendared, nonwoven fabric. The third spun-bond
line is a needle-punched production line which commenced operation in February
2009. This production line has an annual capacity of 4,000 tons of polyester
filament, needle-punched, geo-membrane and waterproofing
material. Currently, we have total annual production capacity of
8,000 tons.
We are
adding capacity to our existing manufacturing facility with a construction
project to increase the factory size, which will house our new PPS lines.
A new production line in currently being installed and is expected to be
completed in January 2011. We plan to order and install two
additional PPS lines using the proceeds of our planned initial public
offering. These three production lines will have an annual output
capacity of 3,600 tons of PPS nonwoven material. We have obtained
approval from the local foreign trade and economic cooperation bureau to install
these three new production lines for this total output capacity. To
comply with PRC environmental regulations, we are required to obtain a
construction commencement approval from the local environmental protection
bureau for the installation of a new production line currently under
construction before we begin installation.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 60 days from
commencement (on or about January 10, 2011), but we cannot assure that this will
be the case. Once the environmental impact assessment is completed, we
intend to resubmit the application for the construction commencement approval
together with the environmental impact assessment to the local environmental
protection bureau. We anticipate that the construction commencement
approval will be issued within 60 days from the submission date, but we cannot
assure that this will be the case.
9
In
addition, we are required to obtain a pollution emission permit for the disposal
of waste gases, waste water, waste dust and other waste materials. We do
not currently have a pollution emission permit, but we are preparing the
application for this permit and intend to submit the application after the new
production line is completed. The process of obtaining this permit can
take up to 5 months after the application has been submitted.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition. See “—
Environmental Matters.”
Quality
Control
We
received the ISO9001-9002 Quality Management System Certification in 2003 and
again in 2009. We adopted what we believe to be the highest quality standards in
the industry and maintain quality control and product quality at high levels. We
have strictly embraced the ISO9001 Management System Standards in order to
integrate our quality management process and enhance the management system and
manufacturing process. We closely inspect our products to guarantee quality
according to Q/NHJL1-2008 Enterprise Quality Standards and strictly control the
manufacturing process and quality control before any products leave our
factory.
Our
Customers
We sell
our existing products to over 200 customers primarily in the PRC, and
also internationally, to manufacturers and converters, which incorporate
our products into their finished goods.
In fiscal
year 2010, approximately 84% of our net sales were to entities in the PRC and
approximately 7% and approximately 9% were made to customers in North America
and Europe and other regions, respectively. In fiscal year
2009, approximately 81% of our net sales were to entities in the PRC and
approximately 6% and approximately 7% were made to customers in North America
and Europe, respectively.
: Dalian
Geolink Geotextile Material Co., Ltd., our largest customer, accounted for
approximately 10.3% of our fiscal year 2010 net sales. In fiscal year
2009, net sales to this customer accounted for 4.92% of our net
sales.
Sales to
our top 20 customers represented approximately 65% of our total net sales in
fiscal year 2010.
The
following chart shows our top ten customers in fiscal year 2010
Name
|
Location
|
Product
Type
|
Application
|
Revenue
(USD$)
|
Percentage
of Sales
|
|||||||||
Geolink Geotextile Material
Co., Ltd
|
Dalian
|
Geotextile
|
Construction
|
2,054,787 | 10.30 | % | ||||||||
Chendu
Sanya Building Material Co., Ltd.
|
Chengdu
|
Geotextile
|
Construction
|
1,816,293 | 9.10 | % | ||||||||
WuJiang
Jing shan Fabric
|
Suzhou
|
PET
|
Filtration
|
1,731,611 | 8.68 | % | ||||||||
Pentair
Water Pool & Spa Inc
|
USA
|
PET
|
Filtration
|
1,322,095 | 6.63 | % | ||||||||
Zhuzhou
Shidai
|
Shanghai
|
PET
|
Construction
|
1,047,566 | 5.25 | % | ||||||||
Shanghai
Rundong Nonwoven Fabric Co., Ltd
|
Shanghai
|
PET
|
Filtration
|
856,147 | 4.29 | % | ||||||||
Xiantao
Ruixin
|
Hubei
|
Geotextile
|
Construction
|
760,395 | 3.81 | % | ||||||||
Guangzhou
Baiyun Meihao Filter Cleaner Factory
|
Guangzhou
|
PET
|
Filtration
|
560,284 | 2.81 | % | ||||||||
Nordic
Air Filtration A/S
|
Denmark
|
PET
|
Filtration
|
486,086 | 2.44 | % | ||||||||
Nan
Hai Ying Sheng Trading Ltd
|
Guangdong
|
PET
|
Filtration
|
452,243 | 2 | % |
10
Sales to
our top 20 customers represented approximately 49% of our total net sales in
fiscal year 2009.
The
following chart shows our top ten customers in fiscal year 2009:
Name
|
Location
|
Product
Type
|
Application
|
Revenue
(USD$)
|
Percentage of
Sales
|
|||||||||
Chendu
Sanya building Material Co., Ltd.
|
Chengdu
|
Geotextile
|
Construction
|
1,068,438 | 9.01 | % | ||||||||
Xiantao
Ruixin
|
Xiantao
|
Geotextile
|
Construction
|
1,037,883 | 8.75 | % | ||||||||
Sichuan
Tianqiang
|
Sichuan
|
Geotextile
|
Construction
|
706,286 | 5.95 | % | ||||||||
Geolink
Geotextile Material Co. Ltd.
|
Dalian
|
Geotextile
|
Construction
|
583,192 | 4.92 | % | ||||||||
Shenzhen
Yaming Civil Engineering Equipment Co.,
|
Shenzhen
|
PET
|
Filtration
|
570,567 | 4.81 | % | ||||||||
Pentair
Water
|
USA
|
PET
|
Filtration
|
517,467 | 4.36 | % | ||||||||
Guangzhou
Baiyun Meihao Filter Cleaner Factory
|
Guangzhou
|
PET
|
Filtration
|
435,380 | 3.67 | % | ||||||||
Shanghai
Rundong Nonwoven Fabric Co., Ltd.
|
Shanghai
|
PET
|
Filtration
|
422,559 | 3.56 | % | ||||||||
Foshan
Nanhai Yingsheng Trading Co., Ltd.
|
Foshan
|
PET
|
Trading
|
257,546 | 2.17 | % | ||||||||
Guangzhou
Groundsill Basis Engineering Co., Ltd.
|
Guangzhou
|
PET
|
Filtration
|
227,259 | 1.92 | % |
Raw
Materials
The
primary raw material that we use to manufacture most of our products is
polyester resin. The price of polyester resin fluctuates based on capacity,
demand and the price of crude oil.
Our major
suppliers of raw materials are Foshan Chemical Fibers Co., Ltd., Kaiping Chunhui
Co., Ltd., and Zhuhai Yuhua Polyester Co., Ltd. We believe that the
loss of any one or more of our suppliers would not have a long-term material
adverse effect on our business because other manufacturers with whom we conduct
business would be able to fulfill our requirements. We do not have long term
supply contracts with any of our suppliers of raw materials.
During
fiscal years 2010 and 2009, we paid approximately $10.9 million and $5.6
million, respectively, for the purchase of raw materials.
Our PPS
product will be made from high quality polyphenylene sulfide resin, which we
intend to purchase in the United States. Accordingly, the cost of this raw
material will fluctuate with the value of the RMB against the
dollar.
Sales
and Marketing
Our
nonwoven products are distributed in 20 provinces in the PRC. In
2003, we began selling our products in Europe, North America and South East
Asia.
In fiscal
year 2010, approximately 84% and 16% of our sales revenues were generated from
sales made in the PRC and internationally, respectively, compared to
approximately 81% and 19%, respectively, in fiscal year 2009.
11
As of
September 30, 2010, we employed 11 direct sales representatives, 8 of whom are
engineers who have advanced technical knowledge of our products and the
applications for which they are used. 7 of these sales representatives are
responsible for national sales and 4 are responsible for international sales. We
plan to double the size of our sales force for the PPS product line in the
next year to take advantages of an anticipated market for our products.
Representatives receive a salary plus commission of the revenues they
generate.
Our sales
process consists of identifying potential customers through cold calls,
responses to marketing efforts, and customer referrals. Once a potential
customer is identified, our sales people aid in identifying the prospect’s
technical requirements and help the customer’s engineers to produce drawings of
the finished products desired. Armed with this technical information, our sales
personnel then quote pricing, production quantities, and lead times. Most of our
customers are repeat customers and the sales force is also responsible for
after-sale support, including quality assurances, dispute resolution, and
relationship-building.
We
promote our products primarily through exhibitions, internet advertising and
marketing, and referrals from existing customers as well as
suppliers.
We intend
to capitalize on China’s “green” movement. We will focus our sales
efforts for our PPS nonwoven fabric material on operators of coal-fired power
plants as this is currently the most suitable and largest market for PPS
filtration materials. The sales to the coal-fired power plants will be made
directly using our existing sales team and sales process described
above.
12
Research
and Development
Our
research and development department has what we believe to be one of the
strongest research and development capabilities in the development of products,
processes and equipment in the nonwovens industry in China.
As of
September 30, 2010, our research and development staff consisted of 20
scientists, professional, engineering and technical personnel. Our research and
development team is lead by Mr. Yao Mu, a senior engineer in the industry and
the former president of Northwestern Polytechnical University.
We spent
approximately $200,000 for each of the last two fiscal years on research and
development activities.
In
addition, we believe that each of our senior managers possesses a
comprehensive technical background. Mr. Li Jie, our chief executive officer and
a senior engineer is a certified chemical engineer, the Associate President of
the China Industrial Textile Association and is considered an expert in his
field. His independent research has been funded by the Central Government. Mr.
Ye Xi-Ping, Vice President of Production, is a senior engineer and certified
automation engineer.
Intellectual
Property
We have
three utility model patents and one patent application:
Name
|
|
Applicant
|
|
Patent
Application
Date
|
|
Patent
Application
Number
|
|
Basis for
patent
|
|
Status
|
Polyphenylene
sulfide nonwoven spunbond needle production method and
device
|
Foshan
SLP Special Materials Company
|
January 26, 2010
|
2010101026602
|
Invention
|
Pending
|
|||||
Tube-type
air distraction apparatus
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011528.3
|
Utility
model
|
Authorized
|
|||||
New
spinning box structure
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011529.8
|
Utility
model
|
Authorized
|
|||||
Lapper
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
19, 2009
|
200920012058.2
|
Utility
model
|
Authorized
|
The three
utility model patents were applied for and were originally owned by Dalian
Huayang Chemical Fiber Engineering Technology Co., Ltd., or Dalian. Dalian has
taken steps to transfer the three utility patents to Foshan and the State
Intellectual Property in the PRC approved the transfer of these three utility
patents from Dalian to Foshan on March 29, 2010.
The
duration of utility model rights in the PRC is 10 years from the application
date and the duration of invention rights in the PRC is 20 years from the
application date.
13
Our
patent application for our process invention is currently pending. No
significant patents are expected to expire in the next five years. We expect
that additional patent applications will be filed as more processes are
developed and specific applications are identified.
We have
the following registered trademarks in the PRC:
Trademark
|
Registration
Number
|
Term of Validity
|
|||
Jinglong
Nonwoven
|
3571234 |
October 21, 2005 to
October 20, 2015
|
|||
Si
Le Pu
|
7161478 |
September
28, 2010 to September 27, 2020
|
|||
Graphic
|
7162185 |
October
14, 2010 to October 13,
2020
|
We have
the following additional trademark application:
Trademark
Application
|
Application
Number
|
Application Date
|
|||
S.L.P
|
7161477 |
January
12, 2009
|
To
safeguard our proprietary knowledge, trade secrets, and technology, we rely
heavily on trade secret protection and non-disclosure/confidentiality agreements
with our employees, consultants and third party collaboration partners with
access to our confidential information.
Competition
We
primarily face domestic competition in our industry. Our main competitors in the
PRC are Jiangxi Guoqiao Industrial Corporation Limited and Shaoxing Yaolong
Spunbonded Nonwoven Technology Co., Ltd. We compete based on our reputation for
quality, product innovation, performance, service and technical support.
Our
competitors in PPS nonwoven fabric industry will be other
manufacturers of PPS material and other materials that are suitable to make bag
filters to be used in coal-fired power plants, garbage incinerators and cement
plants and other potential end users.
Environmental
Matters
As a
manufacturer we are subject to a broad range of national, provincial and local
laws and regulations relating to the pollution and protection of the
environment. Among the many environmental laws applicable to us are laws
relating to air emissions, wastewater discharges and the handling, disposal and
release of solid and hazardous substances and wastes.
In
addition, we are required to obtain a construction commencement approval and a
completion examination approval for each of our three new production lines. We
are adding capacity to our existing manufacturing facility with a construction
project to increase the factory size, which will house our new PPS line(s). A
new production line is currently being installed. The installation is
expected to be completed in January 2011. We plan to order and install two
additional PPS lines using the proceeds of our planned initial public offering.
We have obtained approval from the local foreign trade and economic
cooperation bureau to install these three new production lines for this total
output capacity. To comply with PRC environmental regulations, we are required
to obtain a construction commencement approval from the local environmental
protection bureau for the installation of a new production line currently under
construction before we begin installation.
14
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 60 days from
commencement (on or about January 10, 2011), but we cannot assure that this will
be the case. Once the environmental impact assessment is completed, we
intend to resubmit the application for the construction commencement approval
together with the environmental impact assessment to the local environmental
protection bureau. We anticipate that the construction commencement
approval will be issued within 60 days from the submission date, but we cannot
assure that this will be the case.
In
addition, we are required a pollution emission permit for the disposal of waste
gases, waste water, waste dust and other waste materials. We do not
currently have a pollution emission permit, but we are preparing the application
for this permit and intend to submit the application after the new production
line is completed. The process of obtaining this permit after the
application has been submitted can take up to 5 months.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition. As of
December 19, 2010, no such penalties had been imposed on us.
Insurance
We
maintain worker's insurance and social welfare insurance for our employees. Our
operating subsidiary, Foshan, has not purchased social insurance for all of its
employees, as of December 28, 2010, the accumulated unpaid amount is
approximately RMB 1.49 million (approximately $216,493). If the local labor
authority orders us to pay unpaid insurance premiums, we may become obligated to
do so thereby increasing our labor costs. We provide life insurance
to our executive officers and D & O insurance for two of our independent
directors. We do not presently maintain product liability insurance.
We maintain property and equipment insurance; however, it does not cover the
full value of our property and equipment, which leaves us exposed in the event
of loss or damage to our properties or claims filed against us. Other than the
above mentioned, we do not maintain any other business or liability
insurance.
Employees
As of
December 15, 2010, we had a total of 176 employees, including over 20 engineers.
The following chart shows the number of our employees involved in the various
aspects of our business:
Category
|
Number of Employees
|
|||
Manufacturing
|
109 | |||
Sales
and Marketing
|
11 | |||
Research
and Development
|
5 | |||
Administrative
|
11 | |||
Finance
|
4 | |||
Quality
Control
|
8 | |||
Equipment
|
15 | |||
Logistics
|
13 |
Employee
compensation is composed of a salary plus subsidies based on position, education
level, length of service and performance.
15
PRC
Government Regulations
Business
license
A company
that conducts business in the PRC must have a business license that usually
prescribes a scope of business likely to be conducted. Our business license
covers our present business to manufacture and sell nonwoven fabrics overseas
and domestically. Prior to expanding our business beyond the scope of our
business license, we are required to apply for and receive approval from the PRC
government.
Employment
laws
On
June 29, 2007, the Standing Committee of the National People’s Congress of
the PRC promulgated the Labor Contract Law of
PRC, or the Labor Contract Law, which became effective as of January 1,
2008. On September 18, 2008, the PRC State Council issued the
Implementing Rules for the PRC Labor Contract Law, which became effective as of
the date of issuance. The Labor Contract Law and its implementing rules
impose requirements concerning, among others, the types of contracts to be
executed between an employer and its employees and establish time limits for
probationary periods and for how long an employee can be placed in a fixed-term
labor contract. The Labor Contract Law and its implementation rules also
impose greater liabilities on employers, require certain terminations to be
based upon seniority rather than merit and significantly affect the cost of an
employer’s decision to reduce its workforce. In addition, according to the Labor
Contract Law and its implementing rules, if an employer intends to enforce the
non-compete provision with its employees in the labor contracts or
confidentiality agreements, it has to compensate its employees on a monthly
basis during the term of the restriction period after the termination or ending
of the labor contract. The Labor Contract Law also requires employers in
most cases to provide a severance payment to their employees after their
employment relationships are terminated. Due to the limited period
of effectiveness of the Labor Contract Law and its implementing rules and the
lack of clarity with respect to their implementation and potential penalties and
fines, it is uncertain how it will impact our current employment policies and
practices.
Environmental
regulations
We are
subject to various national and local environmental laws and regulations,
including those governing the use, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing process. The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Environmental Impact Assessment Law, the PRC Regulation
on the Administration of Construction Project Environmental Protection, 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.
In
accordance with the PRC Environmental Impact Assessment Law and the PRC
Regulation on the Administration of Construction Project Environmental
Protection, we are required to obtain a construction commencement
approval and a completion examination approval for each of our three
finished production lines and we are also required to obtain a construction
commencement approval from the local environmental protection bureau for one of
our production lines that is currently under
construction. We have received construction commencement
approval and the completion examination approval for our three finished
production lines. However, we have not obtained the construction
commencement approval for the new production line under construction and the
pollution emission permits from the local environmental protection
bureau.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 60 days from
commencement (on or about January 10, 2011), but we cannot assure that this will
be the case. Once the environmental impact assessment is completed, we
intend to resubmit the application for the construction commencement approval
together with the environmental impact assessment to the local environmental
protection bureau. We anticipate that the construction commencement
approval will be issued within 60 days from the submission date, but we cannot
assure that this will be the case.
16
In
addition, we are required to obtain a pollution emission permit for the disposal
of waste gases, waste water, waste dust and other waste materials. We do
not currently have a pollution emission permit, but we are preparing the
application for this permit and intend to submit the application after the new
production line is completed. The process of obtaining this permit after
the application has been submitted can take up to 5 months.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition.
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) (December 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 2008
and 2010, 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, namely, patents for inventions,
utility models and designs. The Chinese patent system adopts the principle of
first to file. Therefore, 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 cannot 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.
17
PRC law
provides that anyone wishing to exploit the patent of another must enter
into a written licensing contract with the patent holder and pay the patent
holder a fee. One broad exception to this rule, 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. The patent holder may appeal such decision within three months from
receiving notification by filing a suit in a people’s court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. Patent holders who believe their 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. A 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. 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 or
more times 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
four 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 RMB200,000, or approximately $29,500.
Value
added 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. When exporting goods, the exporter is entitled to a portion or
all of the refund of VAT that it has already paid or borne. We are subject to
the foresaid rules, and currently we are required to pay VAT at a rate of 17% in
our sale or importation of goods while we are entitled to VAT refund at the rate
of 16% for our exported goods. We do not enjoy any VAT deduction or
exemption treatment.
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, securities 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 National
Development and Reform Commission. We currently do not hedge
our exposure to fluctuations in currency exchange rates.
Mandatory
statutory reserve and 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 is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year for its general
reserves until the cumulative amount of such reserves reaches 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.
18
OUR
HISTORY AND CORPORATE STRUCTURE
Prior to
March 24, 2010, we were known as Perpetual Technologies, Inc. Perpetual
Technologies was organized as Molokai Enterprises, Inc., on November 27, 1996
under the laws of the State of Colorado. From 1996 to 2006, Molokai Enterprises
had no active business operations. Molokai changed its domicile from Colorado to
Delaware in April 2007 by merging with and into Perpetual Technologies, Inc., a
Delaware corporation organized for that purpose on March 15, 2007. From March
15, 2007 until the February 12, 2010 share exchange transaction described below,
Perpetual had no operations or substantial assets and was deemed to be a "blank
check" or shell company.
On
February 12, 2010, we entered into two related and contemporaneous transactions
pursuant to which the ownership of our company changed.
The first
transaction involved the surrender and cancellation of 12,640,000 shares of
common stock held by a number of our shareholders in exchange for $40,000 in
cash paid by Joseph Nemelka, who was a director of our company at that
time.
The
second transaction involved a share exchange transaction between our company,
Hong Hui Holdings Limited, or Hong Hui, and the shareholders of Hong Hui. At the
time of the share exchange, Hong Hui owned, and currently still owns, all of the
stock of Technic International Limited, or Technic, a Hong Kong holding company
which, in turn, owns 100% of the stock of Foshan, the PRC operating company that
conducts our current, active business operations. In the share exchange
transaction, we acquired direct control of Hong Hui by issuing to the Hong Hui
stockholders an aggregate of 14,510,204 shares of our common stock in exchange
for all of the outstanding capital stock of Hong Hui. As a result of the share
exchange transaction, we became the indirect, 100% shareholder of Technic and
its wholly owned subsidiary, Foshan.
In
connection with these transactions, our two former directors, Joseph Nemelka and
Seth Winterton resigned and Li Jie and Chris Bickel, were appointed as our new
directors. Our management also changed as Li Jie was appointed as our Chief
Executive Officer, Law Wawai was appointed as our President of Sales and a
director, Shijun Zeng was appointed as our Chief Technology Officer and Wei Yang
was appointed as our Corporate Secretary. Mr. Zeng resigned on November 30, 2010
for personal reasons.
On
February 12, 2010, our new board of directors approved (i) a one-for-five
reverse split of our issued and outstanding common stock and (ii) the change of
our name from Perpetual Technologies to China Filtration Technology, Inc.
Stockholders holding shares representing a majority of the votes entitled to be
cast at a shareholders’ meeting consented in writing to these actions. The
reverse split reduced the issued and outstanding shares of common stock from
75,818,571 to 15,235,714 shares. The reverse split and name change were
effective on March 24, 2010. Effective June 1, 2010 we changed our name from
China Filtration Technology, Inc. to China SLP Filtration Technology,
Inc.
Our
current structure, after the reverse merger, is set forth in the diagram
below:
19
Private
Placement
On
February 12, 2010, we completed a financing transaction in which we raised gross
proceeds of $4,140,000 through a private placement of convertible notes and
warrants to certain accredited investors.
The
material agreements through which the private placement transactions were
carried out, the transactions themselves, and the notes and warrants are
described below. Full copies of the transaction documents for this private
placement have been filed as exhibits to our Form 8-K dated February 12, 2010 on
the SEC’s EDGAR database and the summary below is qualified in full by reference
to such exhibits. In connection with the private placement, we engaged a
placement agent and a financial advisor which received separate cash and
equity-based compensation for their services. The financial advisor and
placement agent are related parties. See “Certain Relationships and Related
Transactions and Director Independence” beginning on page 67 for additional
information regarding compensation to the placement agent and financial
advisor.
Note
Purchase Agreement
On
February 12, 2010, immediately following the closing of a share exchange
transaction, we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes, in the aggregate principal amount
of $4,140,000, and warrants (which are exercisable only in certain events and
will become void if our planned initial public offering is consummated). The
closing of the sale of the notes and warrants occurred on February 12,
2010. The terms of the notes and warrants are set forth below. The
note purchase agreement contains representations, warranties and covenants which
are customary for transactions of this nature.
20
Terms
of the Notes
The notes
have the following material terms:
Maturity: The
notes mature after one year. If principal is not paid on maturity then 150%
of the principal amount is payable.
Interest: 10% per
annum payable quarterly increasing to 15% if there is a default. $204,464 out of
the closing proceeds was placed in escrow to cover most of the
interest due in the first six months.
Conversion: In the
event of the closing of our planned initial public offering (or any other equity
or series of related financings resulting in aggregate gross proceeds to the
company of at least $20,000,000 (or such lesser amount as shall be approved in
writing by the holder(s) of notes evidencing at least 50% of the principal
amount of the notes then outstanding)), prior to the maturity
date of the notes, the principal amount of
the notes converts automatically into the securities sold in that financing at a
65% discount to the offering price of such securities. At an assumed
public offering price of $6.00 per share, the notes will have a conversion price
of $2.10 per share. The interest on the notes is payable in cash and
does not convert into shares of common stock.
Terms
of the Warrants
Set forth
below are the material terms of the warrants issued at the closing:
Exercisable: The
warrants become void if our planned public offering is
consummated. In the event that the offering is not consummated, the
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $2,000,000. The warrants cannot be exercised if
no “financing” is consummated prior to February 12, 2015.
Number of Shares: The
warrants represent the right to purchase 8% of the total shares of common stock
outstanding (on a fully-diluted basis) immediately after the closing of the
financing.
Exercise Price: The warrants
are exercisable at the price for which the shares of common stock (or common
stock equivalent if derivative securities are sold) are sold in the financing.
If the financing includes more than one type of security, the exercise price
shall equal the lowest price per share of common stock or common stock
equivalent included in the financing.
Limited
Recourse Guaranty and Pledge Agreement
Our
obligations under the note are guaranteed by Bestyield Group Limited, a BVI
company controlled by Mr. Li, our chief executive officer, and Proudlead
Limited, a BVI company controlled by Mr. Law, our President of Sales and a
member of our Board of Directors, or the “management shareholders,” under a
limited recourse guaranty which is secured by a pledge by the management
shareholders of the 8,706,122 shares of our common stock received by the
management shareholders in the reverse merger.
Registration
Rights Agreement
Under the
registration rights agreement, we agreed that if we file a registration
statement in connection with a “qualified financing,” we will include in that
registration statement for resale the securities issuable on conversion of the
notes or the warrants, as the case may be, for an offering to be made on a
continuous basis pursuant to Rule 415.
21
Accordingly,
in satisfaction of that obligation, we included 378,877 of the 1,971,428 shares
underlying the notes (assuming a public offering price of $6.00 per share) in a
resale prospectus, which forms a part of the Public Offering Registration
Statement on Form S-1
In the
event the SEC, pursuant to Rule 415, does not permit us to register all of the
applicable registrable securities in the registration statement, we will use our
best efforts to register the registrable securities that were not registered in
the initial registration statement, as soon as the SEC permits us to do
so. In the case of an underwritten public offering, if the managing
underwriter(s) or underwriter(s) reasonably objects to the inclusion of the
registrable securities in any registration statement, then if we, after
consultation with the managing underwriter, determine that the inclusion of such
registrable securities would significantly harm the offering contemplated in
such registration statement, and recommend inclusion in such registration
statement of fewer or none of the registrable securities, then (x) the number of
registrable securities included in the registration statement shall be reduced
pro-rata among such holders (based upon the number of registrable securities
requested to be included in the registration), or (y) none of the registrable
securities shall be included in the registration statement. If securities are
being offered for the account of other persons as well as us then the reduction
shall not represent a greater fraction of the number of registrable securities
than the fraction of similar reductions imposed on such other persons (other
than the company).
If (a) we
fail to file a registration statement within 30 days of a demand notice, the
“demand file date” or (b) the registration statement is not effective within 180
days after filing (or, in the case of subsequent registration statements filed
under Rule 415, 90 days after filing or 120 days in the event that registration
statement receives a full review), we have agreed to pay the investors two
percent (2%) of the aggregate principal amount of the notes for each month (or
part thereof) that it is late (capped at 10%). No liquidated damages are payable
with respect to any shares required to be omitted as a result of the operation
of Rule 415.
Item
1A. Risk
Factors
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below together with all
other information contained in this report, including the matters discussed
under “Caution Regarding Forward Looking Statements and Other Information
Contained in this Report,” before you decide to invest in shares of our common
stock. You should pay particular attention to the fact that we are a holding
company with substantial operations in China and are subject to legal and
regulatory environments that in many respects differ from those of the United
States. If any of the following risks, or any other risks and uncertainties that
are not presently foreseeable to us, actually occur, our business, financial
condition, results of operations, liquidity and our future growth prospects
would be materially and adversely affected. You should also consider all other
information contained in this report before deciding to invest in shares of our
common stock.
Risks
Related to Our Business
We
need to raise capital to fully commercialize our PPS manufacturing process and
may not be able to fully execute on our growth strategy if we fail to do
so.
Our core
growth strategy is to commence production of PPS fabric and bag filters using
our proprietary manufacturing process for sale initially to the numerous
coal-fired power plants and subsequently to operators of garbage incinerators
and other potential users in the PRC that are not in compliance
with environmental regulations. On July 8, 2010, we filed the Public
Offering Registration Statement which is currently being reviewed by the SEC and
has not been declared effective. We intend to use the net proceeds of that
offering to purchase PPS manufacturing equipment. We may however need to
raise additional capital in the future through public or private equity
offerings or debt financings. We cannot assure that our planned
public offering will be successful and we cannot be certain that additional
funding will be available on acceptable terms, if at all. As of the
date of this report, we believe the U.S. capital markets are facing many
difficulties. Potential sources of additional financing may be
unwilling or unable to provide us with the additional financing we need to fully
carry out our expansion plans. To the extent that we raise additional
funds by issuing equity securities, our stockholders may experience significant
dilution and the price of our common stock could decrease. Any debt financing,
if available, would result in us incurring interest expenses and we may be
required to pledge assets as security for the debt and may be constrained by
restrictive financial or operational covenants. If we are unable to raise
additional capital, when required, or on acceptable terms, we may have to
significantly delay, scale back or discontinue the development or the
commercialization of our PPS product, which would harm our business and future
growth prospects.
22
Management
recently identified a material weakness in our internal control over financial
reporting which required a restatement of our financial statements.
If our internal controls and disclosure controls and
procedures continue to be ineffective, there may be errors in our
financial statements that could require a future restatement, our filings may
not be timely filed and investors may lose confidence in our reported financial
information, which could lead to a decline in our stock price.
Our
management identified material weaknesses and concluded that our internal
controls over financial reporting and our disclosure controls and procedures
were not effective as of March 31, 2010, June 30, 2010 and September 30, 2010,
respectively.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal controls over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. Because our current accounting department is
relatively new to U.S. GAAP and the related internal control procedures required
of U.S. public companies, our management has determined that they require
additional training and assistance in U.S. GAAP matters. Management has
determined that our internal audit function is also deficient due to
insufficient qualified resources to perform internal audit
functions.
These
material weaknesses resulted in our inability to detect accounting errors where
we failed to record on our financial statements a liability of $75,000 owed to
each of United Best and Primary Capital ($150,000 in total) for advisory
services rendered in connection with our private placement of convertible notes,
which closed on February 12, 2010, as selling, general and administrative
expenses for the interim period ended March 31, 2010 and nine month period ended
June 30, 2010. We also noted that a grant of 30,000 restricted shares
of common stock in June 2010 to one of our directors was not reflected in the
originally issued financial statements for the interim period ended June 30,
2010.
The
identification of these errors resulted in the restatement of (i) our interim
financial statements for the three month and nine month periods ended June 30,
2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010 filed on August 16, 2010 and in the Public Offering
Registration Statement previously filed on July 8, 2010, as amended
on September 7, 2010 and October 15, 2010 and (ii) our interim financial
statements for the three month and six month periods ended March 31, 2010 and
2009, as set forth in the Quarterly Report on Form 10-Q filed on May 24, 2010,
as amended on May 26, 2010 and in the Public Offering Registration
Statement previously filed on July 8, 2010, as amended on September 7, 2010 and
October 15, 2010. This error was not detected by our internal control
procedures.
We have
taken certain steps to resolve these material weaknesses,
including:
·
|
In August 2010, we hired
Eric Gan as our new chief financial
officer;
|
·
|
We are arranging necessary
training for our accounting department
staff;
|
·
|
We plan to engage external
professional accounting or consultancy firms to assist us in the
preparation of the U.S. GAAP accounts;
and
|
·
|
We have allocated financial and
human resources to strengthen the internal control structure and we have
been actively working with external consultants to assess our data
collection, financial reporting, and control procedures and to strengthen
our internal controls over financial
reporting.
|
23
We
believe that the foregoing steps will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate. However, there
is no guarantee that these improvements will be adequate or successful or that
such improvements will be carried out on a timely basis. A material weakness in
our internal controls and procedures may lead to further accounting errors,
which in turn may result in further restatements of our financial statements.
Any of these possible outcomes could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of
our reporting process, which could adversely affect the trading price of our
shares.
If
our PPS nonwoven fabric does not achieve wide market acceptance as a preferred
material for use in pollutant dust removal bag filters by operators of coal
fired power plants, incinerators, cement factories and other
potential users, anticipated profits will not materialize and our business will
suffer.
We
recently developed a manufacturing process to manufacture PPS nonwoven fabric.
We intend to commence commercial production of PPS material in the early part of
2011.
PPS
nonwoven fabric has many applications including high temperature filtration of
pollutant emissions and can be used as the material to manufacture high
temperature bag filters for coal-fired power plant emissions, garbage
incinerators and cement factories.
The PPS
material that we plan to produce is lighter, thicker, and stronger, has higher
air permeability and filtration efficiency and is significantly cheaper to
produce than other types of high temperature filtration materials currently
available in the market place.
Although
prototype bag filters made of our PPS product have been tested in laboratories,
they have not been tested on site by any potential end user and we do not expect
to develop prototype products for testing by any potential end user prior to
commencing commercial production of PPS products. Our new PPS nonwoven fabric
may never achieve broad market acceptance, due to any number of factors,
including that the product may not be as effective as our initial testing
indicates and competitive material may be introduced which renders our PPS
product too expensive or obsolete.
If our
PPS material is not broadly accepted in the marketplace for its intended uses,
we may not achieve a competitive position in the market, anticipated profits
will not materialize and our business will suffer.
We
have a limited operating history and have no experience commercially
manufacturing PPS nonwoven fabric which is a key component of our growth
strategy, which makes it difficult to evaluate our future prospects based
on historical results of operations.
Our
operating history is limited. We currently make two types of PET nonwoven
fabrics and we commenced production of one type of PET fabric in 2006 and a
second type of PET fabric in 2009. We have not yet begun to commercially
manufacture PPS nonwoven fabric. We plan to do so in the early part of 2011.
Accordingly, you should consider our future prospects and historical results in
light of the risks and uncertainties experienced by early-stage companies in
evolving markets such as our ability to:
|
·
|
develop and successfully
commercialize PPS nonwovens using our proprietary manufacturing
process;
|
|
·
|
achieve widespread market
acceptance of our PPS product for use in high temperature pollutant dust
removal bag filters;
|
|
·
|
increase awareness of our
products and continue to develop customer
loyalty;
|
|
·
|
respond to competitive market
conditions;
|
|
·
|
respond to changes in the
regulatory environment;
|
|
·
|
manage risks associated with
intellectual property
rights;
|
|
·
|
maintain
effective control of our costs and
expenses;
|
24
|
·
|
raise sufficient capital to
sustain and expand our business;
and
|
|
·
|
attract, retain and motivate
qualified personnel.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
If
we cannot extend or renew our currently outstanding short-term loans or if our
convertible notes are not converted before their maturity date, we will have to
repay these loans with cash on hand or refinance them with another lender or
else face a default and potential foreclosure upon the collateral we
pledged.
In
January 2010, the Chinese government took steps to tighten the availability of
credit including ordering banks to increase the amount of reserves they hold and
to reduce or limit their lending. In addition, our convertible notes mature on
February 11, 2011. In
December 2010 we repaid our outstanding short-term bank loans totaling RMB 25.4
million. In December 2010 we applied for and obtained unofficial approval for a
six month bank loan in the amount of RMB 20 million from the Foshan branch of
China’s ABC bank. Official approval is expected in early January
2011. On December 8, 200, we obtained a 90 day term loan from
Standard Chartered Bank in amount of RMB 6,000,000 for a term of 90 days.
Although it is customary practice for banks and borrowers to negotiate
roll-overs or renewals of short-term loans on an on-going basis shortly
before they mature and we recently obtained a new loan, we cannot assure you
that we will be able to renew these loans in the future as they mature. If we
cannot renew them we will have to repay them with cash from operations. We
cannot assure you that our business will generate sufficient cash to do
so.
We expect
that the convertible notes will be converted into our common stock at the
closing of our planned initial public offering. If, however, the convertible
notes are not converted before their maturity date, we will have to obtain
additional loans from a bank or raise funds from private sources to pay off the
principal and interest due on the notes. We cannot assure you, however, that
this will be the case and if we are unable to do so and if our business fails to
generate sufficient cash flow from operations to repay these notes, we will be
in default.
If we
default on these loans and convertible notes, we will incur interest and
penalties. In addition, as the loans are secured by our buildings and land if we
fail to repay these loans, the lender could take possession of the
collateral.
If
we have miscalculated the future demand for our products, we may end up
unnecessarily spending a significant amount of funds on PPS manufacturing
equipment which ultimately we may not have needed and which we may not be able
to resell.
We intend
to use the net proceeds of our planned public offering primarily to install
three new production lines to manufacture PPS nonwovens. This will
increase our total annual manufacturing capacity from 8,000 tons to 11,600 tons
of nonwoven material. The scope and timing of our expansion plans are
based on our internal projections and estimated demand for our PPS products. If
our projections are incorrect and the actual demand for our PPS products is less
than projected, we may expend a significant amount of capital on equipment
which ultimately may not have been needed.
If we are unable to adequately
protect our intellectual property, we could lose a significant competitive
advantage and
competitors could use our processes and manufacture and market similar products
using similar processes, which could harm our market share and lower our
profits.
We hold a
number of authorized process patents and have a patent application
pending in the PRC for our PPS manufacturing process. We believe that
among our competitive strengths are the proprietary manufacturing processes
which we have developed and believe act as a barrier to entry for our potential
competitors. Our success depends, in part, on our ability to protect these
unique processes against competitors and to defend our intellectual property
rights when they are violated. If our pending patent application for
our PPS manufacturing process is not granted or if we fail to adequately protect
our existing process patents, competitors could use our processes, and
manufacture and market similar products using similar processes, which could
harm our market share and results of operations. Our competitors may challenge,
invalidate or avoid the application of any existing or future patents,
trademarks, or other intellectual property rights that we receive or license. In
addition, patent rights may not prevent our competitors from developing their
own processes that produce products that are similar or functionally equivalent
to our products. If we lose the protection of our intellectual property our
business would suffer.
25
If
PRC environmental regulations change and our PPS product was unable to meet
those regulatory changes, our PPS product could become obsolete and this would
harm our business and prospects.
To reduce
air pollution in China, the Chinese government recently implemented a policy
which imposes stricter rules on carbon and other emissions by coal-fired power
plants and others. Under these rules which came into effect on January 1, 2010,
carbon and other emissions are required to be less than 50 milligrams per cubic
meter by the end of 2010. Already, some of the larger, more developed cities,
such as Beijing and Tianjin have adopted more stringent rules requiring that
emissions be less than 30 milligrams per cubic meter. (Source: Electric Power, May issue,
2008.) We believe, based on laboratory testing, that our PPS
material satisfies current PRC governmental requirements and the more stringent
local standards. If those regulations were to change and our PPS product
were unable to meet those regulatory changes, our PPS product could become
obsolete and this would harm our business and prospects.
The
introduction by a competitor and market acceptance of a high temperature
resistant pollutant emission filtration material which was superior to our PPS
material would harm our business.
If a
competitor successfully introduces a product which is superior to our PPS
products, and that product achieved wide market acceptance, our PPS product
could become obsolete and the demand for them would decrease
significantly.
As
a manufacturer of components, our revenues will decrease if there is less demand
for the end products in which our products are incorporated.
Our
existing PET nonwoven products are sold, and we expect our PPS products will be
sold, principally to customers that manufacture a wide range of end-use
products, including filtration products, road construction materials, home
furnishings, automobile interior insulation, and industrial packaging.
Therefore, we are subject to the general changes in economic conditions
affecting those industry sectors. If customers that operate in these industry
sectors experience a downturn in their business or if they utilize substitutes
for our products in their products, demand for our products and our business
results will suffer.
Increases
in the price of raw materials could reduce our profit margins if we cannot pass
the increases on to our customers in the form of higher prices for our
products.
Polyester
is the primary raw material used by us to manufacture most of our products. The
price of polyester fluctuates based on manufacturing capacity, demand and
the price of crude oil, among other things. Our PPS product will be made from
high quality polyphenylene sulfide resin, which we intend to purchase in the
United States. Accordingly, the cost of this raw material will fluctuate with
the value of the RMB against the dollar. Even where we are able to pass along at
least a portion of raw material price increases to some of our customers, there
is often a delay between the time we are required to pay the increased raw
material price and the time we are able to pass the increase on to our
customers. To the extent we are not able to pass along all or a portion of such
increased prices of raw materials, our cost of sales would increase and our
operating income would correspondingly decrease. We cannot assure you that the
price of polyester will not increase in the future or that we will be able to
pass on any increases to our customers.
Increases
in energy prices will increase our operating costs and impair our financial
results if we cannot pass cost increases on to our customers in the form of
higher prices for our products.
We use a
significant amount of electricity, gasoline and other energy sources to
manufacture and transport our nonwoven products. We do not hedge our exposure to
higher prices via energy futures contracts. A substantial increase in the price
of fuel and other energy sources would increase our operating costs
and could negatively impact our profitability and cash flows if we cannot
pass the increases on to our customers.
26
Our
manufacturing capacity is limited so a breakdown in our machinery or material
interruption of business could prevent or limit our ability to manufacture our
products and cause us to lose revenue and profits and impair our relationships
with our customers.
We
manufacture all of our existing products and plan to manufacture our new PPS
products at our existing facility. We currently have three lines of production
in operation and plan to install three additional lines. Any breakdown or
disruption of our machinery, or interruption of business due to fires,
explosion, adverse weather conditions or other catastrophic event, would result
in us being incapable of manufacturing nonwovens to meet our production
requirements. This may cause us to lose revenue and impair our relationships
with our customers. Without our existing production facilities, we would have no
other means of manufacturing products until we were able to restore the
manufacturing capability at the facility or identify an acceptable contract
manufacturer. We do not carry business interruption insurance to cover lost
revenue and profits. Furthermore, any interruption in production capability may
require us to make large capital expenditures to remedy the situation, which
could have a negative effect on our profitability and cash flows.
Our
insurance is inadequate so we could be exposed to significant losses if any of
our products cause personal injury or illness or if our property is
damaged.
We do not
maintain product liability insurance and our property and equipment insurance
does not cover the full value of our property and equipment, so we could be
exposed to significant losses if any of our products cause personal injury or
illness or if our property is damaged. Any such loss could harm our
business.
Increases
in our environmental compliance costs and violations of environmental
regulations by us could require us to change business practices, increase our
operating costs and lower our profits.
We use a
variety of chemicals in our manufacturing operations. As a result, we are
subject to a broad range of environmental laws and regulations. We
regularly incur costs to comply with these environmental regulations, and those
costs could increase significantly with changes in environmental regulations or
their interpretation or enforcement which could further
increase our operating costs and lower our profits.
Although
we have not been subject to material environmental claims in the past, if we
fail to comply with any present or future environmental regulations, damages,
fines and criminal sanctions could be assessed against us and production could
be suspended and our operations could cease. New regulations could also require
us to acquire costly equipment or to incur other significant expenses which
would lower our profits.
We
rely on Mr. Jie Li, our chief executive officer, to manage our business, and if
we lose his services, our business and prospects could suffer.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Jie Li, our chief
executive officer, for the direction of our business. The loss of the services
of Mr. Li for any reason could harm our business and prospects. We cannot assure
you that Mr. Li will continue to be available to us, or that we will be able to
find a suitable replacement for Mr. Li. We have entered into an employment
contract with Mr. Li, but that agreement does not guarantee that Mr. Li will
continue to manage the company. Although we plan to do so following the closing
of our planned initial public offering we do not currently have key
man insurance on Mr. Li, and if he were unable to continue as our chief
executive officer due to death or disability and we were unable to replace him
for a prolonged period of time, we could be unable to carry out our long-term
business plan, and our future prospects for growth, and our business, could be
harmed.
27
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, and such difficulties could reduce the value of any
investment in our common stock.
The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, or modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in the PRC. We may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. These deficiencies
could impair our results of operations.
We
may have violated Section 402 of the Sarbanes-Oxley Act of 2002 and Section
13(k) of the Exchange Act and may be subject to sanctions for such
violations.
Section
13(k) of the Exchange Act provides that it is unlawful for a company such as
ours, which has a class of securities registered under Section 12(g) of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company. Issuers violating Section 13(k)
of the Exchange Act may be subject to civil sanctions, including injunctive
remedies and monetary penalties, as well as criminal sanctions. The imposition
of any of such sanctions on the Company may have a material adverse effect on
our financial position, results of operations or cash flows.
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui, a British Virgin Islands holding
company which was incorporated in the British Virgin Islands on January 6, 2010
and our direct, wholly-owned subsidiary. Under the terms of the share exchange
agreement, we issued and delivered to the Hong Hui stockholders a total of
14,510,204 shares of our common stock in exchange for all of the outstanding
shares of Hong Hui. As a result of the share exchange, Hong Hui became our
wholly-owned subsidiary and Foshan S.L.P. Special Material Co., Ltd., a PRC
operating company, became our indirect wholly-owned subsidiary. At that time,
Jie Li, who became our Chief Executive Officer on that date, was indebted on
account of a previous loan in the amount of RMB 200,000 (approximately $29,474)
made by Foshan.
The
existence of indebtedness of Mr. Jie Li at the time the Company acquired Foshan
and the continuation of such indebtedness thereafter may constitute a violation
of Section 13(k) of the Exchange Act (Section 402(a) of
Sarbanes-Oxley). As of June 30, 2010, all loans had been
repaid.
We
do not have a Majority of Independent Directors
Our Board
of Directors is comprised of six members, three of whom are “independent” within
the NASDAQ rules. Accordingly, we do not currently have, and following the
closing of our planned initial public offering we will not have, a Board of
Directors the majority of whom are “independent” within the meaning of the
NASDAQ rules and we will lack the oversight of an independent
board.
We fall
within the definition of a “controlled company” under the NASDAQ Marketplace
Rules which provide that a company is considered a "controlled company" if
greater than 50% of its voting power is held by an individual, a group or
another company. In order for a group to exist for purposes of this rule,
the stockholders forming the group are required to publicly file a notice that
they are acting as a group (e.g., Schedule 13D). On December 29, 2010 a
group consisting of Bestyield Group Limited, Jie Li, Proudlead Limited, Law
Wawai, Pilot Link International Limited, Yang Wei, Li Shiyi, High Swift Limited,
Han Hung Yuk, China Investment Management, Inc., Song Huaying, Newise Holdings
Inc. and Li Jun filed a Schedule 13D disclosing the existence of a group with
respect to their holdings in the Company. As a “controlled company”
we are not subject to the NASDAQ requirements (i) to have a majority of
independent board members; (ii) for independent director oversight of executive
officer compensation (as set forth in Section 5605(d) of the NASDAQ
Marketplace Rule); and (iii) for independent director oversight of director
nomination (as set forth in Section 5605(e) of the NASDAQ Marketplace
Rule).
28
Risks
Related to Doing Business in China
Our
business operations are conducted entirely in the PRC. Because China’s economy
and its laws, regulations and policies are different from those typically found
in the West and are continually changing, we will face risks including those
summarized below.
The
PRC may be more susceptible to political, economic, and social upheaval than
other nations; any such upheaval could cause us to temporarily or permanently
cease operations.
China has
experienced unprecedented growth economically in the past three decades.
Although the country has relaxed some restrictions on individual liberties, the
rule of law is still a relatively new concept. Thus the legal system may not be
equipped to handle complicated social and political problems accompanying the
country’s fast economic growth. China has an extremely large population,
significant levels of poverty, widening income gaps between rich and poor and
between urban and rural residents, large minority ethnic and religious
populations, and growing access to information about the different social,
economic, and political systems to be found in other countries. These conditions
make China unique and may make it susceptible to major structural changes. Such
changes could include a reversal of China’s movement to encourage private
economic activity, labor disruptions or other organized protests,
nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If
any of these events were to occur, it could damage China’s economy and impair
our business.
The
PRC environmental protection laws and regulations require PRC companies,
especially PRC manufacturing companies, to obtain environmental approvals for
the commencement and completion of production lines and pollution emission
permits. Failure to obtain the necessary environmental approvals and permits may
subject us to fines and, in some cases, may even result in the mandated
cessation of production, which may in turn impair our normal business operations
and expansion plans.
In order
to be in compliance with PRC environmental protection laws and regulations, we are required to obtain a
construction commencement approval and a completion examination approval for
each of our three finished production lines. We are also required to
obtain a construction commencement approval from the local environmental
protection bureau for one of our production lines that is currently under
construction. We have obtained the construction commencement approval and
completion examination approval for our three finished production
lines.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 60 days from
commencement (on or about January 10, 2011), but we cannot assure that this will
be the case. Once the environmental impact assessment is completed, we
intend to resubmit the application for the construction commencement approval
together with the environmental impact assessment to the local environmental
protection bureau. We anticipate that the construction commencement
approval will be issued within 60 days from the submission date, but we cannot
assure that this will be the case.
In
addition, we are required to obtain a pollution emission permit for the disposal
of waste gases, waste water, waste dust and other waste materials. We do
not currently have a pollution emission permit, but we are preparing the
application for this permit and intend to submit the application after the new
production line is completed. The process of obtaining this permit after
the application has been submitted can take up to 5 months.
29
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition.
We
are subject to comprehensive regulation by the PRC legal system, which is
uncertain. As a result, it may limit the legal protections available to us and
we may not be now, or remain in the future, in compliance with PRC laws and
regulations.
Foshan,
our operating company, is incorporated under and is governed by the laws of the
PRC, where all of our operations are conducted. The PRC government exercises
substantial control over virtually every sector of the PRC economy, including
the production, distribution and sale of nonwovens. In particular, we are
subject to regulations and administration by local and national branches of the
Ministry of Environmental Protection, the Ministry of Commerce, as well as the
General Administration of Quality Supervision, Inspection and Quarantine, the
State Administration of Foreign Exchange, General Administration of Customs, the
State Administration of Taxation and other regulatory bodies. In order to
operate under PRC law, we must have valid licenses, certificates and
permits, which must be renewed from time to time. If we were to fail to obtain
the necessary renewals for any reason, including sudden or unexplained changes
in local regulatory practice, we could be required to shut down all or part of
our operations temporarily or permanently.
Foshan is subject to PRC
accounting laws, which require that an annual audit be performed in accordance
with PRC accounting standards. The PRC foreign-invested enterprise laws require
that our subsidiary, Foshan, submit periodic fiscal reports and statements to
financial and tax authorities and maintain its books of account in accordance
with Chinese accounting laws. If PRC authorities were to determine that we were
in violation of these requirements, we could lose our business license and be
unable to continue operations temporarily or permanently.
The legal
and judicial systems in the PRC are still rudimentary. The laws governing our
business operations are sometimes vague and uncertain and enforcement of
existing laws is inconsistent. Thus, we can offer no assurance that we are, or
will remain, in compliance with PRC laws and regulations. Because of the
vagaries of implementation, interpretation and enforcement of PRC laws, our
ability to enforce commercial claims or to resolve commercial disputes is
unpredictable.
We
could incur severe penalties if we fail to comply with the Foreign Corrupt
Practices Act which prohibits U.S. companies from engaging in bribery and
prohibits payments to foreign officials for the purpose of obtaining or
retaining business.
We are
required to comply with the United States Foreign Corrupt Practices Act, or
FCPA, which prohibits U.S. companies from engaging in bribery or making
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. The PRC also strictly prohibits bribery of
government officials. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in China. If our competitors engage
in these practices, they may receive preferential treatment from personnel of
some companies, giving our competitors an advantage in securing business or from
government officials who might give them priority in obtaining new licenses,
which would put us at a disadvantage. Our employees, agents, representatives and
consultants may not always be subject to our control. If any of them violates
FCPA or other anti-corruption law, we might be held responsible. We could suffer
severe penalties in that event. In addition, the U.S. government may seek to
hold us liable for successor liability FCPA violations committed by companies in
which we invest or which we acquire.
The
RMB is not a freely convertible currency and governmental control of currency
conversions could limit our ability to distribute and/or obtain sufficient
foreign currency to support our business operations in the future, and may
affect the value of our stock.
30
All of
our revenue is earned in RMB, and current and future restrictions on currency
conversions may limit our ability to use revenue generated in RMB to make
dividend or other payments in U.S. dollars. The PRC government imposes controls
on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currency out of the PRC. Although the PRC government introduced
regulations in 1996 to allow greater convertibility of the RMB for current
account transactions, significant restrictions still remain, including the
restriction that foreign-invested enterprises like us may buy, sell or remit
foreign currencies only after providing valid commercial documents at PRC banks
specifically authorized to conduct foreign-exchange business and register
foreign exchange transactions with the PRC government. This would impair our
ability to pay dividends and could reduce the value of our stock.
In
addition, conversion of foreign currencies for capital account items, including
direct investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign-exchange accounts
for capital account items. There is no guarantee that PRC regulatory authorities
will not impose additional restrictions on the convertibility. In addition,
failure to comply with any other PRC foreign exchange regulations may result in
difficulties in converting foreign currency funds raised offshore into RMB and
injecting such capital into our PRC operating company. These restrictions could
prevent us from distributing dividends and thereby reduce the value of our
stock.
Fluctuation
of the exchange rate of the RMB against the US dollar could result in foreign
currency losses.
In 2005,
the PRC government changed its decade-old policy of pegging the value of the RMB
to the United States dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an appreciation of the RMB
against the United States dollar of approximately 17.5% from July 1, 2005
through September 1, 2009. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the United States dollar.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into RMB, appreciation of the RMB
against the U.S. dollar could reduce the value in RMB of the proceeds of the
financing. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes, and the U.S. dollar appreciates against the RMB, the U.S. dollar
equivalent of our earnings from our business and dividends would be reduced. In
addition, the depreciation of significant U.S. dollar-denominated assets could
result in a charge to our income statement and a reduction in the value of these
assets.
Our
PRC stockholders are required to register with SAFE; their failure to do so
could cause us to lose our ability to remit profits out of the PRC as
dividends.
The State
Administration of Foreign Exchange, or SAFE, issued a public notice in October
2005, or the SAFE No. 75 Notice, requiring PRC residents, including both legal
persons and natural persons, to register with the applicable local SAFE
branch before establishing or controlling any company outside China, referred to
as an “offshore special purpose company” for the purpose of acquiring any assets
of or equity interest in PRC companies and raising funds from overseas. In
addition, any PRC resident that is the shareholder of an offshore special
purpose company is required to amend its SAFE registration with the local SAFE
branch with respect to that offshore special purpose company in connection with
any increase or decrease of capital, transfer of shares, merger, division,
equity investment or creation of any security interest over any asset located in
China. If any PRC shareholder of an offshore special purpose company fails to
make the required SAFE registration and amendment, the PRC subsidiaries of that
offshore special purpose company may be prohibited from distributing their
profits and remitting the proceeds from any reduction in capital, share transfer
or liquidation to the offshore special purpose company. Moreover, failure to
comply with the SAFE registration and amendment requirements described above
could result in liability under PRC laws for evasion of applicable foreign
exchange restrictions.
31
Mr. Jie
Li, Mr. Li Jun, Mr. Li Shiyi, Ms. Wei Yang, and Ms. Song Huaying (collectively
the “Individual Founders”) are PRC residents and the ultimate shareholders of
Foshan. To the best of our knowledge, at the date hereof, the Individual
Founders are subject to the registration requirements of SAFE No. 75 Notice. We
are informed that Foshan has requested the Individual Founders to make the
necessary applications and filings as required under the SAFE No. 75 Notice. We
are informed by Foshan that the Individual Founders have liaised with the SAFE
branch in Guangdong province and upon its confirmation, they will apply for the
SAFE registration. However, we cannot assure you that the SAFE branch in
Guangdong province will accept the application or the Individual Founders can
obtain the SAFE registration. The failure or inability of the Individual
Founders to receive any required approvals or make any required registrations
may subject us and the Individual Founders to fines and legal sanctions,
restrict our overseas or cross-border investment activities, limit Foshan’s
ability to make distributions or pay dividends or affect the ownership
structure, as a result of which our business operations and Foshan’s ability to
distribute profits to us could be materially and adversely
affected.
PRC
regulation of loans to and direct investment by offshore holding companies in
PRC entities may delay or prevent us from making loans or additional capital
contributions to our PRC operating companies, which could materially and
adversely affect our liquidity and ability to fund and expand our
business.
As an
offshore holding company of a PRC operating Company, we may make loans or
additional capital contributions to our existing or future PRC operating
companies. Any loans to our PRC operating companies are subject to PRC
regulations. For example, loans to our operating companies in China to finance
their activities may not exceed statutory limits and must be registered with
SAFE. If we decide to make capital contributions to our operating entities in
the PRC, the PRC Ministry of Commerce, or MOFCOM, (or MOFCOM’s local
counterpart, depending on the amount involved) must approve these capital
contributions. We cannot assure you that we will be able to obtain these
government approvals or registrations on a timely basis, if at all, with respect
to any such capital contributions or shareholder loans. If we fail to receive
such approvals or registrations, our ability to use the proceeds of our planned
initial public offering to capitalize our PRC operations may be
negatively affected, which could adversely affect our ability to fund and expand
our business.
On
August 29, 2008, SAFE promulgated Circular 142, a notice regulating the
conversion by a foreign-invested company of foreign currency into Renminbi by
restricting how the converted Renminbi may be used. The notice requires that the
registered capital of a foreign-invested company settled in Renminbi converted
from the foreign currency-denominated capital may only be used for purposes
within the business scope approved by the applicable governmental authority and
may not be used for equity investments within the PRC unless specifically
provided for in its business scope. In addition, SAFE strengthened its oversight
of the flow and use of Renminbi funds converted from the foreign currency
denominated capital of a foreign-invested company. The use of such Renminbi may
not be changed without approval from SAFE, and may not be used to repay Renminbi
loans if the proceeds of such loans have not yet been used. Violations of
Circular 142 may result in severe penalties, including imposing substantial
fines on us. Therefore, Circular 142 may significantly limit our ability to
transfer the net proceeds or our planned initial public offering to our
subsidiary in the PRC, which may adversely affect the business expansion of
Foshan.
32
The
new provisions of the PRC Labor Contract Law may substantially increase our
labor-related costs in the future.
The PRC
Labor Contract Law, which became effective as of January 1, 2008, contains many
provisions which are more favorable to employees than prior labor regulations in
effect in China. This may substantially increase our labor-related costs in our
future operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her employer for
certain causes, such as delay in payment of wages or social insurance
contribution or dissatisfactory labor protection, and under such circumstances
the employer is liable to pay compensation to the employee. The amount of such
compensation payment shall be one month's salary for each year that the employee
has served the employer. If the monthly wage of an employee is three times
greater than the average monthly wage in the previous year for employees as
announced by the people’s government at the municipal level directly under the
central government or at the city-with-district level where the employer is
located, the compensation paid must be three times the average monthly wage of
employees up to a maximum of not more than 12 years of work. We may also be
liable to compensate an employee if we decide to terminate an existing
employment contract before its expiration. Under the new law, employees who
either have worked for us 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 our rules and regulations or is in
serious dereliction of his or her duties. Such non-cancelable employment
contracts will substantially increase our employment related risks and limit our
ability to downsize our workforce in the event of an economic downturn. No
assurance can be given that we will not in the future be subject to labor
strikes or that we 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 substantially increase our labor-related
costs in the future.
Our
operating subsidiary’s failure to comply with PRC regulations requiring it to
open and contribute to housing accounts for its employees could cause us
to have to pay unpaid housing funds and subject us to fines and employee claims
which would harm our business and reputation.
Under
applicable PRC regulations, PRC enterprises are required to open housing fund
accounts and contribute funds to those accounts for their employees. The monthly
contributions must be at least 5% of each employee’s average monthly income in
the prior year. Foshan has not opened the housing funds accounts since its
establishment. As of September 30, 2010, the accumulated unpaid
amount is approximately RMB 1.516 million (approximately $222,360). The
local housing funds administrative authority may require Foshan to pay the funds
due within a specified time period. If Foshan fails to do so within the
specified time period, the local housing authority may seek
judicial enforcement against Foshan to make such payment. Foshan
could be also be subject to fines imposed by the housing funds administrative
authority of a minimum of RMB10,000 (approximately $1,471) and
maximum of RMB 50,000 (approximately $7,353). Our current and former employees
are also entitled to claim their housing funds individually by arbitration or
action. As of the date of this report, we are not subject to any claims from our
employees in connection with our failure to open or contribute to housing fund
accounts. If any of our employees brings such action against us and the
arbitration award or court judgment was made in their favor, we would have to
pay the total amount of housing funds due to the employee. Our payment to
rectify our non-compliance with employee’s housing provident funds regulations
would require us to divert our financial resources and thus will negatively
impact our operations and our liquidity.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular
698”) which was released in December 2009 with retroactive effect from January
1, 2008.
The
Chinese State Administration of Taxation (SAT) released Circular 698 on December
10, 2009 that addresses the transfer of shares by nonresident companies.
Circular 698, which is effective retroactively to January 1, 2008, may have a
significant impact on many companies that use offshore holding companies to
invest in China. Circular 698, which provides parties with a short period of
time to comply with its requirements, indirectly taxes foreign companies on
gains derived from the indirect sale of a Chinese company. Where a foreign
investor indirectly transfers equity interests in a PRC enterprise by selling
the shares in an offshore holding company, and the latter is located in a
country or jurisdiction where the effective tax burden is less than 12.5% or
where the offshore income of his, her, or its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise through an abuse of form of
organization and there are no reasonable commercial purposes such that the
corporate income tax liability is avoided, the PRC tax authority will have the
power to re-assess the nature of the equity transfer in accordance with PRC’s
“substance-over-form” principle and deny the existence of the offshore holding
company that is used for tax planning purposes.
33
There is
uncertainty as to the application of Circular 698. For example, while the term
"indirectly transfer" is not defined, it is understood that the relevant PRC tax
authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. Moreover, the
relevant authority has not yet promulgated any formal provisions or formally
declared or stated how to calculate and quantify the effective tax in the
country or jurisdiction and the process of the disclosure to the tax authority
in charge of that Chinese resident enterprise. In addition, there are no formal
declarations with regard to how to interpret “abuse of form of organization” and
“reasonable commercial purpose,” to determine compliance with Circular 698. As a
result, we may become at risk of being taxed under Circular 698 and we may be
required to expend valuable resources to comply with Circular 698 or to
establish that we should not be taxed under Circular 698, which could have a
material adverse effect on our financial condition and results of
operations.
Enforcement against us or our
directors and officers may be difficult and you could be unable to collect amounts due to you in the
event that we or any officer or director violates applicable
law.
Our
operating company, Foshan, is located in the PRC and substantially all of our
assets are located in the PRC. Most of our current officers and directors are
residents of the PRC, and most of their assets are located in the PRC. As a
result, it could be difficult for investors to effect service of process on us
or those persons in the United States, or to enforce a judgment obtained in the
United States against us or any of these persons. In addition, it may be
difficult to bring an original action in a PRC court to enforce liabilities
based upon the U.S. federal securities laws against the above foreign persons.
Further, it is unclear if extradition treaties now in effect between the U.S.
and the PRC would permit effective enforcement against us or our officers and
directors of criminal penalties under the U.S. federal securities laws or
otherwise.
If
we lose our land use rights we would be required to identify another site for
our operations and obtain the land use rights for that land. We would then have
to relocate and move our operations to the new site, which would interrupt our
business and would require us to incur relocation and build out costs at the new
site, all of which would have a negative effect on our financial condition and
results of operations.
We do not
own the land where our plant and facility is located, for in China, there is no
private ownership of land, and land is owned by the state or rural collective
economic organizations. In the case of land used for industrial purposes,
land use rights can be obtained from the government for a period of up to
50 years, and are typically renewable. Land use rights, however, can be revoked,
and land users can be forced to vacate at any time, if redevelopment of the land
is deemed to be in the public interest. The public interest rationale is
interpreted quite broadly and the process of land appropriation may be less than
transparent. We have incurred costs in building on the land on which our plant
and machinery are located. If we lost our land use rights (including as a result
of failure of the government to renew our land-use right certificate) we would
be required to relocate and move our operations to a new site, which would
interrupt our business and would require us to incur relocation and build out
costs at the new site, all of which would have a negative effect on our
financial condition and results of operations.
The
approval of the PRC Securities Regulatory Commission, or the CSRC, may be
required in connection with our planned initial public offering under a recently
adopted PRC regulation; any requirement to obtain prior CSRC approval could
delay the offering and failure to obtain such approval, if required, could have
a material adverse effect on our business and could also create uncertainties
for the offering.
On
August 8, 2006, six PRC regulatory agencies, including the CSRC,
promulgated the “Provisions Regarding Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors,” or the M&A Rule, which took effect on
September 8, 2006 and was further amended on June 22, 2009, to more
effectively regulate foreign investment in PRC domestic enterprises. The M&A
Rule requires offshore special purpose vehicles, or SPVs, formed for the
purposes of overseas listing of equity interests in PRC companies and controlled
directly or indirectly by PRC companies or individuals obtain the approval of
the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on its
official website a notice specifying the documents and materials that SPVs are
required to submit when seeking the CSRC approval for their listings outside of
China. The interpretation and application of the M&A Rule is currently
unclear. However, our PRC counsel has advised us that based on its understanding
of the current PRC laws, rules and regulations and the M&A Rule, the M&A
Rule does not require us to obtain prior CSRC approval for our planned initial
public offering and was not required for our reverse acquisition of Hong Hui
Holdings Limited because Foshan was established as a qualified foreign-invested
enterprise before September 8, 2006, the effective date of the M&A
Rule
34
However,
if the CSRC or another PRC regulatory agency subsequently determines that prior
CSRC approval was required, we may face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies may
limit our operating privileges, delay or restrict the repatriation of the
proceeds from the offering into China or payment or distribution of dividends by
Foshan, or take other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our common stock. The CSRC or other PRC
regulatory agencies also may take actions requiring us, or making it advisable
for us, to halt the offering before settlement and delivery of our common stock.
Also, if the CSRC later requires that we obtain its approval, we may be unable
to meet or obtain a waiver of the CSRC approval requirements, if and when
procedures are established to obtain such a waiver. Any uncertainties or
negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our common stock.
We cannot
predict when the CSRC will promulgate additional implementing rules or other
guidance, if at all. If implementing rules or guidance is issued prior to the
completion of the offering and consequently we conclude we are required to
obtain CSRC approval, the offering will be delayed until we obtain CSRC
approval, which may take several months or longer. Furthermore, any delay in the
issuance of such implementing rules or guidance may create additional
uncertainties with respect to the offering. Moreover, implementing rules or
guidance, to the extent issued, may fail to resolve current ambiguities under
the M&A Rule. Uncertainties and/or negative publicity regarding the M&A
Rule could have a material adverse effect on the trading price of our common
stock.
The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
The
M&A Rule establishes additional procedures and requirements that could make
some acquisitions of Chinese companies by foreign investors more time-consuming
and complex than in the past. After the promulgation of the M&A Rule, the
PRC government can now exert more control over the acquisitions of Chinese
companies, including requirements in some instances that the Ministry of
Commerce be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a Chinese domestic enterprise. We may grow our
business in part by acquiring complementary businesses. Complying with the
requirements of the M&A Rule to complete such transactions could be
time-consuming, and any required approval processes, including obtaining
approval from the Ministry of Commerce, may delay or inhibit our ability to
complete such transactions, which could affect our ability to expand our
business or maintain our market share by share or asset acquisition of the PRC
companies.
The
discontinuation of any preferential tax treatment currently available to us in
the PRC or imposition of any additional PRC taxes on us could adversely affect
our financial condition and results of operations.
Before
January 1, 2008, pursuant to the then applicable enterprise income tax laws in
China, foreign-invested companies established in China were generally subject to
a state and local enterprise income tax, or EIT, at statutory rates of 30% and
3%, respectively, and could often be granted various preferential tax treatments
including preferential tax rates and tax holidays. Under the PRC
Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both
effective on January 1, 2008, a unified EIT rate of 25% and unified tax
deduction standard is applied equally to both domestic-invested enterprises and
foreign-invested enterprises, or FIEs. The New EIT Law provides a
five-year transitional period starting from its effective date for those
enterprises which were established before March 16, 2007, the promulgation date
of the New EIT Law. Enterprises established prior to March 16, 2007 are eligible
for certain prescribed preferential tax rate in accordance with the then
applicable income tax laws and administrative regulations and gradually become
subject to the new statutory EIT rate of 25% over a five-year transition period
starting from January 1, 2008. For enterprises granted qualified tax
holidays, such tax holidays continue until their expiration in accordance with
previous tax laws and regulations, but where the tax holiday has not yet started
because of a cumulative loss position, such tax holiday shall be deemed to
commence from 2008, the first effective year of the New EIT Law. Currently,
Foshan enjoys a 12.5% income tax preferential rate, which expires December 31,
2012. Thereafter, the expiration of Foshan’s preferential tax treatment
will reduce our profitability and affect our financial results.
35
We
may be classified as a “resident enterprise” for PRC enterprise income tax
purposes; such classification could result in unfavorable tax consequences to us
and our non-PRC shareholders.
The New
EIT Law provides that enterprises established outside of China whose “de facto
management bodies” are located in China are considered PRC “tax resident
enterprises” and will generally be subject to the uniform 25% PRC EIT rate
on their global income. In addition, a tax circular issued by the State
Administration of Taxation on April 22, 2009 regarding the standards used to
classify certain Chinese-invested enterprises established outside of China as
“resident enterprises” clarified that dividends and other income paid by such
“resident enterprises” will be considered to be PRC source income, subject to
PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC
enterprise shareholders. This recent circular also subjects such “resident
enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation rules to the New EIT Law, a “de facto management body”
is defined as a body that has material and overall management and control over
the manufacturing and business operations, personnel and human resources,
finances and other assets of an enterprise. In addition, the tax circular
mentioned above details that certain Chinese-invested enterprises will be
classified as “resident enterprises” if the following are located or resident in
China: senior management personnel and departments that are responsible for
daily production, operation and management; financial and personnel decision
making bodies; key properties, accounting books, company seal, and minutes of
board meetings and shareholders’ meetings; and half or more of the senior
management or directors having voting rights.
Currently,
there are no detailed rules or precedents governing the procedures and specific
criteria for determining “de facto management bodies” which are applicable to
our company or our overseas subsidiary. A substantial majority of the
members of our management team as well as the management team of some of our
overseas subsidiary are located in China. If our company or any of our overseas
subsidiaries is considered a PRC tax resident enterprise for PRC EIT purposes, a
number of unfavorable PRC tax consequences could follow. First, our
company or our overseas subsidiaries will be subject to the uniform 25% EIT rate
as to our global income as well as PRC EIT reporting obligations. Second,
dividends payable by us to our investors and gain on the sale of our shares may
become subject to PRC withholding tax as described below.
Dividends
payable by us to our foreign investors and gain on the sale of our shares may
become subject to taxes under PRC tax laws.
Under the
New EIT law and its implementation rules, if we are considered a “resident
enterprise”, income tax at the rate of 10% must be withheld on dividends
payable by us to investors that are “non-resident enterprises” if such investors
do not have an establishment or place of business in China or if, the relevant
income is not effectively connected with an establishment or place of business
in China. Similarly, any gain realized on the transfer of our common stock by
such investors is also subject to a 10% PRC withholding income tax if such gain
is regarded as income derived from sources within China and we are considered a
“resident enterprise” for PRC EIT purposes. It is possible that future guidance
issued with respect to the new “resident enterprise” classification could result
in a situation in which a withholding tax of 10% for our non-PRC enterprise
investors or a potential withholding tax of 20% for individual investors is
imposed on dividends we pay to them and with respect to gains realized by such
investors upon transfer of our common stock. In addition to the uncertainty
surrounding “resident enterprise” classification, it is also possible that the
rules may change in the future, possibly with retroactive effect. If we are
required under the New EIT law to withhold PRC income tax on our dividends
payable to our foreign shareholders, or if you are required to pay PRC income
tax on the transfer of our common stock under the circumstances mentioned above,
the value of your investment in our common stock may be materially and adversely
affected. It is unclear whether holders of our common stock would be able to
claim the benefit of income tax treaties or agreements entered into between
China and other countries or areas if we are considered a PRC “resident
enterprise”.
36
We
rely on dividends paid by Foshan for our cash needs, and any limitation on the
ability of Foshan to make payments to us could have a material adverse effect on
our ability to conduct our business.
As a
holding company, we conduct substantially all of our business through our
consolidated subsidiaries incorporated in China. We rely on dividends paid
by these PRC subsidiaries for our cash needs, including the funds necessary to
pay any dividends and other cash distributions to our shareholders, to service
any debt we may incur and to pay our operating expenses. The payment of
dividends by entities established in China is subject to limitations.
Regulations in China currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and
regulations in China. Foshan is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general
reserves or statutory capital reserve fund until the aggregate amount of such
reserves reaches 50% of its respective registered capital. As a result, Foshan’s
ability to transfer a portion of its net assets to us in the form of dividends,
loans or advances is limited. In addition, if Foshan incurs debt on its own
behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other distributions to us. Any limitations on
the ability of Foshan to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct
our business.
Further,
according to the Circular on Issues Concerning Outward Remittance of Profit,
Stock Dividends and Stock Bonuses Processed by Designated Foreign Exchange
Banks, or Circular 29, issued by the SAFE on September 22, 1998, and amended on
September 14, 1999, a foreign-invested enterprise whose registered capital has
not been fully paid as provided by the terms of its articles is not allowed to
remit its profits or dividends abroad unless a special approval by the SAFE is
granted. Circular 29 limits the ability of Foshan to remit funds to us, which
could materially and adversely limit our ability to expand our business, make
investments or acquisitions, pay dividends and otherwise fund and conduct our
business.
All
participants in our stock incentive plan who are PRC citizens may be
required to register with SAFE and failure to comply may subject us and such
participants to fines and legal sanctions. We may also face regulatory
uncertainties that could restrict our ability to adopt additional equity
compensation plans for our directors, employees and other parties under PRC
laws.
In
September 2010, we adopted a stock incentive plan under which we may make option
grants and other awards to our officers, key employees, directors and
consultants. All of our officers and directors, other than Chris Bickel and
Richard M. Cohen, are PRC citizens.
On March
28, 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.” We
believe that under Circular 78, PRC citizens and residents who are granted stock
or options under our stock incentive plans are required to register with SAFE or
its local counterparts and request us (or engage domestic agents) to handle
various foreign exchange matters associated with their stock incentive plans. In
addition, as the employer, we are (or a PRC agent is) required, on behalf of PRC
recipients of stock awards, to apply annually to SAFE or its local offices for a
quota for the conversion and/or payment of foreign currencies in connection with
the domestic individuals’ exercise of the employee stock options. The foreign
exchange proceeds received by the PRC persons from the sale of shares under our
stock incentive plan are required to be remitted to bank accounts in China
opened by their employers or PRC agents.
The
registration and approval requirements set forth in Circular 78 will be
burdensome and time consuming on us. If we fail to comply, our PRC
subsidiary (if deemed to a domestic agent as defined under Circular 78) and
participants of our stock incentive plan who are PRC citizens may be subject to
fines and legal sanctions and we may be prevented form granting equity
compensation to our officers, key employees, directors and consultants who are
PRC citizens, in which event we will have to find alternative methods (such as
additional salary and bonuses) to compensate such persons which would adversely
affect our cash flow and business operations.
37
Risks
Related to an Investment in Our Common Stock
Our
executive officers and directors beneficially own a significant portion of
our common stock and may take actions that are contrary to your interests and
that could reduce the value of your stock.
Our chief
executive officer and director Jie Li, our president of sales and director Law
Wawai and our director Li Jun, beneficially own an aggregate of approximately
69.7% of our common stock. Even assuming conversion of all of the
outstanding convertible notes and the exercise of all our warrants,
they will own a significant portion of our outstanding common stock.
As a result, they will be able to influence the outcome of stockholder
votes on various matters, including the election of directors and extraordinary
corporate transactions such as business combinations. In any such stockholder
vote, their interests may differ from that of other stockholders and they could
cause us to take actions that are contrary to your interests and that could
reduce the value of your stock.
We
do not intend to pay cash dividends in the foreseeable future which may
negatively affect the price of our stock.
We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. The payment of dividends by us will
depend on our future earnings, financial condition and such other business and
economic factors as our management may consider relevant. In addition, as
a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from Foshan, our
PRC-based operating company, which, from time to time, may be subject to
restrictions on its ability to make distributions to us, including as a result
of restrictions on the conversion of local currency into U.S. dollars or other
hard currency and other regulatory restrictions. See “Risks Related to Doing
Business in China” above.
There
is currently no trading market for our common stock and an active trading market
may not develop after our planned initial public offering.
Our
shares are not currently traded on any exchange. We have applied to have
our common stock listed on the NASDAQ Capital Market. On the
consummation of our planned public offering, if such event occurs, we believe
that we will satisfy the listing requirements and expect that our common stock
will be listed. Such listing, however, is not guaranteed. The
underwriters are not obligated to make a market in our securities and, even
after making a market, can discontinue market making at any time without notice.
We cannot provide any assurance that an active and liquid trading market in our
securities will develop or, if developed, that the market will continue. If our
planned public offering is not successful we will not satisfy the listing
requirements for listing on the NASDAQ Capital Market
Our
common stock may be delisted from the NASDAQ which could negatively impact the
price of our common stock and our ability to access the capital
markets.
The
listing standards of the NASDAQ Capital Market provide that a company, in order
to qualify for continued listing, must maintain a minimum stock price, satisfy
standards relative to minimum shareholders’ equity, minimum market value of
publicly held shares and various additional requirements. If, after listing, we
fail to comply with all listing standards applicable to issuers listed on the
NASDAQ Capital Market, our common stock may be delisted. If our common
stock is delisted, it could reduce the price of our common stock and the levels
of liquidity available to our shareholders. In addition, the delisting of our
common stock could hinder our access to the capital markets and any limitation
on liquidity or reduction in the price of our common stock could impair our
ability to raise capital. Delisting from the NASDAQ Capital Market could also
result in other negative consequences, including the potential loss of
confidence by suppliers, customers and employees, the loss of institutional
investor interest and fewer business development opportunities.
38
Future
sales or perceived sales of our shares of common stock could depress our stock
price.
All of
our executive officers and directors and certain of our shareholders have agreed
not to sell shares of common stock for a period of 90 days following the closing
of our planned public offering. In addition, all of the selling
stockholders listed in a resale prospectus which forms a part of the Public
Offering Registration Statement have agreed not to sell shares of their common
stock for a period of 90 days following the closing of the offering.
Shares subject to these lock-up agreements will become eligible for sale
in the public market upon expiration of these lock-up agreements, subject to
limitations imposed by Rule 144 under the Securities Act of 1933, as amended.
As we are a former “shell” company (as that term is defined in Rule
12b-2 under the Exchange Act), none of the shares held by our current
shareholders are freely tradable, however commencing on February 12, 2011 those
shares will be eligible for resale under Rule 144 subject to the restrictions
set forth in Rule 144. If the holders of these shares were to attempt to
sell a substantial amount of their holdings at once, the market price of our
common stock could decline. Moreover, the perceived risk of dilution from the
offering or other potential sales could cause shareholders to attempt to sell
their shares and investors to short shares of our common stock, a practice in
which an investor sells shares that he or she does not own at prevailing market
prices, hoping to purchase shares later at a lower price to cover the sale. As
each of these events would cause the number of shares of our common stock being
offered for sale to increase, our common stock market price would likely further
decline. All of these events could combine to make it very difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
Item
1B. Unresolved
Staff Comments
Not
Applicable.
Item
2. Properties
Our
manufacturing facility is located in Foshan City, Guangdong Province, PRC and
has over 10,000 square meters of operating space on 33,074 square meters of
land. Our land use right was granted by Nanhai State-Owned Land Resource
Bureau in 2002 and expires in October 2052. If we want to continue to use
the land after the expiration date, we must apply for an extension at least one
year prior to the granted land use right’s expiration.
All land
in the PRC is owned by the state or rural collective economic organizations and
cannot be sold to any individual or entity. Instead, the government grants
or allocates land users a “state-owned land use right.”
Granted
land use rights are provided by the government in exchange for a grant fee, and
carry the rights to pledge, mortgage, lease, and transfer within the term of the
grant. Land is granted for a fixed term, generally 70 years for residential use,
50 years for industrial use, and 40 years for commercial and other use. The term
is renewable in theory. Unlike the typical case in Western nations, granted land
must be used for the specific purpose for which it was granted.
Allocated
land use rights are generally provided by the government for an indefinite
period (usually to state-owned entities) and cannot be pledged, mortgaged,
leased, or transferred by the user. Allocated land can be reclaimed by the
government at any time. Allocated land use rights may be converted into granted
land use rights upon the payment of a grant fee to the government
Item
3. Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings in the
ordinary course of our business. We are currently not aware of any
legal proceedings in which the ultimate outcome, in our judgment based on
information currently available, would have a material adverse affect on our
business, financial condition or operating results.
Item
4. (Removed
and Reserved)
39
PART
II
Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
Our
common stock does not trade and is not quoted on any public market. We have
applied to have our common stock listed on the NASDAQ Capital
Market. We expect our listing to be effective prior to the date of
effectiveness of the Public Offering Registration Statement. No
assurance can be given that our listing application will be
approved. If our planned public offering is not successful, we will
not qualify for listing on the NASDAQ Capital Market.
Holders
As of
December 28, 2010, there were 15,265,714 shares of our common stock issued and
outstanding and we had approximately 212 shareholders of record of our common
stock. The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of the
common stock have no preemptive rights and no right to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock.
Dividends
We have
never declared or paid any cash dividends on our common stock and are restricted
from paying dividends by virtue of the fact that we are a holding company. We
currently intend to retain all earnings, if any, for use in business operations
and we do not anticipate declaring any dividends in the near
future.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiary Foshan to obtain approval to send monies out of the PRC. The PRC’s
national currency, the Yuan, or renminbi, is not a freely convertible currency.
The PRC government imposes controls on the convertibility of renminbi into
foreign currencies and, in certain cases, the remittance of currency out of the
PRC. Shortages in the availability of foreign currency may restrict our ability
to remit sufficient foreign currency to pay dividends.
Securities
authorized for issuance under equity compensation plans
The
following table summarizes the equity compensation plans under which our
securities may be issued as of September 30, 2010:
Plan Category
|
|
Number of
securities to
be
issued upon
exercise of
outstanding
options,
warrants
and
rights
|
|
|
Weighted-
average exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans(excluding
securities
reflected in
column (a))
|
|
|||
Equity
compensation plans approved by security holders
|
-
|
—
|
—
|
|||||||||
Equity
compensation plan not approved by security holders (1)
|
400,000
|
$
|
(2)
|
1,756,218
|
||||||||
Total
|
40
(1) Our
Board of Directors adopted the China SLP Filtration Technology, Inc. 2010 Stock
Incentive Plan, or the 2010 Plan, on September 3, 2010. All our officers
and key employees, directors and consultants, including those of our
subsidiaries and affiliates, who are responsible for or contribute to the
management, growth and/or profitability of our business, are eligible for
participation in the 2010 Plan. Two Million One Hundred Eighty Six Thousand
Two Hundred Eighteen (2,186,218) shares of our common stock (or such number of
shares as shall equal ten percent of the shares of common outstanding on a fully
diluted basis after giving effect to the offering and the conversion of the
note) have been authorized and reserved for the 2010 Plan. We may issue stock
options, stock appreciation rights, restricted stock awards, restricted stock
units, performance awards and other stock-based awards under the 2010
Plan.
(2)
On September 3, 2010, under the 2010 Plan and in connection with his
appointment as Chief Financial Officer, the Board granted Eric Gan an option to
purchase 400,000 shares at an exercise price equal to the public offering price
of our planned public offering. The option shall vest and be exercisable
as follows; 160,000 shares will vest and become exercisable on July 31, 2011;
120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares
will vest and become exercisable on July 31, 2013. In the event that the
employment is terminated within 12 months from the employment agreement date by
the Company without cause, 160,000 shares shall be vested immediately on the
termination date.
Recent
Sales of Unregistered Securities
Set forth
below are all issuances of securities by the company during the past three years
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"). In each of these issuances the recipient represented that he
or it was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with any
transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act or the availability of an applicable exemption therefrom.
Unless specifically set forth below, no underwriter participated in the
transaction and no commissions were paid in connection with the
transactions.
February
2010 Share Exchange
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui Holdings Limited, a British Virgin
Islands holding company which was incorporated in the British Virgin
Islands. Under the terms of the share exchange agreement we
issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares
of our common stock in exchange for all of the outstanding shares of Hong
Hui. As a result of the share exchange or reverse merger, Hong Hui
became our wholly-owned subsidiary, and the Hong Hui stockholders became holders
of 14,510,204 shares of our common stock. The Hong Hui stockholders
with whom we completed the share exchange are as set forth below, each of
whom is a company incorporated in the British Virgin Islands and each of
whom received the number of shares set forth beside their respective
names:
Bestyield
Group Limited, 4,353,061;
Proudlead
Limited, 4,353,061;
Newise
Holdings Limited, 2,321,633;
Pilot
Link International Limited, 1,668,673;
High
Swift Limited, 1,088,265; and
China
Investment Management Inc., 725,511.
All of
the above issuances were deemed to be exempt under Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of ours
or our executive officers, and transfer was restricted by us in accordance with
the requirements of the Securities Act.
41
February
2010 Private Placement Transaction
On
February 12, 2010, immediately following the closing of a share exchange
agreement we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes, in the aggregate principal
amount of $4,140,000, and warrants (which are exercisable only in certain
circumstances). The closing of the sale of the notes and
warrants occurred on February 12, 2010.
The terms
of the notes and warrants is described elsewhere in this report. See
“OUR HISTORY AND CORPORATE STRUCTURE – Private Placement”
beginning on page 19 of this report.
Placement
Agent Warrant and Financial Advisor Warrant
United
Best
United
Best, our foreign advisor controlled by Mr. Li Jun, one of our directors,
provided financial services in connection with the financing and reverse
merger.
Under the
terms of a consulting agreement between United Best and the company, United
Best was paid a commission of $202,000 at the closing of the financing. United
Best is also owed an additional $75,000 for services rendered in connection with
the financing. Additionally, under the consulting agreement, as
amended, United Best, our foreign advisor, is entitled to be paid on completion
of our planned initial public offering a success fee of $750,000 (which
represents 3% of the $25,000,000 in gross proceeds to be received by us in
connection with our planned initial public offering).
At the
closing of the transaction, United Best received 362,755 shares of our common
stock for its services. United Best is also entitled to receive an
additional 193,186 shares at the closing of our planned initial public
offering.
In
addition, as partial consideration for providing these financial services,
United Best is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which shall occur upon
consummation of our planned public offering), a five-year warrant to purchase
98,571 shares of common stock (which represents 5% of the number
of common stock expected to be issued to the note holders on conversion),
exercisable at the price of $2.10 per share (i.e. the
price at which the notes converted assuming a public offering price of $6.00 per
share). Unlike the investor warrants, these warrants will not terminate but
instead become exercisable on conversion of the notes and consummation of our
planned initial public offering. If the note conversion does
not occur, United Best will receive a five-year warrant to purchase that number
of shares of common stock equal to 5% of the common stock underlying the
warrants issued to the investors in the private financing exercisable at the
same price at which those investor warrants are exercisable
Primary
Capital
Primary
Capital also provided financial services in connection with the private
placement and reverse merger.
Under the
terms of a financial services agreement between Primary Capital and the company,
Primary Capital was paid a commission of $202,000 at the closing of the February
2010 private financing. Primary Capital is also owed an additional $75,000 for
services rendered in connection with the private placement. Primary
Capital is also entitled to receive $15,000 on completion of our planned initial
public offering and $15,000 for the next succeeding seven calendar quarters for
an aggregate amount of $120,000.
At the
closing of the financing, Primary Capital received 290,755 shares of our common
stock. Primary is also entitled to receive 265,186 shares of common
stock on the closing of our planned initial public offering
42
In
addition, for providing these financial services Primary Capital is
entitled to receive, on conversion of the notes issued to the investors in the
February 2010 private placement (which shall occur upon consummation of our
planned initial public offering), a five-year warrant to purchase 98,571 shares
of common stock (which number is equal to 5% of the 1,971,428 number
of shares of common stock expected to be issued to the noteholders on
conversion), exercisable at $2.10 (which equals the price at which the notes
converted.) Unlike the investor warrants, these warrants will not
terminate but instead become exercisable upon conversion of the notes and
consummation of our planned initial public offering. If the note
conversion does not occur, Primary Capital will receive a five-year warrant to
purchase that number of shares of common stock equal to 5% of the common stock
underlying the warrants issued to the investors in the private financing
exercisable at the same price at which those investor warrants are
exercisable.
Other
than the securities mentioned above, we have not issued or sold any securities
without registration within the past three years.
All of
the above issuances in connection with the February Private Placement were
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of ours or
our executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act.
Issuer
Purchases of Equity Securities
None.
Item 6.
|
Selected Financial
Data
|
Pursuant
to Item 301(c) of Regulation S-K (§ 229.301(c)), the Company is not required to
provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).
Item 7.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
You
should read the following discussion together with our financial statements and
the related notes included elsewhere in this report. This discussion
contains forward-looking statements that are based on our current expectations,
estimates and projections about our business and operations. Our actual results
may differ materially from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including those
which we discuss under “Risk Factors” and elsewhere in this report.
Overview
This
section discusses and analyzes our results of operations and financial
condition, including the results and condition of our operating company, Foshan,
which have been consolidated with our own results for all periods presented.
This discussion is intended to help you understand our financial results and the
current facts and trends that may cause them to change, so that you may make
informed judgments about our likely financial results in the future and, insofar
as those results may affect our stock price and informed investment
decisions.
43
This
discussion should be read in conjunction with our audited financial statements
and accompanying notes as of September 30, 2010 and for the year then
ended.
References
to 2010 and 2009 refer to the fiscal years ended September 30, 2010 and 2009,
respectively.
General
We are a
PRC based manufacturer of nonwoven fabrics. We currently manufacture two types
of PET nonwoven fabrics which are used in a wide range of products, including
filtration products, road construction materials, home furnishings, automobile
interior insulation and industrial packaging.
Our
current PET products are sold primarily to PRC-based manufacturers which use our
products as raw material components for end-products they sell to their
customers. We recently developed a manufacturing process to manufacture
polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product
line around which our long-term growth strategy is centered.
Based on
lab tests which we conducted internally we believe that our PPS nonwoven fabric
is superior to other currently available high temperature filtration material
because it is lighter, thicker, stronger, has higher air permeability and
filtration efficiency and significantly cheaper to produce. Due to
the superior characteristics of our PPS product coupled with the demand created
by these new regulations, we believe that our PPS material will become a market
leader for high temperature filtration applications. We expect to sell our PPS
nonwoven products to operators of coal fired power plants, garbage incinerators
and other heavy industrial plants.
We intend
to continue to manufacture PET nonwovens but we expect that the sales of our PPS
nonwoven fabrics will ultimately eclipse the sales of our existing PET nonwoven
products and become our main product offering.
Our
manufacturing facility, which is located in Foshan City, Guangdong Province,
PRC, currently has three production lines for PET nonwovens with annual product
capacity of 8,000 tons. We plan to begin commercial production of our PPS
nonwoven fabric in early 2011 with the completion of our first PPS filament
production facilities. With the addition of two additional PPS production lines
latter part of 2010, total three production lines of PPS will reach 3,600 tons
of annual production capacity, which will bring our total overall production
capacity to 11,600 tons per year.
Important
Factors Affecting our Results of Operations
The most
significant factors that could affect our financial condition, costs and results
of operations in the future are:
Fluctuations in price of
polyester: Polyester resin is the principal raw material used
in our productions and its price fluctuations affect our business operations.
For the year ended September 30, 2010, 98% of our raw materials consisted of
polyester, the cost of which increased with the price of crude oil. The increase
in the purchase price of our raw materials resulted in a reduction of gross
profit by $0.97 million for the year 2010.
Our ability to successfully
commercialize our PPS manufacturing process: Our future growth and
profitability will depend on our ability to successfully commercialize our PPS
manufacturing process. To date, we have not sold any PPS nonwoven products but
expect sales to commence after we commence production of PPS nonwoven material
in early 2011.
The effectiveness and market
acceptance of our new product offerings. Market perception and acceptance
of our PPS nonwoven materials by coal-fired power plants and other potential
users as a filtration device for carbon and other emissions will largely dictate
the rate at which our company will grow if at all.
44
Our ability to obtain additional
financing. To continue to grow in the future, we will need to
purchase more PPS production equipment which will require us to raise additional
financing. As of the date of this report, we believe the U.S. capital
markets are facing many difficulties. Potential sources of additional financing
may be unwilling or unable to provide us with the additional financing we need
to fully carry out our expansion plans. If we are unable to obtain additional
financing, we will fund our expansion with operating cash flow which may be
inadequate to allow us to grow at our desired rate.
Degree of enforcement of new PRC
Environmental Regulations. The degree to which the PRC government
enforces its recently adopted regulations relating to carbon and other pollutant
emissions by coal fired power plant operators and other plant
operators that operate coal fired facilities that are not currently in
compliance with those regulations will have an impact on the demand for our PPS
bag filters.
Possible financial exposure
resulting from our failure to contribute housing provident fund:
Under PRC regulations we are required to open housing funds
accounts and make monthly contributions of at least 5% of each employee’s
average monthly income in the previous year. We have not contributed housing
funds for our employees because this practice has been permitted by local
authorities. The accumulated unpaid amount was approximately RMB 1.66 million
(approximately $248,087) as of September 30, 2010. If the local authorities
began to enforce these regulations and we are forced to contribute to the funds,
our current year’s net income would be reduced by $16,439 and retained earnings
would be reduced by $231,648. The housing funds administrative authorities are
permitted to impose a fine of not less than RMB10, 000 (approximately $1,471)
and no more than RMB50,000 (approximately $7,353) which would further reduce our
net income by the amount of the fine.
Tax uncertainty. We
believe that our taxable income and deductions were calculated pursuant to the
PRC tax laws, regulations and local tax authority enforcement practice. However,
changes in PRC tax laws and regulations may have an adverse and retroactive
impact on our financial position and results of operations. In addition, the
local tax authority at Foshan may change its interpretation and enforcement of
the PRC tax laws and regulations which could have an adverse and retroactive
impact on our financial position and results of operations. The company is
not able to predict any such changes, and thus we cannot reasonably estimate the
amount of the potential impact.
Results
of Operations
Comparison
of Fiscal Years Ended September 30, 2010 and 2009
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in US dollars and as a percentage of net sales
(percentages may not add due to rounding). See the financial statements of the
company beginning on page F-3 and the related notes thereto and other financial
information included elsewhere in this report.
Year Ended September 30,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Net
sales
|
$ | 19,952,422 | 100 | $ | 11,849,712 | 100 | ||||||||||
Cost
of sales
|
13,772,843 | 69 | 7,906,614 | 67 | ||||||||||||
Gross
profit
|
6,179,579 | 31 | 3,943,098 | 33 | ||||||||||||
SG&A
expense
|
2,272,881 | 11 | 1,219,114 | 10 | ||||||||||||
Bad
debt expense (recovery)
|
- | 11,497 | 0 | |||||||||||||
Operating
income
|
3,906,698 | 20 | 2,712,487 | 23 | ||||||||||||
Other
income (expenses)
|
(1,661,598 | ) | 8 | 266,835 | 2 | |||||||||||
Income
taxes
|
24,023 | - | ||||||||||||||
Net
income
|
$ | 2,221,077 | 11 | $ | 2,445,652 | 21 |
45
Net
Sales
Net sales
consisted of sales of needle punched PET nonwoven fabric and thermal calendared
products. Our net sales for the year ended September 30, 2010 were $19,952,422,
an increase of $8,102,710, or 68%, from prior year’s net sales of $11,849,712.
The increase in net sales was largely attributable to higher sales volume of our
newly launched needle-punched nonwoven fabric products. Sales of needle-punched
PET products for 2010 were $8,618,407, an increase of $5,766,977, or
202%,compared to $2,851,430 for 2009. In addition, sales of
thermal calendared PET materials for 2010 were $11,331,528, an increase of
$2,543,161, or 29%, from $8,788,367 for 2009, which was mainly due to higher
sales volume.
Cost
of Sales
Cost of
sales primarily consists of the cost of raw materials, labor and manufacturing
overhead expenses.
Our cost
of sales for 2010 was $13,772,843, an increase of $5,866,229, or 74%, from
$7,906,614 for 2009. Cost of sales represented 69% of net sales for
2010 compared to 67% for 2009, reflecting the higher cost of our products sold
in 2010 compared to 2009. Raw material cost increased to $10,937,772, an
increase of $5,501,011 from $5,436,761 in 2009 of which production volume
increase accounted for 82%, or $4,525,506, and price increase contributed 18%,
or $975,505
As a
major component of our cost of sales, the price of raw materials, increased in
2010 and contributed 18% of increased cost of sales. Improved demand
for end use products in 2010 increased the price of polyester resin which is the
principal raw material in our PET nonwoven fabric production. The rise in the
price of polyester was more obvious in the later part of 2009. Given
the recent rise of crude oil price and the fact that the global economy is
recovering, we believe the price of our raw materials will stay at relatively
high levels and will continue to adversely affect our PET product gross margin
since our ability to pass the increased material cost to customers is
limited.
Labor
cost accounted for approximately 2% and 3% of the total cost of sales for
2010 and 2009 respectively, reflecting the Company’s effective labor cost
control.
Manufacturing
overhead expenses were approximately 19% of total cost of sales for 2010,
compared to 27% of cost of sales for 2009 reflecting greater capacity
utilization rates with the addition of our new production line in February 2009.
Manufacturing overhead represented approximately 13% and 16% of the net sales
for 2010 and 2009, respectively.
Gross
Profit
Our gross
profit was $6,179,579 in 2010, an increase of $2,236,481, or 57%, from
$3,943,098 in 2009. The increase in gross profit resulted primarily from the
increase in our net sales. As a percentage of net sales, gross profit was
31% in 2010, compared to 33% in 2009. The lower gross profit margin was
primarily due to increase in raw material cost in 2010 from 2009, offset by
improved production efficiency.
Selling,
General and Administrative Expenses
Selling
expenses include salaries, advertising expenses, rent, cost of manufacturing and
all expenses directly related to producing and selling our products.
General expenses include general operating expenses that are
directly related to the general operation of the company, but excluding
selling and administrative expenses. Administrative expenses include executive
salaries and other expenses related to the overall administration of the
company.
46
Selling,
general and administrative expenses were $2,272,881 in 2010, an increase of
$1,053,767, or 87%, from $1,219,114 in 2009 primarily due to (i) increases of
$557,500 in legal and accounting fees; (ii) $310,840 in expenses incurred in our
efforts to raise capital in the United States; and (iii) $170,308 in stock-based
compensation expense.
Other
Income and Expenses
Other
income in 2010 includes interest income and income from revaluation of the fair
value of the Company’s derivative liabilities, while other income in 2009 solely
consists of interest income. Other expenses include primarily interest expense
of $1,988,832 in 2010, an increase of $1,718,983, or 637%, from $269,849 in
2009. Interest expense as a percentage of net sales increased to 10%
in 2010 from 2.3% in 2009. The increase in interest expense was
mainly attributed to non-cash expenses recorded as a result of our adoption of
derivative accounting rules under FASB ASC 815-40 to record the $4,140,000 of
convertible loan notes. These accounting rules require us to record derivative
liabilities (warrants) embedded in the privately placed bridge-loan which closed
on February 12, 2010 and treat the expenses directly related to the debt
financing as discount so that interest is periodically accreted from the
discount to the gross amount of the notes issued at its maturity date. This
non-cash accretion of interest accounted for $1,524,750, or 77%, of the total
interest expense in 2010. Excluding accreted interest, interest expense for 2010
represents approximately 2% of our net sales in 2010.
Provisions
under FASB ASC 815 also require us to measure at each reporting period the fair
value of the warrants issuable in conjunction with the private placement of
convertible notes closed in February 2010. The effect of the revaluation of
warrants resulted in other income of $313,000 in 2010.
Income
Tax
USA
The
Company and its subsidiary and branch divisions are subject to income taxes on
an entity basis on income arising in, or derived from, the tax jurisdiction in
which they operate. Since the Company had no income generated in the United
States, there was no tax expense or tax liability due to the Internal
Revenue Service of the United States as of September 30, 2010 and September 30,
2009.
BVI
Hong Hui
is incorporated under the International Business Companies Act of the British
Virgin Islands and accordingly, is exempted from payment of British Virgin
Island’s income taxes.
PRC
Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Foshan SLP. For 2008 and 2009 Foshan SLP enjoys tax free
holidays. From January 2010 onwards, Foshan SLP is taxed at 25% of net income
except for the 2010, 2011 and 2012 in which we receive a 50% discount on
income tax.
The tax
provision for fiscal year was $24,023. The company has recorded zero deferred
tax assets or liabilities as of September 30, 2010 and September 30, 2009, net
of tax allowance, because all other significant difference in tax basis and
financial statement amounts are permanent differences.
Net
Income
Net
income was $2,221,077 in 2010, a decrease of $224,575, or 9%, from net income of
$2,445,652 in 2009. The decrease was due to the non-cash interest
expense derived from the convertible notes financing transaction which closed in
February 2010. Excluding a $1,524,750 non-cash interest expense
relating to accretion of the discounted convertible notes and income from
revaluation of warrants issued in conjunction with the notes, net income
increased by $987,175, or 40% from 2009.
Foreign
Currency Translation Adjustments
Throughout
2010, the RMB rose steadily against the US dollar. As a result of the
appreciation of the RMB, we recognized a foreign currency translation gain of
$415,775. Given the uncertainty of exchange rate fluctuations, we cannot
estimate the effect of these fluctuations on our future business, product
pricing, results of operations or financial condition, but the fluctuation of
the Renminbi may materially and adversely affect your investment if the current
trend of appreciation of the RMB is reversed.
All of
our revenue was generated and expenses were incurred in the PRC and Hong Kong in
2010 and were denominated in Renminbi. Our income statement accounts in 2010
were translated at the annual average exchange rate of $1 to RMB 6.8118 and the
balance sheet items, except the equity accounts, were translated at the year-end
rate of $1 to RMB 6.6912. The equity accounts were stated at their historical
rate when the corresponding transactions occurred.
Net
foreign currency translation gain was $415,775, or 2% of net sales, in 2010 as
compared with the previous year’s net foreign currency translation losses of
$57,078, or 0.5 % of net sales.
Liquidity
and Capital Resources
The
following table sets forth a summary of our net cash flow information for the
periods indicated:
47
Years Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
(Consolidated)
|
(Consolidated)
|
|||||||
Net
cash provided by operating activities
|
$ | 4,411,689 | $ | 2,700,162 | ||||
Net
cash (used in) investing activities
|
$ | (5,230,563 | ) | $ | (1,158,033 | ) | ||
Net
cash provided by (used in) financing activities
|
$ | 2,708,294 | $ | (600,498 | ) | |||
Net
cash inflow
|
$ | 1,997,653 | $ | 930,078 |
We
finance our business with cash generated from operations and use short-term bank
loans to fund capital expenditures.
Working
capital consists mainly of cash and equivalents, accounts receivable, advances
to suppliers and inventory. Cash and equivalents, inventory and
accounts receivable account for the majority of our working
capital.
Our
working capital requirements may be influenced by many factors, including our
cash flow, competition, relationships with suppliers, and the availability of
credit facilities and financing alternatives, none of which can be predicted
with certainty.
At
September 30, 2010, we had several bank loans in a total amount of $3.8 million
(RMB25.4 million) with Agriculture Bank of China, Foshan Branch. These loans are
repayable in December 2010. See Note 19 (“Subsequent Events”) to our
consolidated financial statements for the current status of these
loans.
On
February 12, 2010, we completed a financing transaction in which we received net
proceeds of $3,409,813 through a private placement of convertible notes and
warrants to certain accredited investors.
Operating
Activities
For the
fiscal year ended September 30, 2010, net cash provided by operating activities
was $4,411,689, representing an increase of $1,711,527, or 63%, from $2,700,162
for the fiscal year ended September 30, 2009. The increase was due
primarily to an increase in net sales, improved collection of credit sales,
increase in clients’ deposits and reduction of advance made to
suppliers.
Investing
Activities
During
2010, net cash used in investing activities was $5,230,563, an increase of
$4,072,530 from $1,158,033 for 2009. The greater investment costs of
2010 were due to our purchases of equipment and expenditures related to
outfitting our manufacturing facilities for new PPS production
line.
Financing
Activities
For 2010,
net cash received in financing activities was $2,708,294, an increase of
$3,308,792 compared with net cash used in financing activities of $600,498 for
2009. Cash received in 2010 represents net proceeds received from private
placement of convertible notes offset by repayments of short term borrowings.
Cash used in 2009 represents repayments of short term
borrowings.
48
Loans
and Credit Facilities
The
balance of our outstanding short-term bank loans as of September 30, 2010 was
$3,796,053, as compared with $4,578,409 as of September 30, 2009. We
repaid $859,346 of short term bank loans in 2010.
Other
than as disclosed in the financial statements, we had no long term debt, capital
lease obligations, operating leases or any other long term obligations as of
September 30, 2010.
On
February 12, 2010, we entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants (which are exercisable only in
certain circumstances), with net proceeds for $3.4 million after finance costs.
The notes require quarterly interest payments at a rate of 10% per annum and
interest for six months in an amount of $204,464 to be held in an escrow
account. The notes are convertible into shares of common stock at a 65% discount
to the offering price upon consummation of a “qualified
financing.” Our planned initial public offering is expected to
be a “qualified financing.”
The
warrants become void if the notes automatically convert into common stock which
is expected to occur upon consummation of our planned initial public offering in
the US capital market. The warrants are exercisable at any time during a
five-year period commencing on the closing of a “financing,” which means the
first sale (or series of related sales) by us of stock (or debt or equity
securities convertible into stock), in a capital raising transaction, occurring
after the maturity date (or the date the notes become due pursuant to a default,
if earlier) with aggregate gross proceeds of at least $20,000,000. The warrants
cannot be exercised if no financing is consummated within the five-year period
after the issue date. Please see the section entitled “Our History And
Corporate Structure - Private Placement” beginning on page 19 for a
more complete discussion of the notes and warrants issued in the February 12,
2010 private placement.
Future
Cash Commitments
Our
planned expansion of our PPS manufacturing facilities in 2011 will require
significant investment capital. We intend to use the net proceeds from the
proposed public offering to purchase and install three new production lines to
manufacture PPS materials which will increase our annual output to 11,600 tons
of nonwoven material. The estimated cost of this equipment is approximately
$20,000,000. In the future, we may need to raise additional capital if the
proceeds from the two financings and our operating cash flows are inadequate to
continue our capital expansion plans.
Restatement
of Previously Issued Financial Statements
In
connection with the review by the staff of the Division of Corporation Finance
of the Securities and Exchange Commission of the Public Offering Registration
Statement, an error in our interim financial statements was identified in that
we failed to record on our financial statements a liability of $75,000 owed to
each of United Best and Primary Capital ($150,000 in total) for advisory
services rendered in connection with our private placement of convertible notes
which closed on February 12, 2010. We also noted that a grant of
30,000 restricted shares of common stock in June 2010 to one of our directors
was not reflected in the financial statements originally issued.
Accordingly,
on November 24, 2010, immediately following the filing of the Current Report on
Form 8-K, we filed (i) an amendment on Form 10-Q/A for the period ended June 30,
2010 containing restated interim financial statements for the three and nine
month periods ended June 30, 2010 and (ii) an amendment on Form 10-Q/A for the
period ended March 31, 2010, containing restated interim financial statements
for the three and six month periods ended March 31,
2010.
The
principal effects of the restatements are as follows:
|
·
|
As of June 30, 2010, accrued
liabilities increased by $150,000 and stockholders’ equity decreased by
$150,000. Of this decrease, $150,000 is due to the recording of
the $150,000 liability to United Best and Primary
Capital.
|
49
|
·
|
As of March 31, 2010, accrued
liabilities increased by $150,000 and stockholders’ equity decreased by
$150,000.
|
|
·
|
We restated our selling, general
and administrative expenses to reflect the fee of $150,000, which resulted
in a reduction of income from operations, income before taxes, net income,
and earnings per share for both the three months and six months ended
March 31, 2010.
|
|
·
|
We restated our selling, general
and administrative expenses to reflect the fee of $150,000 and stock-based
compensation of $5,000, which resulted in a $5,000 and $155,000 reduction
of income from operations, income before taxes, net income, and earnings
per share for three and nine months ended June 30, 2010,
respectively.
|
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. Our
financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” We believe that the following paragraphs
reflect the more critical accounting policies that currently affect our
financial condition and results of operations:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method accounting for
financial reporting purposes. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States and have been
consistently applied in the presentation of financial statements, which are
compiled on the accrual basis of accounting.
Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Management makes these estimates using the best information available
at the time the estimates are made; however actual results could differ
materially from those estimates.
Economic
and political risks
Our
operations are conducted in the PRC. Accordingly, our business, financial
condition and results of operations may be influenced by the political, economic
and legal environment in the PRC, and by the general state of the PRC
economy.
Our
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. Our results may be
adversely affected by changes in political and social conditions in the PRC and
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
Revenue
recognition
Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, and the seller’s price to the buyer is fixed or
determinable and collectible.
50
Land
use rights
Land use
rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method. The
estimated useful life is 50 years.
Property,
plant and equipment
Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of plant and equipment are as follows:
Building
and plant
|
20
years
|
Machinery
|
10
years
|
Office
equipment and computers
|
5
years
|
Vehicles
|
10
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
Accounting
for the Impairment of Long-Lived Assets
The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the
assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonable likely to
have a current or future effect on our financial condition.
Item 7A.
|
Quantitative and Qualitative
Disclosures about Market
Risk
|
Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to
provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).
Item 8.
|
Financial Statements and
Supplementary Data
|
The
financial statements and supplementary data required by this item are included
in a separate section of this Report. See “Index to Consolidated Financial
Statements” on Page F-1.
Item 9.
|
Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
|
None.
51
Item 9A.
|
Controls and
Procedures
|
(a) Disclosure Controls and
Procedures.
As
required by Rule 13a-15 under the Exchange Act, in connection with filing of
this Annual Report on Form 10-K, our management, including our chief executive
officer and chief financial officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010 and has
determined that our disclosure controls and procedures were not
effective. The conclusion that our disclosure controls and procedures
were not effective was based on the material weaknesses identified by management
as set forth below.
(b) Management’s Report on
Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the
process designed by, or under the supervision of, our principal executive
officer and principal financial officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
(1) pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
(2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
(3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk..
Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of our internal control over financial reporting. Based on this
assessment, management has concluded that our internal control over financial
reporting was not effective as of September 30, 2010.
The
conclusion that our internal control over financial reporting was not
effective was based on the material weaknesses identified by management as set
forth below.
52
In
November 2010, management identified certain material weaknesses
which resulted in our inability to detect accounting errors where we failed to
record on our financial statements a liability of $75,000 owed to each of United
Best and Primary Capital ($150,000 in total) for advisory services rendered in
connection with our private placement of convertible notes which closed on
February 12, 2010 as selling, general and administrative expenses for the
interim period ended March 31, 2010 and nine month period ended June 30, 2010.
We also noted that a grant of 30,000 restricted shares of common stock in June
2010 to one of our directors was not reflected in the originally issued
financial statements for the interim period ended June 30, 2010.
The
identification of these errors resulted in the restatement of (i) our interim
financial statements for the three month and nine month periods ended June 30,
2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010 filed on August 16, 2010 and in the Public Offering
Registration Statement filed on July 8, 2010, as amended on September 7, 2010
and October 15, 2010 and (ii) our interim financial statements for the three
month and six month periods ended March 31, 2010 and 2009, as set forth in the
Quarterly Report on Form 10-Q filed on May 24, 2010, as amended on May 26, 2010
and in the Public Offering Registration Statement filed on July 8,
2010, as amended on September 7, 2010 and October 15, 2010. This
error was not detected by our internal control procedures.
We have
taken steps to resolve these material weaknesses, including:
|
·
|
In August 2010, we hired
Eric Gan as our new chief financial
officer;
|
|
·
|
We are arranging necessary
training for our accounting department
staff;
|
|
·
|
We plan to engage external
professional accounting or consultancy firms to assist us in the
preparation of the U.S. GAAP accounts;
and
|
|
·
|
We have allocated financial and
human resources to strengthen the internal control structure and we have
been actively working with external consultants to assess our data
collection, financial reporting, and control procedures and to strengthen
our internal controls over financial
reporting.
|
We
believe that the foregoing steps will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate. However, there
is no guarantee that these improvements will be adequate or successful or that
such improvements will be carried out on a timely basis. A material weakness in
our internal controls and procedures may lead to further accounting errors,
which in turn may result in further restatements of our financial statements.
Any of these possible outcomes could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of
our reporting process, which could adversely affect the trading price of our
shares.
Management
intends to continue to implement procedures to remedy such material weaknesses,
including the possible hiring of additional staff with appropriate
experience.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. As a small reporting company our management’s report
is not subject to attestation by our registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit us to provide
only our management’s report in this annual report.
(c) Changes in Internal Control
over Financial Reporting.
Except as
set forth above, there were no changes in our internal control over financial
reporting that occurred during the fourth quarter of 2010 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B.
|
Other
Information
|
None.
53
PART
III
Item 10.
|
Directors , Executive Officers
and Corporate Governance
|
Our
current executive officers and directors as of the date of filing this report
are as follows:
Directors and Executive
Officers
|
|
Position/Title
|
|
Age
|
Li
Jie
|
Chief
Executive Officer and a Director
|
55
|
||
Law
Wawai
|
President
of Sales and a Director
|
45
|
||
Eric
Gan
|
Chief
Financial Officer
|
48
|
||
Chris
Bickel
|
Director
|
47
|
||
Li
Jun
|
Director
|
47
|
||
Richard
M. Cohen
|
Director
|
59
|
||
Su
Lei
|
Director
|
46
|
Except
for Chris Bickel, Richard M. Cohen and Eric Gan, all of our officers and
directors are residents of the PRC. In addition, substantially all of our assets
are located in the PRC. As a result, it may be difficult or impossible for you
to effect service of process within the United States on our company or any of
them or to enforce court judgments obtained against them in the United States
courts. We have been advised by our PRC counsel that there is uncertainty as to
whether the courts of the PRC would (1) recognize or enforce judgments of U.S.
courts obtained against our officers or directors or the experts named in a
prospectus based on the civil liability provisions of the securities laws of the
U.S. or any state in the U.S., or (2) entertain original actions brought in the
PRC against our officers or directors or the experts named in a prospectus based
on the securities laws of the U.S. or any state in the U.S.
The
following is a summary of the biographical information of our
directors and officers:
Li Jie was
elected director and appointed as our Chief Executive Officer on February 12,
2010. Mr. Li has served as Chief Executive Officer and Managing Director of
Foshan SLP Special Materials Co., Ltd. since its inception in 2000. He also
serves as Director General of the China Industrial Textile Committee. From 1980
to 2000, he served as R&D director of Dalian Synthetic Fiber Research
Institute. We believe that Mr. Li’s knowledge of all aspects of our
business and his in-depth understanding of our operations, combined with his
years of experience in the nonwovens industry, position him well to serve as our
Chairman and Chief Executive Officer. Mr. Li received a bachelor’s degree
in Engineering for Chemical Fiber Technique at Dalian Light Industrial
School. He received a Masters degree from Chinese Academy of Social
Sciences where he studied business management. Mr. Li is not, and has
not been within the last five years, a director of any other publicly traded
company.
Law Wawai
was elected as a director and appointed as President of Sales on February
12, 2010. From 1997 to February 2010, Mr. Law served as director and
general manager of Nanhai Wanzhi Trading Co. From 1987 to 1997, he was
sales manager at Nanhai Polyester Factory. We believe that Mr.
Law’s knowledge of all aspects of the nonwovens business and his in-depth
understanding of its operations position him well to serve as a
director. Mr. Law received his bachelor’s degree in business management
from Nanhai Television University. Mr. Law is not, and has not been within
the last five years, a director of any other publicly traded
company.
54
Eric Gan
was appointed as our Chief Financial Officer in August 2010. From
July 1999 to August 2010 Mr. Gan was a Senior Financial Consultant at The
Goetzman Group, a company which provides staffing solutions in all areas of
finance and accounting. His assignments while at The Goetzman Group
included (i) acting as interim chief financial officer for Rino International
Inc. Inc from January 2007 to September 2007; (ii) acting as interim general
accounting manager for Physicals Formula from March 2008 to September 2008; and
(iii) overseeing the Sarbanes-Oxley compliance project for Smart
& Final from January 2005 to May 2005. Mr. Gan received his
Master of Arts from Fudan University, Shanghai in June 1989 and received his
Master’s degree in Accounting from the University of Southern California in
December 1995.
Chris Bickel
was elected as a director on February 12, 2010. Since October 2009,
Mr. Bickel has served as President of Primary Capital and is responsible for
business development in China. Primary Capital acted as placement agent
for the Company’s February 2010 private placement. From 2005 to
October 2009, Mr. Bickel was an investment banker at Rosewood Capital
Group, LLC (previously an affiliate of Primary Capital and now a branch office )
during which time his investment banking team provided a full range of
investment banking, due diligence and business advisory services to private
China based companies interested in accessing the U.S. capital markets and being
listed in the U.S., as well as advisory services to US based investment banking
firms interested in identifying investment banking clients in China. Mr.
Bickel was instrumental in originating and financing of a number of PRC
companies that are listed on the NASDAQ or whose shares are quoted on the
OTCBB. From 2001 through 2004, Mr. Bickel served as Chairman and CEO of
Sino UJE Ltd., a Hong Kong based company which is a distributor of medical and
industrial instrumentation and technology products. Mr. Bickel was also
employed by Spectris Inc. from 1983 to 1996. As an employee of Spectris,
Mr. Bickel was involved with and managed the nonwoven sector of its
business. Spectris was engaged in providing engineered products for use in
nonwovens production. We believe that Mr. Bickel’s extensive past
experience in providing business advisory services to private China based
companies interested in accessing the U.S. capital markets, including Rino
International Corp. and Sino Gas International Holdings, Inc., and helping those
companies become successfully listed as well as his over ten years’ experience
in the nonwoven market and knowledge with manufacturing practice and the overall
market make him a suitable candidate to serve on our board of
directors.
Li Jun was
elected as a director in February 2010. Mr. Li is the owner and
manager of Shanghai Primary Capital Management Co., Ltd., a business advisory
firm incorporated in Shanghai China, which he started in 2010. (Shanghai
Primary Capital Management Co., Ltd. is not affiliated with Primary
Capital.) He provides advisory services to China business
owners seeking capital and advisory services related to listing their company on
United States stock exchanges. He has over twenty years of experience working in
China in various fields and in various capacities. Mr. Li founded Shanghai
Rosewood Investment Consulting Co., Ltd in 2005 and participated in four listing
and financing transactions in which China based companies received funding from
U.S. based investors and were listed in the U.S. From 2001 through 2008,
Mr. Li has been the Managing Director of SINO UJE, Ltd., a Hong Kong based
company which is a distributor of medical and industrial instrumentation and
technology products throughout Asia. From 1994 through 2000, Mr. Li was employed
by Nanchang Minerals Machinery Imp and Exp Co., Ltd initially as a salesman,
followed by promotions to department director and vice president. From
1987 through 1994, Mr. Li served as an instructor at the University of Military
Science and Technology and he retired as a Major from the Chinese People’s
Liberation Army. Although he has not been previously engaged in the nonwovens
business, we believe that Mr. Li’s business acumen and his extensive past
experience in providing business advisory services to private China based
companies interested in accessing the U.S. capital markets and helping those
companies become successfully listed make him an eminently suitable candidate to
serve on our board of directors. Mr. Li received his Bachelor’s
and his Master’s degree of Science from Shanghai Jiaotong
University. Mr. Li is not, and has not been within the last five years, a
director of any other publicly traded company.
Richard M. Cohen
was elected as a director in June, 2010. Since 1996, Mr. Cohen has
been the President of Richard M. Cohen Consultants, a financial services
consulting company that accepts engagements from public and private companies to
assist with their corporate governance and corporate finance needs. From
1984 through 1992, Mr. Cohen was an investment banker at both Henry Ansbacher
and Furman Selz, where he specialized in mergers & acquisitions, public
equity offerings, and restructurings. From 1980 through 1983, Mr. Cohen
was a Vice President of corporate development at Macmillan, Inc. Mr. Cohen
is a Certified Public Accountant (New York State) and began his career at Arthur
Andersen. He received a B.S. from The University of Pennsylvania (Wharton) in
1973 and an M.B.A. from Stanford University in 1975. Although he has not
been previously engaged in the nonwovens business we believe that Mr. Cohen’s
business acumen and his experience in providing business advisory services to
private companies to assist with their corporate governance and corporate
finance needs coupled with his experience serving as a director of a number of
publicly traded companies make him an eminently suitable candidate to serve on
our board of directors. Mr. Cohen currently serves as a director of
Helix BioMedix (OTCBB:HXBM), Rodman and Renshaw (NASDAQ: RODM), CorMedix
(OTCBB:CRMD), Dune Energy, Inc. (AMEX: DNE), for which he served as Chief
Financial Officer from November 2003 to April 2005.
55
Su Lei was
elected as a director in August 2010. Mr. Su currently serves as the
Associate Director of Information of the State Environmental Protection Agency
in China, a position he has held since 2001. Mr. Su has successively
acted as Principal Staff Member, Associated Director and Director of China
Environmental Protection Industrial Association since September 2001. He
also currently serves as the Director of the Working Committee of China Green
Star, a position he has held since 2002. China Green Star is a
non-profit organization under China's Environmental Protection Association which
focuses on promoting the interests of the environmental protection
industry. We believe that Mr. Su’s position and experience with the
State Environmental Protection Agency and his understanding of public policy
matters make him well suited to serve on our board of directors. Mr. Su
received a bachelor’s degree in Electronic Engineering from China Air Force
Missile Institute, and he is now a senior engineer in Environment
Management.
All of
our directors serve on the board until our next annual meeting of the
stockholders, and until their successors have been elected and qualified or
until their earlier resignation or removal.
Our
executive officers serve at the discretion of the board of directors, subject to
the terms of any employment agreement they have with the Company. Mr.
Bickel is serving on the Board as a designee of Primary Capital. Under the
terms of its financial services agreement with the company, Primary Capital is
entitled to designate one board member and one observer until February 11,
2012.
Family
Relationships
There are
no family relationships among our directors and executive officers, except Eric
Gan, our chief financial officer, is the brother in law of Li Jun, one of our
directors. There is no arrangement or understanding between or among
our executive officers and directors pursuant to which any director or officer
was or is to be selected as a director or officer, and there is no arrangement,
plan or understanding as to whether non-management shareholders will exercise
their voting rights to continue to elect the current board of
directors.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
|
·
|
been convicted in a criminal
proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor
offences);
|
|
·
|
had any bankruptcy petition filed
by or against the business or property of the person, or of any
partnership, corporation or business association of which he was a general
partner or executive officer, either at the time of the bankruptcy filing
or within two years prior to that
time;
|
|
·
|
been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or federal or state authority,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting, his involvement in any type of business, securities, futures,
commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such
activity;
|
|
·
|
been found by a court of
competent jurisdiction in a civil action or by the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended, or
vacated;
|
56
|
·
|
been 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 (not
including any settlement of a civil proceeding among private litigants),
relating to an alleged violation of any federal or state securities or
commodities law or regulation, 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;
or
|
|
·
|
been 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
Independence
In order
to be listed on NASDAQ, a company is required to meet certain corporate
governance requirements, including, with certain exceptions, the requirement to
have a board of directors the majority of whose members are “independent” within
the meaning of NASDAQ rules.
As a
“controlled company” we are exempt from the requirements of the NASDAQ
Marketplace Rules (i) to have a majority of independent board
members; (ii) for independent director oversight of executive officer
compensation and (iii) for independent director oversight of director
nomination. As a controlled company, we remain subject to the NASDAQ audit
committee requirements and the requirement that independent directors regularly
meet in executive session.
Under
NASDAQ Marketplace Rules a company is considered a "controlled company" if
greater than 50% of its voting power is held by an individual, a group or
another company. In order for a group to exist for purposes of this rule,
the stockholders forming the group are required to publicly file a notice that
they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a
group consisting of Bestyield Group Limited, Jie Li, Proudlead Limited, Law
Wawai, Pilot Link International Limited, High Swift Limited, China Investment
Management Inc. and Newise Holdings and Li Jun filed a Schedule 13D
disclosing the existence of a group with respect to their holdings in the
Company.
The Board
has determined that three of its six current members, namely Messrs. Chris
Bickel, Su Lie and Richard M. Cohen, are “independent” within the meaning of
NASDAQ listing standards.
All
actions of the Board of Directors require the approval of either a majority of
the directors in attendance at a meeting, duly called and noticed, at which a
quorum is present or the unanimous written consent of all of the members of the
Board of Directors.
In 2010,
our Board of Directors did not meet in person for regularly scheduled meetings,
and acted by written consent five times. During 2010, no director attended fewer
than 75% of the meetings of the Board of Directors and Board committees of which
the director was a member.
It is the
policy of the Board of Directors that all directors should attend the annual
meetings in person or by teleconference. We have not yet scheduled
our annual shareholder meeting.
Director
Contracts
In May
2010, we entered into a director’s agreement with Richard M. Cohen, which
agreement was effective with his election to the Board. Under the terms of
that agreement, effective on the closing of our proposed public offering,
Mr. Cohen will be paid an annual retainer of $24,000 for serving as a
director (with $2,000 payable at the beginning of each month). In
addition, pursuant to the Company’s equity incentive plan, Mr. Cohen was
awarded 30,000 restricted shares, two thirds of which are subject to
restrictions on transfer and are subject to forfeiture with the restrictions
lapsing as to one-third of the shares on the first anniversary of the date of
grant and as to one-third on the second anniversary of the date of grant in the
event Mr. Cohen continues to be a director on those dates. In addition,
the Company will reimburse the director for pre-approved reasonable
business-related expenses incurred in good faith in the performance of the
director’s duties for the Company.
57
Committees
and Meetings
The Board
currently has three standing committees: Audit Committee, Compensation Committee
and Nominating Committee. Each member of these committees is “independent”
as defined by NASDAQ and SEC rules and each of these committees has a written
charter approved by the Board. Committee members are appointed by the
Board based on the recommendation of the Nominating Committee, except that
members of the Nominating Committee are appointed by the independent members of
the Board. The current members of the committees are as
follows:
Director
|
|
Audit
|
|
Compensation
|
|
Nominating
|
Jie
Li
|
||||||
Law
Wawai
|
||||||
Li
Jun
|
||||||
Chris
Bickel
|
ü
|
ü
|
ü
|
|||
Richard
M. Cohen
|
ü
|
ü
|
ü
|
|||
Su
Lei
|
ü
|
Audit
Committee; Audit Committee Financial Expert
The Audit
Committee, established in September 2010, currently consists of three members,
Su Lei, Chris Bickel and Richard M. Cohen, its Chairman. The Board has
determined that each of them is independent within the meaning of the NASDAQ
listing standards and applicable SEC regulations, and that each member has the
financial literacy required by the NASDAQ listing standards.
The Audit
Committee did not meet in 2010 but met with regard to the 2010 financial
statements.
The Board
also has determined that Mr. Cohen is qualified as an "audit committee financial
expert" within the meaning of applicable SEC regulations and has the accounting
and related financial sophistication required by NASDAQ listing
standards.
The
function of the Audit Committee, as more fully set forth in its charter, is to
(i) oversee our financial statements, our financial reporting process and our
system of internal control over financial reporting; (ii) recommend the
selection of our registered public accounting firm; (iii) review the extent
of non-audit services to be performed by the auditors; and (iv) review the
disclosures made in our periodic financial reports.
Audit
Committee Report
With
respect to the audit of the Company’s financial statements for the year
ended September 30, 2010, the Audit Committee
|
·
|
has reviewed and discussed the
audited financial statements with
management;
|
|
·
|
has discussed with the Company’s
independent accountants the matters required to be discussed by the
Statement on Auditing Standards No. 61, as amended (AICPA, Professional
Standards, Vol. 1, AU section 380), as adopted by the Public Company
Accounting Oversight Board in Rule 3200T;
and
|
|
·
|
has received the written
disclosures and the letter from the independent accountant required by
applicable requirements of the Public Company Accounting Oversight Board
regarding the independent accountant's communications with the Audit
Committee concerning independence and has discussed with the independent
accountant the independent accountant's
independence.
|
58
Based on
these reviews and discussions, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the company's
annual report on Form 10-K for the year ended September 30, 2010.
Chris
Bickel
Richard
M. Cohen
Su
Lei
Compensation
Committee
The
Compensation Committee, established in September 2010, consists of two members
Chris Bickel and Richard M. Cohen. The Board has determined that each of
them is independent within the meaning of the NASDAQ listing standards.
The functions of the Compensation Committee, as more fully set forth in its
charter, are to oversee our compensation policies generally, evaluate senior
executive performance, oversee and determine compensation for senior executives
and review and recommend to the Board actions regarding director
compensation.
The
Compensation Committee did not meet in 2010.
Nominating
Committee
The
Nominating Committee, established in September 2010, currently consists of two
members, Chris Bickel and Richard M. Cohen. The Board has determined that
each of Messrs. Bickel and Cohen is independent within the meaning of the NASDAQ
listing standards.
As more
fully set forth in its charter, the primary responsibilities of the Nominating
Committee are to: (i) develop and recommend to the Board criteria for selecting
qualified director candidates; (ii) identify, review and evaluate individuals
qualified to become Board members; (iii) consider committee member
qualifications, appointment and removal; and (iv) assist the Board in its annual
reviews of the performance of the Board, each committee and management.
The Committee has the exclusive authority to make recommendations to the
Board for approval for the election of new members to the
Board.
To
fulfill its responsibilities and duties the Nominating Committee is required to,
among other things (i) evaluate the current composition of the Board of
Directors and its committees, and determine future requirements for director
candidates; (ii) determine the Board’s criteria for selecting new directors,
including desired board skills and attributes, and actively seek prospective
individuals qualified to become board members; (iii) adopt and maintain a policy
concerning the director nomination process; (iv) adopt a policy concerning the
consideration of director candidates recommended by stockholders and consider
stockholder nominees for election to the Board; (v) evaluate and propose
nominations for election to the Board; and (vi) review and make recommendations
to the Board concerning membership of Board committees.
The
Committee does not assign specific weights to particular criteria. Rather, the
Nominating Committee believes that the backgrounds and qualifications of the
directors, considered as a group, should provide a significant composite mix of
experience, knowledge and abilities that will allow the Board to fulfill its
responsibilities.
The
Nominating Committee will consider director nominees recommended for
consideration by the stockholders. To have a person considered by the
Nominating Committee for recommendation to the Board as a director nominee a
stockholder should write to the Corporate Secretary, specifying the nominee's
name and qualifications for Board membership and providing confirmation of the
nominee's consent to serve as a director. Following verification that the
person submitting the recommendation is a stockholder of the Company, all
properly submitted recommendations will be brought to the attention of the
Nominating Committee at a regularly scheduled Committee
meeting.
59
If a
stockholder properly recommends a director nominee, the Nominating Committee
will give due consideration to that nominee and will use the same criteria used
for evaluating other director nominees, in addition to considering the
information relating to the director nominee provided by the
stockholder.
Stockholders
also may nominate directors for election at our annual meeting of stockholders
by following the provisions set forth in our bylaws. The deadline for
stockholder nominations is set forth in our by laws. Stockholders and
other parties interested in communicating directly with the Board of Directors
may do so by writing to: China SLP Filtration Technology, Inc., Attention:
Board of Directors, Shishan Industrial Park, Nanhai District, Foshan
City, Guangdong Province PRC. Pursuant to a process approved by the Board,
the Corporate Secretary reviews all correspondence received by us and addressed
to members of the Board and regularly forwards to the Board a summary of such
correspondence and copies of all correspondence that, in the opinion of the
Corporate Secretary, deals with the functions of the Board or Board committees
or otherwise requires the Board's attention. Directors may at any time review a
log of all correspondence received by us that is addressed to members of the
Board and request copies of any such correspondence.
Concerns
relating to accounting, internal controls or auditing matters are immediately
brought to the attention of our internal audit department and handled in
accordance with procedures established by the Audit Committee to address such
matters.
The
Nominating Committee did not meet in 2010.
Compensation
Committee Interlocks and Insider Participation
All
current members of the Compensation Committee are independent directors. None of
the past or present members of our Compensation Committee are present or past
employees or officers of ours or any of our subsidiaries. No member of the
Compensation Committee has had any relationship with us requiring disclosure
under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as
amended. None of our executive officers serves on the board of directors or
compensation committee of a company that has an executive officer that serves on
our Board or Compensation Committee.
Code
of Ethics
We strive
to foster a culture of honesty, integrity and accountability.
We have a
code of ethics applicable to all employees, including all officers, and
including our independent directors, who are not employees of the company, with
regard to their company-related activities. The code incorporates our guidelines
designed to deter wrongdoing and to promote honest and ethical conduct and
compliance with applicable laws and regulations. The code also incorporates our
expectations of our employees that enable us to provide accurate and timely
disclosure in our filings with the SEC and other public communications. In
addition, the code incorporates guidelines pertaining to topics such as
complying with applicable laws, rules, and regulations; reporting code
violations; and maintaining accountability for adherence to the
code.
Waivers
of the Code for executive officers and directors may be granted only by the
Board. Amendments to the Code must be approved by the Board. We intend to
provide disclosure of any such amendments or waivers on our website (www.silepu.com) within four
business days of any such amendment or waiver
Board
Operations
One
person holds the positions of principal executive officer and chairman of the
Board of Company. The board has not designated a lead director. Given the
limited number of directors comprising the board, the independent directors call
and plan their executive sessions collaboratively and, between board meetings,
communicate with management and one another directly. The independent directors
believe that they are equally capable of monitoring the Company’s operations and
that delegating to a lead director functions in which they all participate might
detract from rather than enhance performance of their responsibilities as
directors.
60
The Board
plays an active role, as a whole and also at the committee level, in overseeing
the management of the Company’s risks. To date, the Board has not
regularly reviewed reports from members of senior management and committees on
areas of material risk to the Company, including operational, financial, legal,
strategic and regulatory risks. However, the Board intends to
implement such a policy during 2011.
Stockholder
Communications
Stockholders
can mail communications to the Board of Directors, c/o Secretary, c/o China SLP
Filtration Technology, Inc., Shishan Industrial Park, Nanhai District, Foshan
City, Guangdong Province PRC who will forward the correspondence to each
addressee.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
requires our executive officers, directors and persons who beneficially own more
than 10% of our common stock to file initial reports of beneficial ownership and
reports of changes in beneficial ownership with the SEC. These persons are
required by SEC regulations to furnish us with copies of all Section 16(a)
forms filed by such person. Based solely on our review of the forms furnished to
us and written representations from certain reporting persons, we believe that
all filing requirements applicable to our executive officers, directors and
persons who beneficially own more than 10% of our common stock were complied
with in the fiscal year ended September 30, 2010, except that Forms 3 were not
timely filed for Li Jie, Law Wawai, Zeng Shijun, Su Lie, Chris
Bickel, Richard Cohen , Li Jun, Wang Ting, Newise Holdings and Pilot
Link International Limited.
Item 11.
|
Executive
Compensation
|
The
following is a summary of the compensation we paid to each of our
“named executive officers” (as such term is defined in Item 402 of Regulation
S-K) for each of the last two fiscal years ended September 30, 2010 and
2009. No executive officer received compensation in excess of $100,000 for
any of those two years.
Name and
Principal
Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|||
Li
Jie
|
2010
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
|||||||||||||
(CEO(1)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||
Seth
Winterton
|
2010
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||
(former
CEO)(2)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||
Eric
Gan (3)
|
2010
|
18,000
|
-0-
|
-0-
|
75,000
|
-0-
|
-0-
|
-0-
|
93,000
|
|||||||||||||
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1)
|
Jie Li was appointed Chief
Executive Officer in February
2010.
|
(2)
|
Seth Winterton served as Chief
Executive Officer of Perpetual Technologies from December 29, 2008 until
February 12, 2010.
|
(3)
|
Eric Gan was appointed Chief
Financial Officer on August 4, 2010. Mr. Gan is paid
an annual salary of $120,000. In addition, on September
3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of
common stock at an exercise price equal to the initial public offering
price for our planned initial public offering. The option shall vest
and be exercisable as follows; 160,000 shares will vest and become
exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become
exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the
Company without cause, 160,000 shares shall be vested immediately on the
termination date. The amount of the option award in the table
represents the grant date fair value computed in accordance with
Accounting Standards Codification, or ASC, Topic 718, and does not reflect
whether our named executive officer has actually realized a financial
benefit from the award. For information on the assumptions used
to calculate the value of the awards, we refer you to Note 14 to our
consolidated financial statements for the fiscal year ended September 30,
2010. In accordance with SEC rules, the amount shown excludes
the impact of estimated forfeitures related to service-based vesting
conditions.
|
61
The
following is a summary of the compensation paid by our operating subsidiary
Foshan to Li Jie, its President and Chief Executive Officer, for the last two
fiscal years ended September 30, 2010 and 2009, respectively.
No executive officer of Foshan received compensation in excess of $100,000
for any of these two years.
Name and
Principal
Position
|
Fiscal
Year
|
|
Salary
($)(1)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|||||||||
Li
Jie
|
||||||||||||||||||||||||||||||||||
(President
and Chief
|
2010
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
|||||||||||||||||||||||||
Executive
Officer )
|
2009
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
(1)
The relevant exchange rates for fiscal years ended September 2010 and 2009 are
$1 to RMB 6.8 and RMB 6.8, respectively.
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|||||||||||||||||||||||||||||||||||
OPTION AWARDS
|
STOCK AWARDS
|
|||||||||||||||||||||||||||||||||||
Name
(a)
|
Number
of
Securities
Underlying
Unexercised
and Earned
options
(#) (b)
|
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(c)
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
|
Option
Exercise
Price
($)
(e)
|
Option
Expiration
Date
($)
(f)
|
Number
of
Shares
or
Units of
Stock
that
have
not
Vested
(#)
(g)
|
Market
Value
of
Shares
of
Units of
Stock
that
Have
not
Vested
($)
(h)
|
Number
of
Unearned
Shares,
Units or
Other
Rights
that
have not
Vested
(#)
(i)
|
Market or
Payout
Value
of
Unearned
Shares,
Units
or other
Rights
that
have not
Vested
($) (j)
|
|||||||||||||||||||||||||||
Li
Jie
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||||||||
Seth
Winterton
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||||||||
Eric
Gan
|
-0-
|
-0-
|
400,000
|
(1
|
)
|
(2
|
)
|
-0-
|
-0-
|
-0-
|
-0-
|
|
(1)
|
On September 3, 2010, Eric Gan
was granted an option to purchase up to 400,000 shares of common stock at
an exercise price equal to the initial public offering price. The
option vests and is exercisable as follows; 160,000 shares will vest and
become exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become
exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the
Company without cause, 160,000 shares vests immediately on the termination
date.
|
|
(2)
|
The option will expire on
September 3, 2015.
|
Employment
Agreement
On
November 20, 2008, Mr. Li entered into an employment agreement with Foshan to
serve as our President and Chief Executive Officer. Under the agreement, Mr. Li
is to be paid a salary of $15,000 per month beginning on the closing date of the
public offering. The agreement can be terminated by either party by giving 30
days notice.
62
On
January 1, 2010, Mr. Law entered into an employment agreement with Foshan
to serve as our President of Sales. Under the agreement, Mr. Law is to be
paid a salary of $5,000 per month beginning on the closing date of the public
offering. The agreement can be terminated by either party by giving 30 days
notice.
Effective
August 5, 2010, Mr. Gan entered into an employment agreement with the
Company to serve as Chief Financial Officer. The term is for three years
unless sooner terminated as provided in the agreement. Under the agreement
Mr. Gan has agreed to perform such duties as shall be consistent with the
position of Chief Financial Officer subject to the supervision and direction of
the Board. Under the agreement Mr. Gan will receive an annual salary of
$120,000 payable in 12 equal payments payable on the 15th day of each month
beginning on August 15, 2010). However, prior to the completion of our
planned public offering, Mr. Gan will receive a salary of $6,000 per
month (receiving $10,000 for the month during which the Company completes its
initial public offering and thereafter). In addition to his annual salary,
Mr. Gan will be reimbursed for all reasonable expenses including travel expense
between United States and China and will be provided with housing expense during
the term of his employment. In addition, on September 3, 2010, Mr. Gan was
granted an option to purchase up to 400,000 shares of common stock at an
exercise price equal to the initial public offering price. The option
shall vest and be exercisable as follows; 160,000 shares will vest and become
exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on
July 31, 2012; 120,000 shares will vest and become exercisable on July 31,
2013. In the event that the employment is terminated within 12 months from
the employment agreement date by the Company without cause, 160,000 shares shall
be vested immediately on the termination date.
2010
Stock Incentive Plan
On
September 3, 2010, we adopted the 2010 Plan. All officers and key
employees, directors of, and consultants to the Company and its subsidiaries and
affiliates, who are responsible for or contribute to the management, growth
and/or profitability of the business of the Company and/or its subsidiaries and
affiliates are eligible for participation in the 2010 Plan. Two Million
One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) (or such number
as shall be equal to 10% of the outstanding shares on a fully diluted basis
after our proposed public offering and the conversion of the notes) shares of
common stock have been authorized and reserved for the 2010 Plan and any shares
that may become available for issuance under awards under the 2010 Plan as a
result of expiration or forfeiture. Under the 2010 Plan, the company may
issue stock options, stock appreciation rights, restricted stock awards,
restricted stock units, performance awards and other stock-based awards.
The 2010 Plan is administered by our Compensation Committee.
The
purpose of the 2010 Plan is to enhance the profitability and value of the
Company for the benefit of its stockholders by enabling the Company to offer
eligible participants stock-based incentives in the Company to attract and
retain such individuals and strengthen the mutuality of interests between such
individuals and the Company’s stockholders.
The
Compensation Committee does not currently have a set formula for determining who
will receive awards and what the amounts of the awards will be and when such
awards will be made. The Compensation Committee can make an award in its
discretion at any time as consistent with the terms of the 2010 Plan. Long-term
equity incentives are intended to reward and will be awarded to eligible
participants who help achieve our overall corporate goals and meet their
individual employee objectives.
Outstanding
Equity Awards
On
September 3, 2010, as required by the terms of his agreement with the Company
entered into in May 2010, the Board awarded Richard Cohen 30,000 shares of
restricted stock, two-thirds of which are subject to restrictions on transfer
and are subject to forfeiture, with the restrictions lapsing as to one-third of
the shares on the first anniversary of the date of grant, and as to one-third on
the second anniversary of the date of grant in the event Mr. Cohen continues to
be a director on those dates.
63
On
September 3, 2010, under the 2010 Plan and in connection with his appointment as
Chief Financial Officer, the Board granted Eric Gan an option to purchase
400,000 shares at an exercise price equal to the public offering price of the
offering. The option vests and is exercisable as follows; 160,000 shares
will vest and become exercisable on July 31, 2011; 120,000 shares will vest and
become exercisable on July 31, 2012; 120,000 shares will vest and become
exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the Company
without cause, 160,000 shares shall be vested immediately on the termination
date.
Except
for the foregoing there are no option exercises, options outstanding or
restricted stock grants as of the date of this report.
Compensation
of Directors
The table
below sets forth the compensation of the directors during the last completed
fiscal year:
DIRECTOR COMPENSATION
|
||||||||||||||||||||||||||||
Name
(a)
|
Fees
Earned
or
Paid in
Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-Equity
Incentive
Plan
Compensation
($)
(e)
|
Nonqualified
Deferred
Compensation
Earnings
($)
(f)
|
All
Other
Compensation
($)
(g)
|
Total
($)
(h)
|
|||||||||||||||||||||
Law
Wawai
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||
Chris
Bickel
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||
Li
Jun
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||
Richard
M. Cohen (1)
|
-0-
|
180,000
|
-0-
|
-0-
|
-0-
|
-0-
|
180,000
|
|||||||||||||||||||||
Su
Lei
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1) In
May 2010, we entered into a director’s agreement with Richard M. Cohen, which
agreement was effective with his election to the Board. Under the terms of
that agreement, Mr. Cohen is required to be paid an annual retainer of $24,000
for serving as a director (with $2,000 payable at the beginning of each
month). Under an oral agreement Mr. Cohen has agreed with us that the
payment of the monthly retainer will commence on closing of our planned public
offering. We have not made any payments of this retainer as of the
date of this report. In addition, pursuant to the 2010
Plan, on September 3, 2010, Mr. Cohen was granted 30,000 restricted
shares, two-thirds of which are subject to restrictions on transfer and to
forfeiture, with the restrictions lapsing as to one-third of the shares, on the
first anniversary of the date of grant, and as to one-third, on the second
anniversary of the date of grant in the event Mr. Cohen continues to be a
director on those dates. In addition, the Company will reimburse Mr. Cohen
for pre-approved reasonable business-related expenses incurred in good faith in
the performance of the director’s duties for the Company. The amount in the
table above under “Option Awards” represents the grant date fair value of the
award computed in accordance with Accounting Standards Codification, or ASC,
Topic 718.
Except as
set forth above as of the date of this report, we have no formal or informal
arrangements or agreements to compensate our directors for services they provide
as directors. We plan to implement a compensation program for our
independent directors, as and when they are appointed, which we anticipate will
include such elements as an annual retainer, meeting attendance fees and stock
options. The details of that compensation program will be negotiated with each
independent director.
None of
the directors of Foshan, our PRC-based operating company, are presently being
compensated for their service as directors.
Li Jun,
our director, is an officer and controlling stockholder of United Best, our
foreign advisor. See section entitled “Certain Relationships and Related
Transactions and Director Independence” beginning on page 67.
64
Additional
Narrative Disclosure
We have
no plans that provide for the payment of retirement benefits, or benefits that
will be paid primarily following retirement, including, but not limited to, tax
qualified defined benefit plans, supplemental executive retirement plans, tax
qualified defined contribution plans and non-qualified defined contribution
plans.
There are
no contracts, agreements, plans or arrangements, whether written or oral, that
provide for payment to a named executive officer at, following, or in connection
with the resignation, retirement or other termination of a named executive
officer or a change in control of the company or a change in the executive
officers responsibilities following a change in control, with respect to each
named executive officer.
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
The
following table sets forth, as of the close of business on December 26, 2010,
certain information with respect to the beneficial ownership of our common
stock, by (i) each stockholder whom we know to own beneficially more than 5% of
our common stock, (ii) each director, (iii) our chief executive officer and each
other executive officer whose cash compensation for the most recent fiscal year
exceeded $100,000 and (iv) all executive officers and directors as a
group. The table reflects the ownership of our equity securities by the
foregoing parties after the 1-for-5 reverse stock split which occurred on March
24, 2010.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose of or direct the disposition of) with respect to
the security through any contract, arrangement, understanding, relationship or
otherwise, subject to community property laws where applicable. Except as
indicated below, and subject to applicable community property laws, the persons
named in the table below have sole voting and investment power with respect to
our common stock shown as beneficially owned by them. A shareholder is also
deemed to be, as of any date, the beneficial owner of all securities that such
shareholder has the right to acquire within 60 days after that date through (1)
the exercise of any option, warrant or right, (2) the conversion of a security,
(3) the power to revoke a trust, discretionary account or similar arrangement,
or (4) the automatic termination of a trust, discretionary account or similar
arrangement.
In
determining beneficial ownership of the common stock, the number of shares shown
includes shares which the beneficial owner may acquire within 60 days of
December 26, 2010 upon exercise of convertible securities, warrants or options.
In accordance with Rule 13d-3 in determining the percentage of common stock
owned by a person on December 26, 2010 (a) the numerator is the number of shares
of the class beneficially owned by such person, including shares which the
beneficial owner may acquire within 60 days upon conversion or exercise of the
warrants and other convertible securities, and (b) the denominator is the sum of
(i) the total shares of that class outstanding on December 26, 2010, and (ii)
the total number of shares that the beneficial owner may acquire upon conversion
or exercise of other securities. Unless otherwise stated, each beneficial owner
has sole power to vote and dispose of the shares.
As of the
close of business on December 26, 2010, there were 15,265,714 shares of our
common stock outstanding.
Unless
otherwise indicated, the address for each listed stockholder is: c/o China SLP
Filtration Technology, Inc., Shishan Industrial Park, Nanhai District, Foshan
City, Guangdong Province PRC.
65
Owners
of More Than 5% Of Class
|
Number
|
Percent
|
||||||
Bestyield
Group Limited (1)
|
4,353,061
|
28.6
|
%
|
|||||
Proudlead
Limited (2)
|
4,353,061
|
28.6
|
%
|
|||||
Li
Jun (3)
|
2,202,268
|
14.33
|
%
|
|||||
Newise
Holdings (4)
|
1,547,756
|
10.2
|
%
|
|||||
Pilot
Link International Limited (5)
|
1,668,673
|
11
|
%
|
|||||
High
Swift Limited (6)
|
1,088,265
|
7.1
|
%
|
|||||
Primary
Capital, LLC (7)
|
1,328,389
|
8.6
|
%
|
|||||
Directors
and Executive Officers
|
||||||||
Li
Jie (Chief Executive Officer and a Director) (1)
|
4,353,061
|
28.6
|
%
|
|||||
Law
Wawai (President of Sales and a Director) (2)
|
4,353,061
|
28.6
|
%
|
|||||
Eric
Gan (Chief Financial Officer) (10)
|
-
|
-
|
%
|
|||||
Li
Jun (Director) (3)
|
2,202,268
|
14.33
|
%
|
|||||
Richard
M. Cohen (Director) (9)
|
30,000
|
*
|
||||||
Chris
Bickel (Director) (8)
|
-
|
-
|
||||||
Su
Lie (Director)
|
-
|
-
|
||||||
Directors
and executive officers as a group (8 persons)
|
10,9138,390
|
71.523
|
%
|
* Less than 1%.
(1)
Bestyield Group is a BVI company controlled by Mr. Li Jie, our chief executive
officer. Its address is PO Box 957 Offshore Incorporations Center, Road Town,
Tortola, British Virgin Islands. Mr. Li has sole voting power with respect to
the shares. Bestyield has guaranteed our obligations to the investors under our
outstanding convertible notes issued in February 2010. All of these shares have
been pledged to secure the performance of that guaranty.
(2) Proudlead
is a BVI company controlled by Law Wawai, president of sales and a
director. Its address is PO Box 957 Offshore Incorporations Center, Road
Town, Tortola, British Virgin Islands. Mr. Law has sole voting power
with respect to the shares. Proudlead has guaranteed our obligations to the
investors under our outstanding convertible notes issued in February 2010. All
of these shares have been pledged to secure the performance of that
guaranty.
(3)
Represents 1,547,756 shares held by Newise Holdings, a BVI company controlled by
Li Jun, one of our directors. Its address is PO Box 957 Offshore Incorporations
Center, Road Town, Tortola, British Virgin Islands. Mr. Li has sole voting and
dispositive power with respect to the shares held by Newise Holdings. In
addition, under the terms of an agreement between Foshan and United Best, a
company controlled by Mr. Li, United Best received, as a transaction fee
following the closing of the financing, 362,755 shares of our common stock. On
closing of the offering United Best is also entitled to receive an additional
193,186 shares of common stock and a warrant to purchase 98,571 shares at an
exercise price of $2.10 per share (based on an assumed public offering price of
$6.00). Mr. Li has sole voting and dispositive power with respect to the shares
held by United Best.
(4)
Represents 1,547,756 shares held by Newise Holdings, a BVI company controlled by
Li Jun, one of our directors. Its address is PO Box 957 Offshore Incorporations
Center, Road Town, Tortola, British Virgin Islands. Mr. Li has sole voting and
dispositive power with respect to the shares held by Newise
Holdings.
(5) Pilot
Link International is a BVI company controlled by Li Shiyi and Wei Yang, PRC
residents. Its address is PO Box 957 Offshore Incorporations Center, Road
Town, Tortola, British Virgin Islands. Li Shiyi and Wei Yang have shared
voting and dispositive power with respect to the shares.
(6) High
Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC resident.
Its address is PO Box 957 Offshore Incorporations Center, Road Town,
Tortola, British Virgin Islands. Mr. Han has sole voting power and
dispositive with respect to the shares.
66
(7) Primary
Capital received, at the closing of the share exchange
agreement, 290,755 shares of common stock and in February 2010 Primary
Capital purchased 673,877 shares from Newise Holdings. On closing of our
planned public offering Primary Capital is also entitled to receive an
additional 265,186 shares of common stock and a warrant to purchase 98,571
shares at an exercise price of $2.10 per share (based on an assumed public
offering price of $6.00). John Leo has sole voting and dispositive power
with respect to the shares held by Primary Capital. Primary Capital’s
address is 80 Wall Street, 5th Floor, New York, New York 10005.
(8) Chris
Bickel is President of Primary Capital. Mr. Bickel does not have voting or
dispositive power over the shares held by Primary Capital. Mr. Bickel’s business
address is 80 Wall Street, 5th Floor, New York, New York 10005.
(9) Richard
M. Cohen is a director of the Company, and his business address is 3 Park
Avenue, 16th Floor, New York, New York 10016. In May 2010, we
entered into a director’s agreement with Richard M. Cohen, which agreement was
effective with his election to the Board. Under the terms of that
agreement Mr. Cohen on September 3, 2010 was granted 30,000 restricted shares,
two-thirds of which are subject to restrictions on transfer and are subject to
forfeiture, with the restrictions lapsing as to one-third of the shares on the
first anniversary of the date of grant, and as to one-third on the second
anniversary of the date of grant, in the event Mr. Cohen continues to be a
director on those dates.
(10) On
September 3, 2010 Mr. Gan was granted an option to purchase 400,000 shares
of common stock at an exercise price equal to the public offering price.
The option vests and is exercisable as follows; 160,000 shares will vest and
become exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on
July 31, 2013. In the event that the employment is terminated within
12 months from the employment agreement date by the Company without cause,
160,000 shares shall be vested immediately on the termination date. As the
option is not currently exercisable none of the shares underlying the option are
included in the table.
Item 13.
|
Certain Relationships and Related
Transactions, and Director
Independence
|
Except as
set forth below, since October 1, 2007, the Company was not a party to
any transaction (where the amount involved exceeded the lesser of $120,000 or 1%
of the average of our assets for the last two fiscal years) in which an
director, executive officer, holder of more than five percent of our common
stock, or any member of the immediate family of any such person have or will
have a direct or indirect material interest and no such transactions are
currently proposed.
Primary
Capital is a beneficial owner of more than 5% of our common stock.
Mr. Bickel is also the President of Primary Capital. Chris Bickel is
a director of our company serving as a designee of Primary
Capital.
Primary
Capital provided financial services in connection with the private placement and
reverse merger which closed on February 12, 2010. The services provided
and to be provided by Primary Capital include the following:
|
·
|
assisting the Company in
preparing a detailed business plan, financial model and power point
presentation;
|
|
·
|
negotiating and structuring the
reverse merger;
|
|
·
|
acting as placement agent for the
February 12, 2010 note
financing;
|
|
·
|
recommending to the Company a
qualified auditor, securities attorney and investor relations firm, and
assisting the Company with negotiating the terms of their respective
engagements;
|
|
·
|
advising the Company on
strategies to increase shareholder
value;
|
|
·
|
assisting the Company and its
investor relations firm in organizing, and participating with the Company
in, investor road shows and investor conference
calls;
|
|
·
|
recommending investor conferences
in the US and Europe to be attended by the Company and
a representative of Primary
Capital;
|
67
|
·
|
identifying strategic
relationships and joint venture
partners;
|
|
·
|
identifying and recommending
persons to serve on the Company’s Board of
Directors;
|
|
·
|
identifying and rendering advice
regarding potential acquisitions, including the valuation of the
acquisition and financing for the
acquisition;
|
|
·
|
assisting the Company in
connection with its listing on a U.S. stock
exchange;
|
|
·
|
reviewing and commenting on the
Company’s SEC filings associated with the Company’s transactions;
and
|
|
·
|
advising Company regarding its
obligations as a U.S. public
company.
|
United
Best, our foreign advisor controlled by Mr. Li Jun, one of our directors,
provided financial services in connection with our reverse merger with Hong Hui
completed on February 12, 2010. These services included advising the
company on structuring the reverse merger, assisting the company in retaining
service providers such as accountants, PRC and US attorneys to effect the
reverse merger and working with those service providers to facilitate the
completion of the reverse merger. Additionally, United Best will assist the
Company with on-going communications and coordinating the relationships with
service providers during the NASDAQ listing process.
Under the
terms of a financial services agreement between Primary Capital and the company,
Primary Capital was paid a commission of $202,000 at the closing of the February
2010 private financing. Primary Capital is also owed an additional $75,000 for
services rendered in connection with the private placement. Primary
Capital is also entitled to receive $15,000 on completion of our proposed public
offering and $15,000 for the next succeeding seven calendar quarters for an
aggregate amount of $120,000.
At the
closing of the private financing, Primary Capital received 290,755 shares of our
common stock. Primary is also entitled to receive 265,186 shares of common
stock on the closing of our planned public offering.
In
addition, for providing these financial services Primary Capital is
entitled to receive, on conversion of the notes issued to the investors in the
February 2010 private placement (which occurs upon consummation of our planned
public offering), a five-year warrant to purchase 98,571 shares of
common stock (which number is equal to 5% of the 1,971,428 number
of shares of common stock issued to the noteholders on conversion),
exercisable at $2.10 (which equals the price at which the notes converted and
assumes an initial public offering price of $6.00 per share). Unlike the
investor warrants, these warrants will not terminate but instead become
exercisable upon conversion of the notes and consummation of our planned public
offering. If the note conversion does not occur, Primary Capital will
receive a five-year warrant to purchase that number of shares of common stock
equal to 5% of the common stock underlying the warrants issued to the investors
in the private financing exercisable at the same price at which those investor
warrants are exercisable.
Li Jun is
a director and is a beneficial owner of more than 5% of our common stock.
Mr. Li is an officer and controlling stockholder of United Best, our foreign
advisor, and provided financial services in connection with the private
financing.
Under the
terms of a consulting agreement between United Best and the company, United
Best was paid a commission of $202,000 at the closing of the financing. United
Best is also owed an additional $75,000 for services rendered in connection with
the financing. Additionally, under the consulting agreement, as amended,
United Best is entitled to be paid on completion of the offering a success fee
of $750,000 (which represents 3% of the $25,000,000 in gross proceeds expected
to be received by us in connection with the underwritten offering, assuming an
initial public offering price of $6.00 per share).
At the
closing of the private financing, United Best received 362,755 shares of our
common stock for their services. United Best is also entitled to receive
an additional 193,186 shares on closing of our planned public
offering.
68
In
addition, as partial consideration for providing these financial services,
United Best is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which occurs upon consummation
of the offering), a five-year warrant to purchase 98,571 shares of
common stock (which represents 5% of the number of common stock issued
to the note holders on conversion), exercisable at the price of $2.10
per share (i.e. the price at which the notes converted based on the
assumed initial public offering price of $6.00 per share). Unlike the investor
warrants, these warrants will not terminate but instead become exercisable on
conversion of the notes and consummation of our planned public offering.
If the note conversion does not occur, United Best will receive a
five-year warrant to purchase that number of shares of common stock equal to 5%
of the common stock underlying the warrants issued to the investors in the
private financing exercisable at the same price at which those investor warrants
are exercisable.
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of the share
exchange agreement we issued and delivered to the Hong Hui stockholders a total
of 14,510,204 shares of our common stock in exchange for all of the outstanding
shares of Hong Hui. As shareholders of Hong Hui, (i) Bestyield Group, a
company controlled by Mr. Li, our chief executive officer, received 4,353,061
shares, (ii) Proudlead, a company controlled by Mr. Law,
our president of sales and a director, received 4,353,061 shares
and (iii) Newise Holdings, a company controlled by Mr. Li Jun one of
our directors received 2,321,633 shares.
Under a
limited recourse guaranty agreement dated as of February 12, 2010, Bestyield
Group and Proudlead agreed to guaranty the company’s obligations under the notes
issued in the February 2010 private placement. That guaranty is secured by
a pledge of the 8,706,122 shares of common stock received by them in the reverse
merger
In each
of June 2007 and in February 2008 and May 2008, Joseph Nemelka, a former officer
and director, advanced funds to the company in the total aggregate amount of
$15,000. The advances were due on demand and bore interest at 8% per
annum. This indebtedness was forgiven in February 2010 prior to the
reverse merger. In addition, Mr. Nemelka purchased a convertible promissory note
in the aggregate principal amount of $100,000 in the February private
placement.
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be reported
under applicable SEC rules. We have not adopted other procedures for review, or
standards for approval, of such transactions, but instead review them on a
case-by-case basis.
Except
for the foregoing, no executive officer, director or any member of these
individuals’ immediate families, any corporation or organization with whom any
of these individuals is an affiliate or any trust or estate in which any of
these individuals serve as a trustee or in a similar capacity or has a
substantial beneficial interest in is or has been indebted to the Company at any
time since the beginning of the Company’s last fiscal year.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal
years.
Director
Independence
The Board
has determined that three of its six current members, namely Messrs. Chris
Bickel, Su Lie and Richard M. Cohen, are “independent” within the meaning of
NASDAQ listing standards.
Item 14.
|
Principal Accounting Fees and
Services
|
Child,
Van Wagoner & Bradshaw, PLLC, Certified Public Accountants, have audited our
consolidated balance sheets as of September 30, 2010 and September 30, 2009 and
the consolidated statements of income, changes in shareholders’ (deficit) equity
and cash flows for the years ended September 30, 2010
and September 30, 2009 as stated in their report appearing in this
Annual Report on Form 10-K. Child, Van Wagoner &
Bradshaw, PLLC has been the auditor of the Company since Oct
2008.
69
Fee Category
|
Fiscal 2010
|
Fiscal 2009
|
||||||
Audit
Fees (1)
|
$ | 114,500 | $ | 165,000 | ||||
Audit-Related
Fees (2)
|
$ | - | $ | - | ||||
Tax
Fees
|
$ | 4,750- | $ | - | ||||
All
Other Fees
|
$ | - | $ | - | ||||
TOTAL
|
$ | 119,250 | $ | 165,000 |
(1) Audit
fees consisted of fees for the audit of our annual financial statements and
review of quarterly financial statements as well as services normally provided
in connection with statutory and regulatory filings or engagements, comfort
letters, consents and assistance with and review of company documents filed with
the SEC.
(2) There
were no audit related fees other than those set forth above.
Policy
for Pre-Approval of Audit and Non-Audit Services
The
auditor did not provide any non-audit services which could compromise its
independence.
The
Board’s policy is to pre-approve all non-audit services proposed to be provided
by Child, Van Wagoner & Bradshaw, PLLC. The policy restricts the type
of non-audit services that the auditors may provide to our subsidiaries and us.
It includes a mechanism for the consideration and pre-approval by
the Board of all services to be provided by the auditors as well as the
associated fees.
70
PART
IV
Item
15. Exhibits, Financial Statement
Schedules
(a) The
following documents are filed as part of this Report:
1. Financial
Statements.
Incorporated
by reference from the financial statements and notes thereto that are included
in a separate section of this report. See “Index to Consolidated Financial
Statements” on Page F-1.
2. Financial Statement
Schedules.
All
schedules have been omitted because they are not applicable or not required, or
the information is included in the Consolidated Financial Statements or Notes
thereto.
(b) Exhibits.
The
exhibits listed on the accompanying index to exhibits immediately following the
financial statements are filed as part of, or hereby incorporated by reference
into, this Report.
71
CHINA SLP FILTRATION
TECHNOLOGY, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
|
PAGES
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-3
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
F-4
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-5
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-6
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-7
|
|
F-1
F-2
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
BALANCE SHEETS
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 5,295,301 | $ | 3,297,648 | ||||
Accounts
receivable – Net
|
2,207,073 | 1,424,835 | ||||||
Advance
to suppliers
|
- | 685,551 | ||||||
Inventory
|
1,564,537 | 1,197,289 | ||||||
Prepaid
expenses and other current assets
|
585,385 | 45,656 | ||||||
Total
Current Assets
|
9,652,296 | 6,650,979 | ||||||
Deposits
|
4,906,370 | - | ||||||
Property
and equipment – Net
|
10,961,234 | 10,711,865 | ||||||
Receivable
from related party
|
- | 773,672 | ||||||
Land
use rights – Net
|
535,480 | 537,350 | ||||||
Total
Assets
|
$ | 26,055,380 | $ | 18,673,866 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Short
term loan
|
$ | 3,796,053 | $ | 4,578,409 | ||||
Accounts
payable and accrued liabilities
|
742,384 | 410,114 | ||||||
Clients'
deposits
|
286,700 | 75,176 | ||||||
Other
payable - related party
|
160,673 | - | ||||||
Taxes
payable
|
31,406 | 726 | ||||||
Warrants
liabilities
|
739,000 | - | ||||||
Convertible
notes payable $4,140,000, net of discount
|
3,225,007 | - | ||||||
Total
Current Liabilities
|
8,981,223 | 5,064,425 | ||||||
Total
Liabilities
|
8,981,223 | 5,064,425 | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 authorized, 0 share issued and
outstanding; common stock, $0.001 par value, 40,000,000 shares authorized,
15,265,714 and 14,510,204 shares issued and outstanding at September 30,
2010 and September 30, 2009
|
15,266 | 14,510 | ||||||
Additional
paid-in capital
|
8,375,860 | 7,548,752 | ||||||
Retained
earnings
|
6,721,609 | 4,500,532 | ||||||
Accumulated
other comprehensive income
|
1,961,422 | 1,545,647 | ||||||
Total
Stockholders' Equity
|
17,074,157 | 13,609,441 | ||||||
Total
Liabilities and Stockholder's Equity
|
$ | 26,055,380 | $ | 18,673,866 |
See the
accompanying notes to consolidated financial statements
F-3
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended September 30,
|
||||||||||
2010
|
2009
|
|||||||||
Net
Sales
|
$ | 19,952,422 | $ | 11,849,712 | ||||||
Cost
of Sales
|
13,772,843 | 7,296,327 | ||||||||
Cost
of Sales - Related Party
|
- | 610,287 | ||||||||
Gross
Profit
|
6,179,579 | 3,943,098 | ||||||||
Selling,
General and Administration Expenses
|
2,286,066 | 1,219,114 | ||||||||
Bad
Debt (Recovery) Expense
|
(13,185 | ) | 11,497 | |||||||
Income
from Operations
|
3,906,698 | 2,712,487 | ||||||||
Other
Income (expense)
|
||||||||||
Interest
Income
|
14,341 | 3,014 | ||||||||
Interest
Expense
|
(1,988,832 | ) | (269,849 | ) | ||||||
Loss
on Disposal of Fixed Assets
|
(107 | ) | - | |||||||
Changes
in Fair Value of Warrants
|
313,000 | - | ||||||||
Total
Other Income (expenses)
|
(1,661,598 | ) | (266,835 | ) | ||||||
Income
before Income Taxes
|
2,245,100 | 2,445,652 | ||||||||
Income
Tax Provision
|
24,023 | - | ||||||||
Net
Income
|
$ | 2,221,077 | $ | 2,445,652 | ||||||
Other
Comprehensive Income:
|
||||||||||
Foreign
Currency Translation Adjustments
|
415,775 | (57,078 | ) | |||||||
Total
Comprehensive Income
|
$ | 2,636,852 | $ | 2,388,574 | ||||||
Net
Income Per Common Share:
|
||||||||||
Basic
|
$ | 0.15 | $ | 0.17 | ||||||
Diluted
|
$ | 0.15 | $ | 0.17 | ||||||
Weighted-Average
Common Shares Outstanding:
|
||||||||||
Basic
|
14,979,390 | 14,510,204 | ||||||||
Diluted
|
16,227,061 | 14,510,204 |
See
accompanying notes to consolidated financial statements
F-4
CHINA
SLP FILTRATION TECHNOLOGY, INC.
Consolidated
Statements of Changes in Stockholders’ Equity
Accumulated
|
||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings (Deficit)
|
Income
|
Equity
|
|||||||||||||||||||
BALANCE,
September 30, 2008
|
14,510,204 | $ | 14,510 | $ | 7,548,752 | $ | 2,054,880 | $ | 1,602,725 | $ | 11,220,867 | |||||||||||||
Net
Income
|
- | - | - | 2,445,652 | - | 2,445,652 | ||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | (57,078 | ) | (57,078 | ) | ||||||||||||||||
BALANCE,
September 30, 2009
|
14,510,204 | $ | 14,510 | $ | 7,548,752 | $ | 4,500,532 | $ | 1,545,647 | $ | 13,609,441 | |||||||||||||
Shares
effectively issued to former shareholders - 2/12/2010
|
2,600,000 | 2,600 | (2,600 | ) | - | - | - | |||||||||||||||||
Cancellation
of stock in recapitalization
|
(2,528,000 | ) | (2,528 | ) | 2,528 | - | - | - | ||||||||||||||||
Common
stock issued to placement agents in conjunction with convertible
note
|
653,510 | 654 | 656,902 | - | - | 657,556 | ||||||||||||||||||
Restricted
common stock issued –
compensation
|
30,000 | 30 | 79,968 | - | - | 79,998 | ||||||||||||||||||
Employee
stock options
|
90,310 | - | - | 90,310 | ||||||||||||||||||||
Net
Income
|
- | - | - | 2,221,077 | - | 2,221,077 | ||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | 415,775 | 415,775 | ||||||||||||||||||
BALANCE,
September 30, 2010
|
15,265,714 | $ | 15,266 | $ | 8,375,860 | $ | 6,721,609 | $ | 1,961,422 | $ | 17,074,157 |
See
accompanying notes to consolidated financial statements
F-5
Year Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flow from Operating Activities:
|
||||||||
Net
income
|
$ | 2,221,077 | $ | 2,445,652 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
flow
provided by (used in) operating activities:
|
||||||||
Depreciation
|
1,166,260 | 929,995 | ||||||
Amortization
|
12,499 | 12,458 | ||||||
Bad
debt allowance
|
(13,185 | ) | 11,497 | |||||
Non-cash
interest charges
|
1,524,750 | - | ||||||
Non-cash
equity-based expense
|
170,308 | - | ||||||
Changes
in warrants valuation
|
(313,000 | ) | - | |||||
Interest
capitalized to CIP
|
(13,177 | ) | - | |||||
Loss(gain)
from disposal of fixed assets
|
107 | - | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(726,921 | ) | (477,736 | ) | ||||
Advance
to suppliers
|
687,009 | (289,192 | ) | |||||
Advance
to suppliers - related parties
|
- | 610,287 | ||||||
Inventory
|
(336,983 | ) | (354,825 | ) | ||||
Prepaid
expenses and other current assets
|
(529,261 | ) | 326,225 | |||||
Accounts
payable & accrued liabilities
|
325,798 | (466,410 | ) | |||||
Clients'
deposits
|
206,285 | (18,383 | ) | |||||
Taxes
payable
|
30,123 | (29,406 | ) | |||||
Net
cash provided by (used in) operating activities
|
4,411,689 | 2,700,162 | ||||||
Cash
Flow from Investing Activities:
|
||||||||
Addition-property,
equipment, and land use rights
|
(1,185,582 | ) | (844,419 | ) | ||||
Payments
to related parties receivable
|
- | (313,614 | ) | |||||
Deposits
for purchase of equipment
|
(4,819,447 | ) | - | |||||
Proceeds
from disposal of fixed assets
|
- | - | ||||||
Proceeds
from related party receivable
|
774,466 | - | ||||||
Net
cash (used in) provided by investing activities
|
(5,230,563 | ) | (1,158,033 | ) | ||||
Cash
Flow from Financing Activities:
|
||||||||
Repayment
of loans
|
(859,346 | ) | (600,498 | ) | ||||
Due
to related parties payable
|
157,827 | - | ||||||
Proceeds
from notes issued
|
3,409,813 | - | ||||||
Net
cash provided by (used) in financing activities
|
2,708,294 | (600,498 | ) | |||||
Effects
of Exchange Rates on Cash
|
108,233 | (11,553 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
1,997,653 | 930,078 | ||||||
Cash
and cash equivalents, beginning of year
|
3,297,648 | 2,367,570 | ||||||
Cash
and cash equivalents, end of year
|
$ | 5,295,301 | $ | 3,297,648 | ||||
Supplemental
information of cash flows
|
||||||||
Cash
paid for interest
|
$ | 478,111 | $ | 269,849 | ||||
Cash
paid for income taxes
|
$ | 24,023 | $ | - |
See
accompanying notes to consolidated financial statements
F-6
CHINA SLP FILTRATION
TECHNOLOGY, INC.
1.
|
Nature
of Business and Organization
History
|
China SLP
Filtration Technology, Inc., formerly named Perpetual Technologies, Inc. (the
“Company”, or ”We”) was incorporated under the laws of the State of Delaware in
March 2007. Prior to a reverse merger completed on February 12, 2010, we had no
operations or substantial assets.
Hong Hui
Holdings Limited (“Hong Hui”) was formed in January 2010 in the territory of the
British Virgin Islands as a holding company by the shareholders of Technic
International Inc. (“Technic”). Upon the formation, each shareholder transferred
their ownership of Technic to Hong Hui. As a result of this transaction, Technic
became a wholly-foreign owned enterprise under PRC law. This acquisition was
accounted for as a transfer of entities under common control.
Technic
International Ltd. (“Technic”) was incorporated in September 2005 under the laws
of Hong Kong as a holding company that owns 100% equity interest of Nanhai
Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong
Province, the People’s Republic of China (“China”). Jin Long was established in
the year 2000 under the laws of China. In September 2005, Jin Long became the
wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its
name to Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”).
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of the
share exchange agreement we issued and delivered to the Hong Hui stockholders a
total of 14,510,204 (72,551,020 pre-split) shares of our common stock in
exchange for all of the outstanding shares of Hong Hui. As a result of the
share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary.
The transaction is accounted for as a reverse acquisition, except that no
goodwill or other intangible should be recorded. The recapitalization is
considered to be a capital transaction in substance, rather than a business
combination.
On March
24, 2010 the Company effected a 1 for 5 reverse stock split of its outstanding
common stock. The effect of the reverse split is retrospectively shown in all
periods presented.
Through
operation of Foshan, we engage in manufacturing, marketing and sale, research
and development of polyester spun-bonded nonwoven fabrics, polyester
needle-punch nonwovens, spun-laced nonwovens, polylactic acid nonwovens, and
special functions nonwovens ( flame retardant, anti-static, oil & water
repellent, etc).
2.
|
Basis
of Presentation and Principles of
Consolidation
|
The
accompanying consolidated balance sheets as of September 30, 2010 and as of
September 30, 2009, the consolidated statements of income and comprehensive
income for the years ended September 30, 2010 and 2009, the consolidated
statements of cash flow for the years ended September 30, 2010 and 2009, and the
consolidated statements of changes in stockholders’ equity for the same
periods are prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). This basis differs from that used
in the statutory accounts of our subsidiary in China, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises in China. All necessary adjustments have been made to
present the consolidated financial statements in accordance with U.S.
GAAP.
F-7
3.
|
Summary
of Significant Accounting Policies
|
Principles
of consolidation
The
consolidated financial statements include all accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions are eliminated
in the consolidation.
Use
of estimates
Preparing
financial statements requires management to make estimates and assumptions that
affect the reporting amounts of assets, liabilities, revenue and expenses
reported. Examples include estimates of valuation of accounts receivable,
inventories, useful life of property and equipment, and derivative liabilities.
Actual results and outcomes may differ from those estimates.
Cash
and cash equivalents
Cash and
cash equivalents include cash on hand and demand deposits held by banks. As of
September 30, 2010, 99% of the cash and cash equivalents were placed with banks
in China, which is uninsured. The remittance of these funds out of China is
subject to exchange control restrictions imposed by the Chinese
government.
Allowance
for doubtful accounts
The
allowance for doubtful accounts reflects our best estimate of probable losses
inherent in the accounts receivable balance. We determine the allowance based on
known trouble accounts, historical experience, and other currently available
evidence.
Inventory
Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market, using the average cost method. Cost includes
materials, labor, and manufacturing overhead related to the purchase and
production commitments with our suppliers, and the estimated utility of our
inventory. If our review indicates any obsolete or idle inventory or a reduction
in utility below carrying value, we reduce our inventory to a new cost
basis.
Property
and equipment
Property
and equipment is stated at cost and depreciated using the straight-line method
over the estimated life of the assets, ranging from 5 to 20 years. The annual
depreciation rates are as follows:
Building
and plant
|
20
years
|
Machinery
|
10
years
|
Office
equipment and computers
|
5
years
|
Vehicles
|
10
years
|
Capitalized
Interest
Capitalized
interest is recorded in property and equipment for construction-in-progress
using the average interest rate over the construction
period. Capitalized interest for the year ended September 30, 2010
was $13,414. During fiscal year 2009, no interest was capitalized.
Land
use rights
According
to the laws of China, the government owns all of the land in China. Companies or
individuals are authorized to use the land only through land use rights granted
by the Chinese government. Accordingly, the Company paid in advance for land use
rights. Prepaid land use rights are being amortized and recorded as amortization
expenses using the straight-line method over the use terms of the lease, which
is 50 years.
Construction
in progress
Construction
in progress represents the cost of constructing buildings and manufacturing
facilities for the new Polyphenylene sulfide (“PPS”) nonwoven fabric production
line. The major cost includes materials, labor and overhead.
Intangible
assets
The
Company adopted the provisions of FASB ASC 350 Intangibles – Goodwill and Other
Assets. Goodwill and indefinite lived intangible assets are not amortized, but
are reviewed annually for impairment, or more frequently, if indications of
possible impairment exist. The Company has no indefinite lived intangible
assets.
F-8
Impairment
of long-lived assets
Long-lived
assets are tested for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cash flows
attributable to such assets. During the reporting periods, the Company has not
identified any indicators that would require testing for
impairment.
Revenue
recognition
Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are delivered to and accepted by its customers, the price is fixed or
determinable as stated on the sales contract, and collectability is reasonably
assured. Customers do not have a general right of return or warranty on
products shipped. There are no post-shipment obligations, price
protection, or bill and hold arrangements.
Product
development expenses
Product
development costs are expensed as incurred, and the Company expensed
approximately $185,000 and $200,000 in product development for 2010 and
2009.
Advertising
expenses
Advertising
costs are expensed as incurred. The Company incurred $14,339 and $5,679 in
advertising costs for the years ended September 30, 2010 and 2009.
Shipping
and handling costs
Shipping
and handling costs related to costs of raw materials purchased are included in
cost of sales. Shipping and handling amounts billed to customers in related sale
transactions are included in sales revenues.
The
out-bound freight expenses of $75,476 and $156,911 for 2010 and 2009,
respectively, are recorded in the Consolidated Statement of Operations and
Comprehensive Income as a component of selling, general, & administrative
expenses.
Accumulated
other comprehensive income
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Segment
reporting
ASC Topic
280, “Disclosure about Segments of an Enterprise and Related Information”
requires use of the management approach model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. Accordingly, the Company has reviewed its business
activities and determined that multiple segments do not exist to be
reported.
Fair
value of financial instruments
The
carrying amount of the Company’s cash and cash equivalents approximate their
fair value due to the short maturity of those instruments. The carrying amounts
of the Company’s receivables, short-term loans, payables and accrued liabilities
approximated their fair value as of the balance sheet dates due to their short
maturities and the interest rates currently available.
Reclassification
Certain
amounts in the 2010 financial statements have been reclassified to conform to
the 2009 financial statement presentation. Such reclassification had no
effect on net income.
Taxes
Income
taxes expense is based on reported income before income taxes. Deferred income
taxes reflect the effect of temporary differences between assets and liabilities
that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. In accordance with FASB ASC 740, these deferred taxes are
measured by applying currently enacted tax laws.
The
Company has implemented FASB ASC 740, which provides for a
liability approach to accounting for income taxes. Deferred income taxes result
from the effect of transactions that are recognized in different periods for
financial and tax reporting purposes. The Company had no material adjustments to
its liabilities for unrecognized income tax benefits according to the provisions
of FASB ASC 740.
Translation
of foreign currency
The
Company’s functional and reporting currency is the U.S. dollar (“$”). Our
subsidiaries in Hong Kong and China use Chinese Yuan Renminbi (“RMB”) as their
functional currency. The financial statements of these subsidiaries are
translated into U.S. dollars in accordance with FASB ASC topic 830, Foreign Currency Matters.
According to the topic, all assets and liabilities were translated at the
current exchange rate, stockholders’ equity are translated at the historical
rates and income statement items are translated at the average exchange rate for
the period. The resulting translation adjustments are reported under other
comprehensive income in accordance with FASB ASC 220, Comprehensive Income. Foreign exchange
transaction gains and losses are reflected in the income
statement. At the end of the fiscal year ended September 30, 2010,
the Company’s accumulated foreign currency translation adjustments presented
under other comprehensive income were $1,961,422.
Earnings
per share
Earnings
per share is computed by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding.
F-9
4.
Accounts Receivable
The
Company maintains allowance for potential credit losses on accounts receivable.
Management periodically analyzes the composition of the accounts receivable,
aging of the receivables and historical bad debt to evaluate the adequacy of the
reserve for uncollectible accounts.
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Accounts
receivable
|
$ | 2,231,281 | $ | 1,461,721 | ||||
Less:
Allowance for doubtful accounts
|
(24,208 | ) | (36,886 | ) | ||||
Accounts
receivable – Net
|
$ | 2,207,073 | $ | 1,424,835 |
As of
September 30, 2010 and September 30, 2009, customer accounts receivable balances
with significant percentages are as follows:
September 30, 2010
|
September 30, 2009
|
|||||||
Customers:
|
Percentage
|
Percentage
|
||||||
A
|
27.84 | % | 30.45 | % | ||||
B
|
6.2 | % | 13.01 | % | ||||
C
|
5.35 | % | 12.7 | % | ||||
Total
|
39.39 | % | 56.16 | % |
Three
customers individually accounted for 10% or more of the total gross accounts
receivable and together accounted for 56.16% of the total gross accounts
receivable at September 30, 2009. One customer’s account receivable exceeds 10%
and combined with two other customers whose accounts receivable is slightly
below 10% represent 39.39% of the total gross accounts receivable as of
September 30, 2010.
5.
Inventories
Inventory
consisted of the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 205,099 | $ | 40,126 | ||||
Work
in progress
|
39,828 | 50,443 | ||||||
Finished
goods
|
1,319,610 | 1,106,720 | ||||||
$ | 1,564,537 | $ | 1,197,289 |
F-10
6.
Property, plant and equipment
Property,
plant, and equipment are recorded at cost. Expenditures incurred for repairs and
maintenance are recorded as expense. Betterment, additions and renewals to
property, plant, and equipment are capitalized. When property, plant and
equipment are retired or disposed of, associated cost and accumulated
depreciation are removed, and gain or loss, if any, incurred from disposal is
included under other income or expense in the statement of
operations.
Property,
plant, and equipment consist of the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Building
and plant
|
$ | 2,767,897 | $ | 2,958,978 | ||||
Machinery
|
11,697,862 | 11,174,517 | ||||||
Office
equipment and other equipment
|
787,240 | 771,829 | ||||||
Vehicles
|
142,576 | 139,753 | ||||||
Construction
in progress
|
1,173,702 | - | ||||||
16,569,277 | 15,045,077 | |||||||
Less:
|
||||||||
Accumulated
depreciation
|
(5,608,043 | ) | (4,333,212 | ) | ||||
$ | 10,961,234 | $ | 10,711,865 |
Depreciation
expense is computed using straight-line method with estimated useful lives as
follows:
Building
and plant
|
20
years
|
Machinery
|
10
years
|
Office
equipment and other equipment
|
5
years
|
Vehicles
|
10
years
|
For the
years ended September 30, 2010 and September 30, 2009, depreciation expense of
$1,100,955 and $847,057 were included in cost of sales and $65,305 and $82,938
were included in selling, marketing, and administrative expenses, for a total of
$1,166,260 and $929,995 respectively.
F-11
7. Deposits
Deposits
were made as required to equipment suppliers to secure timely delivery for
equipment ordered for the new PPS production line. As of September 30, 2010, we
have deposits of $4,906,370.
8. Land
Use Rights
Land use
rights is amortized over a lease term of 50 years.
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Land
use rights
|
$ | 635,154 | $ | 622,578 | ||||
Less:
|
||||||||
Accumulated
amortization
|
(99,674 | ) | (85,228 | ) | ||||
$ | 535,480 | $ | 537,350 |
During
2010 and 2009, amortization expense was $12,499 and $12,458, respectively. No
additional land use rights were acquired during the fiscal year 2010. Change in
cost of land use rights from September 30, 2009 to September 30, 2010 was caused
by the effect of changes in foreign currency exchange rate.
9.
Short-term Loans
The
Company has several loans with Agricultural Bank of China, Foshan Branch. As of
September 30, 2010, term loans of $2,989,018 (20,000,000 in RMB) and
$807,035(5,400,000 in RMB) are outstanding and repayable in December 2010. The
interest on the outstanding balance is payable every month at rates ranging from
5.85% to 7.75% per annum. Interest expense during 2010 and 2009 was
$203,219 and $269,849, respectively.
10. Clients’
Deposits
The
deposits from clients represent cash received from customers before the Company
shipped products purchased by these customers.
11.
Related Party Transaction
Certain
related party transactions occurred during fiscal year 2010 and 2009 as
follows:
September 30,
|
September 30,
|
|||||||
Amount due to and from related parties
|
2010
|
2009
|
||||||
Loan
payable to shareholder (a)
|
$ | 160,673 | $ | - | ||||
Advance
to former shareholders (b)
|
- | 259,538 | ||||||
Advance
to current shareholders (c)
|
- | 1,413 | ||||||
Advance
to director (d)
|
- | 73,246 | ||||||
Subtotal
|
160,673 | $ | 334,197 | |||||
Receivable
from related companies (e)
|
- | 439,475 | ||||||
$ | 160,673 | $ | 773,672 |
F-12
(a)
|
Loan
payable to a shareholder:
|
To meet
short-term cash need, the Company borrowed from its CEO in amount of $160,673 in
August 2010. This loan is non-interest bearing and due on demand. No such
borrowing was outstanding as of September 30, 2009.
(b)
|
Advance
to former shareholders:
|
The
advance to former shareholders was non-interest bearing and was repaid in
2010.
|
(c)
|
Advance
to current shareholders:
|
The
advance to current shareholders included advances to six current shareholders.
The advance was non-interest bearing and repaid in 2010.
|
(d)
|
Advance
to director:
|
The
advance to one of the directors was non-interest bearing and repaid in
2010.
|
(e)
|
Receivable
from related companies:
|
The
receivable from related companies included funds lent to three companies which
have common shareholders of the Company. The loan was non-interest bearing and
repaid in 2010.
12.
Convertible Notes Payable
On
February 12, 2010, immediately following the closing of a share exchange
agreement, the Company entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants. In addition to the finance
cost of $730,187, which is accounted for as debt discount, 653,510 common shares
were issued to placement agents. The notes have the following material
terms:
Maturity: The notes mature in
one year. If principal is not paid on maturity then 150% of the principal
amount shall be payable.
Interest :
10% per annum payable quarterly increasing to 15% if there is a default.
Interest on the notes was recorded for the period ended September 30, 2010 in
amount of $260,863.
Conversion : In
the event of the closing of any equity or series of related financings resulting
in aggregate gross proceeds to the Company of at least $20,000,000 (or such
lesser amount as shall be approved in writing by the holder(s) of notes
evidencing at least 50% of the principal amount of the notes then outstanding),
a “qualified financing,” prior to the maturity
date of the notes, the principal amount of the notes converts automatically into
the securities sold in such financing at a 65% discount to the offering price of
such securities.
Besides
the stated interest expense at 10% per annum, interest expenses are recorded to
accrete the note to its balance of $4,140,000 due on February 12, 2011.
Accretion on interest expenses amounted to $1,524,750 for the year
ended September 30, 2010.
F-13
Allocation
of the proceeds:
After
allocating $1,052,000 to the initial fair value of warrants derivative
liabilities, and agent commission of $404,000 and legal fee of $326,187, the
remaining proceeds received from the convertible note of $3,409,813 were
allocated to placement agent common stock and convertible note payable based on
their relative fair value. This results in a debt discount of $2,439,743
from the face amount of the convertible notes payable; accordingly, the discount
is being amortized over the life of the notes to accrete the notes to its
redemption value. The proceeds allocation is as follows:
Gross
proceeds
|
$ | 4,140,000 | ||
Less:
|
||||
Commission
paid to placement agent
|
404,000 | |||
Legal
fee
|
326,187 | |||
Net
proceeds
|
$ | 3,409,813 | ||
Record
warrant as derivative liability
|
$ | 1,052,000 | ||
Allocated
remaining proceeds to :
|
||||
Common
stock issued to placement agents
|
657,556 | |||
Convertible
Note
|
1,700,257 | |||
$ | 3,409,813 |
Warrants
|
$ | 1,052,000 | ||
Stock
issued to placement agent
|
657,556 | |||
Cash
paid for commission and legal fees
|
730,187 | |||
$ | 2,439,743 |
Convertible
notes payable, net of discount, at the transaction date was
$1,700,257.
As of
September 30, 2010, after $1,524,750 in accretion of interest expense, net
convertible notes payable was $3,225,007.
13.
Accounting for Warrants
In conjunction with
issuing the convertible notes, the Company agreed to issue common stock warrants
to the convertible notes investors in the debt financing transaction described
in note 12. The warrants issued have the following material terms:
F-14
The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $20,000,000. The warrants cannot be
exercised if no financing is consummated within five-year period after the issue
date and become void if the notes automatically convert into common
stock.
Number of Shares
: The warrants represent the right to purchase 8% of the total
shares of common stock outstanding (on a fully-diluted basis) immediately after
the closing of the financing.
Exercise Price
: The warrants are exercisable at the price for which
the shares of common stock (or common stock equivalent if derivative securities
are sold) are sold in the financing. If the financing includes more
than one type of securities, the exercise price shall equal the lowest price per
share of common stock or common stock equivalent included in the
financing.
At the
time of the notes issuance, the Company also issued non-conversion warrants to
the placement agent to purchase 5% of the Company’s common stock underlying the
warrants issued to the convertible notes investors, exercisable at the same
price at which the investors’ warrants become exercisable.
The
Company analyzed the warrants issued and the conversion features embedded in the
notes to assess whether they meet the definition of a derivative under the
guidance set forth by FASB ASC 815 (SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities”) and, thereof, the applicability of the
accounting rules in accordance to FASB ASC 815 to treat the conversion option
and the warrants as derivative liabilities.
Under
FASB ASC 815-10-15, a financial instrument is a derivative if it meets one of
the following three criteria: i) it requires or permits net settlement; ii)
there is a market mechanism for the net settlement; and iii) the net settlement
can be fulfilled by delivery of assets that are readily convertible to cash.
Management concluded that the conversion option embedded in the notes does not
meet the above criteria and therefore is not a derivative.
Since the
warrants permit the holder to perform a cashless exercise and receive a net
number of shares of the Company’s common stock at the time of exercise, these
warrants meet the definition of derivative instrument under ASC
815-10-15-83.
Management
also evaluated whether the warrants meet the scope exception set forth by FASB
ASC 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity’s Own Stock”), which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of FASB ASC 815. The provisions in FASB ASC 815-40 apply to
any freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by FASB ASC 815 and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. Because the exercise price of the warrants is not fixed and
will be determined by the price at which the Company completes a Financing prior
to the time the warrants become exercisable, the warrants are not considered
indexed to the Company’s common stock. The exception provided under FASB ASC
815-40-15 are not available therefore management determined the warrants should
be accounted for as a derivative liability. The terms of the placement agent
non-conversion warrants have terms identical to the investors’ warrants,
therefore are accounted as a derivative liability.
Derivative
instruments are initially measured and recorded at their fair value and
marked-to-market at each report date until they are exercised or expire, with
any change in the fair value charged or credited to income.
F-15
As a
result of adopting accounting treatment according to ASC 815-40, investor and
placement agent warrants are recorded as derivative liabilities and valued at
$1,052,000 using a binomial option pricing model on the date of issuance and as
of March 31, 2010. Because there was no trade market for the Company’s stock,
management used substitute volatility in the initial and subsequent measuring of
the fair market value of the warrants issued. Management re-measured the fair
market value based on the adjusted volatility of publicly traded stock of three
companies with business and financial size comparable to the Company’s and the
remaining term of the warrants.
As of
September 30, 2010, these warrants were valued at $739,000. The valuation
inputs are provided in the table as follows:
Attribute
|
As of September
30, 2010
|
|||
Warrants
Outstanding
|
1,670,823 | (*) | ||
Stock
Market Price
|
$ | 6.00 | ||
Exercise
Price
|
$ | 6.00 | ||
Risk-free
Interest Rate
|
0.27 | % | ||
Estimated
Volatility
|
75 | % | ||
Expected
Dividend Yield
|
0 | % | ||
Warrants
Life (years)
|
4.4 |
(*)
Warrants outstanding as of September 30, 2010 is based on 8% of the total
outstanding common shares on fully diluted basis and warrants issued to
placement agent equal to 5% of investors’ warrants :
Shares
of common stock to be outstanding as of Sep 30, 2010
|
15,265,714 | |||
Shares
of common stock to be issued in the public offerings
|
4,166,667 | |||
Anti-dilutive
shares to be issued to placement agent
|
458,373 | |||
Total
|
19,890,754 | |||
8%
of the fully-diluted shares outstanding immediately after
IPO
|
8 | % | ||
Shares
underlying the warrants
|
1,591,260 | |||
Placement
agent's non-conversion warrants (5% of investors'
warrants)
|
79,563 | |||
1,670,823 |
F-16
14.
Equity and stock option based compensation
2010
Stock Incentive Plan
In
September 2010, the Board of Directors adopted the 2010 Stock Incentive Plan
(“2010 plan”) under which it may grant incentive and nonqualified stock options,
restricted stock and stock appreciation rights to eligible employees,
non-employee directors, or consultants. Stock options granted
generally have a 5-year life and vest pursuant to terms set forth under
employment agreement. Under the 2010 plan, stock options of 400,000 were granted
with exercise price equal to the Company’s intended initial public offering
price and will be vested over a three year period. Vesting period starts at
August 1, 2010 under the compensation terms of employment contract.
The
Company accounts for stock-based compensation under provisions of FASB ASC 718
– Accounting for Stock Compensation which establishes standards for the
accounting for equity instruments exchanged for employee services. Under the
provisions of FASB ASC 718, share-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and is recognized as
an expense over the employee's requisite service period (generally the vesting
period of the equity grant), net of estimated forfeitures.
The fair
value of the employee stock options granted is estimated using a binomial
pricing model at the grant date with input as follows:
Attribute
|
As of September
10, 2010
|
|||
Vested
Stock Options
|
26,740 | (*) | ||
Stock
Market Price
|
$ | 6.00 | ||
Exercise
Price
|
$ | 6.00 | ||
Risk-free
Interest Rate
|
0.27 | % | ||
Estimated
Volatility
|
75 | % | ||
Expected
Dividend Yield
|
0 | % | ||
Warrants
Life (years)
|
4.8 |
Total
cost of the share-based compensation from the issuance of the stock options is
valued at $1,351,000 and will be recognized over the vesting period. For the
year ended September 30, 2010, $90,310 was recognized as expense from the
options granted.
The
following table summarizes the activities for the stock options granted for the
year ended September 30, 2010:
Options Outstanding
|
||||||||||||
Number of
Shares
|
Exercise Price
|
Remaining
Life (years)
|
||||||||||
As
of October 1, 2009
|
- | |||||||||||
Granted
|
400,000 | $ | 6 | |||||||||
As
of September 30, 2010
|
400,000 | $ | 6 | 4.8 | ||||||||
Requisite
Service Periods Lapsed (months)
|
2 | |||||||||||
Vested
and exercisable as of September 30, 2010
|
26,740 | $ | 6 | 4.8 |
The
Company’s 2010 stock incentive plan also granted 30,000 shares of restricted
common stock to an independent director, of which 20,000 shares vest over a
period of two years. At the grant date, the fair value of these restricted
shares issued was measured at estimated $6 per share. As of September 30, 2010,
shares of 13,333 not subject to forfeiture were recognized as shared-based
compensation expense at an estimated fair market value of $6 per
share.
Total
stock-based expense was recorded as follows:
Restricted
stock
|
$ | 79,998 | ||
Vested
options
|
90,310 | |||
$ | 170,308 |
15.
Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to common
shareholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is calculated by dividing net income
attributable to common shareholders as adjusted for the effect of dilutive
common equivalent shares, if any, by the weighted average number of common and
dilutive common equivalent shares outstanding during the year. Common equivalent
shares consist of the common shares issuable upon the conversion of the
convertible note (using the if-converted method) and common shares issuable
upon the exercise of outstanding warrants (using the treasury stock method).
Diluted EPS excludes all dilutive potential shares if their effect is
anti-dilutive. Using if-converted method, the Company’s fiscal year 2010’s
earnings per share is anti-dilutive.
F-17
For the Years Ended
|
||||||||
September 30,
2010
|
September 30,
2009
|
|||||||
Net
Income
|
||||||||
(numerator
for basic income per share)
|
$ | 2,221,077 | $ | 2,445,652 | ||||
Plus
interest on convertible note
|
1,472,613 | - | ||||||
Net
Income - assumed conversions
|
||||||||
(numerator
for diluted income per share)
|
$ | 3,693,690 | $ | 2,445,652 | ||||
Weighted
average common shares
|
||||||||
(denominator
for basic income per share)
|
14,979,390 | 14,510,204 | ||||||
Effect
of Dilutive Securities:
|
||||||||
Warrants
- treasury stock method
|
- | - | ||||||
Convertible
note as-if-converted method
|
1,247,671 | - | ||||||
Weighted
average common shares
|
||||||||
(denominator
for diluted income per share)
|
16,227,061 | 14,510,204 | ||||||
Basic
net income per share
|
$ | 0.15 | $ | 0.17 | ||||
Diluted
net income per share (anti-dilutive)
|
$ | 0.15 | $ | 0.17 |
F-18
16.
Income Taxes
USA
The
Company and its subsidiary and branch divisions are subject to income taxes on
an entity basis on income arising in, or derived, from the tax jurisdiction in
which they operate. As the Company had no income generated in the United States,
there was no tax expense or tax liability due to the Internal Revenue Service of
the United States as of September 30, 2010 and September 30, 2009.
BVI
Hong Hui
is incorporated under the International Business Companies Act of the British
Virgin Islands and accordingly, is exempted from payment of British Virgin
Island’s income taxes.
PRC
Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday
for two years. From January 2010 onwards, Foshan is taxed at 25% of net income
except for the 2010 and 2011years where there is a 50% discount on income
tax.
The tax
provision was $24,023 and $0 for the years ended September 30, 2010 and
September 30, 2009, respectively. The Company has recorded zero
deferred tax assets or liabilities as of September 30, 2010 and September 30,
2009, net of tax allowance, because all other significant differences in tax
basis and financial statement amounts are permanent differences.
For the Year Ended
|
||||||||
September 30
|
||||||||
2010
|
2009
|
|||||||
Income
Tax Expense:
|
||||||||
Current
Income Tax
|
$ | 24,023 | $ | - | ||||
Change
in Deferred Tax Assets – Net Operating Loss
|
89,631 | 89,631 | ||||||
Change
in valuation allowance
|
(89,631 | ) | (89,631 | ) | ||||
Total
|
$ | 24,023 | $ | - |
The
Company follows the guidance in FASB ASC 740 Accounting for Uncertainty in Income
Taxes. We have not taken any uncertain tax positions on any of
our open income tax returns filed through the period ended September 30,
2010. Our methods of accounting are based on established income tax
principles and are properly calculated and reflected within our income tax
returns. In addition, we have timely filed extension of income tax
returns in all applicable jurisdictions in which we believe we are required to
make an income tax return filing.
We
re-assess the validity of our conclusions regarding uncertain tax positions on a
quarterly basis to determine if facts or circumstances have arisen that might
cause us to change our judgment regarding the likelihood of a tax position’s
sustainability under audit. We have determined that there were no
uncertain tax positions for the years ended September 30, 2010 and
2009.
All of
the Company’s income before income taxes is from PRC sources. Actual income tax
expense reported in the consolidated statements of operations and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 12.5% (50% discount of 25%) to income before income taxes for the years
ended September 30, 2010 and September 30, 2009 for the followings
reasons:
For the Year Ended
|
||||||||
September 30
|
||||||||
2010
|
2009
|
|||||||
Income
before income taxes
|
$ | 2,245,100 | $ | 2,445,652 | ||||
Computed
“expected” income tax expense at 12.5% in 2010 and zero in
2009
|
$ | 280,638 | $ | 546,960 | ||||
Tax
effect of net taxable permanent differences
|
(166,984 | ) | (546,960 | ) | ||||
Effect
of cumulative tax losses
|
(89,631 | ) | - | |||||
$ | 24,023 | $ | - |
F-19
17. Other
Comprehensive Income
Other
comprehensive income on the balance sheet represents accumulated foreign
currency translation adjustments.
18.
Recent Accounting Pronouncements
Fair
Value Measurements
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. The guidance is
effective for annual and interim reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for
annual and interim periods beginning after December 15, 2010. The Company
adopted this guidance at January 1, 2010, except for the Level 3 reconciliation
disclosures on the rollforward activities, which it will adopt at the beginning
of January 1, 2011. Adoption did not have a material impact on our consolidated
financial statements.
Receivables
In April
2010, the FASB issued ASU 2010-18, Receivables (Topic 310), Effect of a
Loan Modification When the Loan is Part of A Pool That Is Accounted for as a
Single Asset . ASU 2010-18 provides that modifications of loans that are
accounted for within a pool under Subtopic 310-30 do not result in the removal
of those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue
to be required to consider whether the pool of assets in which the loans are
included is impaired if expected cash flows for the pool change. This guidance
is effective prospectively for the first interim and annual period ending on or
after July 15, 2010. Early adoption is permitted. The Company adopted this
guidance without a material impact on its consolidated financial
statements.
Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
19.
Subsequent Events
On
December 20, 2010, the Company repaid its short-term loans of RMB 25,400,000 to
the Foshan branch of the Agriculture Bank of China. On December 22, 2010, the
Company obtained unofficial approval from the same bank for a new six
months term loan in the amount of RMB 20 million to meet its
short-term cash needs to complete installation of a new PPS production line. The
loan carries an annual interest rate of 6.21% and is repayable on June 21, 2011.
Official approval is expected in early January 2011.
On
December 8, 200, the Company obtained a loan from Standard Chartered Bank in the
amount of RMB 6,000,000 for a term of 90 days. The loan carries an interest rate
of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as
guarantee.
F-20
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized on January 3, 2011.
CHINA
SLP FILTRATION TECHNOLOGY, INC.
|
|
/s/ Li Jie
|
|
By:
Li Jie
|
|
Chief
Executive Officer and Director
(principal
executive officer)
|
In
accordance with the requirements of the Securities Exchange Act of 1934, this
Report was signed by the following persons in the capacities and on the dates
indicated.
Name
and Title
|
Date
|
|
/s/
Li Jie
|
January 3,
2011
|
|
Li
Jie
Chief
Executive Officer and a director
(principal
executive officer)
|
||
/s/
Eric Gan
|
January 3,
2011
|
|
Eric
Gan
Chief
Financial Officer
(principal
financial officer and accounting officer)
|
||
/s/
Li Jun
|
January 3,
2011
|
|
Li
Jun
Director
|
||
/s/
Chris Bickel
|
January 3,
2011
|
|
Chris
Bickel
Director
|
||
/s/
Richard M. Cohen
|
January 3,
2011
|
|
Richard
M. Cohen
Director
|
||
/s/Law
Wawai
|
January 3,
2011
|
|
Law
Wawai
President
of Sales and Director
|
||
/s/
Su Lei
|
January 3,
2011
|
|
Su
Lei
Director
|
72
EXHIBIT
INDEX
3.1
|
Certificate
of Incorporation, as amended
|
|
3.2
|
Amended
and Restated Bylaws
|
|
4.1
|
Specimen
of Common Stock certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 the Registration Statement on Form S-1
filed on October 15, 2010)
|
|
4.2
|
Form
of Convertible Promissory Note (issued pursuant to Note Purchase
Agreement, dated as of February 12, 2010 between the Company and the
investors.) (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K filed on February 12, 2010)
|
|
4.3
|
Form
of Warrant (issued pursuant to Note Purchase Agreement, dated as of
February 12, 2010 between the Company and the investors.) (incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
4.4
|
Stock
Pledge Agreement, dated as of February 12, 2010, by and among the Company
and certain stockholders of the Company (incorporated by reference to
Exhibit 4.4 to the Current Report on Form 8-K filed on February 12,
2010)
|
|
10.1
|
Share
Exchange Agreement, dated as of February 12, 2010 between the Company,
Hong Hui and the former stockholders of Hong Hui. (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
10.2
|
Note
Purchase Agreement, dated as of February 12, 2010 between the Company and
the investors (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed on February 12, 2010)
|
|
10.3
|
Escrow
Agreement, dated as of February 12, 2010, by and between the Company, each
of the investors, and Interwest Transfer Agent , as escrow agent
(incorporated by reference to Exhibit 10.3 to the Current Report on Form
8-K filed on February 12, 2010)
|
|
10.4
|
Registration
Rights Agreement dated February 12, 2010, by and among the Company and the
Purchasers (incorporated by reference to Exhibit 10.6 to the Current
Report on Form 8-K filed on February 12, 2010)
|
|
10.5
|
Non
Recourse Guaranty Agreement dated as of February 12, 2010, by and among
the Company and certain stockholders of the Company (incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed on
February 12, 2010)
|
10.
6
|
Stock
Pledge Agreement dated as of February 12, 2010, by and among the Company,
certain stockholders of the Company and the collateral agent (incorporated
by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
10.7
|
Engagement
Letter Agreement, dated November 17, 2009, as amended, by and
between Foshan and Primary Capital LLC, as amended (incorporated by
reference to Exhibit 10.7 to Amendment No. 2 the Registration
Statement on Form S-1 filed on October 15, 2010)
|
|
10.8
|
Voting
Agreement dated as of February 12, 2010 by and among the Company, the
Investors, Bestyield Limited and Proudlead Limited (incorporated by
reference to Exhibit 10.7 to the Current Report on Form 8-K filed on
February 12, 2010).
|
|
10.9
|
Employment
Agreement dated as of November 20, 2008 by and between the Company and Ji
Lie (incorporated by reference to Exhibit 10.9 to Amendment No.
2 the Registration Statement on Form S-1 filed on October 15,
2010)
|
73
10.10
|
Employment
Agreement dated as of January 1, 2010 by and between the Company and Law
Wawai (incorporated by reference to Exhibit 10.11 to Amendment No.
2 the Registration Statement on Form S-1 filed on October 15,
2010)
|
|
10.11
|
Employment
Agreement dated as amended, between the company and Zeng
Shijun
(incorporated
by reference to Exhibit 10.10 to Amendment No. 2 the
Registration Statement on Form S-1 filed on October 15,
2010)
|
|
10.12
|
Form
of Lock Up Agreement amended (incorporated by reference
to Exhibit 10.12 to Amendment No. 2 the Registration Statement
on Form S-1 filed on October 15, 2010)
|
|
10.13
|
Form
of Lock Up Agreement amended (incorporated by reference
to Exhibit 10.13 to Amendment No. 2 the Registration Statement
on Form S-1 filed on October 15, 2010)
|
|
10.14
|
Independent
Director’s Agreement dated May 2010 between Richard
M. Cohen and the Company (incorporated by reference to Exhibit
10.14 to Amendment No. 2 the Registration Statement on Form S-1
filed on October 15, 2010)
|
|
10.15
|
The
China SLP Filtration Technology, Inc. 2010 Stock Incentive
Plan (incorporated by reference to Exhibit 10.4 to the Current
Report on Form 8-K filed on September 9, 2010)
|
|
10.16
|
Convertible
Note dated February 7, 2007 and Eric Gan (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed on October 15,
2010)
|
|
10.17
|
Convertible
Note dated February 7, 2007 and conversion notice dated December 2008 by
and between Perpetual Technologies, Inc. and Lorikeet, Inc.
(incorporated by reference to Exhibit 10.18 to Amendment No.
2 the Registration Statement on Form S-1 on October 15,
2010)
|
|
10.18
|
Letter
Agreement dated February 8, 2010 by and among the Company and Joseph
Nemelka, 1st
Orion Corporation and Lorikeet, Inc. (incorporated by reference to
Exhibit 10.19 to Amendment No. 2 the Registration Statement on
Form S-1 filed on October 15, 2010)
|
|
21.1
|
List
of Subsidiaries (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 the Registration Statement on Form S-1 filed on
October 15, 2010)]
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
74