Attached files
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EX-4.1 - SRKP 23 Inc | v210728_ex4-1.htm |
EX-23.1 - SRKP 23 Inc | v210728_ex23-1.htm |
As
Filed with the Securities and Exchange Commission on February 11,
2011
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Registration
No. 333-
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
China
Wesen Recycling Technology, Inc.
(Name
of Registrant As Specified in its Charter)
Delaware
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3080
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26-1357843
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(State or Other Jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer Identification No.)
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Incorporation
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Classification Code Number)
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or Organization)
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Room
405, Floor 4, North Tower, 9 Shen Zhou Road,
Guangzhou
High-tech Industrial Development Zone, Guangzhou
People’s
Republic of China
86
(20) 32290314
(Address
and Telephone Number of Principal Executive Offices)
Corporation
Service Company
2711
Centerville Road
Suite
400
Wilmington,
DE 19808
800-222-2122
(Name,
Address and Telephone Number of Agent for Service)
Copies
to
Thomas
J. Poletti, Esq.
Melissa
A. Brown, Esq.
K&L
Gates LLP
10100
Santa Monica Blvd., 7th Floor
Los
Angeles, CA 90067
Telephone
(310) 552-5000
Facsimile
(310) 552-5001
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V.
Joseph Stubbs, Esq.
Scott
Galer, Esq.
Stubbs
Alderton & Markiles, LLP
15260
Ventura Boulevard, 20th Floor
Sherman
Oaks, California 91403
Telephone
(818) 444-4500
Facsimile
(818) 444-4520
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Approximate Date of Proposed Sale to the Public: From time to time after the effective date of this Registration Statement
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.R
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company R
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CALCULATION
OF REGISTRATION FEE
Proposed
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Proposed
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|||||||||||||||
Maximum
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Maximum
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Amount of
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||||||||||||||
Title of Each Class of
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Amount To Be
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Offering Price
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Aggregate
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Registration
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||||||||||||
Securities To Be Registered
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Registered (1)
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Per Share
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Offering Price
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Fee
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||||||||||||
Common
Stock, $0.0001 par value per share
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1,380,000 | (2) | $ | 4.00 | (2) | $ | 5,520,000 | (2) | $ | 640.87 | ||||||
Common
Stock, $0.0001 par value per share
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2,457,167 | (3) | $ | 4.00 | (4) | $ | 9,828,668 | (4) | $ | 1,141.11 | ||||||
Underwriter’s
Warrants to Purchase Common Stock
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120,000 | (5) | N/A | N/A | N/A | (6) | ||||||||||
Common
Stock Underlying Underwriter’s Warrants, $0.0001 par value per
share
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120,000 | (7) | $ | 4.80 | $ | 576,000 | (10) | $ | 66.87 | (10) | ||||||
Total
Registration Fee
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$ | 1,848.85 | (11) |
(1)
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In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of additional shares of Common Stock that shall be
issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar
transactions.
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(2)
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The
registration fee for securities to be offered by the Registrant is based
on an estimate of the Proposed Maximum Aggregate Offering Price of the
securities, and such estimate is solely for the purpose of calculating the
registration fee pursuant to Rule 457(o). Includes shares which the
underwriters have the option to purchase to cover over-allotments, if
any.
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(3)
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This
Registration Statement also covers the resale under a separate resale
prospectus (the “Resale Prospectus”) by selling stockholders of the
Registrant of up to 2,457,167 shares of Common Stock previously issued to
the selling stockholders as named in the Resale
Prospectus.
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(4)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457.
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(5)
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Represents
the maximum number of warrants to purchase the Registrant’s common stock
to be issued to the underwriter in connection with the public
offering.
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(6)
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In
accordance with Rule 457(g) under the Securities Act, because the shares
of the Registrant’s common stock underlying the underwriter’s warrants are
registered hereby, no separate registration fee is required with respect
to the warrants registered hereby.
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(7)
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Represents
the maximum number of shares of the Registrant’s common stock issuable
upon exercise of the underwriter’s
warrants.
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(8)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act, based on an exercise price of $4.80
per share.
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(9)
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Paid
herewith.
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The
Registrant amends this registration statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to Section 8(a), may determine.
EXPLANATORY
NOTE
This
Registration Statement contains two prospectuses, as set forth
below.
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·
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Public
Offering Prospectus. A prospectus to be used for the public
offering by the Registrant of up to 1,200,000 shares of the Registrant's
common stock (in addition to 180,000 shares that may be sold upon exercise
of the underwriters’ over-allotment option) (the "Public Offering
Prospectus") through the underwriter named on the cover page of the Public
Offering Prospectus. We are also registering the warrants and shares
of common stock underlying the warrants to be received by the underwriter
in this offering.
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·
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Resale
Prospectus. A prospectus to be used for the resale by selling
stockholders of up to 2,457,167 shares of the Registrant’s common
stock (the “Resale
Prospectus”).
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The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
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·
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they
contain different outside and inside front
covers;
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·
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they
contain different Offering sections in the Prospectus Summary section
beginning on page 1;
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·
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they
contain different Use of Proceeds sections on page
30;
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·
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the
Capitalization and Dilution sections are deleted from the Resale
Prospectus on page 32 and page 33,
respectively;
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·
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the
“Selling Stockholders” portion of the Beneficial Ownership of Certain
Beneficial Owners, Management, and Selling Stockholders on page 73 of the
Public Offering Prospectus is deleted from the Resale
Prospectus;
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·
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a
Selling Stockholder section is included in the Resale Prospectus beginning
on page 80A;
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·
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references
in the Public Offering Prospectus to the Resale Prospectus will be deleted
from the Resale Prospectus;
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·
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the
Underwriting section from the Public Offering Prospectus on page 80 is
deleted from the Resale Prospectus and a Plan of Distribution is inserted
in its place;
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·
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the
Legal Matters section in the Resale Prospectus on page 83 deletes the
reference to counsel for the underwriters;
and
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·
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the
outside back cover of the Public Offering Prospectus is deleted from the
Resale Prospectus.
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The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
Resale Prospectus as compared to the Public Offering Prospectus.
Notwithstanding
the Resale Prospectus, selling stockholders named in the Resale Prospectus have
agreed that (i) if the proposed public offering that we expect to conduct is for
$5 million or more, then they would not be able to sell or transfer their shares
until at least six (6) months after the date on which the Company’s common stock
becomes listed or quoted on either the New York Stock Exchange, the NYSE Amex,
the NASDAQ Global Market, the NASDAQ Capital Market or the OTC Bulletin Board
(the “Listing Date”), and (ii) if the offering is for less than $5 million, then
one-tenth of their shares would be released from the lock-up restrictions ninety
(90) days after the Listing Date and there would be a pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, in its discretion, may also release some or all the shares from the
lock-up restrictions earlier. We currently intend this offering to be in
an amount less than $5 million. However, there can be no assurance of the actual
size of this offering.
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission
becomes effective. This prospectus is not an offer to sell these
securities and we are not soliciting offers to buy these securities in any
state where the offer or sale is not
permitted.
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PRELIMINARY
PROSPECTUS
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Subject
to Completion
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February
11, 2011
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1,200,000
SHARES
CHINA
WESEN RECYCLING TECHNOLOGY, INC.
COMMON
STOCK
This is a
public offering of our common stock. We are a reporting company under
Section 13 of the Securities Exchange Act of 1934, as amended. Our shares of
common stock are not currently listed or quoted for trading on any national
securities exchange or national quotation system. We intend to apply for the
listing of our common stock on the NASDAQ Global Market or the NYSE Amex under
the symbol “[___].” There can, however, be no assurance that our common
stock will be accepted for listing on either such exchange.
We are
offering all of the 1,200,000 shares of our common stock offered by this
prospectus. We expect that the public offering price of our common stock
will be between $3.00 and $4.00 per share.
Investing
in our common stock involves a high degree of risk. Before buying any
shares, you should carefully read the discussion of material risks of investing
in our common stock in “Risk Factors” beginning on page 11 of this
prospectus.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
Per Share
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Total
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|||||||
Public
offering price
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$ | [___ | ] | $ | [___ | ] | ||
Underwriting
discounts and commissions (1)
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$ | [___ | ] | $ | [___ | ] | ||
Proceeds,
before expenses, to China Wesen Recycling Technology, Inc.
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$ | [___ | ] | $ | [___ | ] | ||
Proceeds,
before expenses, to selling stockholders
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$ | [___ | ] | $ | [___ | ] |
(1)
The underwriter will receive compensation in addition to the discounts and
commissions as set forth under “Underwriting.”
The
Underwriter has a 45-day option to purchase up to 180,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 1,200,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase
70% of the Over-allotment Shares from the selling stockholders identified in
this prospectus and the remaining shares from us. We will not receive any
proceeds from the sale of the shares, if any, by the selling stockholders.
If the Underwriter exercises this option in full, the total underwriting
discounts and commissions will be $[__], and total proceeds, before
expenses, to the selling stockholders will be $[__] and the additional proceeds
to us, before expenses, from the over-allotment option exercise will be
$[__].
We have
agreed to pay the Underwriter an aggregate non-accountable expense allowance of
3.0% of the gross proceeds of this offering or $[__], based on a public offering
price of $[__] per share.
The
Underwriter will also receive warrants to purchase a number of shares equal to
10% of the shares of our common stock sold in connection with this offering, or
120,000 shares, exercisable at a per share price equal to 120% of the offering
price of this offering. The Underwriter is offering the common stock as
set forth under “Underwriting.” Delivery of the shares will be made on or
about [__________], 2011.
WestPark
Capital, Inc.
The Date
of this Prospectus is: ____________________, 2011
[INSIDE
FRONT COVER].
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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1
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SUMMARY
FINANCIAL DATA
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10
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RISK
FACTORS
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11
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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29
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USE
OF PROCEEDS
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30
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DIVIDEND
POLICY
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31
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CAPITALIZATION
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32
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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33
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DILUTION
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33
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ACCOUNTING
FOR THE SHARE EXCHANGE
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34
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SELECTED
CONSOLIDATED FINANCIAL DATA
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35
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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36
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DESCRIPTION
OF BUSINESS
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53
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MANAGEMENT
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63
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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68
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BENEFICIAL OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
SELLING STOCKHOLDERS
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72
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DESCRIPTION
OF SECURITIES
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74
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SHARES
ELIGIBLE FOR FUTURE SALE
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77
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UNDERWRITING
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80
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CONFLICTS
OF INTEREST
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82
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LEGAL
MATTERS
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83
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EXPERTS
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83
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ADDITIONAL
INFORMATION
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83
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
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II-1
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SIGNATURES
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II-7
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Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not,
and the underwriter has not, authorized any other person to provide you with
different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
i
PROSPECTUS
SUMMARY
Because
this is only a summary, it does not contain all of the information that may be
important to you. You should carefully read the more detailed information
contained in this prospectus, including our financial statements and related
notes. Our business involves significant risks. You should carefully consider
the information under the heading “Risk Factors” beginning on page
11.
As used
in this prospectus, unless otherwise indicated, the terms “we,” “our,” “us,”
“Company” and “Wesen” refer to China Wesen Recycling Technology, Inc., a
Delaware corporation, formerly known as SRKP 23, Inc. (“SRKP 23”). We conduct
our business through our subsidiaries, which include our wholly-owned
subsidiary, Weixin International Co., Limited, a company organized under the
laws of the British Virgin Islands (“Weixin BVI”), Wei Xin Holding Group
Limited, a company organized under the laws of Hong Kong and a wholly-owned
subsidiary of Weixin BVI (“Weixin HK”), Gangzhou Kelida Intelligent Equipment
Co., Ltd., a company organized under the laws of the People’s Republic of China
and a wholly-owned subsidiary of Weixin HK (“Kelida”), and Zhaoqing Hua Su
Plastic Trading Company (“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd. (“Chuang Yi”), Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing
Li Jun Craftwork Co., Ltd. (“Li Jun”), each a company organized under the laws
of the People’s Republic of China and a wholly-owned subsidiary of
Kelida.
The
“selling stockholders” refers, collectively, to the selling stockholders named
in this prospectus under the heading “Beneficial Ownership of Certain Beneficial
Owners, Management, and Selling Stockholders” who have agreed to sell to the
Underwriters up to 70% of the Over-allotment Shares sold in this offering, if
any.
“China”
or “PRC” refers to the People’s Republic of China. “RMB” or “Renminbi” refers to
the legal currency of China and “$” or “U.S. Dollars” refers to the legal
currency of the United States.
Overview
We
recycle engineering plastics from complex waste streams and end-of-life
plastic-rich durable goods such as computer and business equipment, household
appliances, house wares, toys and many other sources. We produce plastic
grains and compounds which are sold to original equipment manufacturers of
consumer products and plastic injection molders which produce new consumer
products using recycled material. We specialize in the production of
high-density polyethylene, or HDPE, low-density polyethylene, or LDPE, acrylonitrile-butadiene-styrene,
or ABS, and polystyrene, or PS. In addition, we offer a line of household
and construction products which we manufacture with our own recycled plastic
compounds. Our plastic grains are sold to trading companies and
wholesalers, as well as customers in industries such as architecture industrial
equipment and engineering production, chemical and petrochemical manufacturing.
In addition, a substantial portion of our revenue is currently derived form the
resale of recycled plastic materials, including HDPE, LDPE, ABS and PS material,
which we cannot currently recycle due to our current recycling
capabilities.
Our
Strategy
Our goal
is to become a leading provider of plastic grains and compounds and proprietary
products manufactured from such material in China. We intend to achieve this
goal by implementing the following strategies:
Maximize our existing resources to
increase our profitability
We plan to use our expertise in
plastics recycling and in the production of products produced from our recycled
plastic material to further increase our profitability. Our plan is to actively
capitalize on market opportunities by:
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·
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expanding
our sale force by recruiting experienced and knowledgeable sales personnel
to reach new customers;
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·
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strengthening
relationships with our existing clients to increase the rate of purchase
of existing products; and
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·
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exploring
new opportunities for expanding our product offerings to new and existing
clients.
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1
Expand output capacity
In November 2009, we began construction
of a new facility in Gangzhou on land for which we have obtained land use
rights. This new facility will primarily act as a research and development
center for our company, and will include a materials laboratory, an advanced
tool shop for researching various end-user products, a showroom and our new
principal corporate offices. The new facility will allow us to improve our
corporate image and increase our ability to develop high-end plastic compounds
and new end-user products, and will lessen our dependence on sales of raw
materials for profitability.
Focus on improved
efficiencies
We will continue to focus on efforts on
improving the overall efficiency of system operations and the operational
performance of our main production plants through additional engineering
improvements, additional automation and modernization of the production process
and reducing non-scheduled shut-downs of equipment. At the same time, we intend
to balance these efforts with additional focus on production safety,
environmental protection, occupational health, energy conservation and emissions
reduction, striving to comply with the requirements for the development of a
low-carbon, green economy with recyclable materials.
Strengthen relationships with suppliers
and focus on reducing commodity costs
The purchase of raw material is
fundamental to the recycling business. In order to cut costs and increase profit
margins, we focus on developing relationships with new suppliers and increasing
amount of raw material purchased directly from overseas recyclers, as opposed to
purchasing from domestic wholesalers or intermediaries. We continue to work on
obtaining more favorable terms and discounts by strengthening our relationship
with suppliers and placing more bulk orders. We also continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
Expand our line of proprietary products
manufactured with our recycled plastic
We intend to expand our product
offerings into higher end technology oriented products such as railroad
crossties. We intend to leverage the engineering and production capabilities of
our experienced management team to develop new high margin product offerings to
further boost our revenues and profitability. We believe that our expansion into
these new product offerings will continue to differentiate us from our
competition and will strengthen our competitiveness in the plastic recycling
industry. Additionally, the increase in our production and sale of end
products will lessen our dependency on sales of raw materials for our
revenues. Sales of proprietary higher end products yield higher revenues
than sales of raw materials, which is key to increasing our
profitability.
Pursue acquisitions to broaden our
product offerings and production capability
The plastic recycling market in China
remains highly fragmented, and the majority of recycling companies are
regionally focused with relatively few attaining national scale. We will
consider strategic acquisitions that will provide us with a broader range of
service offerings and access to new markets. When evaluating potential
acquisition targets, we will consider factors such as market position, growth
potential and earnings prospects and strength and experience of
management.
Our
business is subject to a number of risks and uncertainties, including risks
related to our ability to develop new products utilizing our recycled plastic
products, our dependence on a limited number of suppliers for a majority of our
raw materials, our ability to enter into relationships directly with suppliers
to obtain raw materials; our ability to secure plastic waste raw materials at
competitive prices, our reliance on a limited number of customers for our net
sales and PRC regulations regarding the recycled plastics industry.
Investors should carefully consider these risks and all of the risks discussed
in “Risk Factors” beginning on page 12 of this prospectus before investing in
our securities.
2
Recent
Events
Share
Exchange
On November 12, 2010,we entered into a
Share Exchange Agreement (the “Exchange Agreement”) with Weixin BVI, Weixin HK,
Kelida, Hua Su, Chuang Yi, Xin Ye, Li Jun, and all of the shareholders of Weixin
BVI (collectively, the “Weixin Shareholders”). Pursuant to the Exchange
Agreement, we agreed to issue an aggregate of 7,865,556 shares of our common
stock, $0.0001 par value per share (the “Common Stock”) to the Weixin
Shareholders in exchange for all of the issued and outstanding securities of
Weixin BVI (the “Share Exchange”). The Share Exchange closed on November
23, 2010 and Weixin BVI became our wholly-owned subsidiary. We changed our
name to “China Wesen Recycling Technology, Inc.” on November 24,
2010.
Upon the closing of the Share Exchange,
we issued an aggregate of 7,865,556 shares of our Common Stock to the Weixin
Shareholders in exchange for all of the issued and outstanding securities of
Weixin BVI. Prior to the closing of the Share Exchange and the initial
closing of the Private Placement, as described below, our stockholders prior to
the completion of the Share Exchange (the “SRKP 23 Stockholders”) canceled an
aggregate of 6,679,899 shares held by them such that there were 1,907,455 shares
of Common Stock outstanding immediately prior to the Share Exchange. The
SRKP 23 Stockholders also canceled warrants to purchase an aggregate of
7,804,803 shares of Common Stock such that the SRKP 23 Stockholders held
warrants to purchase an aggregate of 782,545 shares of Common Stock immediately
prior to the Share Exchange. Each warrant is entitled to purchase one
share of our Common Stock at $0.0001 per share and expires five years from the
closing of the Share Exchange. The stockholders did not receive any
consideration for the cancellation of the shares and warrants. The
cancellation of the shares and warrants was accounted for as a contribution to
capital. Immediately after the closing of the Share Exchange and the final
closing of the Private Placement, we had 12,230,178 shares of common stock, no
shares of preferred stock, no options, and warrants to purchase 782,545 shares
of Common Stock issued and outstanding.
The
number of shares and warrants cancelled was determined based on negotiations
with the security holders of SRKP 23 and Wexin BVI. The number of shares
and warrants cancelled by SRKP 23 was not pro rata, but based on negotiations
between the security holders and SRKP 23. As indicated in the Exchange
Agreement, the parties to the transaction acknowledged that a conflict of
interest existed with respect to the negotiations for the terms of the Share
Exchange due to, among other factors, the fact that WestPark Capital, Inc.
(“WestPark Capital”) was advising Wexin BVI in the transaction. As further
discussed below in “Recent
Events—Private Placement,” certain of the controlling stockholders and
control persons of WestPark Capital were also, prior to the completion of the
Share Exchange, controlling stockholders and control persons of SRKP 23.
Under these circumstances, the shareholders of Wexin BVI and the stockholders of
SRKP 23 negotiated an estimated value of Wexin BVI and its subsidiaries, an
estimated value of the shell company (based on similar recent transactions by
WestPark Capital involving similar public shells), and the mutually desired
capitalization of the company resulting from the Share Exchange.
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which we believe allowed us to raise capital at an
appropriate price per share and subsequently list our stock on a national
securities exchange. We believe that investors may have been unwilling to
invest in our company in the Private Placement (as that term is defined below)
on acceptable terms, if at all, in the absence of an investment in a public
reporting vehicle and thus required us to effect the Share Exchange as a
condition to the Private Placement. We did not consider registering our
own securities directly as a viable option for accessing the public
markets. We felt that private financing absent a reverse merger was not
immediately available to us and we chose the structure offered by WestPark
Capital as the best option to becoming publicly listed on a national securities
exchange.
The
services provided by WestPark Capital were not a consideration in determining
this aspect of the transaction. Under these circumstances and based on
these factors, the shareholders of Weixin BVI and the stockholders of SRKP 23
agreed upon the amount of shares and warrants to be cancelled. Further to
such negotiations, we paid a $140,000 success fee to WestPark Capital, Inc for
services provided in connection with the Share Exchange, including coordinating
the share exchange transaction process, interacting with the principals of the
shell corporation and negotiating the definitive purchase agreement for the
shell, conducting a financial analysis of Weixin BVI, conducting due diligence
on Weixin BVI and its subsidiaries and managing the interrelationship of legal
and accounting activities. All of the fees due to WestPark Capital in
connection with the Share Exchange have been paid as of the date of this
prospectus.
3
Based on
an estimated per share offering price of $3.50, the 1,907,455 shares retained by
the SRKP 23 stockholders had an implied monetary value of approximately $6.7
million. Assuming exercise of the 782,545 warrants also retained by the
SRKP 23 stockholders, 2,690,000 shares would have been retained by the SRKP 25
stockholders with an implied monetary value of approximately $9.4 million.
The implied monetary value of the retained shares was calculated based on an
estimated $3.50 per share offering price, without regard to liquidity,
marketability, or legal or resale restrictions; accordingly, such amounts should
not be considered as an indication of the fair value of the retained
shares.
The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” contribution and/or reorganization pursuant to the provisions
of Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as
amended.
Private
Placement
On November 23, 2010 and December 16,
2010, we consummated the initial and final closings of a private placement of
shares of the Company’s Common Stock (the “Private Placement”). Pursuant
to subscription agreements entered into with the investors, we sold an aggregate
of 2,457,167 shares of Common Stock at $2.25 per share, for gross proceeds of
approximately $5.5 million in the Private Placement. The purpose of the
Private Placement was to increase our working capital and the net proceeds from
the Private Placement will be used to expand business operations, including
developing direct sources and dealerships, increasing production capacity,
making permitted acquisitions, purchasing manufacturing equipment, and for
general corporate purposes.
In connection with the Private
Placement, we agreed to pay WestPark Capital, the placement agent for the
Private Placement, commission equal to 10.0% with a non-accountable fee of 4.0%
of the gross proceeds from the Private Placement, for an aggregate fee of
approximately $774,008.
We agreed to file a registration
statement covering the common stock sold in the Private Placement within 30 days
of the closing of the Private Placement pursuant to the subscription agreement
entered into with each investor and to cause such registration statement to be
declared effective by the SEC no later than 150 days from the date of filing or
180 days from the date of filing if the registration statement is subject to a
full review by the SEC.
Each investor in the Private Placement
entered into lock-up agreements pursuant to which they agreed that (i) if the
proposed public offering that we expect to conduct is for $5 million or more,
then they would not be able to sell or transfer their shares until at least six
(6) months after the date on which the Company’s common stock becomes listed or
quoted on either the New York Stock Exchange, the NYSE Amex, the NASDAQ Global
Market, the NASDAQ Capital Market or the OTC Bulletin Board (the “Listing
Date”), and (ii) if the offering is for less than $5 million, then one-tenth of
their shares would be released from the lock-up restrictions ninety (90) days
after the Listing Date and there would be a pro rata release of the shares
thereafter every 30 days over the following nine months. WestPark Capital,
in its discretion, may also release some or all the shares from the lock-up
restrictions earlier. We currently intend this offering to be in an amount
less than $5 million. However, there can be no assurance of the actual size of
this offering.
Pursuant
to the Placement Agency Agreement, we entered into a lock-up agreement pursuant
to which we agreed that we will not, directly or indirectly, indirectly, (a)
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of any
shares of our Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock, or (b) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of shares of Common Stock or such other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock, other than
repurchases at cost or without cost pursuant to the terms of our option and
restricted stock purchase agreements, for a period beginning from the Listing
Date and continuing to and including the date eighteen (18) months after the
Listing Date, without the prior written consent of WestPark Capital; provided,
however, that we may, without the prior written consent of WestPark Capital,
issue equity awards to our employees pursuant to equity incentive plans approved
by our the board of directors and stockholders (provided that such grants do not
exceed 7% of the outstanding shares, which includes the issuance of the shares
issued in connection with the Private Placement).
Some of the controlling stockholders
and control persons of WestPark Capital were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of the Company,
including Richard Rappaport, who is the Chief Executive Officer of WestPark
Capital and was the President and a significant stockholder of the Company prior
to the Share Exchange, and Anthony C. Pintsopoulos, who is the President
and Treasurer of WestPark Capital and was one of the Company’s controlling
stockholders and an officer and director prior to the Share Exchange.
Mr. Rappaport is the sole owner of the membership interests in the parent
company of WestPark Capital. Each of Messrs. Rappaport and
Pintsopoulos resigned from all of their executive and director positions with
the Company upon the closing of the Share Exchange.
4
Certain
Relationships and Related Transactions
The table below identifies all the
benefits that WestPark Capital and its affiliates have received and will receive
in connection with the Share Exchange, the Private Placement and this
offering.
$
|
Other
|
||||
Share
Exchange
|
164,000 | (1) |
Registration
rights for an aggregate of 1,428,691 shares and 586,129 shares underlying
warrants (2) (3)
|
||
Retained
Shares and Warrants
|
2,014,820 | (4) | |||
Private
Placement
|
814,108 | (5) | |||
Public
Offering
|
[______ | ](6) |
Warrants
to purchase 120,000 shares of common stock at an exercise price of $4.20
per share
|
||
Total
|
[______ | ] |
(1)
Includes a success fee of $140,000 paid to WestPark Capital for services
provided in connection with the Share Exchange. Also includes
$24,000 for consulting fees paid to WestPark by the Company for five months of
consulting services provided to the Company by WestPark.
(2)
Pursuant to a Registration Rights Agreement executed in connection with the
closing of the Share Exchange, affiliates of WestPark Capital received
registration rights for an aggregate of 1,428,691 shares and 586,129 shares
underlying warrants. We agreed to include such shares in a subsequent
registration statement to be filed on or before the 10th after the end of the
six-month period that immediately followed the date on which we filed the
registration statement of which this prospectus is a part. The
shareholders of Weixin immediately prior to the date of the Share Exchange
holding an aggregate of 7,865,556 shares of our common stock have agreed
with the Underwriter not
to directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust for
estate planning purposes or to beneficiaries of officers, directors and
shareholders upon their death), or otherwise dispose of or enter into any
transaction which may result in the disposition of any shares of our common
stock or securities convertible into, exchangeable or exercisable for any shares
of our common stock, without the prior written consent of the Underwriter, for a period of 24
months after the date of this prospectus.
(3)
Based on an estimated per share offering price of $3.50, the 1,428,691 shares
retained by SRKP 23 stockholders who are affiliates of WestPark Capital have an
implied monetary value of approximately $5.0 million. Assuming the
exercise of the 586,129 warrants also retained by the SRKP 23 stockholders who
are affiliates of WestPark Capital, 2,014,820 shares would have been retained by
such stockholders with an implied monetary value of approximately $7.1
million. The implied monetary value of the retained shares was calculated
based on an estimated $3.50 per share offering price, without regard to
liquidity, marketability, the likelihood of this offering being consummated, or
legal or resale restrictions; accordingly, such amounts should not be considered
an indication of the fair value of the retained shares.
(4)
Represents the implied aggregate monetary value of 1,428,691 shares and 586,129
shares underlying warrants, assuming the exercise of warrants retained by
WestPark Capital and its affiliates. The implied monetary value of the
retained shares was calculated based on an estimated $3.50 per share offering
price of the common shares to be sold in this offering, without regard to
liquidity, marketability or legal or sale restrictions; accordingly, such amount
should not be considered as an indication of the fair value of the retained
shares and warrants.
(5)
Represents commissions of $552,963, a non-accountable expense allowance of
$221,145, and a reimbursement of WestPark Capital’s fees for legal counsel of
$40,000.
(6)
Represents underwriting discounts and commissions of $[__], plus a
non-accountable fee of $[_____] and a reimbursement of $[_____] for WestPark
Capital’s legal fees.
5
Corporate
Information
We were incorporated in the State of
Delaware on October 11, 2007 and were originally organized as a “blank check”
shell company to investigate and acquire a target company or business seeking
the perceived advantages of being a publicly held corporation.On November 23,
2010, we (i) closed a share exchange transaction, described below, pursuant
to which we became the 100% parent of Weixin BVI and (ii) assumed the
operations of Weixin BVI and its subsidiaries, including Weixin HK, Kelida, Hua
Su, Chuang Yi, Xin Ye and Li Jun. We changed our name from “SRKP 23, Inc.” to
“China Wesen Recycling Technology, Inc.” on November 24, 2010.
Our
principal executive offices and corporate offices are located at Room 405, Floor
4, North Tower, 9 Shen Zhou Road, Guangzhou High-tech Industrial Development
Zone, Guangzhou, People’s Republic of China. Our telephone number is 86
(20) 32290314.
We are a
reporting company under Section 13 of the Securities Exchange Act of 1934, as
amended. Our shares of common stock are not currently listed or quoted for
trading on any national securities exchange or national quotation system. We
intend to apply for the listing of our common stock on either the NASDAQ Global
Market or the NYSE Amex.
6
Corporate
Structure
The
corporate structure of the Company is illustrated as follows:
Weixin BVI is a holding company that
was incorporated on December 3, 2009 under the laws of the British Virgin
Islands by Hongbing Wan. Hongbing Wan was the sole shareholder of Weixin
BVI upon its incorporation. On August 9, 2010, Hongbing Wan transferred
100% of the outstanding shares of Weixin BVI to Hongyu Zhang pursuant to an
instrument of transfer for consideration of $1.00. On October 28, 2010,
Hongyu Zhang transferred 100% of the shares of Weixin BVI to Wesen Environmental
Technology Limited pursuant to an instrument of transfer for consideration of
$1.00. On November 8, 2010, Weixin BVI issued additional shares to the
Weixin Shareholders pursuant to share subscription applications for
consideration of $1.00 per share.
Weixin HK is a liability company
incorporated on December 30, 2005 under the laws of Hong Kong by Hongbing Wan.
Weixin HK is a window for the group to handle business outside China, including
dealing with overseas customers and occasionally, suppliers. Weixin HK
sells metal parts for various home products, including door hardware and lock
parts, to overseas clients. On August 10, 2010, Weixin BVI acquired all
the shares of Weixin HK from Weixin HK’s sole shareholder, Hongbing Wan, for
consideration of 10,000 Hong Kong Dollars pursuant to an instrument of transfer,
sold note and bought note.
Kelida is located in Guangzhou,
Guangdong Province, PRC and was incorporated under the laws of the PRC on
September 29, 2009 by Weixin HK. Since its inception, Kelida has not conducted
any business except for the acquisition of a land use right from Guangzhou
government. Eventually Kelida will be a research and development center of the
Company.
7
Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”) are each located in Zhaoqing City, Guangdong Province,
PRC. Hua Su was incorporated under the laws of the PRC on July 20, 2006
with a registered capital of RMB 500,000. The original registered
shareholders of Hua Su were Luo Jianhua (holding 75% of the registered capital)
and He Jixiong (holding 25% of the registered capital). The registered
capital of Hua Su was later increased to RMB 1,000,000. Each of Chuang Yi,
Xin Ye, and Li Jun were incorporated under the laws of the PRC on September 27,
2007 with registered capital of RMB 1,000,000. The original registered
shareholders of Chuang Yi were Peng Zhizhong and He Jixiong, with each holding
50% of the registered capital. The original registered shareholders of Xin
Ye were Luo Zeming and Lu Jianzhong, with each holding 50% of the registered
capital. The original registered shareholders of Li Jun were Chen Wenqing,
holding 60% of the registered capital, and Qiu Yuji, holding 40% of the
registered capital.
Hongbing Wan was the actual investor of
the registered capital of each of Hua Su, Chuang Yi, Xin Ye and Li Jun.
Upon the establishment date of each of the companies, Hongbing Wan entered into
entrustment agreements with each of the original registered shareholders of each
of Hua Su, Chuang Yi, Xin Ye and Li Jun, pursuant to which Hongbing Wan
entrusted each of the original registered shareholders to hold the shares on his
behalf without paying any entrustment fees. Under the entrustment
agreements, Hongbing Wan entrusted each registered shareholder of Hua Su, Chuang
Yi, Xin Ye, and Li Jun with all of the shareholders’ rights prescribed under the
PRC Company Law and the articles of Articles of Association, including, to be
registered as the registered shareholders of each respective company, to act on
behalf of Hongbing Wan as the shareholders of Hua Su, Chuang Yi, Xin Ye, and Li
Jun, and to attend the shareholders’ meeting and to collect dividends on behalf
of Hongbing Wan. Hongbing Wan under the agreements had the right to
require each registered shareholder to transfer his shareholdings to Hongbing
Wan or any party designed by Hongbing Wan and no registered shareholder could
transfer his shareholdings in Hua Su, Chuang Yi, Xin Ye, and Li Jun without
Hongbing Wan’s prior written consent.
On November 16, 2009, each registered
shareholder of Hua Su, Chuang Yi, Xin Ye, and Li Jun transferred his shares of
each company to Kelida pursuant to equity transfer agreements for consideration
equal to the percentage of the registered capital that each registered
shareholder owned. Each of Hua Su, Chuang Yi, Xin Ye, and Li Jun completed
the required registration procedures to register Kelida as its sole shareholder
with the competent authority on February 1, 2010.
8
The
Offering
Common
stock we are offering
|
1,200,000
shares (1)
|
|
Common
stock included in Underwriter’s option to purchase shares from the selling
stockholders to cover over-allotments, if any (up to 70% of the
over-allotment option)
|
126,000
shares
|
|
Common
stock included in Underwriter’s option to purchase shares from us to cover
over-allotments, if any
|
54,000
shares
|
|
Common
stock outstanding after the offering
|
13,430,178
shares (2)
|
|
Offering
price
|
$3.00
to $4.00 per share (estimate)
|
|
Use
of proceeds
|
We
intend to use the net proceeds of this offering to pay expenses related to
the construction of our new research and development facility tin
Gangzhou. See “Use of Proceeds” on page 30 for more information
on the use of proceeds. We will not receive any proceeds from the sale of
any shares in this offering by the selling
stockholders.
|
|
Conflicts
of interest
|
Affiliates
of WestPark Capital beneficially own approximately 15.7% of our company
and, therefore, WestPark Capital has a “conflict of interest” under FINRA
Rule 5121. Accordingly, this offering is being conducted in
accordance with FINRA Rule 5121, which requires that a “qualified
independent underwriter” as defined in FINRA Rule 5121 participate in the
preparation of the registration statement and prospectus and exercise its
usual standards of due diligence in respect thereto. [_________] is
assuming the responsibilities of acting as the qualified independent
underwriter in the offering. See “Conflicts of Interest” on page 82
for more information.
|
|
Risk
factors
|
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 11.
|
(1)
|
Excludes
(i) up to 120,000 shares of common stock underlying warrants to be
received by to Underwriter in this offering, and (ii) 2,457,167 shares of
our common stock held by the selling stockholders that are concurrently
being registered with this offering for resale by such selling stockholder
under a separate prospectus, and (iii) the 54,000 shares of our common
stock that we may issue upon the Underwriter’s over-allotment option
exercise. The exercise of the Underwriter’s over-allotment option to
purchase the 126,000 shares from selling stockholders named in this
prospectus to cover over-allotments, if any, will not affect the number of
shares outstanding after this
offering.
|
(2)
|
Based
on 12,230,178 shares of common stock issued and outstanding as of the date
of this prospectus and 1,200,000 shares of common stock issued in the
public offering. Excludes (i) the Underwriter’s warrants to purchase
a number of shares equal to 10% of the shares of common stock sold in this
offering excluding the shares sold in the over-allotment option, and (ii)
782,545 shares of common stock underlying warrants that are exercisable at
$0.0001. Excludes the 54,000 shares of our common stock that we may issue
upon the Underwriter’s over-allotment option exercise and is not affected
by the 126,000 shares that the Underwriter may purchase from selling
stockholders named in this
prospectus.
|
9
SUMMARY
FINANCIAL DATA
The
following summary financial information contains consolidated statement of
operations data for the nine months ended September 30, 2010 and 2009
(unaudited) and for each of the years in the five-year period ended December 31,
2009 and the consolidated balance sheet data as of September 30, 2010 and
year-end for each of the years in the four-year period ended December 31,
2009. The consolidated statement of operations data and balance sheet data
were derived from the audited consolidated financial statements, except for data
for the nine months ended and as of September 30, 2010 and 2009 and the year
ended and as of December 31, 2006. Such financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements starting on page F-1 and with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Consolidated Statements of
Operations
For the Nine Months Ended
September 30,
|
For the Year Ended
December 31,
|
|||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
(in thousands, except share and per share information)
|
||||||||||||||||||||||||
Revenue
|
$ | 21,972 | $ | 18,428 | $ | 26,151 | $ | 8,687 | $ | 910 | $ | - | ||||||||||||
Cost
of revenue
|
13,788 | 12,472 | 17,516 | 6,522 | 649 | - | ||||||||||||||||||
Gross
profit
|
8,184 | 5,956 | 8,635 | 2,165 | 261 | - | ||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||
Selling
expenses
|
111 | 79 | 111 | 38 | 8 | - | ||||||||||||||||||
General
and administrative
|
632 | 398 | 591 | 422 | 167 | 5 | ||||||||||||||||||
Total
operating expenses
|
743 | 477 | 702 | 460 | 175 | 5 | ||||||||||||||||||
Income
from operations
|
7,441 | 5,479 | 7,933 | 1,705 | 86 | (5 | ) | |||||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||
Interest
income
|
14 | 9 | 13 | 10 | 2 | - | ||||||||||||||||||
Other
income (expense), net
|
(53 | ) | (27 | ) | (39 | ) | (36 | ) | (26 | ) | - | |||||||||||||
Total
other income (expenses)
|
(39 | ) | (18 | ) | (26 | ) | (26 | ) | (24 | ) | - | |||||||||||||
Income
before income taxes
|
7,402 | 5,461 | 7,907 | 1,679 | 62 | (5 | ) | |||||||||||||||||
Income
taxes
|
(1,885 | ) | (1,354 | ) | (2,031 | ) | (441 | ) | (33 | ) | - | |||||||||||||
Net
income (loss)
|
$ | 5,517 | $ | 4,107 | $ | 5,876 | $ | 1,238 | $ | 29 | $ | (5 | ) | |||||||||||
Earnings
per share – basic and diluted
|
$ | 0.70 | $ | 0.52 | $ | 0.75 | $ | 0.16 | $ | 0.00 | $ | 0.00 | ||||||||||||
Weighted
average shares outstanding – basic and diluted
|
7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 |
Consolidated
Balance Sheets
As of September 30,
|
As of December 31,
|
|||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Total
Current Assets
|
$ | 9,254 | $ | 10,897 | $ | 4,373 | $ | 833 | $ | 476 | ||||||||||
Total
Assets
|
15,954 | 15,951 | 8,019 | 3,236 | 477 | |||||||||||||||
Total
Current Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
Total
Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
Total
Stockholders’ Equity
|
$ | 12,871 | $ | 7,182 | $ | 1,873 | $ | 574 | $ | 61 |
10
RISK
FACTORS
Any
investment in our common stock involves a high degree of risk. Investors
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. Our business, financial condition or results of operations could be
materially adversely affected by these risks if any of them actually
occur. Our shares of common stock are not currently listed or quoted for
trading on any national securities exchange or national quotation system.
If and when our common stock is traded, the trading price could decline due to
any of these risks, and an investor may lose all or part of his
investment. Some of these factors have affected our financial condition
and operating results in the past or are currently affecting our company.
This prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks we face as described below and elsewhere in this
prospectus.
RISKS
RELATING TO OUR BUSINESS
Our
future success depends on our ability to increase revenues from our recycling
operations
We believe that our future success
depends on our ability to significantly increase revenue from processing
recycled plastic wastes. We plan to grow by increasing our product output
volume, developing new products utilizing our recycled plastic products and
entering new markets in China and internationally. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by growing companies, including:
|
·
|
Developing
and enhancing processing methods;
|
|
·
|
Entering
new markets in a cost effective
manner;
|
|
·
|
Expanding
on domestic and international marketing efforts to increase awareness of
our products and capture market
share;
|
|
·
|
Responding
to competitive pressures;
|
|
·
|
Maintaining
and developing relationships with customers and suppliers;
and
|
|
·
|
Attracting
and retaining qualified management, consultants and
employees.
|
The
success of our business is dependent upon our ability to secure plastic wastes
at competitive prices.
Our ability to generate revenue depends
in large part upon our ability to secure plastic wastes at competitive
prices. There is a world-wide market for these raw materials, and we face
competition from other low-cost users. If the market demand for plastics
wastes or the rate at which plastic materials are recycled increase, this would
likely affect both the availability and price of plastics wastes.
Additionally, as the substantial majority of the raw material used in our
manufacturing is imported, an increase in the freight costs or costs of
importing such material would increase our production costs. To the extent
that we are unable to secure sufficient plastics wastes at competitive prices,
our business, financial condition and results of operations will be materially
adversely affected.
We depend on a limited number of
suppliers for a substantial majority of our raw materials.
We import the substantial majority of
plastics wastes from a limited number of suppliers located in Hong Kong,
Australia and the United States. For the nine months ended September 30,
2010, we had six suppliers who accounted for 98% of our total purchases.
For the year ended December 31, 2009, we had four suppliers who accounted for an
aggregate of 98% of our total purchases. For the year ended December 31,
2008, we had two suppliers who accounted for an aggregate of 93% of our total
purchases of raw materials. Failure to maintain good relationships with
our current suppliers or to develop new supply sources could negatively affect
our ability to obtain the raw materials used to produce products in a timely
manner. If we are unable to obtain sufficient supplies of raw material
from our existing suppliers or develop alternative supply sources, we may be
unable to satisfy our customers’ orders which would materially and adversely
affect our revenues and our relationship with our customers. Furthermore,
we are dependent on our suppliers for the timely delivery of raw
materials. Should our suppliers fail to deliver such materials on time,
and if we are unable to source these materials from alternative suppliers on a
timely basis, our revenue and profitability would be adversely
affected.
11
The
Chinese government limits the amount of plastic waste which may be
imported.
The Chinese government limits the
amount of plastic waste which may be imported into China. Imports of
plastic waste are subject to an import quota regulated by the Ministry of
Environmental Protection; we have been approved for an import quota of 16,100
tons of plastic waste for the year ended on December 31, 2010. Although we
have not previously experienced difficulties obtaining and renewing our import
license or applying for and obtaining increases in our import quota, we cannot
guarantee that our import license or any application to increase our quota will
be approved in the future. If we fail to retain our import license or
cannot receive increases in our import quota as needed, we would have to use
domestically supplied plastics wastes which often consist largely of previously
recycled plastics of an inferior quality to virgin plastics waste. If we
are required to use domestically supplied plastics waste, the quality of our
products may decline and we could be required to lower our prices which would
adversely affect our revenue and profitability.
Changes
in Chinese environmental regulations and enforcement policies could subject us
to additional liability and adversely affect our ability to continue certain
operations.
Because Chinese environmental
regulations continue to develop and evolve rapidly, we cannot predict the extent
to which our operations may be affected by future enforcement policies as
applied to existing laws, by changes to current environmental laws and
regulations, or by the enactment of new environmental laws and
regulations. There are numerous Chinese provincial and local laws and
regulations relating to the protection of the environment and the ultimate
impact of complying with such laws and regulations is not always clearly known
or determinable because regulations under some of these laws have not yet been
promulgated or are undergoing revision. Our business and operating results
could be materially and adversely affected if we were required to increase
expenditures to comply with any new environmental regulations affecting our
operations. We may, in the future, receive citations or notices from
governmental authorities that our operations are not in compliance with our
permits or certain applicable regulations, including various transportation,
environmental or land use laws and regulations. Should we receive such
citations or notices, we would generally seek to work with the authorities to
resolve the issues raised by such citations or notices. There can be no
assurance, however, that we will always be successful in this regard, and the
failure to resolve a significant issue could result in adverse consequences to
us. As a result, we could incur material liabilities resulting from the
costs of complying with environmental laws, environmental permits or any claims
concerning noncompliance, or liability from contamination.
We cannot predict what environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist at our facilities or at third-party sites for
which we are liable. Enactment of stricter laws or regulations, stricter
interpretations of existing laws and regulations or the requirement to undertake
the investigation or remediation of currently unknown environmental
contamination at our own or third-party sites may require us to make additional
material expenditures, which would adversely affect our
profitability.
If
environmental regulation enforcement is relaxed, the demand for our products may
decrease.
The demand for our products is
substantially dependent upon the public’s concern with, and the continuation and
proliferation of, the laws and regulations governing the recycling of
plastic. A decrease in the level of public concern, the repeal or
modification of these laws, or any signification relaxation of regulations
relating to the recycling of plastic would significantly reduce the demand for
our products and could have a material adverse effect on our operations and
financial condition.
In
order to expand our recycling operations and increase our import quota for
plastic waste, we will have to move our operations to a state-owned industrial
park in Zhaoqing City and if we are unable to move our operations into the
industrial park, our ability to expand will be greatly diminished which will
have a material adverse affect on our results of operations.
The Zhaoqing Environmental Protection
Agency promulgated new environmental regulations in 2010 that will require us to
move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. The new regulations limit the
ability of plastics recycling operators located outside of the industrial park
to expand the size of the their operations or increase their import quota for
plastic waste. If we do not move our recycling and manufacturing
operations to the new industrial park, we will be unable to expand our
operations and will be unable to increase the import quota of plastic waste from
the 16,100 tons were are currently able to import. We are currently in the
process of trying to purchase a land use right in the industrial park upon which
to build our new factory, however, we cannot assure you that we will be
successful in obtaining land in the industrial park. While we hope to
complete construction on a new manufacturing facility in the industrial park in
mid-2011, we cannot assure you that construction will be occur as anticipated or
that we will have enough funds to cover the estimated $4 million in construction
costs for the new facility. If we are unable to move our operations to a
new facility in the industrial park in 2011, our results operations may be
materially adversely affected.
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Our
business could be materially affected by a global decrease in crude oil
prices.
Since most plastic resin is made from
refined crude oil byproducts, the price of oil significantly affects the raw
material costs for plastics. Any substantial decrease in the price of oil would
make production of virgin plastic material more attractive and substantially
reduce demand for our recycled plastics products.
We
have depended on a small number of customers for the vast majority of our
sales. A reduction in business from any of these customers could cause a
significant decline in our sales and profitability.
The vast majority of our sales are
generated from a small number of customers. During the nine months ended
September 30, 2010 and the years ended December 31, 2009 and 2008, we had three,
three and two customers that generated revenues of at least 10% of our total
revenues, respectively , with our largest customer accounting for 44%, 42%
and63% of our revenues for each respective period. A total of
approximately 85%, 87% and 92% of our revenues for the nine months ended
September 30, 2010 and the years ended December 31, 2009 and 2008, respectively,
were attributable to customers that each individually accounted for at least 10%
of our sales. We believe that we may depend upon a small number of customers for
a significant majority of our sales in the future, and the loss or reduction in
business from any of these customers could cause a significant decline in our
sales and profitability.
A
substantial portion of our assets has been comprised of accounts receivable
representing amounts owed by a small number of customers. If any of these
customers fails to timely pay us amounts owed, we could suffer a significant
decline in cash flow and liquidity which, in turn, could cause us to be unable
to pay our liabilities or expand our sales volume.
Our accounts receivable represented
approximately 35.7%, 38.2% and 35.9%, of our total current assets as of
September 30, 2010, December 31, 2009 and December 31, 2008, respectively. As of
September 30, 2010, 95.9% of our accounts receivable represented amounts owed by
6 customers, each of which represented over 5% of the total amount of our
accounts receivable. As of December 31, 2009, 94.3% of our trade
receivables were owed to us by 5 customers, each of which represented over 5% of
the total amount of our trade receivables. As of December 31, 2008, 90% of
our trade receivables were owed to us by three customers, each of which
represented over 5% of the total amount of our trade receivables. As a
result of the substantial amount and concentration of our trade receivables, if
any of our major customers fails to timely pay us amounts owed, we could suffer
a significant decline in cash flow and liquidity which could adversely affect
our ability to borrow funds to pay our liabilities and to purchase inventory to
sustain or expand our current sales volume.
In addition, our business is
characterized by long periods for collection from our customers and short
periods for payment to our suppliers, the combination of which may cause us to
have liquidity problems. We experience an average accounts settlement period
ranging from 15 days to as high as three months from the time we sell our
products to the time we receive payment from our customers. In contrast, we
typically need to place certain deposits and advances with our suppliers on a
portion of the purchase price in advance and for some suppliers we must maintain
a deposit for future orders. Because our payment cycle is considerably shorter
than our receivable cycle, we may experience working capital shortages. Working
capital management, including prompt and diligent billing and collection, is an
important factor in our results of operations and liquidity. We cannot assure
you that system problems, industry trends or other issues will not extend our
collection period and adversely impact our working capital.
Our
plastics waste operations are risky and we may be subject to civil liabilities
as a result of hazards posed by such operations.
Our operations are subject to potential
hazards incident to the gathering, processing and storage of plastics waste such
as product spills, leaks, emissions and fires. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage, and may result in
curtailment or suspension of operations at the affected facility.
Consequently, we may face civil liabilities in the ordinary course of our
business. At present, we do not carry any insurance to cover such
liabilities in the ordinary course of our business, except that our employees
are insured for injuries occurring at work. Although we have not faced any
civil liabilities historically in the ordinary course of our waste treatment
operations, there is no assurance that we will not face such liabilities in the
future. If such liabilities occur in the future, they may adversely and
materially affect our operations and financial condition.
Our
business could be subject to potential liability claims.
The testing, manufacturing and
marketing of our products involve inherent risks related to product liability
claims or similar legal theories that may be asserted against us, some of which
may cause us to incur significant defense costs. We do not currently
maintain or intent to procure product liability insurance coverage. A
successful product liability claim or other judgment against us could have a
material adverse effect upon us.
13
We do not carry any business
interruption or liability insurance. As a result, we may incur uninsured
losses, increasing the possibility that you would lose your entire investment in
our company.
We could be exposed to liabilities or
other claims for which we would have no insurance protection. We do not
currently maintain any business interruption insurance or any other
comprehensive insurance policy, except for a key-man life insurance policy on
certain of officers and directors and liability insurance on our
automobiles. As a result, we may incur uninsured liabilities and losses as
a result of the conduct of our business. Business disruption insurance is
available to a limited extent in China, but we have determined that the risks of
disruption, the cost of such insurance and the difficulties associated with
acquiring such insurance make it impractical for us to have such
insurance. Should uninsured losses occur, any purchasers of our common
stock could lose their entire investment.
Our
business is affected by competition and substantial technological
change.
We currently face competition from many
other recycling and plastics companies that produce recycled plastics at prices
that are substantially lower than the prices we charge. Many of these
companies have substantially greater financial and other resources than us and,
therefore, are able to spend more than us in areas such as product development,
manufacturing and marketing. In addition, several plastic disposable
packaging manufacturers and converters and others have made efforts to increase
the recycling of their products. Increased recycling of plastic products
could lessen their harmful environmental impact, one major basis upon which we
compete.
In addition, there are few proprietary
rights associated with the production of our recycled raw material products.
While we seek to differentiate ourselves from other Chinese recycling companies
through our production of proprietary products manufactured with our recycled
plastic products, there are no significant barriers to entry in the section of
our business devoted to production of recycled raw material products and resale
of plastic scrap materials. For this reason, there may be many substantial
competitors that may enter our markets that we are unable to currently
identify.
Competitors may develop products that
render our products or proposed products uneconomical or results in products
being commercialized that may be superior to our products. In addition,
alternatives to recycled plastics could be developed, which would have a
material adverse affect on us.
Our
production costs and revenues are impacted by increases in the cost of
labor.
The manufacturing of recycled plastics
is highly labor-intensive as all raw material classification is done by
hand. Recent changes in Chinese labor laws are likely to increase costs
further and impose restrictions on our relationship with our employees. In
June 2007, the National People’s Congress of the PRC enacted new labor law
legislation called the Labor Contract Law and more strictly enforced existing
labor laws. The Labor Contract Law, which became effective on
January 1, 2008, amended and formalized workers’ rights concerning overtime
hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the Labor Contract Law, we have had to increase the
salaries of our employees, provide additional benefits to our employees, and
revise certain other of our labor practices. The increase in labor costs
has increased our operating costs, which increase we have not always been able
to pass through to our customers. In addition, under the Labor Contract
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. Our PRC subsidiaries have not purchased sufficient social insurance
for all of their employees. If the local labor authorities order our PRC
subsidiaries to do so, we may become obligated to pay unpaid insurance premiums
thereby increasing our labor costs. Furthermore, there can be no assurance
that the labor laws will not change further or that their interpretation and
implementation will vary, which may have a negative effect upon our business and
results of operations.
14
We
may be exposed to monetary fines by the local housing authority and claims from
our employees in connection with our PRC subsidiaries’ non-compliance with
regulations with respect to contribution of housing provident funds for
employees.
According
to the relevant PRC regulations on housing provident funds, PRC enterprises are
required to contribute housing provident funds for their employees. The monthly
contributions must beat least 5% of each employee’s average monthly income in
the previous year. None of our PRC subsidiaries have opened the required housing
funds accounts since their establishment. Our PRC subsidiaries have not paid
such funds for their employees since its establishment. As of November,
2010, the total accumulated unpaid contribution amount was approximately
RMB233,040. Under local regulations on the collection of housing provident funds
in Guangzhou and Zhaoqing where our PRC subsidiaries are located, the local
housing authorities may require our PRC subsidiaries to rectify their
non-compliance by setting up bank accounts and making payments and relevant
filings for the unpaid housing funds for their employees within a specified time
period. If our PRC subsidiaries fail to do so within the specified time period,
the local housing authorities in Guangzhou and Zhaoqing may seek
judicial enforcement against our PRC subsidiaries to make such payments.
Each of our PRC subsidiaries could be also be subject to fines imposed by
the housing funds administrative authority of a minimum of RMB10,000
and maximum of RMB 50,000. Employees of our PRC subsidiaries may
also be entitled to claim payment of such funds individually. If we
receive any notice from the local housing authorities or any claim from our
current and former employees regarding our non-compliance with the regulations,
we will be required respond to the notice and pay all amounts due to the
government, including any administrative penalties imposed, which would require
us to divert our financial resources and/or impact our cash reserves, if any, to
make such payments. Additionally, any administrative costs in excess
of the payments, if material, may impact our operating results.
Our business may be adversely
affected by the global economic downturn, in addition to the continuing
uncertainties in the financial markets.
The global economy is currently in a
pronounced economic downturn. Global financial markets are continuing
to experience disruptions, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic
stability. Given these uncertainties, there is no assurance that
there will not be further deterioration in the global economy, the global
financial markets and consumer confidence. Any economic downturn
generally in the PRC, would have a material adverse effect on our business, cash
flows, financial condition and results of operations.
Although we believe we have adequate
liquidity and capital resources to fund our operations internally, in light of
current market conditions, our inability to access the capital markets on
favorable terms, or at all, may adversely affect our financial
performance. The inability to obtain adequate financing from debt or
capital sources could force us to self-fund strategic initiatives or even forego
certain opportunities, which in turn could potentially harm our
performance.
We
will need additional capital to successfully implement our current business
strategy, which may not be available to us, and if we raise additional capital,
it may dilute your ownership in us.
Our
continued growth is dependent upon our ability to generate increased revenue
from our existing customers, obtain new customers and raise capital from outside
sources. In
November 2009, we began constructing a new
factory in Guangzhou, China. We estimate that we will expend $5 million in
constructing this new facility. An
important element of our growth strategy is expected to be the development of
operational locations outside of Guangzhou, China. We
believe that
in order to continue to operate additional market share and general additional
revenue, we will have to raise more capital to fund the
construction and installation of additional facilities and to obtain additional
equipment to collect and process plastics
waste for our existing and future customers. For example, we
anticipate that we will require approximately $30 million in order to fund
expansion projects to upgrade our existing plastics waste processing facilities,
to finance the construction and
installation of additional facilities and to obtain additional equipment to
accommodate expected demand for our products and more stringent regulatory
criteria in environmental management. We anticipate that such funding will be
provided through a variety of
sources including bank loans, equity financing and net cash flow generated from
operations. We expect net proceeds of this offering to be
approximately $2.8 million, and therefore, we will have to seek additional
sources of funding to complete our new facility in Guangzhou, to build our new
factory in the state-owned industrial park in Guangzhou, to purchase needed new
equipment and to expand our product offerings and operations. We cannot
assure you that we will be able to obtain the necessary funding to be able to
complete construction on our new facilities or implement our expansion plans,
which would adversely affect our results of
operations.
In
the future, we may be unable to obtain the necessary financing for our capital
requirements on a timely basis and on acceptable terms, and our failure to do so
may adversely affect our financial position, competitive position, growth and
profitability. Our ability to obtain acceptable financing at any time
may depend on a number of factors, including: our financial condition and
results of operations; the condition of the PRC economy and the industrial waste
treatment industry in PRC, and conditions in relevant financial markets in the
United States, PRC and elsewhere in the world.
Our failure to effectively manage
growth could harm our business.
We have rapidly and significantly
expanded our operations since our inception and will endeavor to further expand
our operations in the future. Any additional significant growth in
the market for our services or our entry into new markets may require and
expansion of our employee base for managerial, operational, financial, sales and
marketing and other purposes. During any growth, we may face problems
related to our operational and financial systems and controls, including quality
control and service capacities. We would also need to continue to
expand, train and manage our employee base. Continued future growth
will impose significant added responsibilities upon the members of management to
identify, recruit, maintain, integrate, and motivate new
employees.
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Aside from increased difficulties in
the management of human resources, we may also encounter working capital issues,
as we will need increased liquidity to finance the development of new products,
to increase our output capacity and to hire additional employees. For
effective growth management, we will be required to continue improving our
operations, management, and financial systems and controls. Our failure to
manage growth effectively may lead to operational and financial inefficiencies
that will have a negative effect on our profitability. We cannot assure
investors that we will be able to timely and effectively meet that demand and
maintain the quality standards required by our existing and potential
customers.
We may pursue future growth through
strategic acquisitions and alliances which may not yield anticipated benefits
and may adversely affect our operating results, financial condition and existing
business.
We may seek to grow in the future
through strategic acquisitions in order to complement and expand our
business. The success of our acquisition strategy will depend on, among
other things:
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the
availability of suitable
candidates;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate favorable terms
for those acquisitions;
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the
availability of funds to finance
acquisitions;
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the
ability to establish new informational, operational and financial systems
to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
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the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur
substantial expenses and devote significant management time and resources in
seeking to complete acquisitions. Acquired businesses may fail to meet our
performance expectations. If we do not achieve the anticipated benefits of
an acquisition as rapidly as expected, or at all, investors or analysts may not
perceive the same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We may be subject to intellectual
property infringement claims, which could result in litigation and substantial
costs to defend.
We cannot be certain that our
operations or any aspects of our business do not or will not infringe upon
patents, copyrights or other intellectual property rights held by third
parties. We may receive notice of claims of infringement of other parties’
proprietary rights. Such actions could result in litigation and we could
incur significant costs and diversion of resources in defending such
claims. The party making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief. Even
if such litigation is not successful, it could result in substantial costs and
diversion of resources and management’s attention from the operation of our
business.
We face risks related to natural
disasters, terrorist attacks or other unpredictable events in China which could
have a material adverse effect on our business and results of
operations.
Our business could be materially and
adversely affected by natural disasters, terrorist attacks or other events in
China where all of our operations are located. For example, in early 2008,
parts of China suffered a wave of strong snow storms that severely impacted
public transportation systems. In May 2008, Sichuan Province in China
suffered a strong earthquake measuring approximately 8.0 on the Richter scale
that caused widespread damage and casualties. The May 2008 Sichuan
earthquake has had a material adverse effect on the general economic conditions
in the areas affected by the earthquake. The occurrence of any future
disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events, or our information system or
communications network breaks down or operates improperly as a result of such
events, our facilities may be seriously damaged, and we may have to stop or
delay operations. We may incur expenses relating to such damages, which
could have a material adverse effect on our business and results of
operations.
16
We may adopt an equity incentive plan
under which we may grant securities to compensate employees and other services
providers, which would result in increased share-based compensation expenses
and, therefore, reduce net income.
We may adopt an equity incentive plan
under which we may grant shares or options to qualified employees. Under
current accounting rules, we would be required to recognize share-based
compensation as compensation expense in our statement of operations, based on
the fair value of equity awards on the date of the grant, and recognize the
compensation expense over the period in which the recipient is required to
provide service in exchange for the equity award. We have not made any
such grants in the past, and accordingly our results of operations have not
contained any share-based compensation charges. The additional expenses
associated with share-based compensation may reduce the attractiveness of
issuing stock options under an equity incentive plan that we may adopt in the
future. If we grant equity compensation to attract and retain key
personnel, the expenses associated with share-based compensation may adversely
affect our net income. However, if we do not grant equity compensation, we
may not be able to attract and retain key personnel or be forced to expend cash
or other compensation instead. Furthermore, the issuance of equity awards
would dilute the shareholders’ ownership interests in our company.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
As substantially all of our assets
are located in the PRC and all of our revenues are derived from our operations
in China, changes in the political and economic policies of the PRC government
could have a significant impact upon the business we may be able to conduct in
the PRC and accordingly on the results of our operations and financial
condition.
Our business operations may be
adversely affected by the current and future political environment in the
PRC. The Chinese government exerts substantial influence and control over
the manner in which we must conduct our business activities. Our ability
to operate in China may be adversely affected by changes in Chinese laws and
regulations, including those relating to taxation, import and export tariffs,
raw materials, environmental regulations, land use rights, property and other
matters. Under the current government leadership, the government of the
PRC has been pursuing economic reform policies that encourage private economic
activity and greater economic decentralization. There is no assurance,
however, that the government of the PRC will continue to pursue these policies,
or that it will not significantly alter these policies from time to time without
notice.
Our operations are subject to PRC
laws and regulations that are sometimes vague and uncertain. Any changes
in such PRC laws and regulations, or the interpretations thereof, may have a
material and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Decided legal cases do not have so much
value as precedent in China as those in the common law system prevalent in the
United States. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to, governmental approvals required for conducting business and
investments, laws and regulations governing the plastics recycling industry, as
well as commercial, antitrust, patent, product liability, environmental laws and
regulations, consumer protection, and financial and business taxation laws and
regulations.
The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic
matters. However, because these laws and regulations are relatively new,
and because of the limited volume of published cases and judicial interpretation
and their lack of force as precedents, interpretation and enforcement of these
laws and regulations involve significant uncertainties. New laws and
regulations that affect existing and proposed future businesses may also be
applied retroactively.
Our PRC subsidiary, Kelida, is
considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of existing
or new PRC laws or regulations may have on our businesses. If the relevant
authorities find us in violation of PRC laws or regulations, they would have
broad discretion in dealing with such a violation, including, without
limitation:
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levying
fines;
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing
original actions in China based upon U.S. laws, including the federal securities
laws or other foreign laws against us or our management.
All of our current operations are
conducted in China. Moreover, all of our directors and officers are
nationals and residents of China. All or substantially all of the assets
of these persons are located outside the United States and in the PRC. As
a result, it may not be possible to effect service of process within the United
States or elsewhere outside China upon these persons. In addition,
uncertainty exists as to whether the courts of China would recognize or enforce
judgments of U.S. courts obtained against us or such officers and/or directors
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear original actions
brought in China against us or such persons predicated upon the securities laws
of the United States or any state thereof.
The scope of the business licenses
for our subsidiaries organized in the PRC, Kelida, Hua Su, Chuang Yi, Xin Ye,
and Li Jun, is limited, and we may not expand or continue our business without
government approval and renewal, respectively.
Our principal operating entities,
Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun, can only conduct business within
their approved business scopes, which ultimately appears on their business
licenses. The business for Kelida covers its present business to engage in
the research, development and manufacture of intelligent control systems, metal
parts and electronic products, the sale of self-made products and the provision
of after-sale service. The business license for Chuang Yi covers its
present business to engage in the recycling, processing and sale of plastic and
hardware waste, handling goods and technology importation and exportation as its
own business or as an agent. The business licenses for Hua Su covers its
present business to engage in the manufacture and sale of imported plastic waste
and hardware, handling goods and technology importation and exportation as its
own business or as an agent. The business licenses for Li Jun covers its
present business to engage in the manufacture and sale of recycled waste plastic
products, plastic craft products, handling goods and technology
importation and exportation as its own business or as an agent. The business
licenses for Xin Ye covers its present business to engage in the
manufacture and sale of recycled
waste plastic products and handling goods and technology importation and
exportation as its own business or as an agent. Additionally, we may
choose to enter into new areas and activities that are not currently covered by
our business licenses. Prior to expanding our business and engaging in
activities that are not covered by our current business licenses, we are
required to apply and receive approval from the relevant PRC government
authorities. In order for us to expand our business beyond the scope of
our licenses, we will be required to enter into a negotiation with the PRC
authorities for the approval to expand the scope of our business. PRC
authorities, which have discretion over business licenses, may reject our
request to expand the scope of our business licenses to include our planned
areas of expansion. We will be prohibited from engaging in any activities
that the PRC authorities do not approve in our expanded business licenses.
Companies that operate outside the scope of their licenses can be subjected to
fines, disgorgement of income and ordered to cease operations. Our
business and results of operations may be materially and adversely affected if
we are unable to obtain the necessary government approval for expanded business
licenses that cover any areas in which we wish to expand.
Contract drafting, interpretation and
enforcement in China involve significant uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As
compared with contracts in the United States, contracts governed by PRC law tend
to contain less detail and are not as comprehensive in defining contracting
parties’ rights and obligations. As a result, contracts in China are more
vulnerable to disputes and legal challenges. In addition, contract
interpretation and enforcement in China is not as developed as in the United
States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject
to disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
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Recent PRC regulations relating to
acquisitions of PRC companies by foreign entities may create regulatory
uncertainties that could restrict or limit our ability to operate. Our
failure to comply with PRC regulations relating to corporate restructurings and
/ or obtain the prior approval of the China Securities Regulatory Commission, or
the CSRC, for our planned public offering and the listing and trading of our
common stock could have a material adverse effect on our business, operating
results, reputation and trading price of our common stock.
The PRC State Administration of Foreign
Exchange, or “SAFE,” issued a public notice in October 2005, known as
Circular 75, concerning the use of offshore holding companies controlled by
PRC residents in mergers and acquisitions in China. Circular 75 requires
that (1) a PRC resident shall register with a local branch of the SAFE
before he or she establishes or controls an overseas special purpose vehicle, or
SPV, for the purpose of overseas equity financing (including convertible debt
financing); (2) when a PRC resident contributes the assets of or his or her
equity interests in a domestic enterprise to an SPV, or engages in overseas
financing after contributing assets or equity interests to an SPV, such PRC
resident must register his or her interest in the SPV and any changes in such
interest with a local branch of the SAFE; and (3) when the SPV undergoes a
material change outside of China, such as a change in share capital or merger or
acquisition, the PRC resident shall, within 30 days from the occurrence of
the event that triggers the change, register such change with a local branch of
the SAFE. In addition, SAFE issued updated internal implementing rules, or
the Implementing Rules in relation to Circular 75. However, there
exist uncertainties regarding the SAFE registration for PRC residents’ interests
in overseas companies. If any PRC resident stockholder of a SPV fails to
make the required SAFE registration and amended registration, the onshore PRC
subsidiaries of that offshore company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or
liquidation to the offshore entity. 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. We have requested our shareholders who are PRC residents to
make the necessary applications, filings and amendments as required under
Circular 75 and other related rules, however, we cannot assure you that such PRC
residents will be able to complete the necessary approval and registration
procedures required by the SAFE regulations. Failure by any PRC resident
beneficial holder to register as required with the relevant branch of SAFE could
subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit our PRC
subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects. Because of uncertainty in how Circular 75 will be
interpreted and enforced, we cannot be sure how it will affect our business
operations or future plans. For example, our PRC subsidiaries’ ability to
conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with
Circular 75 by our PRC resident beneficial holders over whom we have no
control.
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission and SAFE, released a substantially amended
version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect on
September 8, 2006 and was further amended on June 22, 2009.
These new rules significantly revised China’s regulatory framework governing
onshore-to-offshore restructurings and foreign acquisitions of domestic
enterprises. These new rules signify greater PRC government attention to
cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in
China and requiring MOFCOM approval of a broad range of merger, acquisition and
investment transactions. Further, the new rules establish reporting
requirements for acquisition of control by foreigners of companies in key
industries, and reinforce the ability of the Chinese government to monitor and
prohibit foreign control transactions in key industries.
Among other things, the Revised M&A
Regulations include new provisions that purport to require that an offshore
special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must 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 procedures specifying documents and materials required to be
submitted to it by SPVs seeking CSRC approval of their overseas listings.
However, the application of this PRC regulation remains unclear with no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the CSRC approval requirement. Our PRC counsel, Han
Kun Law Offices, believes that it is uncertain whether the transaction is
subject to CSRC’s approval due to the reasons that (i) Kelida was established by
means of direct investment rather than by merger or acquisition by Weixin HK;
and (ii) in reality, many other similar companies have completed similar
transactions like the share exchange and private placement contemplated under
the Exchange Agreement without CSRC’s approval and our PRC legal counsel is not
aware of any situation in which the CSRC has imposed a punishment or penalty in
connection with any such transactions. However, if the CSRC or other PRC
Government Agencies subsequently determine that CSRC approval is required for
the share exchange and private placement contemplated under the Exchange
Agreement, we may face material regulatory actions or other sanctions from the
CSRC or other PRC Government Agencies. These regulatory agencies may impose
fines and penalties on our operations in the PRC, limit our operating privileges
in the PRC, 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. In addition,
any uncertainties and/or negative publicity regarding this CSRC approval
requirement could have a material adverse effect on the trading price of our
common stock.
19
According to the Revised M&A
Regulations, a “Related Party Acquisition” is defined as having taken place when
a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity
that is established or controlled, directly or indirectly, by those same PRC
individual(s). Under the Revised M&A Regulations, any Related Party
Acquisition must be approved by MOFCOM and any indirect arrangement or series of
arrangements which achieves the same end result without the approval of MOFCOM
is a violation of PRC law. In February 2010, Kelida acquired the equities
of each of Chuang Yi, Hua Su, Li Jun and Xin Ye (the “WFOE Acquisition”).
At the time of the WFOE Acquisition, the WFOE was indirectly owned by a PRC
individual who had an entrustment arrangement with the PRC shareholders of each
of Chuang Yi, Hua Su, Li Jun and Xin Ye. Under such entrustment
arrangement, the PRC shareholders of each of Chuang Yi, Hua Su, Li Jun and Xin
Ye were holding their shares on behalf of the PRC individual indirectly owning
the WFOE prior to and until the WFOE Acquisition. The WFOE Acquisition has
been completed without being deemed by relevant PRC Government Agencies as
Related Party Acquisition which requires the approval of MOFCOM. However,
it remains uncertain that whether the PRC Government Agencies would later
challenge the WFOE Acquisition with the concern of Related Party Acquisition and
require the MOFCOM’s approval for the WFOE Acquisition and impose material
regulatory actions or other sanctions on us if we are unable to obtain the
MOFCOM approval or a waiver of such approval, if and when procedures are
established to obtain such a waiver, invalidate the WFOE Acquisition, limit our
operating privileges in China, delay or restrict the repatriation of the
proceeds from any private placement or public offerings into China, limit our
PRC subsidiaries’ ability to make distributions or pay dividends to us or take
other actions that could have a material and adverse effect on our business,
financial condition or results of operations, as well as on the
trading price of our common stock
It is uncertain how our business
operations or future strategy will be affected by the interpretations and
implementation of Circular 75 and the Revised M&A Regulations. It
is anticipated that application of the new rules will be subject to significant
administrative interpretation, and we will need to closely monitor how MOFCOM,
SAFE, CSRC and other ministries apply the rules to ensure that our domestic and
offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we may
need to expend significant time and resources to maintain compliance with such
rules.
If our land use rights or the land
use rights of our landlord are revoked, we would be forced to relocate
operations.
Under Chinese law, land is owned by the
state or rural collective economic organizations. The state issues to the
land users the land use right certificate. Land use rights can be revoked
and the land users could be forced to vacate at any time when redevelopment of
the land is in the public interest. The public interest rationale is
interpreted quite broadly and the process of land appropriation may be less than
transparent. In November 2009, we acquired approximately 12,143 square
meters of land equity in Guangzhou for a total of RMB 7.29 million under land
use right grant from the Guangzhou Land Resource Bureau that gives us the right
to use the land for 50 years and an agreement with Guangzhou Land Resource
Bureau. Besides our land use rights in Guangzhou, we rely on our own land
use rights and the land use rights of our landlords in Zhaoqing, and the loss of
own land uses rights or our landlords’ land use rights would require us to
identify and relocate our operations, which could have a material adverse effect
on our financial conditions and results of operations.
The
plants built by Chuang Yi, Hua Su, Li Jun and Xin Ye on the land they leased
from certain landlord are temporary buildings, and we cannot assure you of our
continuity use of the plants and we may be forced to relocate
operations.
Chuang
Yi, Hua Su, Li Jun and Xin Ye lease land from a landlord in Zhaoqing. Each
of Chuang Yi, Hua Su, Li Jun and Xin Ye has built its own plant on the leased
land. All of the plants were built as temporary buildings and, therefore,
Chuang Yi, Hua Su, Li Jun and Xin Ye are not able to obtain any house ownership
certificates for their plants. Temporary buildings may only exist for a
limited period and the local authority may determine to remove the temporary
buildings at its discretion. If the local authority orders us to remove
the plants, we have to relocate our operations, which could have a material
adverse effect on our financial conditions and results of
operations.
20
We will not be able to complete an
acquisition of prospective acquisition targets in the PRC unless their financial
statements can be reconciled to U.S. generally accepted accounting principles in
a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S.
generally accepted accounting principles. If we attempt to acquire a
significant PRC target company and/or its assets, we would be required to obtain
or prepare financial statements of the target that are prepared in accordance
with and reconciled to U.S. generally accepted accounting principles.
Federal securities laws require that a business combination meeting certain
financial significance tests require the public acquirer to prepare and file
historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a
proposed acquisition target does not have financial statements that have been
prepared in accordance with, or that can be reconciled to, U.S. generally
accepted accounting principles and audited in accordance with the standards of
the PCAOB, we will not be able to acquire that proposed acquisition
target. These financial statement requirements may limit the pool of
potential acquisition targets with which we may acquire and hinder our ability
to expand our retail operations. Furthermore, if we consummate an
acquisition and are unable to timely file audited financial statements and/or
pro forma financial information required by the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), such as Item 9.01 of Form 8-K, we will be
ineligible to use the SEC’s short-form registration statement on Form S-3
to raise capital, if we are otherwise eligible to use a Form S-3. If
we are ineligible to use a Form S-3, the process of raising capital may be
more expensive and time consuming and the terms of any offering transaction may
not be as favorable as they would have been if we were eligible to use
Form S-3.
We face uncertainty from China’s
Circular on Strengthening the Administration of Enterprise Income Tax on
Non-Resident Enterprises’ Share Transfer Income (“Circular 698”) that was
released in December 2009 with retroactive effect from January 1,
2008.
The Chinese State Administration of
Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698)
on December 10, 2009 that addresses the transfer of shares of Chinese resident
companies 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. While,
Circular 698 does not apply to shareholders who are individuals, two of the
original shareholders of Weixin BVI were BVI companies. The PRC authority
has the discretion to determine whether these enterprise shareholders are
treated as a resident enterprise. If such shareholders are recognized as
non-resident enterprises, Circular 698 may have been applicable to the
Share Exchange due to the transfer of shares of Weixin BVI, which indirectly
holds the equity interests of Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, to
the Company by such enterprise shareholders. Circular 698 provides
that where a non-resident enterprise investor indirectly transfers the equity of
a PRC resident enterprise, if the overseas intermediary holding company being
transferred by the non-resident enterprise is established in a country/region
where the effective tax rate is less than 12.5% or which does not tax the
overseas income of its residents, the non-resident enterprise must submit the
required documents to the PRC tax authority in charge of the PRC resident
enterprise within 30 days after the equity transfer agreement is
concluded. However, there is uncertainty as to the application of
Circular 698. For example, while the term "indirectly transfer" is
not defined, it is understood that the relevant PRC tax authorities have
jurisdiction regarding requests for information over a wide range of foreign
entities having no direct contact with China. Moreover, the relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the country or jurisdiction and to
what extent and the process of the disclosure to the tax authority in charge of
that Chinese resident enterprise. We have not provided any information to
the relevant PRC tax authorities regarding the share exchange
transaction.
We have sought the advice, but not an
opinion, of PRC legal counsel regarding the application of and the risks
associated with Circular 698. Circular 698, which provides
parties with a short period of time to comply its requirements, indirectly taxes
foreign companies on gains derived from the indirect sale of a Chinese
company. It further provides that 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. However, there are
no formal declarations with regard to how to decide “abuse of form of
organization” and “reasonable commercial purpose,” which can be utilized by us
to balance if our company complies with the Circular 698.
Due to the short history of the New EIT
law and lack of applicable legal precedents, it remains unclear how the PRC tax
authorities will determine the PRC tax resident treatment of our holding
companies, Weixin International Co., Limited, a company organized under the laws
of the British Virgin Islands (“Weixin BVI”) and Wei Xin Holding Group Limited,
a company organized under the laws of Hong Kong (“Weixin HK”). If we,
Weixin BVI or Weixin HK is determined to be a PRC resident enterprise by PRC tax
authorities, Circular 698 will not be applicable to any direct or indirect
transfer of our shareholdings in Kelida, Hua Su, Chuang Yi, Xin Ye or Li
Jun. If we, Weixin BVI or Weixin HK is determined to be a non-resident
enterprise by the PRC tax authorities and the direct or indirect transfer of our
shareholdings in Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, is recognized by
the tax authority in charge as the transfer of shares of Chinese resident
companies by nonresident companies, 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. Because Weixin HK, a Hong Kong
company owns 100% of Kelida; Weixin BVI, a British Virgin Islands company owns
100% of Weixin HK; and the Company, a Delaware corporation, owns 100% of Weixin
BVI, it is possible that Circular 698 could apply to any transfer of shares
of the Company, Weixin BVI or Weixin HK, as an indirect transfer of the equity
of Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun, if such transfers are not made
through a public securities market or by individuals. If the PRC tax
authority determines that Circular 698 applies to us, we will be obligated
to make tax returns filings with the relevant PRC tax authority in accordance
with PRC tax laws and regulations. Failure to do so will subject us to
fines up to RMB 10,000 ($1,471). Furthermore, if the PRC tax authority
determines that our arrangement which resulted in the underpayment of taxes was
done to evade taxation, in addition to paying all the underpaid taxes, we may be
subject to further penalties including late fees, fines ranging from 50% to 500%
of the underpaid taxes, and even criminal liabilities under grave circumstances.
21
The foreign currency exchange rate
between U.S. Dollars and Renminbi could adversely affect our financial
condition.
Until 1994, the Renminbi experienced a
gradual but significant devaluation against most major currencies, including
dollars, and there was a significant devaluation of the Renminbi on
January 1, 1994 in connection with the replacement of the dual exchange
rate system with a unified managed floating rate foreign exchange system.
Since 1994, the value of the Renminbi relative to the U.S. dollar has remained
stable and has appreciated slightly against the U.S. Dollar. Countries,
including the United States, have argued that the Renminbi is artificially
undervalued due to China’s current monetary policies and have pressured China to
allow the Renminbi to float freely in world markets. In July 2005, the PRC
government changed its policy of pegging the value of the Renminbi to the U.S.
dollar. Under the new policy the Renminbi is permitted to fluctuate within
a narrow and managed band against a basket of designated foreign
currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
U.S. dollar.
As we may rely on dividends and other
fees paid to us by our subsidiary and affiliated consolidated entities in China,
any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the amount of,
and any dividends payable on, our shares in U.S. dollars. To the extent
that we need to convert U.S. dollars into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our shares or for other business
purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amount available to us. In addition,
since our functional and reporting currency is the U.S. dollar while the
functional currency of our subsidiary and affiliated consolidated entities in
China is Renminbi, appreciation or depreciation in the value of the Renminbi
relative to the U.S. dollar would have a positive or negative effect on our
reported financial results, which may not reflect any underlying change in our
business, results of operations or financial condition.
Governmental control of currency
conversion may limit our ability to utilize our revenues.
Substantially all of our revenues and
expenses are denominated in Renminbi. Under PRC laws, the Renminbi is
currently convertible under a company’s “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the company’s “capital account,” which includes foreign direct investment
and loans, without the prior approval of SAFE. SAFE reserves the
discretion to deny the conversion of RMB into foreign currencies for capital
account transactions. Currently our PRC subsidiaries, Kelida, Hua Su,
Chuang Yi, Xin Ye, and Li Jun, may purchase foreign currencies for settlement of
current account transactions, including payments of dividends to us, without the
approval of SAFE. Therefore, Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun
may convert the revenues it generates in RMB into other currencies, such as U.S.
Dollars, for settlement of current account transactions without having to obtain
approval from SAFE. However, foreign exchange transactions by Kelida, Hua
Su, Chuang Yi, Xin Ye and Li Jun under the capital account continue to be
subject to significant foreign exchange controls and require the approval of or
need to register with PRC governmental authorities, including SAFE.
Therefore, Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun may not convert its
sales revenues from RMB into other currencies for capital account transactions,
such as to repay a loan, without first obtaining the approval of SAFE. If
Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun borrow foreign currency loans from
us or other foreign lenders, these loans must first be registered with the
SAFE. If Kelida, a wholly foreign-owned enterprise, borrows foreign
currency, the accumulative amount of its foreign currency loans shall not exceed
the difference between the total investment and the registered capital of
Kelida. If we finance Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun by means
of additional capital contributions, these capital contributions must be
approved by certain government authorities such as the Ministry of Commerce or
its local counterparts. Additionally, the existing and future restrictions
on currency exchange may affect the ability of our PRC subsidiary or affiliated
entities to obtain foreign currencies, limit our ability to meet our foreign
currency obligations, or otherwise materially and adversely affect our
business.
22
Inflation in the PRC could negatively
affect our profitability and growth.
While the PRC economy has experienced
rapid growth, such growth has been uneven among various sectors of the economy
and in different geographical areas of the country. Rapid economic growth
can lead to growth in the money supply and rising inflation. According to
the National Bureau of Statistics of China, the change in China’s Consumer Price
Index increased to 8.5% in April 2008. If prices for our products and
services rise at a rate that is insufficient to compensate for the rise in the
costs of supplies such as raw materials, it may have an adverse effect on our
profitability.
Furthermore, in order to control
inflation in the past, the PRC government has imposed controls on bank credits,
limits on loans for fixed assets and restrictions on state bank lending.
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. The implementation of such policies
may impede economic growth. In October 2004, the People’s Bank of China,
the PRC’s central bank, raised interest rates for the first time in nearly a
decade and indicated in a statement that the measure was prompted by
inflationary concerns in the Chinese economy. In April 2006, the People’s
Bank of China raised the interest rate again. Repeated rises in interest
rates by the central bank would likely slow economic activity in China which
could, in turn, materially increase our costs and also reduce demand for our
products and services.
Because our funds are held in banks
which do not provide insurance, the failure of any bank in which we deposit our
funds could affect our ability to continue in business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A
significant portion of our assets are in the form of cash deposited with banks
in the PRC, and in the event of a bank failure, we may not have access to our
funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
Failure to comply with the United
States Foreign Corrupt Practices Act could subject us to penalties and other
adverse consequences.
As our ultimate holding company is a
Delaware corporation, we are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that
may compete with us, are not subject to these prohibitions. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices may occur
from time-to-time in the PRC. We can make no assurance, however, that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.
If we make equity compensation grants
to persons who are PRC citizens, they may be required to register with the State
Administration of Foreign Exchange of the PRC, or SAFE. We may also face
regulatory uncertainties that could restrict our ability to adopt an equity
compensation plan for our directors and employees and other parties under PRC
law.
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.” It is not clear whether
Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. Domestic individuals who
are granted shares or share options by companies listed on overseas stock
exchanges based on the employee share option or share incentive plan are
required to register with the State Administration of Foreign Exchange or its
local counterparts. Pursuant to Circular 78, PRC individuals
participating in the employee stock option plans of the overseas listed
companies shall entrust their employers, including the overseas listed companies
and the subsidiaries or branch offices of such offshore listed companies in
China, or engage domestic agents to handle various foreign exchange matters
associated with their employee stock options plans. The domestic agents or
the employers shall, on behalf of the domestic individuals who have the right to
exercise the employee stock options, apply annually to the State Administration
of Foreign Exchange 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 domestic individuals from sale of shares under the stock option
plans granted by the overseas listed companies must be remitted into the bank
accounts in China opened by their employers or PRC agents. If we adopt an
equity compensation plan in the future and make option grants to our officers
and directors, most of whom are PRC citizens, Circular 78 may require our
officers and directors who receive option grants and are PRC citizens to
register with SAFE. We will comply with Circular 78 if we adopt an
equity incentive plan. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that any of our equity compensation plans
are subject to Circular 78, failure to comply with such provisions may
subject our PRC subsidiary when it is deemed a domestic agent as defined under
Circular 78 and participants of our incentive plan who are PRC citizens to
fines and legal sanctions and may prevent us from being able to grant equity
compensation to our PRC employees. If we are unable to compensate our PRC
employees and directors through equity compensation, our business operations may
be adversely affected.
23
Under the New EIT Law, we, Weixin BVI
and Weixin HK may be classified as “resident enterprises” of China for tax
purposes, which may subject us, Weixin BVI and Weixin HK to PRC income tax on
taxable global income.
Under the new PRC Enterprise Income Tax
Law (the “New EIT Law”) and its implementing rules, both of which became
effective on January 1, 2008, enterprises are classified as resident
enterprises and non-resident enterprises. An enterprise established
outside of China with its “de facto management bodies” located within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese domestic enterprise for enterprise income tax
purposes. The implementing rules of the New EIT Law define de facto
management body as a managing body that in practice exercises “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. Due to the short history of
the New EIT law and lack of applicable legal precedents, it remains unclear how
the PRC tax authorities will determine the PRC tax resident treatment of a
foreign company such as us, Weixin BVI and Weixin HK. The Company has not
sought the advice of PRC tax counsel regarding the risks associated with the New
EIT Law. Because our Weixin BVI’s and Weixin HK’s members of management
are located in China, we believe it is likely that the we, Weixin BVI and Weixin
HK meet the qualifications of a “resident enterprise” and would be recognized as
a Chinese “resident enterprise,” subject to the ultimate judgment of the PRC tax
authority, based on the standard of “de facto management body”. “Resident
enterprise” treatment would not have impacted the Company’s results since the
New EIT Law’s effectiveness, as Weixin BVI and Weixin HK have no taxable income
and no dividends were paid by any of our subsidiaries, including Weixin BVI,
Weixin HK, Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun. If the PRC tax
authorities determine that we, Weixin BVI or Weixin HK is a “resident
enterprise” for PRC enterprise income tax purposes, a number of PRC tax
consequences could follow. First, we may be subject to the enterprise
income tax at a rate of 25% on our worldwide taxable income, including interest
income on the proceeds from the Private Placement, as well as PRC enterprise
income tax reporting obligations. The failure to pay such taxes will
subject us to fines up to RMB10, 000 ($1,471), and furthermore, if the PRC tax
authority determines that our arrangement which resulted in the underpayment of
taxes was done to evade taxation, in addition to paying all the underpaid taxes,
we may be subject to further penalties including late fees, fines ranging from
50% to 500% of the underpaid taxes, and even criminal liabilities under grave
circumstances. Second, the New EIT Law provides that dividend paid between
“qualified resident enterprises” is exempted from enterprise income tax. A
recent circular issued by the State Administration of Taxation on April 22,
2009, regarding the standards used to classify certain Chinese-invested
enterprises controlled by Chinese enterprises or Chinese group enterprises and
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 shareholders. It is unclear whether the
dividends that we, Weixin BVI or Weixin HK receives from Kelida, Hua Su, Chuang
Yi, Xin Ye or Li Jun will constitute dividends between “qualified resident
enterprises” and would therefore qualify for tax exemption, because the
definition of qualified resident enterprises is unclear and the relevant PRC
government authorities have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. We are actively
monitoring the possibility of “resident enterprise” treatment for the applicable
tax years and are evaluating appropriate organizational changes to avoid this
treatment, to the extent possible. As a result of the New EIT Law, our
historical operating results will not be indicative of our operating results for
future periods and the value of our common stock may be adversely
affected.
Dividends payable by us to our
foreign investors and any gain on the sale of our shares may be subject to taxes
under PRC tax laws.
If dividends payable to our
stockholders are treated as income derived from sources within China, then the
dividends that stockholders receive from us, and any gain on the sale or
transfer of our shares, may be subject to taxes under PRC tax laws. We
have not consulted with PRC tax counsel regarding the taxes that may be
associated with dividends paid by us.
24
Under the New EIT Law and its
implementing rules, PRC enterprise income tax at the rate of 10% is applicable
to dividends payable by us to our investors that are non-resident enterprises so
long as such non-resident enterprise investors do not have an establishment or
place of business in China or, despite the existence of such establishment of
place of business in China, the relevant income is not effectively connected
with such establishment or place of business in China, to the extent that such
dividends have their sources within the PRC. Similarly, any gain realized
on the transfer of our shares by such investors is also subject to a 10% PRC
income tax if such gain is regarded as income derived from sources within China
and we are considered as a resident enterprise which is domiciled in China for
tax purpose. Additionally, there is a possibility that the relevant PRC
tax authorities may take the view that the purpose of us, Weixin BVI and Weixin
HK is holding Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, and the capital gain
derived by our overseas shareholders or investors from the share transfer is
deemed China-sourced income, in which case such capital gain may be subject to a
PRC withholding tax at the rate of up to 10%. If we are required under the
New EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders or investors who are non-resident enterprises, or if you are
required to pay PRC income tax on the transfer or our shares under the
circumstances mentioned above, the value of your investment in our shares may be
materially and adversely affected.
In January, 2009, the State
Administration of Taxation promulgated the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct
obligation to make the following payment to a non-resident enterprise shall be
the relevant tax withholders for such non-resident enterprise, and such payment
includes: incomes from equity investment (including dividends and other return
on investment), interests, rents, royalties, and incomes from assignment of
property as well as other incomes subject to enterprise income tax received by
non-resident enterprises in China. Further, the Measures provides that in
case of equity transfer between two non-resident enterprises which occurs
outside China, the non-resident enterprise which receives the equity transfer
payment shall, by itself or engage an agent to, file tax declaration with the
PRC tax authority located at place of the PRC company whose equity has been
transferred, and the PRC company whose equity has been transferred shall assist
the tax authorities to collect taxes from the relevant non-resident
enterprise. However, it is unclear whether the Measures refer to the
equity transfer by a non-resident enterprise which is a direct or an indirect
shareholder of the said PRC company. Given these Measures, there is a
possibility that we may have an obligation to withhold income tax in respect of
the dividends paid to non-resident enterprise investors. If we have such
an obligation, our omission or failure to fulfill such obligation may subject us
to similar penalties to those applied to a taxpayer, including fines up to
RMB10,000, and in the case of being recognized as constituting evasion of
taxation, other than making up for the underpaid taxes, we may be subject to
further penalties including late fees, fines ranging from 50% to 500% of the
underpaid taxes, and even criminal liabilities under grave
circumstances.
SAFE rules and regulations may limit
our ability to transfer the net proceeds from the Private Placement offering to
our PRC subsidiaries, which may adversely affect the business expansion of our
PRC subsidiaries, and we may not be able to convert the net proceeds from the
Private Placement into Renminbi to invest in or acquire any other PRC
companies.
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 foreign currencies
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. In addition, SAFE strengthened its oversight of the flow
and use of the registered capital of a foreign-invested company settled in
Renminbi converted from foreign currencies. The use of such Renminbi
capital may not be changed without SAFE’s approval, and may not in any case be
used to repay Renminbi loans if the proceeds of such loans have not been
used. Violations of Circular 142 will result in severe penalties, such as
heavy fines. As a result, Circular 142 may significantly limit our ability
to transfer the net proceeds from the Private Placement to our PRC subsidiaries,
Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun, and we may not be able to convert
the net proceeds from the Private Placement into Renminbi to invest in or
acquire any other PRC companies.
Any recurrence of Severe Acute
Respiratory Syndrome (SARS), Avian Flu, or another widespread public health
problem, such as the spread of H1N1 (“Swine”) Flu, in the PRC could adversely
affect our operations.
A renewed outbreak of SARS, Avian Flu
or another widespread public health problem, such as the spread of H1N1
(“Swine”) Flu, in China, where all of our operations are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon our ability to recycle plastics
and sell end-products from our recycled plastic. Such an outbreak could
have an impact on our operations as a result of:
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quarantines
or closures of some of our facilities, which would severely disrupt our
operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the Chinese
economy.
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Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
25
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our common stock is not currently
listed or quoted for trading on any national securities exchange or national
quotation system. We intend to apply for the listing of our common stock
on the NYSE Amex or the NASDAQ Global Market in the future. There is no
guarantee that the NYSE Amex or the NASDAQ Global Market, or any other
securities exchange or quotation system, will permit our shares to be listed and
traded. If we fail to obtain listing on NYSE Amex or NASDAQ Global Market,
we may seek quotation on the OTC Bulletin Board. FINRA has enacted changes
that limit quotations on the OTC Bulletin Board to securities of issuers that
are current in their reports filed with the Securities and Exchange
Commission. The effect on the OTC Bulletin Board of these rule changes and
other proposed changes cannot be determined at this time. The OTC Bulletin
Board is an inter-dealer, over-the-counter market that provides significantly
less liquidity than the NASDAQ Global Market and the NYSE Amex. Quotes for
stocks included on the OTC Bulletin Board are not listed in the financial
sections of newspapers as are those for the NYSE Amex and the NASDAQ Global
Market. Therefore, prices for securities traded solely on the OTC Bulletin
Board may be difficult to obtain and holders of common stock may be unable to
resell their securities at or near their original offering price or at any
price.
The
market price and trading volume of shares of our common stock may be
volatile.
When and if a market develops for our
securities, the market price of our common stock could fluctuate significantly
for many reasons, including for reasons unrelated to our specific performance,
such as reports by industry analysts, investor perceptions, or negative
announcements by customers, competitors or suppliers regarding their own
performance, as well as general economic and industry conditions. For
example, to the extent that other large companies within our industry experience
declines in their share price, our share price may decline as well. In
addition, when the market price of a company’s shares drops significantly,
shareholders could institute securities class action lawsuits against the
company. A lawsuit against us could cause us to incur substantial costs
and could divert the time and attention of our management and other
resources.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
Pursuant to the terms of the Share
Exchange, we agreed to file a registration statement with the Securities and
Exchange Commission to register the 2,457,167 shares of our common stock issued
the Private Placement. The registration statement must be filed within
thirty (30) days of the final closing of the Private Placement. We
also intend to register the 1,907,455 shares of common stock held by the SRKP 23
Stockholders and all of the 782,545 shares of common stock underlying the
warrants held by the SRKP 23 Stockholders. These shares will be included
in a subsequent registration statement filed by us within ten (10) days after
the end of the six (6)-month period that immediately follows the date on which
we file the registration statement to register the shares issued in the Private
Placement.
Each investor in the Private Placement
and each of the SRKP 23 Stockholders may sell or transfer any shares of the
common stock after the effective date of their respective registration
statement, except that they entered into a lock-up agreement pursuant to which
they agreed that (i) if the proposed public offering that we hope to
conduct is for $5 million or more, then the investors would not be able
sell or transfer their shares until at least six (6) months after the public
offering’s completion, and (ii) if the offering is for less than
$5 million, then one-tenth (1/10th) of the
investors’ shares would be released from the lock-up restrictions ninety (90)
days after offering and there would be a pro rata release of the shares
thereafter every thirty (30) days over the following nine (9) months.
WestPark Capital, in its sole discretion, may allow early releases under the
referenced lock-up restrictions; provided, however, that (i) no early
release shall be made with respect to SRKP 23 Stockholders prior to the release
in full of all such lock-up restrictions on shares of the common stock acquired
in the Private Placement and (ii) any such early release shall be made pro
rata with respect to all investors’ shares acquired in the Private
Placement.
Additionally, following the Share
Exchange, the Weixin Shareholders may be eligible to sell all or some of our
shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144 (“Rule 144”), promulgated under the
Securities Act of 1933, as amended (the “Securities Act”), subject to certain
limitations. Under Rule 144, an affiliate stockholder who has
satisfied the required holding period may, under certain circumstances, sell
within any three (3)-month period a number of securities which does not exceed
the greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four (4) calendar weeks prior to
such sale. As of the date of this prospectus, 1% of our issued and
outstanding shares of common stock was approximately 122,301 shares.
Non-affiliate stockholders are not subject to volume limitations. Any
substantial sale of common stock pursuant to any resale prospectus or
Rule 144 may have an adverse effect on the market price of our common stock
by creating an excessive supply. The Weixin Shareholders have agreed to
enter into a lock-up agreement pursuant to which they will agree not to sell any
of their securities of the Company until twenty-four (24) months after our
common stock began to be listed on the NASDAQ Global Market or NYSE
Amex.
26
If
you purchase securities in this offering, you will suffer immediate dilution of
your investment.
Assuming
our sale of 1,200,000 shares of common stock at an assumed public offering price
of $3.50 per share of common stock, which is the mid-point of the estimated
initial offering price range set forth on the cover of this prospectus, and
after deducting the underwriting discount and commissions, non-accountable
expenses and estimated offering expenses, our pro forma, as-adjusted net
tangible book value as of September 30, 2010 would be approximately $20.4
million, or $1.52 per share of common stock outstanding. The pro forma adjusts
for the issuance of 2,457,167 shares of common stock in the Private Placement
pursuant to which we received approximately $4.8 million in net proceeds and the
cancellation of 6,679,899 in connection with the Share Exchange such that there
were 1,907,455 shares of common stock outstanding immediately prior to the Share
Exchange. The sale of 1,200,000 shares of common stock in this offering
represents an immediate increase in net tangible book value of $0.08 per share
of common stock to our existing stockholders and an immediate dilution of $1.98
per share of common stock to the new investors purchasing common stock in this
offering. There would be further dilution when our outstanding warrants to
purchase 782,545 shares of common stock are exercised at $0.0001 per share. In
addition, purchasers of common stock in this offering will have contributed
approximately 41% of the aggregate price paid by all owners of our common stock
but will own only approximately 8.5% of our common stock outstanding after this
offering, assuming the exercise of our outstanding warrants to purchase 782,545
shares.
Following
the Share Exchange, the Weixin Shareholders have significant influence over
us.
The Weixin Shareholders beneficially
own or control approximately 72.3% of our outstanding shares as of the close of
the Share Exchange and Private Placement and have a controlling influence in
determining the outcome of any corporate transaction or other matters submitted
to our stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors, and other
significant corporate actions. These stockholders may also have the power
to prevent or cause a change in control. In addition, without the consent
of these stockholders, we could be prevented from entering into transactions
that could be beneficial to us. The interests of these stockholders may
differ from the interests of our other stockholders.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are required to establish and
maintain appropriate internal controls over financial reporting. Failure
to establish those controls, or any failure of those controls once established,
could adversely impact our public disclosures regarding our business, financial
condition or results of operations. Any failure of these controls could
also prevent us from maintaining accurate accounting records and discovering
accounting errors and financial frauds. Rules adopted by the SEC pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment
of our internal control over financial reporting. The standards that must
be met for management to assess the internal control over financial reporting as
effective are complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may encounter
problems or delays in completing activities necessary to make an assessment of
our internal control over financial reporting. If we cannot assess our
internal control over financial reporting as effective, investor confidence and
share value may be negatively impacted.
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any
actual or perceived weaknesses and conditions that need to be addressed in our
internal control over financial reporting or disclosure of management’s
assessment of our internal controls over financial reporting may have an
adverse impact on the price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On November 12, 2010, we entered into
the Share Exchange Agreement with Weixin BVI, Weixin HK, Kelida, Hua Su, Chuang
Yi, Xin Ye, Li Jun and the Weixin Shareholders, pursuant to which we agreed to
acquire 100% of the issued and outstanding securities of Weixin BVI in exchange
for shares of our common stock. On November 23, 2010, the Share Exchange
closed, Weixin BVI became our 100%-owned subsidiary, and our sole business
operations became that of Weixin BVI and its subsidiaries. We also have a
new Board of Directors and management consisting mostly of persons from Weixin
BVI and Weixin HK and changed our corporate name from “SRKP 23, Inc.” to “China
Wesen Recycling Technology, Inc.”
27
We may not realize the benefits that we
hoped to receive as a result of the Share Exchange, which include:
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access
to the capital markets of the United
States;
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the
increased market liquidity expected to result from exchanging stock in a
private company for securities of a public company that may eventually be
traded;
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the
ability to use registered securities to make acquisition of assets or
businesses;
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increased
visibility in the financial
community;
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enhanced
access to the capital markets;
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improved
transparency of operations; and
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
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There can be no assurance that any of
the anticipated benefits of the Share Exchange will be realized with respect to
our new business operations. In addition, the attention and effort devoted
to achieving the benefits of the Share Exchange and attending to the obligations
of being a public company, such as reporting requirements and securities
regulations, could significantly divert management’s attention from other
important issues, which could materially and adversely affect our operating
results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty
for public companies and significantly increased the costs and risks associated
with accessing the public markets and public reporting. For example, on
January 30, 2009, the SEC adopted rules requiring companies to provide
their financial statements in interactive data format using the eXtensible
Business Reporting Language, or XBRL. We will have to comply with these
rules by June 15, 2011. Our management team will need to invest
significant management time and financial resources to comply with both existing
and evolving standards for public companies, which will lead to increased
general and administrative expenses and a diversion of management time and
attention from revenue generating activities to compliance
activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our common stock, which is not
currently listed or quoted for trading, may be considered to be a “penny stock”
if it does not qualify for one of the exemptions from the definition of “penny
stock” under Section 3a51-1 of the Exchange Act, once, and if, it starts
trading. Our common stock may be a “penny stock” if it meets one or more
of the following conditions (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a “recognized” national exchange;
(iii) it is NOT quoted on the NASDAQ Capital Market, or even if so, has a
price less than $5.00 per share; or (iv) is issued by a company that has
been in business less than three (3) years with net tangible assets less than
$5 million.
The principal result or effect of being
designated a “penny stock” is that securities broker-dealers participating in
sales of our common stock will be subject to the “penny stock” regulations set
forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For
example, Rule 15g-2 requires broker-dealers dealing in penny stocks to
provide potential investors with a document disclosing the risks of penny stocks
and to obtain a manually signed and dated written receipt of the document at
least two (2) business days before effecting any transaction in a penny stock
for the investor’s account. Moreover, Rule 15g-9 requires
broker-dealers in penny stocks to approve the account of any investor for
transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii) provide the investor with a written statement setting forth the basis
on which the broker-dealer made the determination in (ii) above; and
(iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor’s financial situation,
investment experience and investment objectives. Compliance with these
requirements may make it more difficult and time consuming for holders of our
common stock to resell their shares to third parties or to otherwise dispose of
them in the market or otherwise.
28
If
securities or industry analysts do not publish research or reports or publish
unfavorable research about our business, the price and trading volume of our
common stock could decline.
The
trading market for our common stock will depend in part on the research and
reports that securities or industry analysts publish about us or our business.
We do not currently have and may never obtain research coverage by securities
and industry analysts. If no securities or industry analysts commence coverage
of us the trading price for our common stock and other securities would be
negatively affected. In the event we obtain securities or industry analyst
coverage, if one or more of the analysts who covers us downgrades our
securities, the price of our securities would likely decline. If one or more of
these analysts ceases to cover us or fails to publish regular reports on us,
interest in the purchase of our securities could decrease, which could cause the
price of our common stock and other securities and their trading volume to
decline.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any
cash dividends on our shares of common stock in the foreseeable future and
currently intend to retain any future earnings for funding growth. As a
result, investors should not rely on an investment in our securities if they
require the investment to produce dividend income. Capital appreciation,
if any, of our shares may be investors’ sole source of gain for the foreseeable
future. Moreover, investors may not be able to resell their shares of our
common stock at or above the price they paid for them.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this prospectus, including in the documents
incorporated by reference into this prospectus, includes some statements that
are not purely historical and that are forward-looking statements. Such
forward-looking statements include, but are not limited to, statements regarding
our and our management’s expectations, hopes, beliefs, intentions or strategies
regarding the future, including our financial condition, results of operations,
and the expected impact of the Share Exchange on the parties’ individual and
combined financial performance. In addition, any statements that refer to
projections, forecasts or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. The words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The
forward-looking statements contained in this prospectus are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance that
future developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by these forward-looking statements, including the
following:
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Our
ability to develop new products utilizing our recycled plastic
products;
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Our
dependence on a limited number of suppliers for a majority of our raw
materials;
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Our
ability to enter into relationships directly with suppliers to obtain raw
materials;
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Our
ability to secure plastic waste raw materials at competitive
prices;
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Our
reliance on a limited number of customers for our net
sales;
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Our
ability to manage growth
effectively;
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Our
ability hire and retain qualified and knowledgeable employees and
management;
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Our
ability to raise additional capital to fund our
operations;
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29
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Our
ability to collect on accounts
receivables;
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Changes
in the laws of the PRC that affect our operations and our corporate
structure;
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Inflation
and fluctuations in foreign currency exchange
rates;
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Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
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Development
of a public trading market for our
securities;
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The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
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The
other factors referenced in this Current Report, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
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These
risks and uncertainties, along with others, are also described above under the
heading “Risk Factors.” Should one or more of these risks or
uncertainties materialize, or should any of the parties’ assumptions prove
incorrect, actual results may vary in material respects from those projected in
these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as may be required under applicable
securities laws.
The risks included above are not
exhaustive. Other sections of this prospectus may include additional factors
that could adversely impact our business and operating results. Moreover,
we operate in a very competitive and rapidly changing environment. New
risk factors emerge from time to time and we cannot predict all such risk
factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
You
should not rely upon forward-looking statements as predictions of future events.
We cannot assure you that the events and circumstances reflected in the
forward-looking statements will be achieved or occur. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the forward-looking
statements. Except as required by law, we undertake no obligation to
update publicly any forward-looking statements for any reason after the date of
this prospectus to conform these statements to actual results or to changes in
our expectations.
You
should read this prospectus, and the documents that we reference in this
prospectus and have filed as exhibits to this prospectus with the Securities and
Exchange Commission, completely and with the understanding that our actual
future results, levels of activity, performance and achievements may materially
differ from what we expect. We qualify all of our forward-looking statements by
these cautionary statements.
USE
OF PROCEEDS
Based on a per share offering price of
$3.50, which is the midpoint of our estimated offering price range, we estimate
that the net proceeds from the sale of the 1,200,000 shares of common stock in
the offering will be approximately $2.8 million after deducting he estimated
underwriting discounts and commissions of 10%, a non-accountable allowance of 3%
(excluding
the proceeds from the Underwriter’s over-allotment option) and estimated
offering expenses of approximately $900,000.
The
Underwriter has a 45-day option to purchase up to 180,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 1,200,000 shares of common stock in this
offering. The Underwriter has agreed to purchase 70% of such
over-allotment shares, or 126,000 shares, from the selling stockholder
identified in this prospectus and the remaining shares purchase 30% of such
over-allotment shares, or 54,000 shares, from us. We will not receive any
proceeds from the sale of the shares, if any, by the selling stockholders.
If the underwriter’s over-allotment option is exercised in full, we estimate
that our net proceeds will be approximately $2.9 million.
30
The principal purposes of this offering
are to increase our working capital, to create a public market for our common
stock, and to facilitate our future access to the public capital markets. We
expect to use the net proceeds of this offering to pay expenses related to the
construction of our new research and development facility tin Gangzhou. The
amounts and timing of our actual expenditures will depend on numerous factors
related to the construction of the facility. We may find it necessary or
advisable to use portions of the proceeds for other purposes, and we will have
broad discretion in the application of the net proceeds. We have no current
intentions to acquire any other businesses. Pending these uses, the proceeds
will be invested in short-term, investment grade, interest-bearing
securities.
Circular
142 promulgated by SAFE regulates the conversion of foreign currency into
Renminbi by a foreign-invested company like Kelida and restricts how the
converted Renminbi may be used. To the extent that we need to convert the net
proceeds of this offering that has been injected in the registered capital of
Kelida into Renminbi, we will be subject to the restrictions of Circular 142.
Pursuant to Circular 142, the registered capital of a foreign-invested company,
like Kelida, settled in Renminbi converted from foreign currencies may only be
used for purposes within the business license approved by the applicable
governmental authority and may not be used for equity investments within the
PRC. In addition, the use of such registered capital may not be changed without
SAFE’s approval, and may not in any case be used to repay Renminbi loans if the
proceeds of such loans have not been used. We intend to convert most of the
proceeds of the offering in Renminbi in order to use them in our operations in
the PRC as described above.
DIVIDEND
POLICY
We do not expect to declare or pay any
cash dividends on our common stock in the foreseeable future, and we currently
intend to retain future earnings, if any, to finance the expansion of our
business. The decision whether to pay cash dividends on our common stock will be
made by our board of directors, in its discretion, and will depend on our
financial condition, operating results, capital requirements and other factors
that the board of directors considers significant. We did not pay cash
dividends in the nine months ended September 30, 2010, or in the years ended
December 31, 2009, 2008 or 2007.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its
statutory reserve until the accumulative amount of such reserve reaches 50.0% of
its registered capital. The funds in the statutory reserve are not distributable
as cash dividends, and may be used only for the following
purposes: covering deficits of the company; expanding the company’s
production and operations; and increasing the company’s registered
capital. If a company’s statutory reserve is not sufficient to cover its
accumulated deficits, then its profits for the current year must first be
applied to cover such deficits before being set aside to the statutory
reserve. A PRC company may only distribute dividends from its net profits
after the above requirements for covering previous deficits and supplementing
the statutory reserve are satisfied; otherwise, its shareholders who receive
dividends distributed in violation with the above requirements must return such
dividends to the company. 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.
In general, PRC law allows foreign
invested companies to declare and pay dividends, however, dividends can only be
paid out of net accumulated profits of our direct subsidiary, Kelida, and only
when Kelida has enough net after-tax profits to pay the dividends after its
previous deficits are covered and the mandatory requirement of supplementing the
statutory reserve is satisfied. Any dividends distributed to its
shareholder, Weixin HK, in violation of the above requirements must be returned
to Kelida. Kelida has accumulated deficits of $4,268 for the year ended
December 31, 2009. Therefore, it has no retained earnings which can be declared
and distributed as dividends outside of China.
Because
all of our operations are conducted in the PRC, substantially all of our
revenues and expenses are denominated in Renminbi (RMB). Under PRC law,
the conversion of RMB into U.S. dollars is subject to various
restrictions. The remittance of dividends in U.S. dollars out of China by
a foreign invested Chinese company is subject to administrative procedural
requirements promulgated by SAFE. A bank processing a payment of dividends
must review and approve the dividend payment application submitted by a foreign
invested Chinese company, such as Kelida, using the administrative procedures
promulgated by SAFE. Kelida's failure to meet these requirements could
prevent us from paying dividends to shareholders outside China.
Our
inability to receive dividends or other payments from Kelida could adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends, or otherwise fund and conduct our
business. Our funds may not be readily available to us to satisfy obligations
which have been incurred outside the PRC, which could adversely affect our
business and prospects or our ability to meet our cash obligations. Accordingly,
if we do not receive dividends from Kelida, our liquidity, financial condition
and ability to make dividend distributions to our stockholders will be
materially and adversely affected.
31
CAPITALIZATION
The
following table sets forth our capitalization as of September 30, 2010
(unaudited) on:
|
·
|
an
actual basis, which
|
|
(i)
|
consists
of the 7,865,556 shares of common stock that were issued to the
shareholders of Weixin BVI pursuant to the Share Exchange as outstanding
as of September 30, 2010, as the Share Exchange was accounted for as a
reverse merger and a recapitalization Weixin BVI and its subsidiaries (see
Note 1 to the financial statements);
and
|
|
(ii)
|
excludes
the 1,907,455 shares of common stock outstanding immediately prior to the
issuance of the 7,865,556 shares of common stock after giving effect to
the cancellation of 6,679,899 shares in connection with
the
|
|
·
|
on
a pro forma basis, which includes
|
|
(i)
|
the
addition of the 1,907,455 shares of common stock outstanding immediately
prior to the Share Exchange after giving effect to the cancellation of
6,679,899 shares in connection with the Share Exchange that closed on
November 23, 2010; and
|
|
(ii)
|
the
sale and issuance of 2,457,167 shares of common stock at $2.25 per share
in the Private Placement pursuant to which we received approximately $4.8
million in net proceeds (unaudited);
and
|
|
·
|
on
a pro forma, as adjusted, basis, to give effect to our receipt of
estimated net proceeds of $2.8 from the sale of 1,200,000 shares of common
stock in this offering at an assumed public offering price of $3.50 per
share, which is the mid-point of the estimated range of the offering
price, and after deducting estimated underwriting discounts and
commissions, non-accountable expenses and estimated offering costs and
expenses aggregating approximately
$900,000.
|
You
should read this table in conjunction with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related
notes included elsewhere in this prospectus.
September 30, 2010
|
||||||||||||
Actual
|
Pro Forma
|
Pro Forma, as
Adjusted
|
||||||||||
(in thousands)
|
||||||||||||
Stockholders'
equity:
|
||||||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none issued and
outstanding
|
- | - | - | |||||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized; 7,865,556 shares
issued and outstanding on an actual basis; 12,230,178 issued and
outstanding on a pro forma basis; and 13,430,178 issued and outstanding on
a pro forma, as adjusted, basis (1)
|
1 | 1 | 1 | |||||||||
Additional
paid-in capital
|
528 | 5,328 | 8,088 | |||||||||
Statutory
reserves
|
719 | 719 | 719 | |||||||||
Retained
earnings (unrestricted)
|
11,407 | 11,407 | 11,407 | |||||||||
Accumulated
other comprehensive income
|
216 | 216 | 216 | |||||||||
Total
stockholders' equity
|
$ | 12,871 | $ | 17,671 | $ | 20,431 | ||||||
Total
capitalization
|
$ | 12,871 | $ | 17,671 | $ | 20,431 |
_____
(1)
|
The
number of our shares of common stock shown above to be outstanding after
this offering is based on (i) 7,865,556 shares of common stock issued and
outstanding as of September 30, 2010, (ii) the cancellation of 6,679,899
shares on November 23, 2010 in connection with the Share Exchange such
that there were 1,907,455 shares of common stock outstanding, (iii) the
issuance and sale of 2,457,167 shares of common stock at $2.25 per share
in our Private Placement , and (iv) 1,200,000 shares of common stock
issued in the public offering. The number (i) excludes the 126,000
shares of our common stock that we may issue upon the Underwriter’s
over-allotment option exercise, (ii) excludes the 782,545 shares of common
stock that will be issued upon the exercise of outstanding warrants
exercisable at $0.0001 per share; (iii) excludes the 120,000 shares of
common stock underlying warrants that will be issued to the Underwriter
upon completion of this offering, and (iv) is not affected by the 54,000
shares that the Underwriter may purchase from selling stockholders named
in this prospectus.
|
32
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has
never been a public trading market for our common stock and our shares of common
stock are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We intend to apply for the listing
of our common stock on the NASDAQ Global Market or the NYSE Amex Equities.
As of the date of this prospectus, we had 171 stockholders of
record.
DILUTION
If you
invest in our shares of common stock, your investment will be diluted
immediately to the extent of the difference between the public offering price
per share you will pay in this offering and the net tangible book value per
share of common stock immediately after this offering.
As of
September 30, 2010, we had 7,865,556 shares of common stock outstanding, which
consists of the shares of common stock that were issued to the former
shareholders of Weixin BVI pursuant to the Share Exchange, which was accounted
for as a reverse merger and a recapitalization Weixin BVI and its subsidiaries
(see Note 1 to the financial statements). On a pro forma basis, we had
12,230,178 shares of common stock outstanding as of September 30, 2010 after
giving effect to (i) the 1,907,455 shares of common stock outstanding
immediately prior to the issuance of the 7,865,556 shares of common stock and
after the cancellation of 6,679,899 shares in connection with the Share Exchange
that closed on November 23, 2010, and (ii) the sale and issuance of 2,457,167
shares of common stock at $2.25 per share in the Private Placement pursuant to
which we received approximately $4.8 million (unaudited) in net
proceeds.
On a pro
forma basis, our net tangible book value as of September 30, 2010 was
approximately $17.7 million, or $1.44 per share (unaudited) based on 12,230,178
shares of common stock outstanding. Based on the mid-range point of
the per share offering price of $3.50, investors will incur further dilution
from the sale by us of 1,200,000 shares of common stock offered in this
offering, and after deducting the estimated underwriting discount and
commissions of 10%, a non-accountable allowance of 3% (excluding
the proceeds from the Underwriter’s over-allotment option) and
estimated offering expenses of $900,000, our pro forma, as adjusted net tangible
book value as of September 30, 2010 would have been $20.4 million, or $1.52 per
share. This represents an immediate increase in net tangible book value of
$0.08 per share to our existing stockholders and an immediate dilution of $1.98
per share to the new investors purchasing shares of common stock in this
offering.
The
following table illustrates this per share dilution:
Public
offering price per share
|
$ | 3.50 | ||||||
Pro
forma net tangible book value per share as of September 30,
2010
|
$ | 1.44 | ||||||
Increase
per share attributable to new public investors
|
$ | 0.08 | ||||||
Net
tangible book value per share after this offering
|
$ | 1.52 | ||||||
Dilution
per share to new public investors
|
$ | 1.98 | ||||||
Furthermore,
our stockholders hold warrants to purchase 782,545 shares of common stock at a
per share exercise price of $0.0001. If all of the warrants were
exercised, the as-adjusted net tangible book value per share as of September 30,
2010 would decrease to $1.44 per share after this offering, which would
represent an immediate increase in net tangible book value of nil per share
to our existing stockholders and an immediate dilution of $2.06 per share to the
new investors purchasing shares of common stock in this offering.
The
following table sets forth, on a pro forma, as adjusted basis as of September
30, 2010, the difference between the number of shares of common stock purchased
from us, the total cash consideration paid, and the average price per share paid
by our existing shareholders and the average price to be paid by new investors
in this public offering before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, using an assumed
public offering price of $3.50 per share of common stock. The information
is as of September 30, 2010 on a pro forma basis giving effect to:
33
|
(i)
|
the
cancellation of 6,679,899 shares in connection with the Share Exchange
that closed on November 23, 2010 such that there were 1,907,455 shares of
common stock outstanding immediately prior to the Share
Exchange;
|
|
(ii)
|
the
sale of 2,457,167 shares of common stock at $2.25 per share in our Private
Placement that closed concurrently with the Share Exchange;
and
|
|
(iii)
|
the
issuance of 782,545 shares of common stock underlying currently
outstanding warrants held by the SRKP 23, Inc. shareholders that are
exercisable at $0.0001 per share.
|
Shares Purchased
|
Total Cash Consideration
|
|||||||||||||||||||
Number
|
Percent
|
Amount
(in thousands)
|
Percent
|
Average Price
Per
Share
|
||||||||||||||||
Shares
issued to shareholders of Weixin BVI in the Share Exchange
|
7,865,556 | 55.3 | % | 529 | 5 | % | $ | 0.07 | ||||||||||||
SRKP
23, Inc. stockholders outstanding after Share Exchange, including assumed
exercise of warrants to purchase 782,545 shares of common stock at $0.0001
per share
|
2,690,000 | 18.9 | % | 8 | 0 | % | $ | 0.00 | ||||||||||||
Investors
in the Private Placement
|
2,457,167 | 17.3 | % | $ | 5,529 | 54 | % | $ | 2.25 | |||||||||||
New
investors in this offering
|
1,200,000 | 8.5 | % | $ | 4,200 | 41 | % | $ | 3.50 | |||||||||||
Total
|
14,212,723 | 100.0 | % | 10,266 | 100.0 | % |
The total
consideration amount for shares of common stock held by our existing
stockholders includes total cash paid for our outstanding shares of common stock
as of September 30, 2010 and excludes the value of securities that we have
issued for services. If the underwriter’s over-allotment option of 180,000
shares of common stock is exercised in full, the number of shares held by
existing stockholders and the new investors from the Private Placement will be
reduced to 90.4% of the total number of shares to be outstanding after this
offering and the number of shares held by the new investors will be increased to
1,380,000 shares, or 9.6%, of the total number of shares of common stock
outstanding after this offering.
The
discussion and tables above are based on (i) 7,865,556 shares of common stock
issued and outstanding as of September 30, 2010; (ii) the cancellation of
6,679,899 shares in connection with the Share Exchange that closed on November
23, 2010 such that there were 1,904,455 shares of common stock outstanding
immediately prior to the Share Exchange; (iii) the cancellation of warrant to
purchase 7,804,803 shares of common stock in connection with the Share Exchange
such that there were warrants to purchase an aggregate of 782,545 shares of
common stock outstanding immediately prior to the Share Exchange; (iv) the sale
of 2,457,167 shares of common stock at $2.25 per share in our Private Placement
that closed concurrently with the Share Exchange, and (v) 1,200,000 shares
of common stock issued in this public offering. The number of our shares
outstanding after this offering as shown above (i) excludes the 54,000
shares of our common stock that we may issue upon the Underwriter’s
over-allotment option exercise, and (iii) is not affected by the 126,000
shares that the Underwriter may purchase from selling stockholders named in this
prospectus.
ACCOUNTING
FOR THE SHARE EXCHANGE
The
acquisition of Weixin BVI by us pursuant to the Share Exchange was accounted for
as a recapitalization by us. The recapitalization was, at the time of the
Share Exchange, the merger of a private operating company (Weixin BVI and its
subsidiaries, whose management took control of China Wesen Recycling Technology,
Inc.), into a non-operating public shell corporation (us) with nominal net
assets and as such is treated as a capital recapitalization, rather than a
business combination. As a result, the assets of the operating company are
recorded at historical cost. The transaction is accounted for using the reverse
merger in which Weixin BVI was considered the accounting acquirer.
34
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated statement of operations data contains
consolidated statement of operations data for the nine months ended September
30, 2010 and 2009 (unaudited) and for each of the years in the four-year period
ended December 31, 2009 and the consolidated balance sheet data as of
September 30, 2010 and as of year-end for each of the years in the four-year
period ended December 31, 2009. The consolidated statement of
operations data and balance sheet data were derived from the audited
consolidated financial statements, except for the nine months ended and as of
September 30, 2010 and 2009 and the year ended and as of December 31,
2006. Such financial data should be read in conjunction with the
consolidated financial statements and the notes to the consolidated financial
statements starting on page F-1 and with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Consolidated
Statements of Operations
For the Nine Months Ended
September 30,
|
For the Year Ended
December 31,
|
|||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Revenue
|
$ | 21,972 | $ | 18,428 | $ | 26,151 | $ | 8,687 | $ | 910 | $ | - | ||||||||||||
Cost
of revenue
|
13,788 | 12,472 | 17,516 | 6,522 | 649 | - | ||||||||||||||||||
Gross
profit
|
8,184 | 5,956 | 8,635 | 2,165 | 261 | - | ||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||
Selling
expenses
|
111 | 79 | 111 | 38 | 8 | - | ||||||||||||||||||
General
and administrative
|
632 | 398 | 591 | 422 | 167 | 5 | ||||||||||||||||||
Total
operating expenses
|
743 | 477 | 702 | 460 | 175 | 5 | ||||||||||||||||||
Income
from operations
|
7,441 | 5,479 | 7,933 | 1,705 | 86 | (5 | ) | |||||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||
Interest
income
|
14 | 9 | 13 | 10 | 2 | - | ||||||||||||||||||
Other
income (expense), net
|
(53 | ) | (27 | ) | (39 | ) | (36 | ) | (26 | ) | - | |||||||||||||
Total
other income (expenses)
|
(39 | ) | (18 | ) | (26 | ) | (26 | ) | (24 | ) | - | |||||||||||||
Income
before income taxes
|
7,402 | 5,461 | 7,907 | 1,679 | 62 | (5 | ) | |||||||||||||||||
Income
taxes
|
(1,885 | ) | (1,354 | ) | (2,031 | ) | (441 | ) | (33 | ) | - | |||||||||||||
Net
income (loss)
|
$ | 5,517 | $ | 4,107 | $ | 5,876 | $ | 1,238 | $ | 29 | $ | (5 | ) | |||||||||||
Earnings
per share – basic and diluted
|
$ | 0.70 | $ | 0.52 | $ | 0.75 | $ | 0.16 | $ | 0.00 | $ | 0.00 | ||||||||||||
Weighted
average shares outstanding – basic and diluted
|
7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 |
Consolidated
Balance Sheets
As of September 30,
|
As of December 31,
|
|||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Total
Current Assets
|
$ | 9,254 | $ | 10,897 | $ | 4,373 | $ | 833 | $ | 476 | ||||||||||
Total
Assets
|
15,954 | 15,951 | 8,019 | 3,236 | 477 | |||||||||||||||
Total
Current Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
Total
Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
Total
Stockholders’ Equity
|
$ | 12,871 | $ | 7,182 | $ | 1,873 | $ | 574 | $ | 61 |
35
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes, and
the other financial information included in this prospectus.
This
prospectus contains forward-looking statements. The words “anticipated,”
“believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,”
“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding
future operations, future capital expenditures, and future net cash flow.
Such statements reflect our management’s current views with respect to future
events and financial performance and involve risks and uncertainties, including,
without limitation, the current economic downturn adversely affecting demand for
the our products; our reliance on our major customers for a large portion of our
net sales; our ability to develop and market new products; our ability to raise
additional capital to fund our operations; our ability to accurately forecast
amounts of supplies needed to meet customer demand; market acceptance of our
products; exposure to product liability and defect claims; fluctuations in the
availability of raw materials and components needed for our products; protection
of our intellectual property rights; changes in the laws of the PRC that affect
our operations; inflation and fluctuations in foreign currency rates and various
other matters, many of which are beyond our control. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove to be
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Consequently, all
of the forward-looking statements made in this prospectus are qualified by these
cautionary statements and there can be no assurance of the actual results or
developments.
Overview
Our revenues are primarily derived from
the sales of recycled plastic grains, and the sale of further processed plastic
products, manufactured with our recycled plastic grains. We also derive a
substantial portion of our revenue from the sale of recycled plastic material.
We manufacture various kinds of recycled plastic material including high density
polyethylene (“HDPE”), low density polyethylene (“LDPE”), Polystyrene (“PS”),
acrylonitrile butadiene styrene (“ABS”) using imported raw material in the form
of plastic waste. We further process the recycled plastic grains and turn them
into household products such as plastic tables and chairs, and fruit boxes and
construction products such as clapboard.
A substantial portion of
our revenue is currently derived from the resale of recycled plastic materials,
including HDPE, LDPE, ABS and PS waste plastic materials. We currently
import recycled
plastic materials in an amount that exceeds our manufacturing
capabilities, but we are able to resell such materials at a premium to our cost
of acquiring the recycled plastic. The resale of our recycled plastic
materials shortens our inventory turn over period and, therefore, improves our
working capital position. We expect that resales of recycled plastics will
decrease as a percentage of revenues as we continue to expand our recycling
capabilities.
We also sell metal parts for various
home products, including door hardware and lock parts. The sale of these
parts is primarily to overseas customers and accounted for approximately 1%, 1%
and 2%, of our total net sales for the nine months ended September 30, 2010 and
the years ended December 31, 2009 and 2008, respectively. It is expected
that this portion of our business will be substantially eliminated by the end of
the fourth quarter of fiscal 2010 or the first quarter of fiscal 2011 as we
continue to focus exclusively on our recycling business.
We primarily purchase recycled plastics
directly from overseas recyclers located in Australia and North America as well
as from domestic wholesalers in Hong Kong. Our cost of revenue consists mainly
of the purchase price of imported plastic waste. We have limited influence
on such costs. The prices of imported recycled plastic are determined solely by
suppliers and are dependent upon market conditions. The price of raw material
recycled plastic heavily depends upon changes in the price of oil, which drives
the price of virgin plastic and causes changes in the price of raw material
plastic wastes.
The purchase of raw material is
fundamental to the recycling business. In order to cut costs and increase profit
margins, we focus on developing relationships with new suppliers and increasing
the amount of raw material purchased directly from overseas recyclers, as
opposed to purchasing from domestic wholesalers. We have established two direct
sources in the United States which provide an estimated 20,000 tons of
post-industrial recycled materials annually and we are in negotiation with
another supplier to obtain a minimum of 26,000 tons of recycled plastic from
North American and Australia. The imported raw material is of a high quality,
allowing us to benefit from efficiencies in our manufacturing operations and
affording us the ability to offer quality plastic grains and compounds as well
as a comprehensive line of consumer and commercial products used in demanding
applications. We intend to continue to work on obtaining more favorable
terms and discounts by strengthening our relationships with suppliers and
placing more bulk orders.
36
Our funds are kept in financial
institutions located in the PRC, which do not provide insurance for amounts on
deposit. Moreover, we are subject to the regulations of the PRC, which
restrict the transfer of cash from the PRC, except under certain specific
circumstances. Accordingly, such funds may not be readily available to us
to satisfy obligations which have been incurred outside the PRC.
We generally finance our operations
through operating profit and borrowings from our directors. As of the date of
this Current Report, we have not experienced any difficulties due to a shortage
of capital, we have not experienced any difficulty in raising funds through
loans from banks and financial institutions, and we have not experienced any
liquidity problems in settling our payables in the normal course of business and
repaying our loans when they come due. We are unaware of any trends, demands,
commitments events or uncertainties that will result or be likely to result in
material changes in our liquidity.
We believe that the level of financial
resources is a significant factor for our future development and accordingly, we
may determine from time to time to raise capital through private debt or equity
financing to strengthen our financial position, to expand our facilities and to
provide us with additional flexibility to take advantage of business
opportunities. No assurances can be given that we will be successful in raising
such additional capital on terms acceptable to us.
Recent
Events
Share Exchange
On November 23, 2010, we completed a
share exchange transaction pursuant to which we became the 100% parent company
of Weixin International Co., Limited, a company organized under the laws of the
British Virgin Islands (“Weixin BVI”); which is the 100% parent of Wei Xin
Holding Group Limited, a company organized under the laws of Hong Kong (“Weixin
HK”); which is the 100% parent of Gangzhou Kelida Intelligent Equipment Co.,
Ltd., a company organized under the laws of the People’s Republic of China
(“Kelida”); which is the 100% parent of Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”), each a company organized under the laws of the People’s
Republic of China. Pursuant to a Share Exchange Agreement, we issued an
aggregate of 7,865,556 shares of our common stock to the shareholders of Weixin
BVI (the “Weixin Shareholders”) in exchange for all of the issued and
outstanding securities of Weixin BVI (the “Share Exchange”).
Prior to the closing of the Share
Exchange and the initial closing of the Private Placement, as described below,
our stockholders canceled an aggregate of 6,679,899 shares held by them such
that there were 1,907,455 shares of common stock outstanding immediately prior
to the Share Exchange. Our stockholders prior to the Share Exchange (the
“SRKP 23 Stockholders”) also canceled warrants to purchase an aggregate of
7,804,803 shares of common stock such that they held warrants to purchase an
aggregate of 782,545 shares of common stock immediately prior to the Share
Exchange and initial closing of the Private Placement. In addition, we
paid a $140,000 success fee to WestPark Capital for services provided in
connection with the Share Exchange, including coordinating the share exchange
transaction process, interacting with the principals of the shell corporation
and negotiating the definitive purchase agreement for the shell, conducting a
financial analysis of Weixin BVI, conducting due diligence on Weixin BVI and its
subsidiaries and managing the interrelationship of legal and accounting
activities. Immediately after the closing of the Share Exchange and
initial closing of the Private Placement, we had 10,884,120 shares of common
stock, no shares of preferred stock, no options, and warrants to purchase
782,545 shares of common stock issued and outstanding.
Pursuant to the terms of the Share
Exchange, we entered into a Registration Rights Agreement with each of the SRKP
23 Stockholders pursuant to which we agreed to register all of the 1,907,455
shares of common stock and all of the 782,545 shares of common stock underlying
the warrants held by such stockholders. These shares will be included in a
subsequent registration statement (the “Subsequent Registration Statement”)
filed by us no later than the tenth (10th) day
after the end of the six (6) month period that immediately follows the date on
which we file the registration statement to register the shares issued in the
Private Placement (the “Required Filing Date”). We agreed to use
reasonable efforts to cause the Subsequent Registration Statement to become
effective within one hundred fifty (150) days after the Required Filing Date or
the actual filing date, whichever is earlier, or one hundred eighty (180) days
after the Required Filing Date or the actual filing date, whichever is earlier,
if such Subsequent Registration Statement is subject to a full review by the SEC
(the “Required Effectiveness Date”). If we fail to file the Subsequent
Registration Statement by the Required Filing Date or if it does not become
effective on or before the Required Effectiveness Date we are required to issue,
as liquidated damages, to each of the SRKP 23 Stockholders’ shares (the “Penalty
Shares”) equal to a total of 0.0333% of their respective shares for each
calendar day that the Subsequent Registration Statement has not been filed or
declared effective by the SEC (and until the Subsequent Registration Statement
is filed with or declared effective by the SEC), as applicable. However,
no Penalty Shares shall be due to the SRKP 23 Stockholders if we are using our
best efforts to cause the Subsequent Registration Statement to be filed and
declared effective in a timely manner.
37
The transactions contemplated by the
Share Exchange Agreement were intended to be a “tax-free” reorganization
pursuant to the provisions of Sections 351 and/or 368(a) of the Internal
Revenue Code of 1986, as amended.
The Private Placement
On November 23, 2010, concurrently with
the closing of the Share Exchange, we conducted an initial closing of a private
placement of shares of our Common Stock (the “Private
Placement”). The purpose of the Private Placement was to increase our
working capital and the net proceeds from the Private Placement will be used to
expand business operations, including developing direct sources and dealerships,
increasing production capacity, making permitted acquisitions, purchasing
manufacturing equipment, and for general corporate purposes. Pursuant
to subscription agreements entered into with the investors in the Private
Placement, we sold an aggregate of 1,111,099 shares of Common Stock at $2.25 per
share in the initial closing of the Private Placement, for gross proceeds of
approximately $2.5 million in the initial closing of the Private
Placement.
We agreed to file a registration
statement covering the shares of Common Stock sold in the Private Placement
within thirty (30) days of the final closing of the Private Placement pursuant
to the subscription agreement entered into with each investor and to cause such
registration statement to be declared effective by the SEC no later than one
hundred fifty (150) days from the date of filing or one hundred eighty (180)
days from the date of filing if the registration statement is subject to a full
review by the SEC. The SRKP 23 Stockholders and the investors in the
Private Placement also entered into lock-up agreements pursuant to which they
agreed that (i) if the proposed public offering that we expect to conduct
is for $5 million or more, then the investors and our stockholders prior to the
Share Exchange would not be able to sell or transfer their shares until at least
six (6) months after the public offering’s completion, and (ii) if the
offering is for less than $5 million, then one-tenth (1/10th) of
their shares would be released from the lock-up restrictions ninety (90) days
after the offering and there would be a pro rata release of the
shares thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, Inc., the placement agent for the Private
Placement (“WestPark Capital”), in its discretion, may also release some or all
the shares from the lock-up restrictions earlier, however, (i) no early
release shall be made with respect to SRKP 23 Stockholders prior to the release
in full of all such lock-up restrictions on the shares of Common Stock acquired
in the Private Placement and (ii) any such early release shall be made pro
rata with respect to all investors’ shares acquired in the Private
Placement.
Pursuant to a Placement Agency
Agreement with WestPark Capital, we paid WestPark Capital, Inc. a commission
equal to 10.0% with a non-accountable fee of 4.0% of the gross proceeds from the
Private Placement. We are also retaining WestPark Capital for a
period of six months following the initial closing of the Private Placement to
provide us with financial consulting services for which we will pay WestPark
Capital $4,000 per month. Out of the proceeds of the Private
Placement, we paid $250,000 to Keen Dragon Group Limited, a third party
unaffiliated with Weixin BVI, the Company, or WestPark Capital for services in
connection with arranging the reverse merger.
PRC
Regulations that May Affect our Results of Operations
Tax uncertainty. We
believe that our taxable income is calculated pursuant to the PRC tax laws and
regulations and is substantiated by our financial data. 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 Guangzhou and Zhaoqing 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. We
are not able to predict any such changes, and thus we cannot reasonably estimate
the amount of the potential impact.
Foreign Currency
Translation. Our financial statements are expressed in US
dollars, but the functional currency of our operating subsidiaries is RMB. Our
results of operations are translated at average exchange rates during the
relevant financial reporting periods, assets and liabilities are translated at
the unified exchange rate at the end of these periods and equity is translated
at historical exchange rates. Adjustments resulting from the process of
translating the local currency financial statements into US dollars are included
in determining comprehensive income.
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% of its after-tax profit based on
PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in
the event of liquidation. We do not plan to declare or pay any cash dividends on
our shares of common stock in the foreseeable future and currently intend to
retain any future earnings for funding growth. Any change in the laws
and regulations on the dividend distribution or any change in our decision to
pay cash dividends on our common stock will affect our financial condition and
operating results.
38
Critical
Accounting Policies, Estimates and Assumptions
Accounting Principles
Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements. These financial statements are prepared in accordance with
Generally Accepted Accounting Principles in the United States (“U.S. GAAP”),
which requires us to make estimates and assumptions that affect the reported
amounts of our assets, liabilities, revenues and expenditures, to disclose
contingent assets and liabilities on the date of the financial statements, and
to disclose the reported amounts of revenues and expenses incurred during the
financial reporting period. The most significant estimates and assumptions
include revenues recognition, valuation of inventories and provisions for income
taxes. We continue to evaluate these estimates and assumptions that we believe
to be reasonable under the circumstances. We rely on these evaluations as the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Since the use of estimates is
an integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We believe critical
accounting policies as disclosed in this report reflect the more significant
judgments and estimates used in preparation of our financial statements. We
believe there have been no material changes to our critical accounting policies
and estimates.
The following critical accounting
policies rely upon assumptions and estimates and were used in the preparation of
our consolidated financial statements:
Accounts
receivable
Accounts receivable are recognized and
carried at original invoiced amount less an allowance for uncollectible
accounts, as needed.
The allowance on uncollectible accounts
receivable reflects management’s best estimate of probable losses determined
principally on the basis of historical experience. The allowance for
uncollectible accounts receivable is determined primarily on the basis of
management’s best estimate of probable losses, including specific allowances for
known troubled accounts. All accounts or portions thereof deemed to be
uncollectible or to require an excessive collection cost are written off to the
allowance for uncollectible accounts receivable. When facts subsequently become
available to indicate that the amount provided as the allowance was incorrect,
an adjustment which is classified as a change in estimate is made.
Inventories
Inventories consist of finished goods,
work in progress, and raw materials. Inventories are valued at the lower of
cost, as determined on a weighted average basis, or market. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
writes down the inventories to market value if it is below cost. Management also
regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if valuation allowance is required. Costs
of raw material inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Finished goods
are comprised of direct materials, direct labor, and an appropriate proportion
of overhead.
Revenue
recognition
Hua Su, Chuang Yi, Xin Ye and Li Jun
(collectively, the “Subsidiaries Four”) are identical in their operations and
generate revenue from the sale of manufactured HDPE, LDPE, ABS and PS grains.
These companies recognize revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, as evidenced by an agreement with the
customer, delivery of the goods has occurred, customer acceptance has been
obtained, which means the significant risks and ownership have been transferred
to the customer, the price is fixed or determinable and collectability is
reasonably assured. Sales contracts, invoices and shipping documents are
utilized to facilitate the sales process. Revenue is recognized when customers
acknowledges the sale and delivery and the title of the goods is properly
transferred to the customers.
39
There are no shipping charges involved
as all of the manufactured goods are picked up by the customers at the Company's
warehouse. Customer acceptance is obtained at the point of delivery. No return
allowance is made as product returns are insignificant based on historical
experience. The Company does not provide warranties, rebates, price protection,
or similar privileges among customers. The prices of the products are
predetermined and fixed based on contractual agreements.
The Subsidiaries Four also generate
revenue from the sale of purchased recyclable plastic materials, which are
recognized on the same basis as the sales of manufactured HDPE, LDPE, ABS and PS
grains. The Company recognizes revenue from the sale of these materials on a
gross basis because it is responsible for fulfillment and takes title to the
materials before they are ordered by a customer and acts as the principal
obligor in the transaction. The revenue is recorded when delivery of the goods
has occurred, customer acceptance has been obtained, and the significant risks
and ownership have been transferred to the customer, the price is fixed or
determinable, and collectability is reasonably assured.
Weixin HK generates revenue from
selling lock parts. Weixin HK records revenue net of pass-through charges as the
Company believes the key indicators of the business suggest that the Company
generally acts as an agent on behalf of its customers.
Cost of goods
sold
Cost of goods sold consists primarily
of raw materials, utility and supply costs consumed in the manufacturing
process, manufacturing labor, depreciation expense and direct overhead expenses
necessary to manufacture finished goods as well as warehousing and distribution
costs such as inbound freight charges, shipping and handling costs, purchasing
and receiving costs.
Value added
taxes
We are subject to value added tax
(“VAT”). The applicable VAT rate is different based on the different structure
of business under Chinese tax law. Some of our transactions are levied at a VAT
tax rate of 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Some of transactions are
levied at a VAT tax rate of 7%, such as shipping services and other
transportation services.
Foreign currency
translation
Our reporting currency is the U.S.
dollar. Our functional currencies are local currencies, primarily the PRC
currency Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in
foreign currencies are translated into U.S. dollar at exchange rate in effect on
the date of the transactions. The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Exchange
gains or losses on transaction are included in earnings.
Recently issued accounting
pronouncements
In June 2009, the Financial
Accounting Standards Board (FASB) issued a standard that established the FASB
Accounting Standards Codification (ASC) and amended the hierarchy of generally
accepted accounting principles (ASC) and amended the hierarchy of generally
accepted accounting principles (GAAP) such that the ASC became the single source
of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S.
GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All previously existing accounting standard documents were superseded and
all other accounting literature not included in the ASC is considered
non-authoritative. New accounting standards issued subsequent to June 30,
2009 are communicated by the FASB through Accounting Standards Updates (ASUs).
The Company adopted the ASC on July 1, 2009. This standard did not have an
impact on the Company’s consolidated results of operations or financial
condition.
In April 2009, the FASB issued an
accounting standard which provides guidance on (1) estimating the fair
value of an asset or liability when the volume and level of activity for the
asset or liability have significantly declined and (2) identifying
transactions that are not orderly. The standard also amended certain disclosure
provisions for fair value measurements and disclosures in ASC 820 to require,
among other things, disclosures in interim periods of the inputs and valuation
techniques used to measure fair value as well as disclosure of the hierarchy of
the source of underlying fair value information on a disaggregated basis by
specific major category of investment. The standard was effective prospectively
beginning April 1, 2009. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
40
In May 2009, the FASB issued new
guidance on the treatment of subsequent events which is intended to establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Specifically, this new guidance sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that occurred for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions that occurred after the balance
sheet date in its financial statements, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. This new guidance was effective for fiscal years and interim periods ended
after June 15, 2009, and must be applied prospectively. We adopted and applied
the provisions of the new guidance in the third quarter of 2009.
In February 2010, subsequent to our
adoption of the new guidance discussed above, the FASB issued updated guidance
on subsequent events, amending the May 2009 guidance. This updated guidance
revised various terms and definitions within the guidance and requires us, as an
"SEC filer," to evaluate subsequent events through the date the financial
statements are issued, rather than through the date the financial statements are
available to be issued. Furthermore, we no longer are required to disclose the
date through which subsequent events have been evaluated. The updated guidance
was effective for us immediately upon issuance. As such, we adopted and applied
the provisions of the updated guidance in the first quarter of 2010. Our
adoption of both the new and updated guidance did not have an impact on our
consolidated financial position or results of operations.
In June 2009, the FASB issued an
accounting standard that revised the consolidation guidance for
variable-interest entities. The modifications include the elimination of the
exemption for qualifying special purpose entities, a new approach for
determining who should consolidate a variable-interest entity, and changes to
when it is necessary to reassess who should consolidate a variable-interest
entity. The standard is effective January 1, 2010. The adoption did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
In August 2009, the FASB issued
ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides
additional guidance on how companies should measure liabilities at fair value
under ASC 820. The ASU clarifies that the quoted price for an identical
liability should be used. However, if such information is not available, a
entity may use, the quoted price of an identical liability when traded as an
asset, quoted prices for similar liabilities or similar liabilities traded as
assets, or another valuation technique (such as the market or income approach).
The ASU also indicates that the fair value of a liability is not adjusted to
reflect the impact of contractual restrictions that prevent its transfer and
indicates circumstances in which quoted prices for an identical liability or
quoted price for an identical liability traded as an asset may be considered
level 1 fair value measurements. The ASU is effective October 1,
2009. The adoption of this standard did not have a material impact on the
Company’s consolidated results of operations or financial
condition.
In January 2010, the FASB issued ASU
No. 2010-6, Improving Disclosures About Fair Value Measurements, that amends
existing disclosure requirements under ASC 820 by adding required disclosures
about items transferring into and out of levels 1 and 2 in the fair value
hierarchy; adding separate disclosures about purchase, sales, issuances, and
settlements relative to level 3 measurements; and clarifying, among other
things, the existing fair value disclosures about the level of disaggregation.
This ASU is effective for the first quarter of 2010, except for the requirement
to provide level 3 activities of purchases, sales, issuances, and settlements on
a gross basis, which is effective beginning the first quarter of 2011. Since
this standard impacts disclosure requirements only, its adoption did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
Nine
Months Ended September 30, 2010 and 2009
The following table sets forth a
summary of certain key components of our results of operations for the periods
indicated, in dollars and as a percentage of revenues.
For The Nine Months Ended September 30,
|
||||||||||||||||||||
2010
|
2009
|
Change in %
|
||||||||||||||||||
Revenue
|
$ | 21,971,844 | 100 | % | $ | 18,427,828 | 100 | % | 19 | % | ||||||||||
Cost
of revenue
|
13,788,072 | 63 | % | 12,471,539 | 68 | % | 11 | % | ||||||||||||
Gross
profit
|
8,183,772 | 37 | % | 5,956,289 | 32 | % | 37 | % | ||||||||||||
Operating
expenses
|
743,188 | 3 | % | 477,744 | 3 | % | 56 | % | ||||||||||||
Operating
income
|
7,440,584 | 34 | % | 5,478,545 | 30 | % | 36 | % | ||||||||||||
Other
expenses
|
38,529 | * | 18,004 | * | 114 | % | ||||||||||||||
Income
taxes
|
1,885,457 | 9 | % | 1,353,887 | 7 | % | 39 | % | ||||||||||||
Net
income
|
$ | 5,516,598 | 25 | % | $ | 4,106,654 | 22 | % | 34 | % |
* less
than 1%.
41
Revenues
The following table sets forth the
revenue generated from different categories of products for the nine months
period, in dollars and as a percentage of revenues.
Revenues
|
||||||||||||||||||||
Nine Months ended September 30,
|
||||||||||||||||||||
2010
|
2009
|
Change in %
|
||||||||||||||||||
Plastic
grains
|
$ | 5,110,232 | 23 | % | $ | 4,124,506 | 22 | % | 24 | % | ||||||||||
Household
and construction products
|
5,960,199 | 27 | % | 3,394,596 | 18 | % | 76 | % | ||||||||||||
Recycled
plastic
|
10,775,136 | 49 | % | 10,777,181 | 58 | % | 0 | % | ||||||||||||
Sale
of metal parts
|
126,277 | 1 | % | 131,545 | 1 | % | (4 | )% | ||||||||||||
21,971,844 | 100 | % | 18,427,828 | 100 | % | 19 | % |
For the nine months ended September 30,
2010 and 2009, total revenue was $22.0 million, and $18.4 million, respectively,
representing a 19% growth rate. The increase in total revenue was primarily due
to the increase in overall sales as well as our adjustment of our product mix
during the nine months ended September 30, 2010, which resulted in us
manufacturing more higher gross margin products, such as household and
construction products.
For the nine months ended September 30,
2010, revenue generated from the sale of recycled plastic grains increased to
$5.1 million, representing a 24% increase from $4.1 million generated in the
nine months ended September 30, 2009. The increase was mainly due to
an increase in the selling prices of our plastic grains and an increase in sales
volume of all of our products, which resulted from the global economy recovery.
The average selling price of our plastic grains for the nine months ended
September 30, 2010 was $1,040 per ton, which increased from $1,000 per ton for
the same period of 2009, an increase of 4%. Our sales volume for our plastic
grains increased from 4,100 to 4,900 tons, a 20% increase. Revenue generated
from the sale of household and construction products increased to $6.0 million,
representing a 76% increase from $3.4 million in the nine months ended September
30, 2009. The increase was due to the increase in sales volume of our household
and construction products in the nine months ended September 30, 2010, which
increased from 1.3 million units to 2.3 million units in the nine months ended
September 30, 2010, a 77% increase. The average selling price of such
products remained relatively flat. Sales of recycled plastic material
remained flat at $10.8 million in the nine months ended September 30, 2010 and
$10.8 million for the nine months ended September 30, 2009. For the nine months
period ended September 30, 2010, the sales volume of recycled plastic material
slightly decreased to 18,600 tons from 18,800 tons sold in the nine months ended
September 30, 2009. However, the selling price of recycled plastic
increased from $575 per ton in the nine months ended September 30, 2009 to $580
per ton in the nine months ended September 30, 2010.
Cost of Revenue
Our cost of revenue primarily consists
of the import costs of recycled plastics. In the nine months ended September 30,
2010 and 2009, the cost of revenue was $13.8 million and $12.5 million,
respectively, representing 63% and 68% of the nine months revenue, respectively.
The decrease as a percentage of revenues was due to a slight decrease in the
purchase price of the recycled plastic imported and purchased, which resulted
from management’s development of good relationships with our
suppliers. The prices of imported recycled plastic are determined
solely by suppliers and are dependent upon market conditions. In the nine months
ended September 30, 2010, cost of revenue increased in total dollars by 11% as
compared to the same period in 2009. This is primarily due to the increase in
sales volume of our plastic grains and our household and construction products
and an increase in the average sales price of our plastic grains.
42
In the nine months ended September 30,
2010, the amount of raw material purchased from our domestic wholesalers
decreased to 18% of our total raw material purchased, as compared to 46% in the
same period of 2009. Meanwhile, we continue to work on obtaining more favorable
terms and discounts by strengthening our relationship with suppliers and placing
more bulk orders.
Gross Profit
In the nine months ended September 30,
2010, our gross profit increased to $8.2 million, from $6.0 million in the nine
months ended September 30, 2009. During the same period, our gross profit margin
increased to 37%, up from 32% in the nine months ended September 30,
2009. This increase in
our gross profit margin is mainly due to a decrease in raw material costs and an
increase in the selling price of our plastic grains for the nine
months ended September 30,
2010. The average purchase price of our raw materials decreased 2%, from
$470 per ton in the nine months ended September 30, 2009 to $460 per ton in the
comparable period in 2010. The average selling price of our plastic
grains in the nine month period ended September 30, 2010 was $1,040 per ton, an
increase of 4% from $1,000 per ton for the same period of fiscal year 2009. The
increase in the selling price of our recycled plastic grains and our related
products from the prior fiscal period was because the prior fiscal period was
suffered from decreased selling prices as a result of the global financial
crisis.
Operating Expenses
For The Nine Months Ended September 30,
|
||||||||||||||||||||
2010
|
2009
|
Change in %
|
||||||||||||||||||
Operating
expenses
|
$ | $ | ||||||||||||||||||
Selling
and marketing
|
110,722 | 15 | % | 79,308 | 17 | % | 40 | % | ||||||||||||
General
and administrative
|
632,466 | 85 | % | 398,436 | 83 | % | 59 | % | ||||||||||||
Total
|
$ | 743,188 | 100 | % | $ | 477,744 | 100 | % | 56 | % |
For the nine months ended September 30,
2010, operating expenses increased 56% from $0.5 million for nine months ended
September 30, 2009 to $0.7 million for the comparable fiscal period in 2010. The
increase was primarily due to the increase of general and administrative
expenses.
Selling and marketing expenses include
sales remunerations and expenses directly related to marketing. The increase in
overall dollars to $0.1 million for the nine months ended September 30, 2010 was
primarily due to the increase in our sales, which resulted in an increase in
selling-related travel expenses for our sales personnel from approximately
$51,000 for the nine months ended September 30, 2009 to $80,200 for the nine
months ended September 30, 2010.
General and administrative expenses
primarily consist of management remuneration, depreciation and amortization,
professional fees, employee welfare costs, rent and lease expenses, and office
expenses. During the nine months ended September 30, 2010, general and
administrative expenses increased 59% to $0.6 million, as compared to $0.4
million in the nine months ended September 30, 2009. This increase was primarily
due to the legal and professional fees incurred in preparation for the Share
Exchange in November 2010 and legal and professional fees incurred in connection
with the Registrant’s compliance and reporting obligations as a public
company. We incurred legal fees of approximately $20,000, auditing
and accounting fees of $74,000 and consulting fees of $45,000 during the nine
months ended September 30, 2010 which were related to our preparation for the
Share Exchange. No such expenses were incurred in the comparable
period in 2009.
Operating Income
Our operating income increased from
$5.5 million in the nine months ended September 30, 2009 to $7.4 million in the
nine months ended September 30, 2010, representing an increase of
36%.
43
In order to achieve a higher gross
margin, we intend to enhance manufacturing techniques and labor efficiencies.
Meanwhile we plan to continue improving our gross margin by strengthening
relationships with our major suppliers to obtain more favorable
terms.
Net Income
For the nine months ended September 30,
2010, our net income increased to $5.5 million from $4.1 million for the nine
months ended September 30, 2009, representing an increase of 34%.
Year
Ended December 31, 2009 and 2008
The following table sets forth a
summary of certain key components of our results of operations for years
indicated, in dollars and as a percentage of revenues.
For
The Year Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Revenue
|
$ | 26,151,437 | 100 | % | $ | 8,686,922 | 100 | % | ||||||||
Cost
of Revenue
|
17,516,014 | 67 | % | 6,521,446 | 75 | % | ||||||||||
Gross
Profit
|
8,635,423 | 33 | % | 2,165,476 | 25 | % | ||||||||||
Operating
expenses
|
702,036 | 3 | % | 460,359 | 5 | % | ||||||||||
Operating
income
|
7,933,387 | 30 | % | 1,705,117 | 20 | % | ||||||||||
Other
expenses
|
26,306 | * | 25,890 | * | ||||||||||||
Income
taxes
|
2,030,996 | 8 | % | 441,337 | 5 | % | ||||||||||
Net
income
|
$ | 5,876,085 | 22 | % | $ | 1,237,890 | 14 | % |
* less
than 1%
Revenues
The following table sets forth the
revenue generated from different categories of products for years indicated, in
dollars and as a percentage of revenues for fiscal year 2009 and
2008.
Revenues
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Plastic
grains
|
5,860,725 | 22 | % | 3,201,015 | 37 | % | ||||||||||
Household
and construction products
|
5,162,847 | 20 | % | 214,895 | 2 | % | ||||||||||
Recycled
plastic
|
14,955,227 | 57 | % | 5,116,483 | 59 | % | ||||||||||
Sale
of metal parts
|
172,638 | 1 | % | 154,529 | 2 | % | ||||||||||
26,151,437 | 100 | % | 8,686,922 | 100 | % |
For the years ended December 31, 2009
and 2008, total revenue was $26.2 million, and $8.7 million respectively,
representing a 201% growth rate. The increase in total revenue was primarily due
to our adjustment of our product mix in 2009, which resulted in the manufacture
of more higher gross margin products, such as household and construction
products. Our increase in revenue was affected by our receipt of an import quota
of 20,000 tons of recycled plastic in 2009, which significantly increased our
total manufacture and sales volume compared to 2008.
44
For fiscal 2009, revenue generated from
the sale of recycled plastic grains increased 83% to $5.8 million from $3.2
million for fiscal 2008. The increase was primarily due to greater demand for
our recycled products, resulting in an increase in sales volume. The total
plastic grains sold in 2009 increased to 5,840 tons from 2,850 tons in fiscal
2008 while, representing a 105% increase. The difference between the increase of
revenue and the increase in sale volume was due to a decrease in the selling
prices of our products as a result of the global financial crisis for fiscal
2009. The average selling price of our plastic grains for the year ended
December 31, 2009 was $1,000 per ton, which decreased from $1,120 per ton for
the same period of 2008, a decrease of 12%. Revenue generated from the sale of
household and construction products increased to $5.2 million from $0.2 million
for fiscal 2008. The increase was due to management’s adjustment of the
production structure in 2009, increasing the production volume of our higher
gross margin household and construction plastic products. Sales of our household
and construction products increased from 244,500 million units in the year ended
December 31, 2008 to 1.9 million units in the year ended December 31, 2009, a
677% increase. The average selling price of such products increased
from $0.88 per unit in the year ended December 31, 2008 to $2.72 per unit in the
year ended December 31, 2009, a 209% increase. We also increased our
direct sales of recycled plastic material by 192% to $15.0 million for fiscal
2009, as compared to $5.1 million for fiscal 2008. The increase of direct sales
of waste materials was due to the increase of the import quota in fiscal 2009,
whereby we were granted the right to import 20,000 tons of recycled
plastic.
Cost of Revenue
For fiscal 2009 and 2008, cost of
revenue was $17.5 million and $6.5 million, respectively, representing 67% and
75% of revenues, respectively. The decrease of cost of revenue as a percentage
of revenues was due to a decrease in the purchase prices of our raw
materials. The average purchase price for our raw materials decreased
from $590 per ton in 2008 to $460 per ton in 2009, a decrease of 20%, which
resulted from a decrease in the price of crude oil in 2009 from 2008. For fiscal
2009, cost of revenue increased by 169% as compared to fiscal
2008. This increase was primarily due to the increase in sales volume
of our plastic grains and our household and construction products.
Gross Profit
For fiscal 2009, our gross profit
increased to $8.6 million from $2.2 million for fiscal 2008. During the same
period, our gross profit margin increased to 33%, up from 25% in fiscal 2008.
This increase was mainly due to
the decrease in raw material costs in fiscal 2009 as compared to 2008, and the
increases in the average selling prices of our plastic grains and household and
construction products which resulted from the recovery of the global financial
crisis in 2009.
Operating Expenses
For
The Year Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Operating
expenses
|
||||||||||||||||
Sales
and marketing
|
$ | 111,165 | 16 | % | $ | 38,076 | 8 | % | ||||||||
General
and administrative
|
590,871 | 84 | % | 422,283 | 92 | % | ||||||||||
Total
|
$ | 702,036 | 100 | % | $ | 460,359 | 100 | % |
During fiscal 2009, operating expenses
increased 52% from $0.5 million in fiscal 2008 to $0.7 million in 2009. The
increase was primarily due to an increase in general and administrative
expenses. For fiscal 2009, sales and marketing expenses increased 192% to
$111,165, as compared to $38,076 for fiscal 2008. The increase in sales and
marketing expenses was primarily due to an increase of in our business
development activities. The increase in general and administrative
expenses was largely due to a 94% increase in travel-related expenses for our
sales and marketing personnel from $34,000 in 2008 to $66,000 in 2009. In
addition, expenses for entertainment and meals increased from $48,300 in the
year ended December 31, 2008 to $99,000 in the year ended December 31, 2009, an
increase of 100%.
During fiscal 2009, general and
administrative expenses increased 40% to $0.6 million, as compared to $0.4
million in fiscal 2008. This increase was primarily due to the increase in
personnel resulting in higher payroll and staff benefit expenses.
45
Operating Income
Our operating income
increased 365% from $1.7 million for fiscal 2008 to $7.9 million for fiscal
2009. This is primarily due to the substantial increase in
sales volume and revenue. Further, from the beginning of fiscal 2009,
particularly in the second quarter, revenue began increasing because the market
price of recycled plastic grains steadily increased.
Net Income
Our net income increased from $1.2
million for fiscal 2008 to $5.9 million for fiscal 2009, representing an
increase of 375%.
Year
Ended December 31, 2008 and 2007
The
following table sets forth a summary of certain key components of our results of
operations for years indicated, in dollars and as a percentage of
revenues.
For
The Year Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Revenue
|
$ | 8,686,922 | 100 | % | $ | 909,575 | 100 | % | ||||||||
Cost
of Revenue
|
6,521,446 | 75 | % | 648,503 | 71 | % | ||||||||||
Gross
Profit
|
2,165,476 | 25 | % | 261,072 | 29 | % | ||||||||||
Operating
expenses
|
460,359 | 5 | % | 174,636 | 19 | % | ||||||||||
Operating
income
|
1,705,117 | 20 | % | 86,436 | 10 | % | ||||||||||
Other
expenses
|
25,890 | * | 24,602 | 3 | % | |||||||||||
Income
taxes
|
441,337 | 5 | % | 33,235 | 4 | % | ||||||||||
Net
income
|
$ | 1,237,890 | 14 | % | $ | 28,599 | 3 | % |
* less
than 1%
Revenues
The following table sets forth the
revenue generated from different categories of products for years indicated, in
dollars and as a percentage of revenues for fiscal year 2008 and
2007.
Revenues
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Plastic
Grains
|
$ | 3,201,015 | 37 | % | $ | - | - | |||||||||
Household
and construction products
|
214,895 | 2 | % | - | - | |||||||||||
Recycled
plastic
|
5,116,483 | 59 | % | 788,400 | 87 | % | ||||||||||
Sale
of metal parts
|
154,529 | 2 | % | 121,175 | 13 | % | ||||||||||
$ | 8,686,922 | 100 | % | $ | 909,575 | 100 | % |
46
Total revenue for the year
ended December 31, 2008 was $8.7 million, an increase of 855%, compared to
revenue of $0.9 million for the year ended December 31, 2007. The
increase in total revenue was primarily due to an increase of sales volume of
our plastic grains and recycled plastic. In 2008, we sold 7,000 tons of recycled
plastic at an average price of $730 per ton, compared to 1,328 tons in 2007, an
increase of 427%, at an average price of $594 per ton. In 2008, we
sold 2,800 tons of plastic grains, compared to no sale of plastic grains in
2007. The production and sales of plastic grains commenced in 2008,
as our manufacturing facilities were fully set up in 2008, while in 2007, we
only sold recycled plastic materials through Hua Su and metal parts through
Weixin HK.
Cost
of Revenue
Our cost of revenue primarily consisted
of the import costs of recycled plastics. The cost of revenue increased from
$0.6 million in 2007 to $6.5 million in 2008, representing a 906%
increase. This is primarily due to the increase in sales volume of
our plastic grains. The average price of our purchased raw materials was $535
per ton in 2008 as compared to $590 per ton in 2007. The increase of
cost of revenue is 50% higher than that of revenue, which resulted from a surge
in oil prices in 2008.
Gross
Profit
In 2008, our gross profit increased to
$2.2 million from $0.3 million in 2007. During the same period, our gross profit
margin decreased from 29% to 25% in fiscal year 2008. This decrease is mainly due to an
increase in raw material costs in 2008 as compared to 2007.
Operating
Expenses
For
The Year Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Operating
expenses
|
||||||||||||||||
Sales
and marketing
|
$ | 38,076 | 8 | % | $ | 7,152 | 4 | % | ||||||||
General
and administrative
|
422,283 | 92 | % | 167,484 | 96 | % | ||||||||||
Total
|
$ | 460,359 | 100 | % | $ | 174,636 | 100 | % |
Operating
expenses were $0.5 million in 2008, or 5% of revenues, as compared to $0.2
million in 2007, or 19% of revenues. The increase was primarily due to the
increase in general and administrative expenses, which include management salary
and benefits, traveling expenses, meals and entertainment, office supplies, rent
and utilities expenses, and other related expenses. Expenses related to staff
salaries increased from $110,000 in the year ended December 31, 2007 to $130,000
in the year ended December 31, 2008, an increase of 20%. Traveling expenses
increased from $9,000 in the year ended December 31, 2007 to $34,000 in the year
ended December 31, 2008, an increase of 280%. Entertainment and meals expenses
were $48,300 and $13,500 in the years ended December 31, 2008 and 2007,
respectively, an increase of 258%. The increase in operating expenses
was primarily due to an increase in our production capacity, which required more
production staff and sales personnel. We also expanded our efforts to
develop our relationships with our customers and our suppliers, which resulted
in the increase on our sales and marketing expenses.
Operating
Income
Our operating income
increased from $86,436 in 2007 to $1.7 million in 2008. This
is primarily due to the substantial increase in sales volume and revenue. Chuang
Yi, Xin Ye, and Li Jun were incorporated in 2007. They were all in
the development stage in 2007 and had no operations in 2007.
Net
Income
Our net income increased from $28,599
in 2007 to $1.2 million, representing an increase of 4228%.
Liquidity
and Capital Resources
Our working capital as of September 30,
2010 was $6.2 million, as compared to working capital of $2.1 million as of
December 31, 2009, a working capital deficit of $1.8 million as of December 31,
2008 and 2007. We had cash and cash equivalents of approximately $2.91 million
as of September 30, 2010, approximately $4.48 million as of December 31, 2009
and approximately $1.72 million as of December 31, 2008. The improved
working capital is mainly due to the decrease in amounts due to directors,
accounts payable and accrued liabilities.
47
We generally finance our operations
through operating profit and borrowings from our directors. As of the date of
this report, we have not experienced any difficulties due to a shortage of
capital, we have not experienced any difficulty in raising funds through loans
from banks and financial institutions, and we have not experienced any liquidity
problems in settling our payables in the normal course of business and repaying
our loans when they come due. We are unaware of any trends, demands, commitments
events or uncertainties that will result or be likely to result in material
changes in our liquidity
We make
capital expenditures principally to fund manufacturing facilities, which
includes, among other things, construction in progress, acquire fixed assets and
land use right. Gross capital expenditures were $3.0 million and $0.8
million for the nine months ended September 30, 2010 and 2009, respectively. The
increase in gross capital expenditures during the nine months ended September
30, 2010 compared to the same period in 2009 was primarily attributable to
the acquisition of a land use right located in Guangzhou City, and expenditures
incurred for the construction of manufacturing facilities on the acquired
land. Gross capital expenditures were $0.9 million, $1.4 million and
$1.6 million for fiscal 2009, fiscal 2008 and fiscal 2007, respectively. The
decrease in gross capital expenditures during fiscal 2009 compared to fiscal
2008 was primarily attributable to expenses related to the construction of
manufacturing facilities incurred in fiscal year 2008. We plan to
continue to invest in our infrastructure, including expanding our manufacturing
facilities in 2010 and 2011. We expect capital expenditures to range between
$1.2 million and $2.0 million for fiscal 2010. Capital expenditures are funded
through cash provided by operating activities as well as cash and cash
equivalents.
We have spent approximately $3 million
through September 30, 2010 on our new facility in Guangzhou, which will house
our research and development operations, our new corporate headquarters and a
tooling and molding workshop. These costs mostly relate to fees related to the
purchase of the land use right on which the facility is to be constructed,
construction design fees, environmental evaluation fees, and other
pre-construction related costs. We anticipate that we will need an
additional $9 million of to complete our new facility. We anticipate
that the construction of the new facility will start in March 2011 and will be
completed in the fourth quarter of 2011 and that the additional $9 million will
be spent by the end of 2011.
Due to new environmental regulations
implemented by the Zhaoqing Environmental Protection Agency in 2010, we intend
to move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. We anticipate that we
expend $4.0 million in 2011 to purchase a land use right in the industrial park
and to construct a new factory building on such land. In addition, we
anticipate that we will incur moving costs of approximately $100,000 for moving
of our factory equipment and operations to the new facility.
We also plan to purchase approximately
$10 million in new equipment during 2011, including a custom designed automatic
sorting machine, a custom designed automatic washing and cleaning line, an
automatic dispensing machine, automatic an drying machine, lab equipment,
plastic injection machines and tool making machines.
Further, we anticipate that we will
spend approximately $8.0 million in additional operation-related expenses for
our expansion plans related to research and development costs for new recycling
processes and products, increased labor and management costs, supply chain and
sales channel development and strengthening our enterprise resource planning and
information technology systems.
Expenses for the construction of our
new headquarters and research and development facility, expenses for our new
manufacturing facility in the industrial park, expenses for new equipment and
additional operation-related expenses for our expansion will be funded through
cash-on-hand generated from our operating activities and the proceeds from the
Private Placement, as well as proceeds from a public offering contemplated by
the Company in 2011. To the extent that cash-on-hand, cash from
operations or proceeds from our proposed public offering of equity securities is
not sufficient to fund such expenditures we may rely on bank loans to fund such
expenditures.
Anticipated cash flows from operations
and funds available from our credit facilities, together with cash on hand,
should provide sufficient funds to finance our operations for at least the next
12 months. Changes in our operating plans, lower than anticipated sales,
increased expenses, acquisitions or other events may require us to seek
additional debt or equity financing. There can be no guarantee that financing
will be available on acceptable terms or at all. Debt financing, if available,
could impose additional cash payment obligations and additional covenants and
operating restrictions.
48
The following table sets forth the
summary of our cash flows, in dollars, for the nine months ended September 30,
2010 and 2009 (unaudited) and the years ended December 31, 2009, 2008 and
2007:
Nine
Months Ended
September
30,
|
Year
Ended
December
31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
Net
cash provided by (used in) operating activities
|
$ | 5,902,116 | $ | 1,900,429 | $ | 3,859,107 | $ | (42,267 | ) | $ | (795,718 | ) | ||||||||
Net
cash used in investing activities
|
(3,486,587 | ) | (770,460 | ) | (906,404 | ) | (1,371,101 | ) | (1,585,514 | ) | ||||||||||
Net
cash provided by (used in) financing activities
|
(4,068,923 | ) | (703,599 | ) | (154,447 | ) | 2,677,902 | 2,665,721 | ||||||||||||
Effect
of exchange rate changes on cash
|
82,079 | 3,491 | (39,192 | ) | 151,284 | 1,454 | ||||||||||||||
Cash
and cash equivalents, beginning of period
|
4,483,402 | 1,724,338 | 1,724,338 | 308,520 | 22,577 | |||||||||||||||
Cash
and cash equivalents, end of period
|
$ | 2,912,087 | $ | 2,154,199 | $ | 4,483,402 | $ | 1,724,338 | $ | 308,520 |
Operating activities
During the nine months ended September
30, 2010, we generated net cash from operating activities of $5.9 million, an
increase of 211% from $1.9 million in the nine months ended September 30, 2009.
The increase was primarily due to the increase in net income, inventories and
accounts receivable. Since the global economy is recovering from the financial
crisis, the selling prices and sales volume of our plastic grains and our
household and construction products has increased. Therefore, the
Company earned more net income during the nine months ended September 30, 2010
than September 30, 2009. Additionally, the Company improved its
inventory management system in 2010, which allowed it to maintain lower
inventory levels than in 2009, which increased cash provided by inventories by
$0.8 million. The Company also exercised more efficient credit
control policies in 2009, which improved the collectability of accounts
receivable and increased cash provided by investing activities by $3.3
million.
During the year ended December 31,
2009, we generated net cash from operating activities of $3.9 million, compared
to net cash used in operating activities of $42,267 during fiscal 2008 and $0.8
million of net cash used in operating activities during fiscal 2007. The
increase during fiscal 2009 was primarily due to a higher sales volume and net
income earned during fiscal 2009. In 2009, the Company’s production facility was
fully completed and, therefore, the Company’s manufacturing capacity and sales
volume increased significantly from 2008. In addition the global
economy began to recover from the global financial crisis and the demand for
plastic grains, recycled plastic and household and construction products
increased over 2008. In 2009, the Company earned net income of $5.9 million,
increase of $4.7 million from net income of $1.2 million in
2008. Accounts receivable increased to $4.2 million in fiscal 2009,
compared to $1.6 million in 2008 and $0.4 million in fiscal 2007. The increase
in accounts receivable was largely due to the increase in
sales. Accounts payable increased to $1.4 million in fiscal 2009, as
compared to $0.7 million in fiscal 2008, and $0.4 million in fiscal 2007. The
increase was due to the Company’s increased raw material
purchases.
Investing Activities
During the nine months ended September
30, 2010, net cash used in investing activities was $3.5 million compared to
$0.8 million of net cash used in investing activities in the nine months ended
September 30, 2009. The increase is primarily attributable to capital
expenditures of $1.0 million related to the acquisition of land use rights, and
$2.0 million for prepayments made in relation to the construction of plant and
office building for Kelida.
During the fiscal year ended December
31, 2009, net cash used in investing activities was $0.9 million, compared to
$1.4 million of net cash used in investing activities in fiscal 2008 and $1.6
million of net cash used in investing activities in fiscal 2007. The decrease in
net cash used in investing activities in fiscal 2009 as compared to fiscal 2008
is primarily attributable to a $0.2 million decrease in capital expenditures for
the purchase of new equipment and a $0.3 million decrease in capital
expenditures related to the construction of the Company’s production plant,
which were partially offset by the Company’s prepayment of $0.1 million for the
acquisition of the land use right by Kelida in 2009. The decrease in cash used
in investing activities in fiscal 2008 as compared to fiscal 2007 is largely
attributable to a $1.2 million decrease in payments for construction in progress
which was offset by a $1 million increase in costs related to the purchase of
property and equipment.
Financing Activities
Cash used for financing activities for
the nine months ended September 30, 2010 was $4.1 million, compared to $0.7
million net cash used for financing activities for the nine months ended
September 30, 2009. The increase is primarily due to repayment of
borrowings to our directors of $4.8 million, which was partially offset by $0.7
million in loan proceeds we received from a third party financing institute in
the nine months ended September 30, 2010. Borrowings from the
directors were non-interest bearing, unsecured and have no set repayment date.
The loans were obtained during the early stages of our operations and the
proceeds of the loans provided us with needed working capital. As our
revenue and cash flows have grown, we have begun repaying the
loans. In the future, we anticipate being able to finance our
operations through our net income and through external debt and equity
financings and bank borrowings. We do not anticipate any need for
additional related party financing for our on-going operations in future
periods.
49
Cash used for financing activities for
the fiscal year ended December 31, 2009 was $0.2 million, as compared to $2.7
million in net cash provided by financing activities in each of fiscal 2008 and
2007. The increase in cash used for financing activities for the year ended
December 31, 2009 as compared to the comparable period in 2008 and 2007 is
primarily due to a repayment of capital to a shareholder of $0.5 million in
fiscal 2009 and a decrease in the loans outstanding from related parties during
fiscal 2009 as compared to fiscal 2008 and 2007.
Inflation
We believe that inflation has had a
negligible effect on operations over the past two fiscal years. However, overall
commodity inflation is an ongoing concern for our business and has been a
considerable operational and financial focus for us. Further, as production
increases, commodity inflationary pressures may increase, both in the plastic
manufacturing industry and in the broader economy. We continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
Off-Balance
Sheet Arrangements
We do not have any outstanding
derivative financial instruments, off-balance sheet guarantees, interest rate
swap transactions of foreign currency forward contracts. Furthermore, we do not
have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in an unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or that
engages in leasing, hedging or research and development services with
us.
Quantitative
and Qualitative Disclosures about Market Risk
Interest Rates Risk
Our exposure to interest rate risk for
changes in interest rates relates primarily to the interest-bearing bank loans
and interest income generated by the bank deposits. We have not used any
derivative financial instruments in our investment portfolio or for cash
management purposes. Interest-earning instruments carry a degree of interest
rate risk. We have not been exposed nor do we anticipate being exposed to
material risks due to changes in interest rates. However, our future interest
expense or interest income may expect to be increased due to changes in interest
rates in the PRC.
Foreign Exchange Rates
Risk
We do not
hold any derivative instruments and do not engage in any hedging activities.
Because most of our purchases and sales are made in RMB, any exchange rate
change affecting the value of the RMB relative to the U.S. dollar could have an
effect on our financial results as reported in U.S. dollars. If the RMB were to
depreciate against the U.S. dollar, amounts reported in U.S. dollars would be
correspondingly reduced. If the RMB were to appreciate against the U.S. dollar,
amounts reported in U.S. dollars would be correspondingly
increased.
Country Risk
The
substantial portion of our assets and operations are located and conducted in
China. While the PRC economy has experienced significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of resources. Some of
these measures benefit the overall economy of China, but may also have a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by government control over capital
investments or changes in tax regulations applicable to us. If there are any
changes in any policies by the Chinese government and our business is negatively
affected as a result, then our financial results, including our ability to
generate revenues and profits, will also be negatively affected.
50
Contractual
Obligations
The
following table describes our contractual commitments and obligations as of
September 30, 2010:
Payments due by Period (in $)
|
||||||||||||||||||||
Less Than
|
1-3
|
3-5
|
More Than
|
|||||||||||||||||
Contractual Obligations
|
Total
|
1 Year
|
Years
|
Years
|
5 Years
|
|||||||||||||||
Operating
lease obligations
|
$ | 45,634 | $ | 18,930 | $ | 26,704 | $ | - | $ | - |
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations.
Quarterly
Information (unaudited)
The table
below presents selected (unaudited) results of operations for the quarters
indicated.
Quarter Ended
|
||||||||||||||||
September 30,
|
June 30,
|
March 31,
|
||||||||||||||
2010
|
2010
|
2010
|
Total
|
|||||||||||||
$
|
$
|
$
|
$
|
|||||||||||||
Revenues
|
6,867,175 | 7,959,833 | 7,144,836 | 21,971,844 | ||||||||||||
Gross
Profit
|
2,425,986 | 3,085,996 | 2,671,790 | 8,183,772 | ||||||||||||
Net
Income
|
1,522,779 | 2,092,116 | 1,901,703 | 5,516,598 |
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2009
|
2009
|
2009
|
2009
|
Total
|
||||||||||||||||
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
Revenues
|
7,723,609 | 7,844,872 | 6,606,787 | 3,976,169 | 26,151,437 | |||||||||||||||
Gross
Profit
|
2,679,134 | 2,924,736 | 2,024,778 | 1,006,775 | 8,635,423 | |||||||||||||||
Net
Income
|
1,769,431 | 2,101,048 | 1,347,749 | 657,857 | 5,876,085 |
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2008
|
2008
|
2008
|
2008
|
Total
|
||||||||||||||||
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
Revenues
|
1,642,658 | 3,234,694 | 2,592,031 | 1,217,539 | 8,686,922 | |||||||||||||||
Gross
Profit
|
282,709 | 846,052 | 736,059 | 300,656 | 2,165,476 | |||||||||||||||
Net
Income
|
118,537 | 523,896 | 450,560 | 144,897 | 1,237,890 |
Change
in Accountants
On November 23, 2010, we dismissed AJ.
Robbins, PC (“AJ. Robbins”) as our independent registered public accounting firm
following the change in control of the Company on the closing of the Share
Exchange. The Company engaged AJ. Robbins to audit its financial
statements for the years ended December 31, 2009 and December 31,
2008. The decision to change accountants was approved and ratified by
our board of directors. The reports of AJ. Robbins on the financial
statements of the Company for the years ended December 31, 2009 and
December 31, 2008 did not contain any adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope, or accounting
principle, except for an explanatory paragraph relative to the Company’s ability
to continue as a going concern. Additionally, during the Company’s
two most recent fiscal years and any subsequent interim period through the date
of dismissal, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
51
While AJ. Robbins was engaged by the
Company, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the Company, which disagreements if not
resolved to the satisfaction of AJ. Robbins would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the Company’s financial statements for the fiscal year ended
December 31, 2009 or its report on the Company’s financial statements for
the fiscal year ended December 31, 2008.
The Company engaged MaloneBailey, LLP
(“MaloneBailey”) as the Company’s independent registered public accounting
firm as of November 23, 2010. MaloneBailey is and has been Weixin
BVI’s independent registered public accounting firm.
52
DESCRIPTION
OF BUSINESS
Overview
We recycle engineering plastics from
complex waste streams and end-of-life plastic-rich durable goods such as
computer and business equipment, household appliances, house wares, toys and
many other sources. We produce plastic grains and compounds which are
sold to original equipment manufacturers of consumer products and plastic
injection molders which produce new consumer products using recycled
material. We specialize in the production of high-density
polyethylene, or HDPE, low-density polyethylene, or LDPE, acrylonitrile-butadiene-styrene,
or ABS, and polystyrene, or PS. In addition, we offer a line of
household and construction products which we manufacture with our own recycled
plastic compounds. Our plastic grains are sold to trading companies
and wholesalers, as well as customers in industries such as architecture
industrial equipment and engineering production, chemical and petrochemical
manufacturing. In addition, a substantial portion of our revenue is currently
derived form the resale of recycled plastic materials, including HDPE, LDPE, ABS
and PS material, which we cannot currently recycle due to our current recycling
capabilities.
Industry
China is the world’s second largest
plastic products manufacturing country. China’s plastics industry has
benefited from lower production and labor costs as manufacturing and recycling
of plastics products has been outsourced from higher-cost countries to China and
other low-cost countries.
There is a growing awareness in the
global economy on issues surrounding waste management, and recycling processes
and recycled products are being developed to address those
issues. The advantages of recycling waste material are being
increasingly recognized by the global community. The environmental
benefits of recycled plastics products are well known and recycled plastics are
typically less expensive than virgin poly plastics.
It is estimated that demand for
recycled plastic in China for the foreseeable future will be in the automotive,
office building, materials, household supplies and road and rail construction
industries. We believe that demand for products made from recycled materials
will expand with the increased demand for environmentally-friendly
products.
Products
We currently manufacture recycled
plastics products made from ABS, HDPE, LDPE and PS. Our products are
produced in both translucent and opaque varieties and are colored to the strict
color requirements of our customers. We currently sell substantially
all of our products in China.
Grains and
Compounds
We produce a wide variety of plastic
grains and compounds produced primarily from four types of recycled plastic
compounds. The grade is determined by the chemical properties of the
plastic grain; higher grade plastics grains are typically more
expensive. The following is a list of the recycled plastic compounds
we offer:
High-density polyethylene
(HDPE). HDPE is most commonly used for milk
containers. The Chinese government has set a target mark that 50% of
milk containers must be made of recycled materials by 2020, so it is expected
that the recycling rate of HDPE will likely increase. HDPE is also
used for bleach and other cleaning product containers, and is also found in
films and some thin-gauge carriers and fresh produce bags. HDPE is a
versatile polymer that can be manipulated to control transparency and is also
known for its strength and toughness.
Low-density polyethylene
(LDPE). LDPE is used in food trays, as well as wrapping films
and bags. It is easily cleaned, has strong impact resistance and is
very flexible. LDPE can withstand moderately high temperatures, does
not absorb moisture and is chemical and corrosion resistant. LDPE’s
tensile force is lower than that of HDPE and its resilience is
higher.
Acrylonitrile-butadiene-styrene
(ABS). ABS
is found in the casing of electronics and computer products, beverage bottles,
milk bottles and related products. It is known for its versatility
and ease of recycling.
Polystyrene (PS). PS is found in yogurt
containers and food trays, and in its expanded form, in protective packaging and
hot drinks cups. Research has shown that PS comprises a small part of the waste
stream, but as with other rigid packaging plastics, it is likely to form part of
future fixed plastics recycling trials, which focus on new ways to recycle and
to enhance the collection of recyclable products.
53
Manufactured Recycled
Products.
In addition to our plastic grains and
compounds, we manufacture and market proprietary end products from our own
recycled plastic material. As a vertically integrated operation, we offer
environmentally friendly products as an alternative to goods manufactured with
traditional raw materials. All of our products are manufactured in our 21,450
square meter warehouse and manufacturing facility located in Zhaoqing City of
Guangdong province.
Consumer Products. We
currently offer a line of household products such as tables and chairs, fruit
boxes and other household products.
Construction
Products. We offer products for use in residential and
commercial construction such as window frames and clapboards. These
products have higher margins than our consumer products. The increase in our
production and sale of higher margin end products lessens our dependency on
sales of raw materials for our revenues. Sales of these proprietary end-products
yield higher revenues than sales of raw materials and our consumer products,
which is key to increasing our profitability
Higher End Technology Focused
Products. We intend to expand our business to the production
of proprietary higher end technology focused products such as railway crossties.
We intend to leverage the engineering and production capabilities of our
experienced management team to develop new higher margin product offerings to
further boost our revenues and profitability. We believe that our expansion into
these new product offerings will continue to differentiate us from our
competition and will strengthen our competitiveness in the plastic recycling
industry.
Resale of Recycled Plastic
Material
A substantial portion of
our revenue is currently derived from the resale of recycled plastic materials,
including HDPE, LDPE, ABS and PS waste plastic materials. We currently
import recycled plastic materials in an amount that exceeds our manufacturing
capabilities, but we are able to resell such materials at a premium to our cost
of acquiring the recycled plastic. The resale of our recycled plastic
materials shortens our inventory turn over period and, therefore, improves our
working capital position. We expect that resales of recycled plastics will
decrease as a percentage of revenues as we continue to expand our recycling
capabilities.
Sale of Appliance
Parts
We also sell metal parts for various
home products, including door hardware and lock parts. The sale of
these parts is primarily to overseas customers and accounted for approximately
1%, 1% and 2%, of our total net sales for the nine months ended September 30,
2010 and the years ended December 31, 2009 and 2008, respectively. It
is expected that this portion of our business will be substantially eliminated
by the end of the fourth quarter of fiscal 2010 or the first quarter of fiscal
2011 as we continue to focus exclusively on our recycling business.
The breakdown of our sales by type of
product as a percentage of sales revenue is as follows:
Nine Months Ended
|
Year Ended
|
|||||||||||
September 30,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Recycled
plastic
|
49 | % | 57 | % | 59 | % | ||||||
Plastic
grains
|
23 | % | 22 | % | 37 | % | ||||||
Construction
products
|
20 | % | 7 | % | - | |||||||
Consumer
products
|
7 | % | 13 | % | 2 | % | ||||||
Appliance
parts
|
1 | % | 1 | % | 2 | % | ||||||
100 | % | 100 | % | 100 | % |
54
Competitive
Strengths
We believe the following strengths
contribute to our competitive advantages:
Comprehensive product
offerings
Our core product offerings consist of
plastic grains and compounds which are sold to original equipment manufacturers
of consumer products and plastic injection molders which produce new consumer
products using recycled material. In addition, we believe we have differentiated
our company from other Chinese recycling companies in that we are able to
manufacture and market proprietary end products from our own recycled plastic
material. As a vertically integrated operation, we offer
environmentally friendly products as an alternative to goods manufactured with
traditional raw materials.
Established manufacturing
capabilities
In China, the vast majority of plastic
recycling companies are small-scale operations lacking the capacity to properly
process raw materials, deal with sewage treatment issues and meet required
environmental standards. In comparison, we have a large, 21,450
square meter warehouse and manufacturing facility in which we produces various
plastics products, and also had a sewage treatment facility that is able to
filter and process the waste products resulting from the
manufacturing.
Broad source of recyclable
materials
Plastic waste material supplied by
Chinese suppliers is often of inferior quality due to the fact that it poorly
sorted and much of it has previously been recycled. Use of this material
increases the cost of production and lowers the quality of products produced
with such material. In contrast, we have a steady supply of raw material from
wholesalers who source products from suppliers outside China, as well as direct
sourcing from different suppliers located in the United States. We
have established two direct sources in the United States which provide an
estimated 20,000 tons of post-industrial recycled materials annually and we are
in negotiation with another supplier to obtain a minimum of 26,000 tons of
recycled plastic from North American and Australia. The imported raw material is
of a high quality, allowing us to benefit from efficiencies in our manufacturing
operations and affording us the ability to offer quality plastic grains and
compounds, as well as a comprehensive line of consumer and commercial products
used in demanding applications.
Diversified customer base
During the nine months ended September
30, 2010, we had over 10 different customers for our plastic grains and
compounds across China. Our plastic grain and compound products are
used to produce a wide variety of end products, including shoe soles, outdoor
furniture, and construction materials. Our manufactured recycled
products serve growing residential and commercial construction industries and
benefit from increased infrastructure construction in China. Our client base
spans a wide range of sectors and industries, such as architecture industrial
equipment and engineering production, chemical and petrochemical manufacturing.
We believe that our integrated product offerings and range of our client base
enhances our reputation in the recycling industry positions us to continue to
attract new customers and allows us to be more responsive to clients’ specific
requirements.
Experienced management
team
Our senior management team has
extensive business and industry experience, including an understanding of
changing market trends, consumer needs, technologies and our ability to
capitalize on the opportunities resulting from these market changes. Members of
our senior management team also have significant experience with respect to key
aspects of our operations, including engineering, recycling, sales and
marketing.
Strategy
Our goal is to become a leading
provider of plastic grains and compounds and proprietary products manufactured
from such material in China. We intend to achieve this goal by implementing the
following strategies:
Maximize our existing resources to
increase our profitability
We plan to use our expertise in
plastics recycling and in the production of products produced from our recycled
plastic material to further increase our profitability. Our plan is to actively
capitalize on market opportunities by:
|
·
|
expanding
our sale force by recruiting experienced and knowledgeable sales personnel
to reach new customers;
|
|
·
|
strengthening
relationships with our existing clients to increase the rate of purchase
of existing products; and
|
55
|
·
|
exploring
new opportunities for expanding our product offerings to new and existing
clients.
|
Expand output capacity
In November 2009, we began construction
of a new facility in Gangzhou on land for which we have obtained land use
rights. This new facility will primarily act as a research and
development center for our company, and will include a materials laboratory, an
advanced tool shop for researching various end-user products, a showroom and our
new principal corporate offices. The new facility will allow us to improve
our corporate image and increase our ability to develop high-end plastic
compounds and new end-user products, and will lessen our dependence on sales of
raw materials for profitability.
Focus on improved
efficiencies
We will continue to focus on efforts on
improving the overall efficiency of system operations and the operational
performance of our main production plants through additional engineering
improvements, additional automation and modernization of the production process
and reducing non-scheduled shut-downs of equipment. At the same time, we intend
to balance these efforts with additional focus on production safety,
environmental protection, occupational health, energy conservation and emissions
reduction, striving to comply with the requirements for the development of a
low-carbon, green economy with recyclable materials.
Strengthen relationships with suppliers
and focus on reducing commodity costs
The purchase of raw material is
fundamental to the recycling business. In order to cut costs and increase profit
margins, we focus on developing relationships with new suppliers and increasing
amount of raw material purchased directly from overseas recyclers, as opposed to
purchasing from domestic wholesalers or intermediaries. We continue to work on
obtaining more favorable terms and discounts by strengthening our relationship
with suppliers and placing more bulk orders. We also continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
Expand our line of proprietary products
manufactured with our recycled plastic
We intend to expand our product
offerings into higher end technology oriented products such as railroad
crossties. We intend to leverage the engineering and production capabilities of
our experienced management team to develop new high margin product offerings to
further boost our revenues and profitability. We believe that our expansion into
these new product offerings will continue to differentiate us from our
competition and will strengthen our competitiveness in the plastic recycling
industry. Additionally, the increase in our production and sale of
end products will lessen our dependency on sales of raw materials for our
revenues. Sales of proprietary higher end products yield higher
revenues than sales of raw materials, which is key to increasing our
profitability.
Pursue acquisitions to broaden our
product offerings and production capability
The plastic recycling market in China
remains highly fragmented, and the majority of recycling companies are
regionally focused with relatively few attaining national scale. We will
consider strategic acquisitions that will provide us with a broader range of
service offerings and access to new markets. When evaluating potential
acquisition targets, we will consider factors such as market position, growth
potential and earnings prospects and strength and experience of
management
Recycling
Process
The plastics recycling process begins
with procuring raw material, which is shipped directly from our suppliers to our
recycling facility where it is classified. Upon receipt, we perform a
number of lab and physical inspections and analyses of the material to verify
its chemical properties, impurity percentages and weight. The material is sorted
by hand based on polymer type and color. Visible impurities such as
metal parts are be sorted and set aside as much as possible.
After sorting, the material is smashed
and cut into pieced by our smashing machines. The material is then
washed and cleaned to eliminate impurities. After drying, the material is fed
into plastic grain machines, which break down the material, add color pursuant
to our customers’ specifications and form it into small plastic grains and
compounds of recycled plastic. The plastic resins are then tested to make sure
the quality meets the customers’ specifications. The recycled material is then
bagged and shipped to consumers in various manufacturing
industries.
56
The waste water from the washing
process is treated in our sewage treatment area. The water is
discharged into sediment pools which separate inorganic suspended particles and
insoluble organic material. The waste water is then run through a
reaction pool, where coagulant agents are added. The water is then
reprocessed through the sediment pool before it is sand filtered and run back to
our facility for re-use.
Once the plastic resin is produced, we
can produce end-user products using plastic extrusion or injection machines. We
produce our own molds and tooling for our finished products. The proper mold and
tooling is installed onto the injection machine based on different
products. We then load the resin to the material cabin and inject the
melted material into the molds to form the product.
Suppliers
Our key suppliers of raw materials and
wholesalers are located in Hong Kong, Australia and North America which source
raw materials from suppliers outside China. Domestically supplied
waste is often poorly sorted and much of it has previously been recycled which
increases the cost of production and lowers the quality of products produced
with such material. In an effort to expand direct relationships with
primary suppliers and obtain a higher supply of quality and consistently
recyclable materials, we established two direct sources in the United States
which provide an estimated 20,000 tons of post-industrial recycled materials
annually and we are in negotiation with another supplier to obtain a minimum of
26,000 tons of recycled plastic from North American and Australia in
2010.
We rely on a small number of suppliers
for our raw materials. For the nine months ended September 30, 2010
we had three suppliers, Tonghe Environmental Holdings Ltd., Canvas Valley LLC
and Global Green Lands LLC, who accounted for 57%, 15% and 10%, respectively, of
our raw material purchases for the period. For the year ended December 31,
2009, we had four suppliers, Tonghe Environmental Holdings Ltd., Zhaoqing
Guangyu Trade Co., Ltd., Canvas Valley LLC, and Zhaoqing Taihua Plastic
Recycling Co., Ltd., who accounted for 29%, 26%, 22% and 21%, respectively, of
our raw material purchases for the period. For the year ended December 31, 2008,
we had two suppliers, Canvas Valley LLC and Zhaoqing Guangyu Trade Co., Ltd.,
who accounted for 53% and 40%, respectively, of our total raw material purchases
for the period. For the year ended December 31, 2007, we had two
suppliers, Canvas Valley LLC and Zhaoqing Guangyu Trade Co., Ltd., who counted
for 89% and 11%, respectively, of our total purchases of raw material purchases
for the period.
We have master supply agreements with
most of our major suppliers pursuant to which all of our orders are
subject. Our master supply agreements with Tonghe Environmental
Holdings, Ltd., Canvas Valley LLC and Global Green Lands LLC provide that a
deposit of 30% of the purchase price is due upon the execution of a purchase
order contract, with the other 70% due upon the shipment of the
products. The vendor must arrange for shipment within 30 days of the
signing of such purchase order contract. Once a purchase order
contract is signed, we may cancel the order, however, the supplier does not have
the ability to cancel the contract without our consent.
We are located in the Ding Hu District
in Zhaoqing City, which possesses unique geographic strategic
advantages. Zhaoqing is one of the four ports that are allowed to
import recycled material in the Guangdong Province. The Guangzhou – Zhaoqing
highway connects to other highway systems in the region. The raw
materials can be transported by ocean freighter directly from Hong Kong and
other major ports to Zhaoqing. This geographic location affords us a
cost-effective way to obtain our supply shipments and to transport and deliver
our finished products to our customers.
Importers of plastic waste into the PRC
are subject to an import quota regulated by the Ministry of Environmental
Protection. We have been approved for an import quota of 16,100 tons
of plastic waste for 2010. We currently have 17 import licenses which are issued
by the Ministry of Environmental Protection of the People’s Republic of China to
our PRC operating subsidiaries, Hua Su, Chuang Yi, Xin Ye and Li
Jun. The permits are issued annually and expire on December 31st of each
year. We apply for renewals of our permits each year based on our
factory output capacity. As our operations expand and our
factory output capacity increases, we will apply for an increase in our import
quotas, which is subject to review by the Ministry of Environmental Protection,
on an annual basis. Without our import quota, we would be required to
purchase domestically supplied plastic waste, which will negatively impact the
quality of our products, as most plastic waste in China has already been
recycled, which is more flexible and ductile than unrecycled plastic
waste.
Sales
and Marketing
We employ an internal sales team that
focus on selling our raw material products to both manufacturers of
recycled-plastics products and distributors. We currently do not
advertise our products because demand for our products exceeds the available
supply. We monitor the recycled plastics market carefully for changes
and the introduction of new products by our competitors.
57
All of our customers pre-pay for the
raw material products they purchase and our pricing does not include shipping
and transportation costs. We typically sell our products on a
purchase order basis. The customer base is spread across different geographic
markets and industries, such as construction material manufacturing and outdoor
furniture manufacturing.
The vast majority of our sales are
generated from a small number of customers. For the nine months ended
September 30, 2010, we had three customers, Guangzhou Kialin Industrial Co.,
Ltd., Shantou Sky Wing Industrial Limited, and Shenzhen Aoli Metal Hardware Co.,
Ltd., who exceeded 10% of our revenues. These customers accounted for 44%, 29%
and 12%, respectively, of revenues for the period. These same
customers accounted for 42%, 31% and 14%, respectively, of net sales for the
year ended December 31 2009. For the year ended December 31, 2008, we
had two customers, Shantou Sky Wing Industrial Limited and Beijing Xingping
Weiye Technology Co., Ltd., who each accounted for over 10% of our net
sales. These customers accounted for 63% and 29%, respectively, of
revenues for the period. We expect that we will continue to depend upon a small
number of customers for a significant majority of our sales for the foreseeable
future.
Research
and Development
Currently,
we do not conduct any significant research and development. We
incurred no research and development expenses during the nine months ended
September 30, 2010 or years ended December 31, 2009 and 2008. We are
currently constructing a new research and development facility which we expect
will be completed in the third quarter of 2011. We will focus our
research and development efforts on improving our plastic recycling process and
improving and developing end-products for new applications. We intend
to employ scientific and technical personnel who will be directly engaged in the
research and development of new products and their applications. Our
research professionals will closely observe industry trends in plastics
recycling to design new products. We are in the process of
establishing a strategic cooperation arrangement with the Changchun Institute of
Applied Chemistry, which will help us to develop various new technologies and
products.
Competition
The market for recycling plastics in
China is highly fragmented and there are few companies that have vertically
integrated operations that are able to recycle plastics and manufacture end
products. We face competition from other plastic recyclers, as well
as manufacturers of recycled plastics end-products. Many of our
competitors have significantly greater name recognition and financial,
technical, manufacturing, personnel, marketing, and other resources than we
have. Our competitors may be able to respond more rapidly than we can to
new or emerging technologies or changes in customer requirements. Our
primary competitor is Hua Nan Recycled Resource (Zhong Shan) Col, Ltd., which
both recycled plastics and produces end-products. Our other competitors include
Foshan Nanhai Lishui Lisuo Plastic Limited, which specializes in processing PET
waste plastics; Guangdong Foshan Warsing Plastic Limited, which specializes in
processing a wide range of materials such as PS, LDPE, HDPE, polyethylene
terephthalate (‘PET”), polyvinyl chloride (“PVC”), polypropylene (“PP”),
poly(methyl methacrylate) (“PMMA”), and polycarbonate (“PC”); and Tongbao
Environmental Technology Limited, which specializes in processing plastic
materials such as ABS, HDPE, LDPE, PP, PC, PMMA and linear low-density
polyethylene (“LLDPE”).
PRC
Government Regulations
The
plastics recycling industry in China is subject to a number of laws and
regulations, such as those regulations regarding environmental protections and
recycling of renewable resources. This section summarizes the
principal PRC regulations currently relevant to our business and
operations.
Prevention and Control of Environmental Pollution by Solid
Wastes
The Prevention and Control of
Environmental Pollution by Solid Wastes Law of the PRC was enacted in 1995 and
amended in 2004. Under this law, the PRC government authority
encourages and supports scientific research, technological development and the
dissemination of advanced prevention and control technologies and scientific
knowledge in the prevention and control of environmental pollution of solid
wastes. The law forbids the import of solid wastes that cannot be
used as raw materials and those that cannot be utilized through harmless
treatment, and restricts the import of solid wastes that can be used as raw
materials and implements the classification management of automatic licensing
import thereto. The import of solid wastes listed in the catalogue of
import-restricted shall be examined and approved by the environmental protection
administrative department of the State Council in collaboration with the foreign
trade administrative department of the State Council. For any
importation of solid wastes listed in the catalog of automatic licensing import,
formalities on the automatic licensing import shall be gone
through.
58
Business
License
Any company that conducts business in
the PRC must have a business license that covers the scope of the business in
which such company is engaged. We conduct our business through our
operating subsidiaries, Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun and each
of our operating subsidiaries holds a business license that covers its present
business. Prior to expanding our business beyond the scope covered by
our business licenses, we are required to apply and receive approvals from the
relevant PRC authorities (if applicable, based on the new business in which we
intend to engage) and conduct modification registration formalities with the
competent administration of industry and commerce. Companies that operate
outside the scope of their licenses can be subjected to a fine of not more than
RMB20,000 if such operations do not violate the PRC Criminal Law, or a fine of
not less than RMB20,000 but no more than RMB200,000 if such operations violate
the PRC Criminal Law, or a fine of not less than RMB50,000 but not more than
RMB500,000 if the such operations harm human health, have serious hidden hazards
to safety, threaten public safety or destroy environmental
resources. Other penalties can include disgorgement of income and
being ordered to cease operations.
Environmental Matters
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities.
The major
environmental regulations applicable to us include:
|
·
|
the
Environmental Protection Law of the
PRC;
|
|
·
|
the
Law of the PRC on the Prevention and Control of Water
Pollution;
|
|
·
|
Implementation
Rules of the Law of the PRC on the Prevention and Control of Water
Pollution;
|
|
·
|
the
Law of the PRC on the Prevention and Control of Air
Pollution;
|
|
·
|
Implementation
Rules of the Law of the PRC on the Prevention and Control of Air
Pollution;
|
|
·
|
the
Law of the PRC on the Prevention and Control of Solid Waste Pollution;
and
|
|
·
|
the
Law of the PRC on the Prevention and Control of Noise
Pollution.
|
Due to the fact that our main business
involves the importation of solid waste, we especially focus on the Law of the
PRC on the Prevention and Control of Solid Waste Pollution, which was enacted in
1995 and amended in 2004. Under this law, the PRC government
authority encourages and supports scientific research, technological development
and the dissemination of advanced prevention and control technologies and
scientific knowledge in the prevention and control of environmental pollution of
solid wastes. The law forbids the import of solid wastes that cannot
be used as raw materials and those that cannot be utilized through harmless
treatment. As a means of controlling the importation of waste, solid
waste that can be used as raw materials is classified as either solid waste the
import of which is restricted and solid waste the import of which is
automatically licensed. The administrative department for
environmental protection under the State Council, in conjunction with the
department in charge of foreign trade under the State Council, the department in
charge of comprehensive and macro-economic control under the State Council, the
General Administration of Customs and the department in charge of quality
supervision, inspection and quarantine under the State Council, formulates,
readjusts and publishes the catalogs of solid waste the import of which is
banned, restricted or automatically licensed in order to safeguard state
security, public interest and ethics, and to protect human health or safety, the
lives or health of animals and plants, or the environment. The import of solid
wastes listed in the catalog of import-restricted items must be examined and
approved by the environmental protection administrative department of the State
Council in collaboration with the foreign trade administrative department of the
State Council. For any importation of solid wastes listed in the catalog of
automatic licensing import, a company must apply for an automatic-import license
from the State Environmental Protection Administration. Any failure to obtain
approvals before importing solid wastes listed in the catalog of
import-restricted items will result in the shutout of the goods and fines of not
less than RMB100,000 and RMB1,000,000. Any failure to obtain
approvals before importing solid wastes listed in the catalog of automatic
licensing items will result in the failure of the items to go through customs
clearance.
59
Our
operating subsidiaries have received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that their
business operations are in material compliance with the relevant PRC
environmental laws and regulations. We are not currently subject to any pending
actions alleging any violations of applicable PRC environmental laws. To date,
our cost of compliance with PRC environmental laws and regulations has been
insignificant. We do not believe the existence of these environmental laws, as
currently written and interpreted, will materially hinder or adversely affect
our business operations; however, there can be no assurances of future events or
changes in laws, or the interpretation of laws, governing our industry. Failure
to comply with PRC environmental protection laws and regulations may subject us
to fines up to RMB1,000,000, the exact amount of which is determined on a case
by case basis, or disrupt our operations and the construction of our new
facilities, result in the shutdown of our operations temporarily or permanently,
which may materially and adversely affect our business, results of operations
and financial condition.
Recycle of Renewable
Resources
Administrative
Measures for the Recycle of Renewable Resources was enacted in 2007, which
regulates the operation of the renewable resource recycling
industry. According to this administrative measure, renewable
resources recycling operators should apply for a business license from the local
office of administration for industry and commerce and register with the local
office of Ministry of Commerce within 30 days after obtaining the business
license; if the operator is recycling scrap metal, regardless of whether it is
recycles for production or non-production purposes, a renewable resources
recycling operator is also required to register with the local public security
authority. Renewable resources recycling operators must register any
changes in their registration with the local office of Ministry of Commerce
within 30 days and with the local public security authority within 15 days (if
applicable) after such changes take place. In the event of noncompliance with
these regulations, the local office of Ministry of Commerce and/or local
authority of public security may give a warning, require renewable resources
recycling operators who fail to make the required registration(s) to rectify
their non-compliance within a specific time period and impose a fine of no less
than RMB500 and no more than RMB2000, in its discretion, on the renewable
resources recycling operators and make an announcement of such non-compliance to
the public.
Product Liability and Consumers
Protection
Product liability claims may arise if
the products sold have any harmful effect on the consumers. The injured party
may make a claim for damages or compensation. The General Principles of the
Civil Law of the PRC, which became effective in January 1987, state that
manufacturers and sellers of defective products causing property damage or
injury shall incur civil liabilities for such damage or injuries.
The Product Quality Law of the PRC was
enacted in 1993 and amended in 2000 to strengthen the quality control of
products and protect consumers’ rights and interests. Under this law,
manufacturers and distributors who produce or sell defective products may be
subject to confiscation of earnings from such sales, revocation of business
licenses and imposition of fines, and in severe circumstances, may be subject to
criminal liability.
The Law of the PRC on the Protection of
the Rights and Interests of Consumers was promulgated on October 31, 1993 and
became effective on January 1, 1994 to protect consumers’ rights when they
purchase or use goods or services. All business operators must comply with this
law when they manufacture or sell goods and/or provide services to
customers.
The Tort Law of the PRC effective on
July 1, 2010 requires that when the product defect endangers people’s life or
property, the injured party may hold the producer or the seller liable in tort
and require that it remove obstacles, eliminate danger, or take other action.
The Tort Law also requires that when a product is found to be defective after it
is put into circulation, the producer and the seller shall give timely warnings,
recall the defective product, or take other remedial measures.
Employment Laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, and social insurance, housing funds
and other welfare. These include local labor laws and regulations,
which may require substantial resources for compliance.
China’s National Labor Law, which
became effective on January 1, 1995, and China’s National Labor Contract
Law, which became effective on January 1, 2008, permit workers in both
state and private enterprises in China to bargain collectively. The
National Labor Law and the National Labor Contract Law provide for collective
contracts to be developed through collaboration between the labor union (or
worker representatives in the absence of a union) and management that specify
such matters as working conditions, wage scales, and hours of
work. The laws also permit workers and employers in all types of
enterprises to sign individual contracts, which are to be drawn up in accordance
with the collective contract. The National Labor Contract Law has
enhanced rights for the nation’s workers, including permitting open-ended labor
contracts and severance payments. The legislation requires employers
to provide written contracts to their workers, restricts the use of temporary
labor and makes it harder for employers to lay off employees. It also
requires that employees with fixed-term contracts be entitled to an
indefinite-term contract after a fixed-term contract is renewed once or the
employee has worked for the employer for a consecutive ten-year
period.
60
Foreign Currency Exchange
The principal regulations governing
foreign currency exchange in China are the Foreign Exchange Administration
Regulations promulgated by the State Council, as amended on August 5, 2008, or
the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the
RMB is freely convertible for current account items, including the distribution
of dividends, interest payments, trade and service-related foreign exchange
transactions, but not for capital account items, such as direct investments,
loans, repatriation of investments and investments in securities outside of
China, unless prior approval of the PRC State Administration of Foreign
Exchange, or SAFE is obtained and prior registration with the SAFE is
made. 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 (“MOFCOM”), the
SAFE and the State Reform and Development Commission.
Dividend Distributions
Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise
in China is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in
the event of liquidation.
Foreign
Ownership of PRC Operating Subsidiaries
The
establishment, approval and registered capital requirement matters of wholly
foreign-owned enterprises, such as our PRC subsidiary, Kelida, are regulated by
the Wholly Foreign-owned
Enterprise Law of the PRC promulgated and effective on April 12,
1986, as amended on October 31, 2000, and the Implementation Rules of the Wholly
Foreign-owned Enterprise Law of the PRC effective
on December 12, 1990, as amended in 2001. The procedures of
establishing Kelida as a wholly foreign-owned enterprise complied with such law
and regulation.
Investment
activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for
Foreign Investment, or the Catalogue, which was promulgated and is
amended from time to time by the Ministry of Commerce and the National
Development and Reform Commission. The Catalogue divides industries into
three categories: encouraged, restricted and prohibited. An industry not
listed in the Catalogue is generally open to foreign investment unless it is
specifically restricted by other PRC regulations. In addition, the
establishment of wholly foreign-owned enterprises is generally permitted in most
industries except for the restricted industries which are listed in the
Catalogue or restricted by other government regulations (which are subject
to governmental approvals) and industries prohibited from foreign
investments. Pursuant to the currently effective Catalogue (2007
version) and other PRC regulations, the business scope of Kelida as
indicated on its business license does not fall within the restricted or
prohibited industries and is not restricted by other PRC regulations and ,
therefore, Weixin HK is permitted to invest in Kelida in the form of a wholly
foreign-owned enterprise.
In addition, in accordance with the
Interim Provisions on
Investment Made by Foreign-Invested Enterprises in China promulgated on July 25,
2000 and effective on September 1, 2000, a foreign-invested enterprise in the
form of limited liability enterprise is permitted to establish a new domestic
enterprise or purchase the equity interest of other domestic enterprises in
China. Except as otherwise disclosed in the “Risk Factor - Risk Related To Us
Doing Business In China - Recent PRC regulations relating to acquisitions of PRC
companies by foreign entities may create regulatory uncertainties that could
restrict or limit our ability to operate. Our failure to comply with
PRC regulations relating to corporate restructurings and / or obtain the prior
approval of the China Securities Regulatory Commission, or the CSRC, for our
planned public offering and the listing and trading of our common stock could
have a material adverse effect on our business, operating results, reputation
and trading price of our common stock.”, Kelida’s acquisition of the equity
interest of Chuang Yi, Hua Su, Li Jun and Xin Ye in February 2010 complies with
the aforementioned regulation.
61
Delayed
Compliance
To
conduct business in China, we are required to comply with multiple laws and
regulations. Currently, we fail to comply with the laws and
regulations of social insurance, the housing provident fund and the registration
requirement of State Administration of Foreign Exchange. For further
information on our failure to comply with these regulations, please see our
disclosure under “Risk Factors” under the captions “Our production costs and
revenues are impacted by increases in the cost of labor,” “We may be exposed to
monetary fines by the local housing authority and claims from our employees in
connection with our PRC subsidiaries’ non-compliance with regulations with
respect to contribution of housing provident funds for employees,” and “Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to comply with PRC regulations relating to
corporate restructurings and/or obtain the prior approval of the China
Securities Regulatory Commission, or the CSRC, for our planned public offering
and the listing and trading of our common stock could have a material adverse
effect on our business, operating results, reputation and trading price of our
common stock.”
We are
not sure we will be always able to comply with all laws and regulations in all
aspects. PRC laws and regulations develop rapidly and we may not be
prompt enough to react to new laws and regulations which would result in our
delayed compliance.
Employees
As of September 30, 2010, we had
approximately 105 employees, 93 of which are full time employees. All of our
employees are based inside China and Hong Kong. We have not
experienced any work stoppages and we consider our relations with our employees
to be good. We have a labor contract with each of our employees as
required PRC law, which includes provisions relating to working conditions, term
of employment, working time, payment of salary and other terms.
Approximately 65% of our employees
currently live in company-provided housing facilities. Under PRC
laws, we are required to make contributions to a housing assistance fund for
employees based in China. Any increase in contributions to the
housing assistance fund will increase the costs and expenses of conducting our
business operations and could have negative effect on our results of
operations.
Properties
Our
principal executive offices are located at Room 405, Floor 4, North Tower, 9
Shen Zhou Road, Guangzhou High-tech Industrial Development Zone, Guangzhou,
People’s Republic of China. We lease these facilities under a two-year lease
that expires on February 28, 2012 for free. This lease agreement has been
registered with the local competent authority.
All of
our manufacturing operations are currently located in mainland China at in
Zhaoqing City, Guangzhou. We lease approximately 34.6 acres of land upon which
our 21,450 square meter manufacturing facility is located. Our
manufacturing facility consists of manufacturing plants, storage areas,
dormitories and research and development facilities. This lease
expires on October 8, 2026 and we have prepaid the rent under this lease through
the duration of the lease. The laws and regulations on the land lease
between a state-owned land-use right holder and the lessee in the PRC are rather
ambiguous, however, we believe that the failure to registration with the land
lease agreement would not result in our loss of our facility and would not
result in material penalties.
Our
current recycling and manufacturing facilities are adequate to meet the need of
our existing customers. We are currently able to process 20,000 tons
of plastic material at our facilities. We are currently operating our
recycling facilities of 80%. The total annual output capacity of our
household and construction products is 2.8 million units. We are
currently operating our household and construction product manufacturing
facilities at 90%. However, due to the increasing competition for
employees in the region in which we operate, we are facing increased labor costs
and difficulties in hiring new employees for our sorting
operations. In 2011, we intend to purchase new, customized sorting
equipment to automate our sorting activities in response to such difficulties
and increased costs and to increase our production efficiency. In
addition, we intend to purchase custom-designed automatic washing and cleaning
equipment, an automatic dispensing machine, an automatic drying machine, new lab
equipment, plastic injection machines and tool making machines in
2011. We anticipate that such equipment could cost up to $10
million.
62
In China, only the PRC government and
peasant collectives may own land. On November 15, 2009, we acquired
approximately 12,143 square meters of land in Guangzhou city for a total of RMB
7.29 million ($1.12 million) under a land use right grant from the Guangzhou
Land Resource Bureau that gives us the right to use the land for 50 years
pursuant to an agreement with the government of Guangzhou. In the event we wish
to continue to use the land after the 50-year period, we must apply for an
extension at least one year prior to the land grant’s expiration. We are
currently in the process of building a new facility on this site which will
house our new research and development center and corporate offices, as well as
space to produce tooling and molding equipment. No recycling
operations or manufacturing will be performed at the facility. We
anticipate that the new facility will be completed at the end of 2011 and that
the facility will be up and running in the first quarter of 2012. Our
rights with respect to the land use right grant permit us to develop the land
and construct buildings for industrial applications. We have the right to
transfer or rent the land and use it as collateral for our loans. We anticipate
beginning construction on the facility in March 2011. We anticipate
that our new facility will cost a total of $12 million, $3 million of which has
already been spent as of September 30, 2010 on items such as land use right
costs, construction design fees, environmental evaluation fees, and other
pre-construction related costs. We will also need approximately $8.0
million in additional operation-related expenses for our expansion plans related
to research and development costs for new recycling processes and products,
increased labor and management costs, supply chain and sales channel development
and strengthening our enterprise resource planning and information technology
systems.
New environmental regulations
implemented by the Zhaoqing Environmental Protection Agency in 2010 will require
us to move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. The new regulations limit
the ability of plastics recycling operators located outside of the industrial
park to expand the size of the their operations or increase their import quota
for plastic waste. If we do not move our recycling and manufacturing
operations to the new industrial park, which is located approximately 50 KM from
our current factory location, we will be unable to expand our operations and
will be unable to increase the import quota of plastic waste from the 16,100
tons were are currently able to import. In order to move the
industrial park, we will have to purchase a land use right for space in the
industrial park upon which to build a building to house our recycling and
manufacturing operations. We are currently in the process of trying
to obtain land in the industrial zone upon which to build our new
factory. We anticipate that we will be able to purchase land in the
industrial park and that we would begin construction on a new manufacturing and
recycling facility in the in the first quarter of 2011. We expect
that we would move our operations to the new factory in mid 2011. We
estimate that we will spend approximately $4.0 million in costs related to the
new facility, including costs for the purchase of the land and the design and
construction of the factory building. In addition, we anticipate that
moving costs will total approximately $100,000 for the moving of our factory
equipment and operations to the new facility.
Legal
Proceedings
We are
not involved in any material legal proceedings outside of the ordinary course of
our business.
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive management
as of the date of this prospectus.
Name
|
Age
|
Position
|
||
Xiao
Liu
|
37
|
Chief
Executive Officer and Director
|
||
Hongbing
Wan
|
43
|
Chairman
of the Board and Chief Operating Officer
|
||
Xiaozhu
Pang
|
35
|
Director
|
||
Yuhong
Hu
|
|
43
|
|
Director
|
Xiao Liu
has served as the Chief Executive Officer and as a Director of the Company since
November 23, 2010. He has served as the Vice President and as a
director of Weixin BVI since its inception in December 2009, assisting the
company to switch from recycling to end-user product development and
manufacturing. Mr. Liu has also served as a director of Weixin HK
since December 2005. From April 2004 to December 2009, Mr. Liu served
as an engineering and sourcing consultant, assisting international companies to
find qualified suppliers and/or products in China, including plastic and metal
parts for small home appliances, computer cases, telecommunication boxes, ice
makers, and LCD frames. Mr. Liu received a Bachelor’s degree in
Mechanical Engineering from Beijing Industry and Commerce University 1994, a
Master of Science degree in Engineering Management from Northeastern University
in 2002 and an MBA from Renmin University of China in 2005. Mr. Liu’s
qualifications to sit on the board of directors of the Company include his
strong experience in business management and his years of experience in the
manufacturing industry, and his extensive knowledge of the operations of Weixin
BVI and its subsidiaries.
63
Hongbing
Wan has served as the Chairman of the Board and Chief Operating
Officer of the Company since November 23, 2010. He has served as the
President and General Manager and a director of Weixin BVI since its formation
in December 2009. He has also served as the General Manager and a
director of Weixin HK since December 2005. Mr. Wan has served
as the Chief Executive Officer and as a director of Kelida since September 2009
and of each of Hua Sa, Chuang Yi, Xin Ye and Li Jun since December
2009. From June 1988 to September 2002, Mr. Wan served in various positions
at Gangzhou Henasia Engineering Ltd., including Sales Representative, Sales
Manager and General Manager. Mr. Wan received a Bachelor’s degree in
Mechanical Engineering in 1988 from Guangdong Industry University and an MBA in
2002 from Guangzhou Yajiada Economics Management College. Mr. Wan’s
qualifications to sit on the board of directors of the Company include his over
15 years of experience in the recycling business, his extensive knowledge of the
recycling market, his knowledge of sales distribution channels and his extensive
knowledge of the operations of Weixin BVI and its subsidiaries.
Xiaozhu
Pang has served as a Director of the Company since November 23,
2010. She has served as a senior accountant at Chang Lee LLP since
November 2006. From May 2005 to March 2006, Ms. Pang was an
Accountant at Cooper, Murray Chartered Accountants. Ms. Pang received
a Bachelor’s degree in Accounting in 1998 and a Master’s degree in Accounting in
2001 from the Dongbei University of Finance and Economics. Ms. Pang’s
qualifications to serve on the board of directors of the Company include her
knowledge of knowledge of the rules and regulations regarding publicly trading
companies, her education in accounting and her understanding of US
GAAP.
Yuhong Hu
has served as a Director of the Company since November 23, 2010. She
has served as the Corporate Controller of Premier Diagnostics Health Services,
Inc. since October 2010. From October 2007 to January 2010, she
served as an Intermediate Accountant at IGC Entertainment
Corporation. From May 2006 to March 2007, she served as the Finance
Director of Pfizer Global Contract Manufacturing Asia. From February
2001 to May 2006, she served as the Finance Controller of Pfizer Global
Manufacturing China. Ms. Hu received a Bachelor’s degree in Business
Administration in 1989 from Liao Ning Engineering University, a Diploma in
Accounting in 1993 from North East Financial and Economic University and an MBA
in 2005 from China Europe International Business School. Ms. Hu’s
qualifications to serve on the board of directors of the Company include her
knowledge of knowledge of the rules and regulations regarding publicly trading
companies, her education in accounting and her understanding of US
GAAP.
On November 23, 2010, the board of
directors of the Company appointed Zongqi Li as a director of the
Company. Mr. Li resigned as a director on November 26, 2010 for
personal reasons and not due to any disagreement with the Company.
Family
Relationships
There are no family relationships among
any of the officers and directors.
Involvement
in Certain Legal Proceedings
There have been no events under any
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of the Company during the past ten
years.
The Company is not aware of any legal
proceedings in which any director, nominee, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company, or any associate of any such director,
nominee, officer, affiliate of the Company, or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
Board
of Directors and Committees
Our Board of Directors does not
maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are
performed by the Board of Directors as a whole. We are not required
to maintain such committees under the rules applicable to companies that do not
have securities listed or quoted on a national securities exchange or national
quotation system. We intend to create board committees, including an
independent audit committee, in the near future. If we are successful
in listing our common stock on the NYSE Amex or the NASDAQ Global Market, we
would be required to have, prior to listing, an independent audit committee
formed, in compliance with the requirements for listing on the NYSE Amex and
NASDAQ Global Market and in compliance with Rule 10A-3 of the Exchange
Act.
Director
Independence
Yu Hong Hu and Xiao Zhu Pang are
considered independent directors under Section 803A(2) of the NYSE Amex Company
Guide, even though such definition does not currently apply to us because we are
not listed on the NYSE Amex.
64
Financial
Experience of Management and Preparation of Financial Statements
We maintain our books and records in
accordance with Chinese GAAP on the accrual basis. Chinese GAAP is
similar to International Financial Reporting Standards. The basic accounting
principles and practice of Chinese GAAP are similar to U.S. GAAP. We
hire knowledge and reputable third-party consultants to covert our books and
records from Chinese GAAP to U.S. GAAP. We provide our books and
records to the consultants who make the appropriate adjustments in the working
papers prepared for the auditor. All adjustments are approved by
management and reviewed and/or audited by our auditor. Our accounting manager
reviews all the adjustments and conversions made by our
consultants. The accounting manager has over 10 years of accounting
experience with Chinese GAAP obtained from his prior work experience in the
accounting department of various companies in the manufacturing industry in
China, at which he served in various positions, including accountant, accounting
supervisor and accounting manager. He also obtained experience with
internal controls over financial reporting from his experience at these
companies. Our accounting manager reviewed the conversion of our
books and records to U.S. GAAP performed by our consultants as described below
with the assistance of other persons familiar with such conversion
procedures.
Our third-party consultants, who are
individual professional accountants, work closely with the Company’s accounting
department to prepare the financial statements. Each of the consultants hold
bachelor’s degrees in accounting, and some of them hold master’s degrees in
accounting. They take continuing professional development courses
each year to update their accounting knowledge as is required by the governing
accounting bodies, including the Chinese Institute of Certified Public
Accountants (CICPA) and the Association of Chartered Certified Accountants
(ACCA). They also subscribe to online courses where they learn updated U.S. GAAP
and SEC rules and regulations. Most of the consultants are
CICPAs. The manager of the consulting team has over 10 years of
experience working in an international firm and in auditing U.S.
companies. He formerly worked in an Association of Chartered
Certified Accountants (ACCA) firm in London where he accumulated valuable public
company auditing experience. He received his certification in the
United Kingdom. He also worked for a Big 10 accounting firm in the UK
and has extensive knowledge of International Financial Reporting Standards and
U.S. GAAP. Another of the senior consultants has over 15 years of
accounting and auditing experience. He obtained knowledge of U.S.
GAAP and SEC rules and regulations and experience with converting Chinese GAAP
to U.S. GAAP by serving as the accounting manager at the Chinese headquarters of
a U.S. public company for 4 years. He is currently pursuing a AICPA
certificate. We believe that our consultants are qualified to prepare
our financial statements based on their professional experience. They
spent about three to four weeks in 2010 assisting us in preparing our financial
statements and we paid them a total of RMB 300,000 (US$44,780), for their
services in 2010.
Our accounting department is in charge
of the preparation of our financial statements with the assistance of the third
party financial consultants. Our accounting manager has over twenty years’
accounting experience in the manufacturing sector. Our other two
senior accountants each have over 10 years of accounting experience. We also
employ five intermediate and junior accountants in our accounting department to
assist in the preparation of our financial statements.
We do not currently maintain an audit
committee or have an audit committee financial expert. We intend to
form an audit committee and appoint an audit committee financial expert prior to
our listing on the NYSE Amex or NASDAQ Global Market.
Code
of Business Conduct and Ethics
On
December 20, 2007, Company adopted a formal code of ethics statement for senior
officers and directors (the “Code of Ethics”) that is designed to deter
wrongdoing and to promote ethical conduct and full, fair, accurate, timely and
understandable reports that the Company files or submits to the Securities and
Exchange Commission and others. A form of the Code of Ethics is attached
as Exhibit 14.1
to the Company’s Form 10-K filed with the Securities and Exchange Commission on
February 18, 2009. We intend to post a copy of the Code of Ethics on
our website. The Code is available in print, without charge, upon
written request to us at China Wesen Recycling Technology, Inc., Attention:
Secretary, Room 405, Floor 4, North Tower, 9 Shen Zhou Road, Guangzhou High-tech
Industrial Development Zone, Guangzhou, People’s Republic of
China. We intend to post promptly any amendments to or waivers of the
Code on our corporate website.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth information concerning the compensation for the three
fiscal years ended December 31, 2010 of the principal executive officer,
principal financial officer, in addition to our three most highly compensated
officers whose annual compensation exceeded $100,000, and up to two additional
individuals, as applicable, for whom disclosure would have been required but for
the fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
65
Name and Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
Xiao
Liu
|
2010
|
$ | - | $ | - | $ | - | |||||||
Chief
Executive Officer
|
2009
|
- | - | - | ||||||||||
2008
|
- | - | - | |||||||||||
Richard
Rappaport (1)
|
2010
|
$ | - | $ | - | $ | - | |||||||
Former
President
|
2009
|
- | - | - | ||||||||||
and
Former Director
|
2008
|
- | - | - | ||||||||||
Anthony
Pintsopoulos (1)
|
2010
|
$ | - | $ | - | $ | - | |||||||
Former
Secretary, Former Chief
|
2009
|
- | - | - | ||||||||||
Financial
Officer, and Former
|
2008
|
- | - | - | ||||||||||
Director
|
|
(1)
|
Upon
the close of the Share Exchange on November 23, 2009, Messrs. Rappaport
and Pintsopoulos resigned from all positions with the Company, which they
held from the Company’s inception on October 11,
2007.
|
Outstanding
Equity Awards at 2010 Fiscal Year End
There
were no option exercises or options outstanding in 2010.
Employment
Agreements
We have
currently no employment agreements with any of our executive
officers.
Director
Compensation
The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2010 by members of board of
directors.
Name
|
Fees Earned or
Paid in Cash
($) (1)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Xiao
Liu
|
3,077 | (1) | - | - | - | - | - | 3,077 | (1) | |||||||||||||||||||
Hongbing
Wan
|
3,077 | (1) | - | - | - | - | - | 3,077 | (1) | |||||||||||||||||||
Zongqi
Li (2)
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Xiaozhu
Pang
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Yuhong
Hu
|
- | - | - | - | - | - | - |
66
(1) Includes
fees paid for service on the board of directors of Weixin BVI and its
subsidiaries.
(2) Mr.
Li resigned as a director on November 26, 2010.
We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
Indemnifications
of Directors And Executive Officers And Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our Certificate of Incorporation provides for
the indemnification, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, of officers,
directors, employees and agents of the Company. We may, prior to the
final disposition of any proceeding, pay expenses incurred by an officer or
director upon receipt of an undertaking by or on behalf of that director or
executive officer to repay those amounts if it should be determined ultimately
that he or she is not entitled to be indemnified under the bylaws or
otherwise. We shall indemnify any officer, director, employee or
agent upon a determination that such individual has met the applicable standards
of conduct specified in Section 145. In the case of an officer or
director, the determination shall be made by (a) a majority vote of directors
who are not parties to such proceeding, even though less than a quorum; (b) a
committee of such directors designated by majority vote of such directors, even
though less than a quorum; (c) if there are no such directors, independent legal
counsel in a written opinion or (d) the stockholders.
Our
certificate of incorporation provides that, pursuant to Delaware law, our
directors shall not be liable for monetary damages for breach of the directors’
fiduciary duty of care to us and our stockholders. This provision in
the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of no monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a
director’s responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable. In the event a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by its
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
67
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Weixin
International Co., Limited and Subsidiaries
Weixin
BVI, Weixin HK, Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, which are either
directly or indirectly wholly-owned subsidiaries of the Company, each have
interlocking executive and director positions with us and with each
other.
Share
Exchange
On
October 11, 2007, certain original stockholders of SRKP 23, Inc. purchased an
aggregate of 7,096,390 shares of common stock for aggregate proceeds equal to
$5,000.12 and warrants to purchase an aggregate of 7,096,390 shares of Common
Stock for aggregate proceeds equal to $2,500.05. On November 3, 2010,
certain other original stockholders of SRKP 23, Inc. purchased an aggregate of
1,490,964 shares of common stock for aggregate proceeds of $1,050.00 and
warrants to purchase an aggregate of 1,490,958 shares of common stock for
aggregate proceeds of $525.00. The warrants have an exercise price
equal to $0.0001 and expire on November 23, 2015. These securities were the only
items of value received by any such stockholders from SRKP 23, Inc.
On
November 23, 2010, SRKP 23 completed the Share Exchange with Weixin BVI, Weixin
HK, Kelida, Hua Su, Chuang Yi, Xin Ye, Li Jun and the Weixin
Shareholders. At the closing of the Share Exchange, Weixin BVI became
a wholly-owned subsidiary of SRKP 23 and 100% of the issued and outstanding
securities of Weixin BVI were exchanged for securities of SRKP 23. An
aggregate of 7,865,556 shares of common stock were issued to the Weixin
Shareholders. As of the close of the Share Exchange, the Weixin
Shareholders owned approximately 72.3% of the issued and outstanding stock of
SRKP 23. Prior to the closing of the Share Exchange and the initial
closing of the Private Placement, the SRKP 23 Stockholders agreed to the
cancellation of an aggregate of 6,679,899 shares and warrants to purchase an
aggregate of 7,804,803 shares of common stock held by them such that there were
1,907,455 shares of common stock and warrants to purchase an aggregate of
782,545 shares of common stock owned by them immediately after the Share
Exchange and initial closing of the Private Placement.
The
stockholders of SRKP 23 did not receive any consideration for the cancellation
of the shares and warrants. The cancellation of the shares and
warrants was accounted for as a contribution to capital. The number
of shares and warrants cancelled was determined based on negotiations with the
securityholders of SRKP 23, Inc. and Weixin BVI. The number of shares
and warrants cancelled by SRKP 23, Inc. was not pro rata, but based on
discussions between the securityholders and SRKP 23, Inc. The
discussions regarding the relative amounts of share and warrant cancellations
were arms-length discussions between all of the securityholders of SRKP
23. All SRKP 23 securityholders unanimously agreed as to the share
and warrant allocations. No other criteria were involved nor was any additional
compensation or monies paid or concessions given to any SRKP secuityholder in
connection with the determination of the relative number of shares and warrants
cancelled by each securityholder.
Holder
|
Number of Shares
|
Number of Warrants
|
Implied Aggregate
Monetary Value of
Retained Shares and
Warrants (1)
|
|||||||||
WestPark
Financial Services, LLC (2)
|
960,691 | 394,130 | $ | 4,741,874.00 | ||||||||
Richard
Rappaport
|
181,350 | 74,399 | $ | 895,121.50 | ||||||||
Amanda
Rappaport Trust (2)
|
52,650 | 21,600 | $ | 259,875.00 | ||||||||
Kailey
Rappaport Trust (2)
|
52,650 | 21,600 | $ | 259,875.00 | ||||||||
Debbie
Schwartzberg
|
159,022 | 65,240 | $ | 784,917.00 | ||||||||
The
Julie Schwartzberg Trust dated 2/9/2000
|
16,487 | 6,764 | $ | 81,378.50 | ||||||||
The
David N. Sterling Trust dated 2/3/2000
|
16,487 | 6,764 | $ | 81,378.50 | ||||||||
Anthony
Pintsopoulos
|
117,000 | 48,000 | $ | 577,500.00 | ||||||||
Janine
Frisco (3)
|
40,950 | 16,800 | $ | 202,125.00 | ||||||||
Kevin
DePrimio
|
40,950 | 16,800 | $ | 202,125.00 | ||||||||
Jason
Stern
|
23,400 | 9,600 | $ | 115,500.00 | ||||||||
Xingrong
Zhang
|
81,940 | 33,616 | $ | 404,446.00 | ||||||||
Zhou
Chen
|
81,939 | 33,616 | $ | 404,442.50 | ||||||||
HaiLan
Zhang
|
81,939 | 33,616 | $ | 404,442.50 | ||||||||
1,907,455 | 782,545 | $ | 9,415,000.00 |
68
|
(1)
|
Based
on an estimated $3.50 per share offering price, which is the midpoint of
our estimated offering price range, the 1,907,455 shares retained by the
SRKP 23 stockholders had an implied monetary value of approximately $6.7
million. Assuming exercise of the 782,545 warrants also
retained by the SRKP 23 stockholders, 2,690,000 shares would have been
retained by the SRKP 23 stockholders with an implied monetary value of
approximately $9.4 million. The implied monetary value of the
retained shares was calculated based on an estimated $3.50 per share
offering price, without regard to liquidity, marketability, or legal or
resale restrictions; accordingly, such amounts should not be considered as
an indication of the fair value of the retained
shares.
|
|
(2)
|
Richard
A. Rappaport may be considered the indirect beneficial owner of the
securities owned by these entities by nature of his position as the
trustee of the Amanda Rappaport Trust and the Kailey Rappaport Trust and
as CEO and Chairman of WestPark Capital Financial Services,
LLC.
|
|
(3)
|
Janine
Frisco transferred all shares and warrants to her sister immediately after
the Share Exchange.
|
As
indicated in the Share Exchange Agreement, the parties to the transaction
acknowledged that a conflict of interest existed with respect to the
negotiations for the terms of the Share Exchange due to, among other factors,
the fact that WestPark Capital, Inc. (“WestPark Capital”) was advising Weixin
BVI in the transaction. As further discussed below in “Certain Relationships And Related
Transactions —Private Placement,” certain of the controlling stockholders
and control persons of WestPark Capital were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of SRKP 23,
Inc. Under these circumstances, the shareholders of Weixin BVI and the
stockholders of SRKP 23 negotiated an estimated value of Weixin BVI and its
subsidiaries, an estimated value of the shell company (based on similar recent
transactions by WestPark Capital involving similar public shells), and the
mutually desired capitalization of the company resulting from the Share
Exchange.
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which we believe allowed us to raise capital at an
appropriate price per share and subsequently list our stock on a national
securities exchange. We believe that investors may have been
unwilling to invest in our company in the Private Placement (as that term is
defined below) on acceptable terms, if at all, in the absence of an investment
in a public reporting vehicle and thus required us to effect the Share Exchange
as a condition to the Private Placement. The services provided by
WestPark Capital were not a consideration in determining this aspect of the
transaction. Under these circumstances and based on these factors,
the shareholders of Weixin BVI and the stockholders of Weixin agreed upon the
amount of shares and warrants to be cancelled. Further to such
negotiations, we paid a $140,000 success fee to WestPark Capital for services
provided in connection with the Share Exchange, including coordinating the share
exchange transaction process, interacting with principals of the shell
corporation and negotiating the definitive purchase agreement for the shell,
conducting a financial analysis of Weixin BVI, conducting due diligence on
Weixin BVI and its subsidiaries and managing the interrelationships of legal and
accounting activities. All of the fees due to WestPark Capital in
connection with the Share Exchange have been paid as of the date of this
prospectus.
Our board
of directors resigned in full upon the closing of the Share Exchange and
appointed Xiao Liu, Hongbing Wan, Zongqi Li, Yu Hong Hu and Xiao Zhu Pang to the
board of directors of our company, with Hongbing Wan serving as Chairman of the
Board. The board of directors also appointed Xiao Liu as our Chief
Executive Officer and Hongbing Wan as our Chief Operating Officer. Xiao Liu and
Hongbing Wan were executives and/or directors of Weixin BVI and/or its
subsidiaries. Zongqi Li subsequently resigned as a director on
November 26, 2010.
Private
Placement
Richard Rappaport, the President of
SRKP 23 and one of its controlling stockholders prior to the Share Exchange,
indirectly holds a 100% interest in WestPark Capital, the placement agent for
the equity financing conducted by us on the close of the Share
Exchange.
Anthony C. Pintsopoulos, an
officer, director and significant stockholder of SRKP 23 prior to the Share
Exchange, is the President and Treasurer of WestPark Capital. Kevin
DePrimio and Jason Stern, each employees of WestPark Capital, are also
stockholders of SRKP 23. In addition, Richard Rappaport is the sole
owner of the membership interests of the parent company of WestPark
Capital. Each of Messrs. Rappaport and Pintsopoulos resigned
from all of their executive and director positions with the Company upon the
closing of the Share Exchange.
69
Pursuant to a Placement Agency
Agreement entered into with WestPark Capital, we paid WestPark Capital, Inc. a
commission equal to 10.0% with a non-accountable fee of 4.0% of the gross
proceeds from the Private Placement. We are also retaining WestPark
Capital for a period of six months following the initial closing of the Private
Placement to provide us with financial consulting services for which we will pay
WestPark Capital $4,000 per month. Out of the proceeds of the Private
Placement, we paid $250,000 to Keen Dragon Group Limited, a third party
unaffiliated with Weixin BVI, the Company, or WestPark Capital for services in
connection with arranging the Share Exchange and the Company’s listing of
securities in the United States.
Each of Messrs. Rappaport and
Pintsopoulos may be considered a promoter of our company prior to the Share
Exchange. In addition to the director and executive officer positions
that each held with our company prior to the Share Exchange, each currently
holds director and executive officer positions with SRKP 2, Inc., SRKP 3, Inc.,
SRKP 5, Inc., SRKP 10, Inc., SRKP 12, Inc., SRKP 14, Inc., SRKP 15, Inc., SRKP
16, Inc., SRKP 24, Inc., SRKP 26, Inc., SRKP 27, Inc., SRKP 28, Inc., SRKP 29,
Inc., WRASP 30, Inc., WRASP 31, Inc. and WRASP 32, Inc., all of which are
publicly-reporting, blank check and non-trading shell companies. None
of the other original stockholders of SRKP 23 may be considered a promoter of
our company because none of them were involved in founding or organizing the
business of SRKP 23 and each received their securities of the Company solely in
consideration for personal funds paid directly by such stockholders to the
Company.
Mr. Rappaport and Pintsopoulos did not
receive any benefits related to the transactions described above, except their
retention of shares in the Company upon the closing of the Share Exchange
described above in this section.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
WestPark
Capital, Inc.
WestPark
Capital is the Underwriter in this offering. Subject to the terms and
conditions of the underwriting agreement dated [________], 2011, WestPark
Capital has agreed to purchase from us the number of shares set forth in the
“Underwriting” section of this prospectus at the public offering price less the
underwriting discounts and commissions indicated in the “Underwriting”
section. In addition, we have agreed to pay the Underwriters an
aggregate non-accountable expense allowance of 3.0% of the gross proceeds of
this offering (excluding
the proceeds from the Underwriter’s over-allotment
option). Based on the estimated per share offering price of
$3.50, which is the midpoint of our estimated offering price range, and the sale
by us of 1,200,000 shares of common stock offered in this offering, we will pay
the Underwriter a non-accountable fee equal to approximately
$126,000. The Underwriter will also receive warrants to purchase a
number of shares equal to 10% of the shares of our common stock sold in
connection with this offering excluding the shares sold in the over-allotment
option. The warrants will be exercisable at a per share price of
$4.20, which is 120% of the estimated per share offering price of this
offering.
The table below identifies all the
benefits that WestPark Capital and its affiliates have received and will receive
in connection with the Share Exchange, the Private Placement and this
offering.
$
|
Other
|
||||
Share
Exchange
|
164,000 | (1) |
Registration
rights for an aggregate of 1,428,691 shares and 586,129 shares underlying
warrants (2) (3)
|
||
Retained
Shares and Warrants
|
2,014,820 | (4) | |||
Private
Placement
|
814,108 | (5) | |||
Public
Offering
|
[______]
|
(6) |
Warrants
to purchase 120,000 shares of common stock at an exercise price of $4.20
per share
|
||
Total
|
[______]
|
(1)
Includes a success fee of $140,000 paid to WestPark Capital for services
provided in connection with the Share Exchange. Also includes
$24,000 for consulting fees paid to WestPark by the Company for five months of
consulting services provided to the Company by WestPark.
70
(2) Pursuant
to a Registration Rights Agreement executed in connection with the closing of
the Share Exchange, affiliates of WestPark Capital received registration rights
for an aggregate of 1,428,691 shares and 586,129 shares underlying
warrants. We agreed to include such shares in a subsequent
registration statement to be filed on or before the 10th after the end of the
six-month period that immediately followed the date on which we filed the
registration statement of which this prospectus is a part. The
shareholders of Weixin immediately prior to the date of the Share Exchange
holding an aggregate of 7,865,556 shares of our common stock have
agreed with the Underwriter
not to directly or indirectly sell, offer, contract or grant any option
to sell, pledge, transfer (excluding intra-family transfers, transfers to a
trust for estate planning purposes or to beneficiaries of officers, directors
and shareholders upon their death), or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for any
shares of our common stock, without the prior written consent of the
Underwriter, for a period
of 24 months after the date of this prospectus.
(3) Based
on an estimated per share offering price of $3.50, the 1,428,691 shares retained
by SRKP 23 stockholders who are affiliates of WestPark Capital have an implied
monetary value of approximately $5.0 million. Assuming the exercise
of the 586,129 warrants also retained by the SRKP 23 stockholders who are
affiliates of WestPark Capital, 2,014,820 shares would have been retained by
such stockholders with an implied monetary value of approximately $7.1
million. The implied monetary value of the retained shares was
calculated based on an estimated $3.50 per share offering price, without regard
to liquidity, marketability, the likelihood of this offering being consummated,
or legal or resale restrictions; accordingly, such amounts should not be
considered an indication of the fair value of the retained shares.
(4) Represents
the implied aggregate monetary value of 1,428,691 shares and 586,129 shares
underlying warrants, assuming the exercise of warrants retained by WestPark
Capital and its affiliates. The implied monetary value of the
retained shares was calculated based on an estimated $3.50 per share offering
price of the common shares to be sold in this offering, without regard to
liquidity, marketability or legal or sale restrictions; accordingly, such amount
should not be considered as an indication of the fair value of the retained
shares and warrants.
(5)
Represents commissions of $552,963, a non-accountable expense allowance of
$221,145, and a reimbursement of WestPark Capital’s fees for legal counsel of
$40,000.
(6)
Represents underwriting discounts and commissions of $[__], plus a
non-accountable expense allowance of $[_____] and a reimbursement of $40,000 for
WestPark Capital’s legal fees.
The Underwriter has a 45-day option to
purchase up to 180,000 additional shares of common stock at the public offering
price solely to cover over-allotments, if any, if the Underwriter sells more
than 1,200,000 shares of common stock in this offering. The Underwriter agreed
to purchase 70% of the over-allotment shares from the selling stockholders
identified in this prospectus and the remaining shares from us. We will
not receive any proceeds from the sale of the shares, if any, by the selling
stockholders. If the Underwriter exercises this option in full, the total
underwriting discounts and commissions will be $[__], and total proceeds,
before expenses, to the selling stockholders will be $[__] and the total
proceeds to us, before expenses, from the over-allotment option exercise will be
$[__].
See
“Underwriting” on page 81 of this prospectus for more information.
Related
Party Loans
During 2008 and 2009, we obtained
certain related party loans from Hongbing Wan and Xiao Liu, two of the Company’s
directors. The loans were obtained during the early stages of the
Company’s operations and the proceeds of the loans provided us with needed
working capital. The amounts outstanding on the loans as of September
30, 2010 and December 31, 2009 and 2008 are as follows:
September 30,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Due
to Wan, Hongbing, Director
|
$
|
636,219
|
$
|
4,231,403
|
$
|
5,175,060
|
||||||
Due
to Liu, Xiao, Director
|
44,615
|
1,143,272
|
-
|
|||||||||
$
|
680,834
|
$
|
5,374,675
|
$
|
5,175,060
|
The loans are non-interest bearing and
have no maturity date. As our revenue and cash flows have grown, we
have begun repaying the loans. In the future, we anticipate being
able to finance our operations through our net income and through external debt
and equity financings. We do not anticipate any need for additional
related party financing for our on-going operations in future
periods.
71
Policy
for Approval of Related Party Transactions
We do not
currently have a formal related party approval policy for review and approval of
transactions required to be disclosed pursuant to Item 404 (a) of
Regulation S-K. We expect our board to adopt such a policy in the
near future.
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND SELLING
STOCKHOLDERS
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on issued and outstanding shares of common
stock before and after the offering, by:
|
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
·
|
Each
executive officer;
|
|
·
|
Each
director; and
|
|
·
|
All
of the executive officers and directors as a
group.
|
The
number of shares of our common stock outstanding as of the date of this
prospectus, excludes up to 1,200,000 shares of our common stock to be offered by
us in a firm commitment public offering concurrently herewith. Unless
otherwise indicated, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder’s name, subject to community property laws, where
applicable. Unless otherwise indicated, the address of each
beneficial owner listed in the table is c/o China Wesen Recycling Tecnhology,
Inc., Room 405, Floor 4, North Tower, 9 Shen Zhou Road, Guangzhou High-tech
Industrial Development Zone, Guangzhou, People’s Republic of China.
Beneficial Ownership
|
Beneficial Ownership
|
|||||||||||||||||||||
Before the Offering
|
Number of
|
After the Offering
|
||||||||||||||||||||
Shares
|
Shares of
|
|||||||||||||||||||||
Name and Address
|
Shares of
|
Percent of
|
Being
|
Common
|
Percent of
|
|||||||||||||||||
of Beneficial Owner
|
Title
|
Common Stock
|
Class(1)
|
Offered(2)
|
Stock
|
Class(3)
|
||||||||||||||||
Directors
and Executive Officers
|
||||||||||||||||||||||
Xiao
Liu
|
Chief
Executive Officer and Director
|
3,126,056 | (4) | 25.6 | % | - | 3,126,056 | (4) | 23.3 | % | ||||||||||||
Hongbing
Wan
|
Chairman
of the Board and Chief Operating Officer
|
- | - | - | - | - | ||||||||||||||||
Yu
Hong Hu
|
Director
|
- | - | - | - | - | ||||||||||||||||
Xiao
Zhu Pang
|
Director
|
- | - | - | - | - | ||||||||||||||||
Officers
and Directors as a Group (total of 4 persons)
|
3,126,056 | 25.6 | % | 3,126,056 | 23.3 | % | ||||||||||||||||
5%
or More Owners
|
||||||||||||||||||||||
Richard
A. Rappaport
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
1,759,070 | (5) | 13.8 | % | - | 1,759,070 | (5) | 12.6 | % | |||||||||||||
WestPark
Capital Financial Services, LLC
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
1,354,821 | (6) | 10.7 | % | - | 1,354,821 | (6) | 9.8 | % |
72
Beneficial Ownership
|
Beneficial Ownership
|
|||||||||||||||||||||
Before the Offering
|
Number of
|
After the Offering
|
||||||||||||||||||||
Shares
|
Shares of
|
|||||||||||||||||||||
Name and Address
|
Shares of
|
Percent of
|
Being
|
Common
|
Percent of
|
|||||||||||||||||
of Beneficial Owner
|
Title
|
Common Stock
|
Class(1)
|
Offered(2)
|
Stock
|
Class(3)
|
||||||||||||||||
Wesen
Environmental Technology Limited
|
3,126,056 | 25.6 | % | 3,126,056 | 23.3 | % | ||||||||||||||||
Zhang Hailan
TianLai
17 Block, Zheng Zhong Golf
Long
Gong District, Shenzhen People’s Republic of China
|
615,555 | (7) | 5.0 | % | - | 615,555 | (7) | 4.6 | % |
(1)
|
Based
on 12,230,178 shares of common stock issued and outstanding as of February
9, 2011.
|
(2)
|
Up
to 180,000 shares may be sold by the selling stockholders and us if the
Underwriter exercises its over-allotment option. See “Selling
Stockholders” table that follows.
|
(3)
|
Based
on 13,430,178 shares of common stock, which consists of (i) 12,230,178
shares of common stock issued and outstanding as of February 9, 2011, and
(ii) 1,200,000 shares of common stock issued in the public
offering. This amount (i) excludes the 54,000 shares of our
common stock that we may issue upon the Underwriter’s over-allotment
option exercise, (ii) excludes 782,545 shares of common stock
underlying warrants that are exercisable at $0.000344 per share; (iii)
excludes 120,000 shares of common stock underlying warrants that will be
issued to the Underwriter upon the completion of this offering, and (iv)
is not affected by the 126,000 shares that the Underwriters may be
purchased from selling stockholders named
below.
|
(4)
|
Consists
of shares owned by Wesen Environmental Technology Limited, a British
Virgin Islands company, of which Xiao Liu is a director and the sole
shareholder and may be deemed to have voting and investment control over
the shares owned by Wesen Environmental Technology
Limited.
|
(5)
|
Includes
181,350 shares of Common Stock and a warrant to purchase 74,399 shares of
Common Stock owned by Mr. Rappaport. Also includes 52,650
shares of Common Stock and warrants to purchase 21,600 shares of Common
Stock held by each of the Amanda Rappaport Trust and the Kailey Rappaport
Trust (together, the “Rappaport Trusts”) as well as 960,691 shares of
Common Stock and warrants to purchase 394,130 shares of Common Stock held
by WestPark Capital Financial Services LLC. Mr. Rappaport, as Trustee of
each of the Rappaport Trusts and Chief Executive Officer (“CEO”) and
Chairman of WestPark Capital Financial Services, LLC, may be deemed the
indirect beneficial owner of these securities since he has sole voting and
investment control over the
securities.
|
(6)
|
Includes
960,691 shares of Common Stock and a warrant to purchase 394,130 shares of
Common Stock.
|
(7)
|
Includes
581,939 shares of Common Stock and a warrant to purchase 33,616 shares of
common stock.
|
Selling
Stockholders
The
Underwriter has a 45-day option to purchase up to 180,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 1,200,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase up to
70% of the Over-allotment Shares, or 126,000 shares, from the selling
stockholders identified in this prospectus and the remaining 30%, or 54,000
shares, will be purchased from us. We will not receive any proceeds from the
sale of the shares, if any, by the selling stockholders. The selling
stockholders acquired their shares in the private placement that we conducted
that finally closed on November 23, 2010 and December 16, 2010 pursuant to which
we sold we sold an aggregate of 2,457,167 shares of common stock for total gross
proceeds of $5.5 million. If any of the stockholders that participated in the
private placement elect not to participate as a selling stockholder for the
Over-allotment Shares, we will cover such sale of shares to the
Underwriter.
73
Except as
indicated below, no selling stockholder is the beneficial owner of any
additional shares of common stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities. Except as indicated below, no selling security holder is a
registered broker-dealer or an affiliate of a broker-dealer.
Except as
described below, none of the selling stockholders, to our knowledge, has had a
material relationship with our company other than as a stockholder at any time
within the past three years.
|
Beneficial Ownership
Before the Offering
|
Number of
|
Beneficial Ownership
After the Offering
|
|||||||||||||||||
Name of Selling Stockholder
|
Shares of
Common
Stock
|
Percent of
Class(1)
|
Shares
Being
Offered(2)
|
Shares of
Common Stock
|
Percent of
Class(3)
|
|||||||||||||||
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue 100,000,000 shares of common stock, $0.0001 par value per
share, of which 12,230,178 shares are issued and outstanding as of the date of
this prospectus. Each outstanding share of common stock is entitled
to one vote, either in person or by proxy, on all matters that may be voted upon
by their holders at meetings of the stockholders.
Holders
of our common stock:
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our Board of
Directors;
|
(ii)
|
are
entitled to share ratably in all of our assets available for distribution
to holders of common stock upon our liquidation, dissolution or winding
up;
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
The
former shareholders of Weixin BVI and their designees own approximately 63.7% of
the outstanding shares of our common stock. Accordingly, these stockholders are
in a position to control all of our affairs.
Preferred
Stock
We may
issue up to 10,000,000 shares of our preferred stock, par value $0.0001 per
share, from time to time in one or more series. No shares of Preferred Stock
have been issued.
Our Board
of Directors, without further approval of our stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights, liquidation preferences and other rights and restrictions relating to
any series. Issuances of shares of preferred stock, while providing flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of our common stock and prior series of preferred stock then
outstanding.
Warrants
Prior to
the Share Exchange, our stockholders held an aggregate of 8,587,348 warrants to
purchase shares of our common stock. Our stockholders cancelled an
aggregate of 7,804,803 warrants in conjunction with the closing of the Share
Exchange. As of the date of this prospectus, the stockholders held an aggregate
of 782,545 warrants with an exercise price of $0.0001 per share. The
warrants are currently exercisable.
74
Market
Price of Our Common Stock
The
shares of our common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We intend to apply to
list our common stock on either the NASDAQ Global Market or the NYSE Amex. If
and when our common stock is listed or quoted for trading, the price of our
common stock will likely fluctuate in the future. The stock market in general
has experienced extreme stock price fluctuations in the past few years. In some
cases, these fluctuations have been unrelated to the operating performance of
the affected companies. Many companies have experienced dramatic volatility in
the market prices of their common stock. We believe that a number of factors,
both within and outside our control, could cause the price of our common stock
to fluctuate, perhaps substantially. Factors such as the following could have a
significant adverse impact on the market price of our common stock:
|
·
|
Our
financial position and results of
operations;
|
|
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
·
|
Federal
and state regulatory actions and the impact of such requirements on our
business;
|
|
·
|
The
development of litigation against
us;
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
·
|
Changes
in interest rates;
|
|
·
|
Competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
|
|
·
|
Period-to-period
fluctuations in our operating
results;
|
|
·
|
Investor
perceptions of us; and
|
|
·
|
General
economic and other national
conditions.
|
Delaware
Anti-Takeover Law and Charter Bylaws Provisions
We are
subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines a business combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
75
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our company, including changes
a stockholder might consider favorable. In particular, our
certificate of incorporation and bylaws, as applicable, among other things,
will:
|
·
|
provide
our board of directors with the ability to alter our bylaws without
stockholder approval;
|
|
·
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business to be
brought before a meeting of stockholders;
and
|
|
·
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal and
to discourage some tactics that may be used in proxy fights. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure our company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing
changes in our management.
Transfer
Agent
The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.
Listing
We expect
to apply to list our common stock on either the NASDAQ Global Market or the NYSE
Amex Equities under the symbol “[___].” If we fail to obtain a listing on either
of these exchanges, we will not complete this offering.
76
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no public market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate of 13,430,178 shares of common stock, assuming no
exercise of the underwriter’s over-allotment option. Of the
outstanding shares of common stock as of the completion of this offering, the
1,200,000 shares sold in the offering and the 2,457,167 shares registered for
resale under a separate prospectus will be freely tradeable without restriction
or further registration under the Securities Act, except that any shares
purchased by our “affiliates,” as that term is defined in Rule 144 of the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below.
All other
outstanding shares not sold in this offering or registered under a separate
resale prospectus will be deemed “restricted securities” under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 promulgated under
the Securities Act, which rules are summarized below. Our stockholders will not
be eligible to utilize Rule 144 until November 30, 2011, at the earliest, which
is 12 months from the date we filed our Form 10 information, as required under
Rule 144. Subject to the lock-up agreements described below and the provisions
of Rules 144, additional shares will be available for sale in the public market
as follows:
Approximate Number of
Shares Eligible for
Future Sale
|
Date
|
|
1,200,000
|
After
the date of this prospectus, freely tradable shares sold in this
offering.
|
|
2,457,167
|
After
the date of this prospectus, these shares will have been registered under
a separate prospectus (“Resale Prospectus”) and will be freely tradable by
selling stockholders listed in the Resale Prospectus, subject to the
lock-up arrangement described below. These shares consist of all of the
shares of common stock registered under the Resale Prospectus. The selling
stockholders have agreed that (i) if this offering is for $10 million or
more, then the selling stockholders would not be able to sell or transfer
their shares until at least six months after this offering’s completion,
and (ii) if this offering is for less than $10 million, then one-tenth of
the selling stockholders’ shares would be released from the lock-up
restrictions ninety days after this offering and there would be a pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, in its discretion, may also release some or all the shares from
the lock-up restrictions earlier. We currently intend this offering to be
in an amount less $10 million. However, there can be no assurance of the
actual size of this offering.
|
|
2,690,000
|
Subject
to a lock-up arrangement described below, these shares, which were held by
our stockholders prior to the Share Exchange (the “Existing Security
holders”), will be freely tradable after the Securities and Exchange
Commission declares effective the registration statement that we intend to
file on or about [____], 2011, which is 10 days after the end of the
six-month period that immediately follows the date on which we filed the
registration statement of which this prospectus is a part. Also to be
registered under the registration statement is 782,545 shares of common
stock underlying warrants that have been previously issued to the Existing
Security holders, which are currently exercisable at $0.0001 per share.
The Existing Security holders have agreed that they will not sell any of
their shares subject to the same restrictions as that of the selling
stockholders, as described above.
|
|
7,865,556
|
On
November 30, 2011, which is twelve months after the filing of a current
report on Form 8-K reporting the closing of the share exchange
transaction, these shares, which were issued in connection with the share
exchange transaction, may be sold under and subject to Rule 144. However,
all of the holders of these shares have agreed with the Underwriter not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust
for estate planning purposes or to beneficiaries of officers, directors
and shareholders upon their death), or otherwise dispose of or enter into
any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable
for any shares of our common stock, without the prior written consent of
the Underwriter, for a period of 24 months after the date of this
prospectus.
|
77
Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned shares of our common stock for
at least nine months, including the holding period of any prior owner, except if
the prior owner was one of our affiliates, would be entitled to sell all of
their shares, provided the availability of current public information about our
company.
Sales
under Rule 144 may also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Any substantial sale of common stock pursuant to any resale
registration statement or Rule 144 may have an adverse effect on the market
price of our common stock by creating an excessive supply.
Because
we were a shell company with no operations prior to the close of the Share
Exchange, sales of our shares must be compliant with Rule
144(i). Pursuant to Rule 144(i), none of our shares of common stock
may be sold under Rule 144 until November 30, 2011, which is 12 months after the
filing of a current report on Form 8-K reporting the closing of the Share
Exchange. Additionally, stockholders may not sell our shares pursuant
to Rule 144 unless at the time of the sale, we have filed all reports, other
than reports on Form 8-K, required under the Exchange Act with the SEC for the
preceding 12 months.
Lock-Up Agreements and
Registration
The
investors in our Private Placement, in which we sold 2,457,167 shares of common
stock, entered into lock-up agreements pursuant to which they agreed that (i) if
this offering is for $10 million or more, then the investors would not be able
to sell or transfer their shares until at least six months after this offering’s
completion, and (ii) if this offering is for less than $10 million, then
one-tenth of the investors’ shares would be released from the lock-up
restrictions ninety days after the offering and there would be a pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, Inc., in its discretion, may also release some or all the shares from
the lock-up restrictions earlier. We currently intend this offering to be in an
amount less than $10 million. However, there can be no assurance of the actual
size of this offering.
Notwithstanding
the foregoing, such investors must provide written confirmation to WestPark
Capital and us (the “Confirmations”) that he, she or it (i) is and has been in
compliance with any and all state and federal securities and other laws, statues
and regulations regarding his, her or its ownership and/or any sale, transfer or
hypothecation of shares of our common stock including but not limited to those
rules and regulations promulgated by the SEC, FINRA and any exchange on which
the our common stock is listed, and those of federal and state governments and
other agencies such as improper short selling of our common stock and failure to
properly file all documents required by the SEC or otherwise and (ii) does not
wish to have the shares subject to partial release to continue to bear a lock-up
legend, failure to provide such written confirmation being sufficient grounds to
allow the placement agent, in its sole discretion, to disallow the automatic
release of such shares until the expiration in totality of the referenced
lock-up. Subject to the lock-up agreement, the shares will be freely tradable
upon effectiveness of the registration statement that we filed to register the
investors’ shares.
We have
agreed to register 1,907,455 shares of common stock and the 782,545 shares of
common stock underlying the warrants held by our stockholders immediately prior
to the Share Exchange (the “Existing Security holders”). The shares will be
included in a registration statement that we agreed to file on or about
[_______], 2011, which is 10 days after the end of the six-month period that
immediately follows the date on which we filed the registration statement of
which this prospectus is a part. All of the shares included in an effective
registration statement may be freely sold and transferred, subject to a lock-up
agreement pursuant to which the Existing Security holders agreed to be subject
to the lock up restrictions that the selling stockholders are subject, as
described above.
We have
agreed with the Underwriter that we will not, without the prior consent of the
Underwriter, directly or indirectly sell, offer, contract or grant any option to
sell, pledge, transfer, or otherwise dispose of or enter into any transaction
which may result in the disposition of any shares of our common stock or
securities convertible into, exchangeable or exercisable for any shares of our
common stock (excluding the exercise of certain warrants and/or options
currently outstanding and exercisable) for a period of 24 months after the date
of this prospectus.
In
addition, each of our executive officers and directors, in addition to all of
the stockholders that received shares issued in the Share Exchange holding an
aggregate of 7,865,556 shares of common stock, have agreed with the Underwriter
not to directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust for
estate planning purposes or to beneficiaries of officers, directors and
stockholders upon their death), or otherwise dispose of or enter into any
transaction which may result in the disposition of any shares of our common
stock or securities convertible into, exchangeable or exercisable for any shares
of our common stock, without the prior written consent of the Underwriter, for a
period of 24 months after the date of this prospectus.
78
We have
been advised by the Underwriter that it has no present intention and there are
no agreements or understandings, explicit or tacit, relating to the early
release of any locked-up shares. The Underwriter may, however, consent to an
early release from the lock-up period if, in its opinion, the market for the
common stock would not be adversely impacted by sales. The release of any
lock-up would be considered on a case-by-case basis. Factors that the
Underwriter may consider in deciding whether to release shares from the lock-up
restriction include the length of time before the lock-up expires, the number of
shares involved, the reason for the requested release, market conditions, the
trading price of our securities, historical trading volumes of our securities
and whether the person seeking the release is an officer, director or affiliate
of us.
79
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement dated [_________],
2011 WestPark Capital, Inc. (the “Underwriter”), has agreed to purchase
from us the number of shares of common stock set forth below at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus.
Underwriter
|
Number
of Shares
|
||
WestPark
Capital, Inc.
|
[_____]
|
||
Total
|
[_____]
|
The
underwriting agreement provides that the agreement may be terminated by the
Underwriter at any time prior to delivery of and payment for the shares if, in
the Underwriter's judgment, payment for and delivery of the shares is rendered
impracticable or inadvisable by reason of events specified in the underwriting
agreement, including but not limited to the state of the financial markets and
our financial condition. Subject to the foregoing, the underwriter is committed
to purchase all of the common stock being offered by us if any of such shares
are purchased, other than those covered by the over-allotment option described
below.
The Underwriter proposes to offer the
common stock directly to the public at the public offering price set forth on
the cover page of this prospectus. The Underwriter may offer the common stock to
some dealers at that price less a concession not in excess of $[__] per share.
Dealers may re-allow a concession not in excess of $[__] per share to some other
dealers. After the shares of common stock are released for sale to the public,
the Underwriter may vary the offering price and other selling
terms.
The
Underwriter has a 45-day option to purchase up to 180,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 1.200,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase up to
70% of the Over-allotment Shares from the selling stockholders identified in
this prospectus and the remaining shares from us. We will not receive any
proceeds from the sale of the shares, if any, by the selling stockholders. The
Underwriter can exercise this right at any time and from time to time, in whole
or in part, within 45 days after the offering.
The
following table summarizes the compensation and estimated expenses we and the
selling stockholders will pay:
Per
Share
|
Total
|
|||||||||||||||
Without
Over-
allotment
|
With
Over-
allotment
|
Without
Over-
allotment
|
With
Over-
allotment
|
|||||||||||||
Underwriting
Discounts and Commissions paid by us
|
$ | $ | $ | $ | ||||||||||||
Expenses
payable by us
|
$ | $ | $ | $ | ||||||||||||
Underwriting
Discounts and Commissions paid by selling stockholders
|
$ | $ | $ | $ | ||||||||||||
Expenses
payable by the selling stockholders
|
$ | $ | $ | $ |
The
Underwriter may make offers and sales both inside and outside the United States
through its selling agents. Any offers and sales in the United States will be
conducted by broker-dealers registered with the SEC.
The
Underwriter has entered into an agreement in which it agreed to restrictions on
where and to whom it and any dealer purchasing from it may offer shares of
common stock, as a part of the distribution of the shares.
We have
agreed with the Underwriter that we will not, without the prior consent of the
Underwriter, directly or indirectly sell, offer, contract or grant any option to
sell, pledge, transfer, or otherwise dispose of or enter into any transaction
which may result in the disposition of any shares of our common stock or
securities convertible into, exchangeable or exercisable for any shares of our
common stock (excluding the exercise of certain warrants and/or options
currently outstanding and exercisable) for a period of 24 months after the date
of this prospectus.
80
Each of
our executive officers and directors, in addition to all of the stockholders
that received shares issued in the Share Exchange holding an aggregate of
7,865,556 shares of common stock, have agreed with the Underwriter not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust for
estate planning purposes or to beneficiaries of officers, directors and
stockholders upon their death), or otherwise dispose of or enter into any
transaction which may result in the disposition of any shares of our common
stock or securities convertible into, exchangeable or exercisable for any shares
of our common stock, without the prior written consent of WestPark Capital, Inc,
the representative of the Underwriter, for a period of 24 months after the date
of this prospectus.
We have
agreed to indemnify the Underwriter against some liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
Underwriter may be required to make in respect thereof.
We have
agreed to pay the Underwriter an aggregate non-accountable expense allowance of
3.0% of the gross proceeds of this offering (excluding
the proceeds from the Underwriter’s over-allotment option) or
$[________], based on an estimated public offering price of $3.50 per share. In
addition, we have agreed to pay the Underwriter’s road show expenses of $[____]
and counsel fees (excluding blue sky fees) of $[____]. We have
retained WestPark Capital, Inc. for a period of six months following the closing
of the Private Placement to provide certain consulting services for which it
will pay WestPark Capital $4,000 per month. These consulting services
augment the services provided by WestPark Capital, Inc. before, during, and
after the closing of the Private Placement and Share Exchange, which included
but were not limited to coordinating the Share Exchange process, negotiating the
related definitive agreements, conducting multiple financial analyses and due
diligence on the Weixin BVI and its subsidiaries and managing the
interrelationships of legal and accounting activities.
Upon the
closing of this offering, we have agreed to sell to the Underwriter warrants to
purchase a number of shares equal to 10% of the shares of our common stock sold
in this offering, excluding any shares that may be sold pursuant to the
Underwriters’ exercise of the over-allotment option. The warrants
will be exercisable at a per share exercise price equal to $4.20, which is 120%
of the estimated public offering price, subject to standard anti-dilution
adjustments for stock splits and similar transactions, and will become
exercisable one year after the date of this prospectus and expire five years
from the effective date of the registration statement date of which this
prospectus forms a part. The warrants and the 120,000 shares of common stock
underlying the warrants have been deemed compensation by the FINRA and are
therefore subject to a 180-day lock-up pursuant to FINRA Rule
5110(g)(1). The Underwriter (or permitted assignees under the Rule)
will not sell, transfer, assign, pledge, or hypothecate the warrants or the
securities underlying the warrants, nor will it engage in any hedging, short
sale, derivative, put, or call transaction that would result in the effective
economic disposition of the warrants or the underlying securities for a period
of 180 days from the date of this prospectus. Additionally, the warrants may not
be sold transferred, assigned, pledged or hypothecated for a one-year period
(including the foregoing 180 day period) following the effective date of the
registration statement except to any underwriter and selected dealer
participating in the offering and their bona fide officers or
partners.
None of the warrants issued to the
Underwriter will be exercisable unless at the time of exercise the Common Stock
issuable upon the exercise of the warrants is covered by an effective
registration statement filed with the Securities and Exchange Commission (the
“SEC”) under the Securities Act and such securities are qualified for sale or
exempt from qualification under applicable securities laws of the states or
other jurisdictions in which the registered holders of the warrants
reside.
Under the terms of the warrants issued
to the Underwriter, we have agreed that prior to the date on which the warrants
becomes exercisable, we will file with the SEC a post-effective amendment to the
registration statement of which this prospectus is a part, or a new registration
statement, for the registration under the Securities Act of, and that we shall
take such action as is necessary to qualify for sale, in those states in which
the warrants were initially offered by the Company, the shares of Common Stock
issuable upon exercise of the warrants and any shares of Common Stock issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of any of the shares of Common Stock issued
upon exercise of the warrants. In either case, we agreed to use our
commercially reasonable efforts to cause the same to become effective on or
prior to the date on which the warrants first become exercisable and to maintain
the effectiveness of such registration statement until the expiration of the
warrants pursuant to their terms.
In no event will the holders of the
warrants issued to the Underwriter be entitled to receive a net-cash settlement
or other consideration in lieu of physical settlement in shares of Common Stock
if the shares issuable upon exercise of the warrants are not covered by an
effective registration statement filed with the SEC under the Securities
Act. Accordingly, the warrants may expire unexercised and worthless
if a current registration statement covering the shares of Common Stock issuable
upon exercise of the warrants is not effective.
81
The
Underwriter may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and passive market making in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Penalty bids may have the effect of deterring syndicate members from
selling to people who have a history of quickly selling their shares. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to some limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the NASDAQ Global Market, NYSE Amex or otherwise and, if commenced,
may be discontinued at any time.
In
connection with the offering, the Underwriter may make short sales of the
issuer’s shares and may purchase the issuer’s shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
Underwriter of a greater number of shares than it is required to purchase in the
offering. ‘Covered’ short sales are sales made in an amount not greater than the
Underwriter’s over-allotment option to purchase additional shares in the
offering. The Underwriter may close out any covered short position by either
exercising its over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
Underwriter will consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which they may purchase
shares through the over-allotment option. ‘Naked’ short sales are sales in
excess of the over-allotment option. The Underwriter must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the Underwriter is concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Similar to
other purchase transactions, the Underwriters’ purchases to cover the syndicate
short sales may have the effect of raising or maintaining the market price of
the issuer’s stock or preventing or retarding a decline in the market price of
issuer’s stock. As a result, the price of the issuer’s stock may be higher than
the price that might otherwise exist in the open market.
Prior to
this offering, there has been no public market of the common stock.
Consequently, the public offering price will be determined by negotiations
between us and the Underwriter. Among the factors considered in these
negotiations will be prevailing market conditions, the market capitalizations
and the stages of development of other companies that we and the Underwriters
believe to be comparable to us, estimates of our business potential, our results
of operations in recent periods, the present state of our development and other
factors deemed relevant.
We intend
to apply to list our common stock on either the NASDAQ Global Market or the NYSE
Amex Equities under the symbol “[___].” If we fail to obtain a listing on either
of these exchanges, we will not complete this offering.
We
estimate that our out of pocket expenses for this offering will be approximately
$[______].
Foreign
Regulatory Restrictions on Purchase of the Common Stock
No action
may be taken in any jurisdiction other than the United States that would permit
a public offering of the common stock or the possession, circulation or
distribution of this prospectus in any jurisdiction where action for that
purpose is required. Accordingly, the common stock may not be offered or sold,
directly or indirectly, and neither the prospectus nor any other offering
material or advertisements in connection with the common stock may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of any such country or jurisdiction.
CONFLICTS
OF INTEREST
Affiliates
of WestPark Capital beneficially own more than 10% of the Company. Because
WestPark Capital is an Underwriter and its affiliates beneficially own more than
10% of the Company, WestPark Capital may be deemed to have a “conflict of
interest” and/or be an “affiliate” of us under FINRA 5121(f)(5) and
(f)(1). Accordingly, this offering is being conducted in accordance with FINRA
Rule 5121. This rule requires that a “qualified independent underwriter,”
as defined by FINRA, participate in the preparation of the registration
statement and prospectus, and exercise the usual standards of due diligence in
respect thereto. [____________] is assuming the responsibilities of
acting as the qualified independent underwriter in this offering. We
have agreed to indemnify [__________] against any liabilities arising in
connection with acting as a qualified independent underwriter, including
liabilities under the Securities Act.
82
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by K&L Gates LLP, Los Angeles, California. Stubbs Alderton
& Markiles, LLP, Sherman Oaks, California is acting as counsel for the
Underwriter. Legal matters as to PRC law will be passed upon for us by Han Kun
Law Offices. K&L Gates LLP may rely upon Han Kun Law Offices with respect to
matters governed by PRC law. An affiliate of a partner of Han Kun Law
Offices owns 120,000 shares of common stock of our company.
EXPERTS
The
consolidated financial statements of China Wesen Recycling Technology, Inc. as
of December 31, 2009 and 2008 and for the years ended December 31,
2009, 2008 and 2007 appearing in this prospectus and registration statement have
been audited by MaloneBailey, LLP, an independent registered public accounting
firm, as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
for the shares of common stock in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule that were filed with the registration statement. For further
information with respect to us and our common stock, we refer you to the
registration statement and the exhibits and schedule that were filed with the
registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We file periodic reports under the
Securities Exchange Act of 1934, including annual, quarterly and special
reports, and other information with the Securities and Exchange Commission.
These periodic reports and other information are available for inspection and
copying at the regional offices, public reference facilities and website of the
Securities and Exchange Commission referred to above.
83
INDEX TO FINANCIAL
STATEMENTS
CHINA
WESEN RECYCLING TECHNOLOGY, INC. AND SUBSIDIARIES
FINANCIAL
STATEMENTS
INDEX
PAGE
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-3
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-4
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
|
F-5
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-6
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-7
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
China
Wesen Recycling Technology, Inc. and Subsidiaries
Guangzhou,
China
We have
audited the accompanying consolidated balance sheets of China Wesen Recycling
Technology, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and
2008, and the related consolidated statements of operations and comprehensive
income, changes in stockholders’ equity, and cash flows for the years ended
December 31, 2009, 2008 and 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008 and the results of operations and cash flows for the years ended
December 31, 2009, 2008 and 2007 in conformity with accounting principles
generally accepted in the United States of America.
/s/
MALONEBAILEY, LLP
www.malonebailey.com
Houston,
Texas
November
30, 2010
F-2
CHINA
WESEN RECYCLING TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In U.S.
Dollars)
September
30,
|
December
31,
|
December
31,
|
||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Assets
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
and cash equivalents
|
$ | 2,912,087 | $ | 4,483,402 | $ | 1,724,338 | ||||||
Accounts
receivable, net
|
3,302,566 | 4,167,100 | 1,568,187 | |||||||||
Inventories
|
1,298,391 | 1,436,219 | 517,014 | |||||||||
Due
from related parties
|
- | 5,868 | 179,894 | |||||||||
Advances
for inventory purchase
|
1,108,268 | 743,184 | 351,062 | |||||||||
Note
receivable
|
526,570 | - | - | |||||||||
Other
current assets
|
106,578 | 61,272 | 32,169 | |||||||||
Total
Current Assets
|
9,254,460 | 10,897,045 | 4,372,664 | |||||||||
Property
and equipment, net
|
2,857,965 | 3,140,400 | 2,815,735 | |||||||||
Construction
in progress
|
1,970,319 | 28,926 | - | |||||||||
Other
assets
|
768,560 | 786,320 | 830,606 | |||||||||
Intangible
assets, net
|
1,103,518 | 1,097,836 | - | |||||||||
Total
Assets
|
$ | 15,954,822 | $ | 15,950,527 | $ | 8,019,005 | ||||||
Liabilities
and Stockholders' Equity
|
||||||||||||
Current
Liabilities
|
||||||||||||
Accounts
payable - trade
|
$ | 1,075,420 | $ | 1,352,788 | $ | 739,124 | ||||||
Accrued
liabilities
|
57,063 | 1,177,261 | 142,114 | |||||||||
Taxes
payable
|
564,379 | 863,860 | 89,443 | |||||||||
Short
term debt
|
705,656 | - | - | |||||||||
Due
to related parties
|
680,834 | 5,374,675 | 5,175,060 | |||||||||
Total
Current Liabilities
|
3,083,352 | 8,768,584 | 6,145,741 | |||||||||
Stockholders'
Equity
|
||||||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none issued and
outstanding
|
- | - | - | |||||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized,
7,865,556 shares issued and outstanding
|
787 | 787 | 787 | |||||||||
Additional
paid-in capital
|
528,496 | 528,496 | 528,496 | |||||||||
Statutory
reserves
|
719,169 | 719,169 | 127,996 | |||||||||
Retained
earnings
|
11,407,305 | 5,890,707 | 1,133,796 | |||||||||
Accumulated
other comprehensive income
|
215,713 | 42,784 | 82,189 | |||||||||
Total
Stockholders' Equity
|
12,871,470 | 7,181,943 | 1,873,264 | |||||||||
Total
Liabilities and Stockholders' Equity
|
$ | 15,954,822 | $ | 15,950,527 | $ | 8,019,005 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA
WESEN RECYCLING TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations and Other Comprehensive Income
(In
U.S. Dollars)
For
the Nine Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Revenue
|
$ | 21,971,844 | $ | 18,427,828 | $ | 26,151,437 | $ | 8,686,922 | $ | 909,575 | ||||||||||
Cost
of revenue
|
13,788,072 | 12,471,539 | 17,516,014 | 6,521,446 | 648,503 | |||||||||||||||
Gross
profit
|
8,183,772 | 5,956,289 | 8,635,423 | 2,165,476 | 261,072 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
Selling
expenses
|
110,722 | 79,308 | 111,165 | 38,076 | 7,152 | |||||||||||||||
General
and administrative
|
632,466 | 398,436 | 590,871 | 422,283 | 167,484 | |||||||||||||||
Total
operating expenses
|
743,188 | 477,744 | 702,036 | 460,359 | 174,636 | |||||||||||||||
Income
from operations
|
7,440,584 | 5,478,545 | 7,933,387 | 1,705,117 | 86,436 | |||||||||||||||
Other
income (expenses):
|
||||||||||||||||||||
Interest
income
|
14,874 | 9,405 | 12,233 | 10,165 | 1,617 | |||||||||||||||
Other
income (expense), net
|
(53,403 | ) | (27,409 | ) | (38,539 | ) | (36,055 | ) | (26,219 | ) | ||||||||||
Total
other income (expenses)
|
(38,529 | ) | (18,004 | ) | (26,306 | ) | (25,890 | ) | (24,602 | ) | ||||||||||
Income
before income taxes
|
7,402,055 | 5,460,541 | 7,907,081 | 1,679,227 | 61,834 | |||||||||||||||
Income
taxes
|
(1,885,457 | ) | (1,353,887 | ) | (2,030,996 | ) | (441,337 | ) | (33,235 | ) | ||||||||||
Net
Income
|
$ | 5,516,598 | $ | 4,106,654 | $ | 5,876,085 | $ | 1,237,890 | $ | 28,599 | ||||||||||
Other
comprehensive income
|
||||||||||||||||||||
Foreign
currency translation adjustment
|
172,929 | 3,231 | (39,405 | ) | 61,420 | 19,167 | ||||||||||||||
Comprehensive
Income
|
$ | 5,689,527 | $ | 4,109,885 | $ | 5,836,680 | $ | 1,299,310 | $ | 47,766 | ||||||||||
Earnings
per share, basic and diluted
|
$ | 0.70 | $ | 0.52 | $ | 0.75 | $ | 0.16 | $ | 0.00 | ||||||||||
Weighted
average shares outstanding, basic and diluted
|
7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 | 7,865,556 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CHINA
WESEN RECYCLING TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income
For the
years ended December 31, 2009, 2008 and 2007 and the nine months ended September
30, 2010 (Unaudited)
(In
U.S. Dollars)
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders'
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Reserves
|
Earnings
|
Equity
|
||||||||||||||||||||||
Balance
at December 31, 2006
|
7,865,556 | $ | 787 | $ | 62,921 | $ | 1,602 | $ | - | $ | (4,697 | ) | $ | 60,613 | ||||||||||||||
Contribution
|
- | - | 465,575 | - | - | - | 465,575 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 19,167 | - | - | 19,167 | |||||||||||||||||||||
Allocation
of statutory reserve
|
- | - | - | - | 4,904 | (4,904 | ) | - | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | 28,599 | 28,599 | |||||||||||||||||||||
Balance
at December 31, 2007
|
7,865,556 | 787 | 528,496 | 20,769 | 4,904 | 18,998 | 573,954 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 61,420 | - | - | 61,420 | |||||||||||||||||||||
Allocation
of statutory reserve
|
- | - | - | - | 123,092 | (123,092 | ) | - | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | 1,237,890 | 1,237,890 | |||||||||||||||||||||
Balance
at December 31, 2008
|
7,865,556 | 787 | 528,496 | 82,189 | 127,996 | 1,133,796 | 1,873,264 | |||||||||||||||||||||
Distribution
|
- | - | - | - | - | (528,001 | ) | (528,001 | ) | |||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | (39,405 | ) | - | - | (39,405 | ) | |||||||||||||||||||
Allocation
of statutory reserve
|
- | - | - | - | 591,173 | (591,173 | ) | - | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | 5,876,085 | 5,876,085 | |||||||||||||||||||||
Balance
at December 31, 2009
|
7,865,556 | 787 | 528,496 | 42,784 | 719,169 | 5,890,707 | 7,181,943 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 172,929 | - | - | 172,929 | |||||||||||||||||||||
Net
income
|
- | - | - | - | - | 5,516,598 | 5,516,598 | |||||||||||||||||||||
Balance
at September 30, 2010 (Unaudited)
|
7,865,556 | $ | 787 | $ | 528,496 | $ | 215,713 | $ | 719,169 | $ | 11,407,305 | $ | 12,871,470 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHINA
WESEN RECYCLING TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In U.S.
Dollars)
For
the Nine Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Cash
Flows From Operating Activities
|
||||||||||||||||||||
Net
Income
|
$ | 5,516,598 | $ | 4,106,654 | $ | 5,876,085 | $ | 1,237,890 | $ | 28,599 | ||||||||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||||||||||
Depreciation
expense
|
345,267 | 330,900 | 445,515 | 247,944 | 356 | |||||||||||||||
Amortization
expense
|
49,887 | 33,203 | 47,944 | 43,514 | 9,945 | |||||||||||||||
Interest
expense on debt discount
|
9,386 | - | - | - | - | |||||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
Accounts
receivable
|
935,798 | (2,348,904 | ) | (2,598,893 | ) | (1,109,076 | ) | (48,483 | ) | |||||||||||
Inventories
|
167,321 | (629,684 | ) | (919,197 | ) | (517,014 | ) | 0 | ||||||||||||
Advances
for inventory purchases
|
(349,823 | ) | (445,145 | ) | (392,116 | ) | (277,987 | ) | (68,298 | ) | ||||||||||
Other
current assets
|
(44,087 | ) | (32,428 | ) | (29,103 | ) | (30,276 | ) | 0 | |||||||||||
Other
assets
|
- | - | - | - | (828,067 | ) | ||||||||||||||
Accounts
payable
|
(281,874 | ) | 110,020 | 613,663 | 301,826 | 51,321 | ||||||||||||||
Accrued
liabilities
|
(129,378 | ) | 14,259 | 40,792 | 25,273 | 8,617 | ||||||||||||||
Taxes
payable
|
(316,979 | ) | 761,554 | 774,417 | 35,639 | 50,292 | ||||||||||||||
Net
cash provided by (used in) operating activities
|
5,902,116 | 1,900,429 | 3,859,107 | (42,267 | ) | (795,718 | ) | |||||||||||||
Cash
Flows From Investing Activities
|
||||||||||||||||||||
Advance
on note receivable
|
(526,570 | ) | - | - | - | - | ||||||||||||||
Payments
on land use right
|
(1,014,771 | ) | - | (107,082 | ) | - | - | |||||||||||||
Payments
on construction in progress
|
(1,940,799 | ) | - | (28,926 | ) | (365,789 | ) | (1,584,637 | ) | |||||||||||
Purchases
of property and equipment
|
(4,447 | ) | (770,460 | ) | (770,396 | ) | (1,005,312 | ) | (877 | ) | ||||||||||
Net
cash used in investing activities
|
(3,486,587 | ) | (770,460 | ) | (906,404 | ) | (1,371,101 | ) | (1,585,514 | ) | ||||||||||
Cash
Flows From Financing Activities
|
||||||||||||||||||||
Cash
proceeds from shareholder capital contribution
|
- | - | - | - | 479,840 | |||||||||||||||
Return
of capital to shareholder
|
- | - | (528,001 | ) | - | - | ||||||||||||||
Proceeds
on short term debt
|
696,105 | - | - | - | - | |||||||||||||||
Net
cash (payments)/proceeds on related parties debt
|
(4,765,028 | ) | (703,599 | ) | 373,554 | 2,677,902 | 2,185,881 | |||||||||||||
Net
cash provided by (used in) financing activities
|
(4,068,923 | ) | (703,599 | ) | (154,447 | ) | 2,677,902 | 2,665,721 | ||||||||||||
Effect
of exchange rate changes on cash
|
82,079 | 3,491 | (39,192 | ) | 151,284 | 1,454 | ||||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
(1,571,315 | ) | 429,861 | 2,759,064 | 1,415,818 | 285,943 | ||||||||||||||
Cash
and cash equivalents, beginning of period
|
4,483,402 | 1,724,338 | 1,724,338 | 308,520 | 22,577 | |||||||||||||||
Cash
and cash equivalents, end of period
|
$ | 2,912,087 | $ | 2,154,199 | $ | 4,483,402 | $ | 1,724,338 | $ | 308,520 | ||||||||||
Supplemental
disclosure information:
|
||||||||||||||||||||
Income
taxes paid
|
$ | 2,006,647 | $ | 747,408 | $ | 1,428,184 | $ | 405,426 | $ | 3,349 | ||||||||||
Interest
paid
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Non-cash
investing and financing activities:
|
||||||||||||||||||||
Construction
in progress purchase on credit
|
$ | - | $ | - | $ | - | $ | 103,063 | $ | - | ||||||||||
Land
use right purchase on credit
|
$ | - | $ | - | $ | 994,353 | $ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Wesen Recycling Technology, Inc. (the “Company”, “China Wesen”, formerly SRKP
23, Inc.) was incorporated in the State of Delaware on October 11, 2007. China
Wesen was originally organized as a “blank check” shell company to investigate
and acquire a target company or business seeking the perceived advantages of
being a publicly held corporation. On November 23, 2010, China Wesen
(i) closed a share exchange transaction pursuant to which SRKP 23 became
the 100% parent of Weixin International Co., Limited (“Weixin BVI”), (ii)
assumed the operations of Weixin BVI and its subsidiaries, including Wei Xin
Holding Group Limited (“Weixin HK”), Guangzhou Kelida Intelligent Equipment Co.,
Ltd. (“Kelida”), Zhaoqing Hua Su Plastic Trading Company (“Hua Su”), Zhaoqing
Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”), Zhaoqing Xin Ye Plastic
Co., Ltd. (“Xin Ye”), and Zhaoqing Lijun Craftwork Co., Ltd. (“Li Jun”), and
(iii) changed its name from SRKP 23, Inc. to China Wesen Recycling Technology,
Inc.
Weixin
BVI was incorporated under the laws of British Virgin Islands on December 3,
2009 by Hongbing Wan, who was the original sole shareholder of Weixin BVI
holding 1 share. On August 9, 2010, Hongbing Wan transferred 100% of the
outstanding shares of Weixin BVI to Hongyu Zhang pursuant to an instrument of
transfer for a consideration of $1.00. On October 28, 2010, Hongyu Zhang
transferred 100% of the shares of Weixin BVI to Wesen Environmental Technology
Limited pursuant to an instrument of transfer for a consideration of $1.00. On
November 8, 2010, Weixin BVI issued 9,999 additional shares to certain
individuals and entities. The Company has 50,000 common shares authorized with
$1.00 par value each and 10,000 shares issued and outstanding.
Weixin HK
was incorporated under the laws of Hong Kong, People’s Republic of China (“PRC”)
on December 30, 2005 by Hongbing Wan, who was Weixin HK’s sole shareholder upon
its incorporation. On August 10, 2010, Weixin BVI acquired all of the issued and
outstanding shares of Weixin HK from Hongbing Wan for 10,000 Hong Kong Dollars
and, as a result, Weixin HK became the wholly-owned subsidiary of Weixin BVI.
Weixin HK has 10,000 common shares authorized with HK$1.00 par value each and
10,000 shares issued and outstanding.
Kelida is
located in Guangzhou, Guangdong Province, PRC and was incorporated under the
laws of the PRC on September 29, 2009 by Weixin HK, with Weixin HK as its sole
shareholder. Kelida has a registered capital of USD $14,300,000 and is a
wholly-owned subsidiary of Weixin HK.
Hua Su,
Chuang Yi, Xin Ye, and Li Jun (collectively, the “Subsidiaries Four”) are
located in Zhaoqing city, Guangdong Province, PRC and were incorporated under
the laws of the PRC. Hua Su was incorporated on July 20, 2006 with registered
capital of USD $132,00 (RMB 1,000,000), with the original registered
shareholders of Hua Su being Luo Jianhua (holding 75% of the registered capital)
and He Jixiong (holding 25% of the registered capital); Chuang Yi, Xin Ye, and
Li Jun were incorporated on September 27, 2007 with registered capital of USD
$132,000 (RMB 1,000,000) each. The original registered shareholders of Chuang Yi
were Peng Zhizhong and He Jixiong, with each holding 50% of the registered
capital. The original registered shareholders of Xin Ye were Luo Zeming and Lu
Jianzhong, with each holding 50% of the registered capital. The original
registered shareholders of Li Jun were Chen Wenqing, holding 60% of the
registered capital, and Qiu Yuji, holding 40% of the registered capital. These
original registered shareholders of Subsidiaries Four were holding the interests
on behalf of Hongbing Wan pursuant to the Ownership Entrust Agreements entered
among them upon the establishment of each of the four companies. In November
2009, the original shareholders of each of the Subsidiaries Four transferred all
interests in Subsidiaries Four to Kelida for a consideration equals to the
respective registered capital of each of the Subsidiaries Four and, as a result,
the Subsidiaries Four became the wholly-owned subsidiaries of Kelida. Each of
the Subsidiaries Four completed the registration procedures to register Kelida
as its sole shareholder with the competent PRC government authority on February
1, 2010.
Since all
the entities are controlled by the same group of shareholders, the
reorganization has been accounted for as a transaction under common control and
a recapitalization. The financial statements have been prepared as if the
existing corporate structure had been in existence throughout all periods and
the reorganization had occurred as of the beginning of the earliest period
presented in the accompanying financial statements.
Since
their inception, the Subsidiaries Four have been principally engaged in the
manufacture and distribution of high density polyethylene (“HDPE”), low density
polyethylene (“LDPE”), Polystyrene (“PS”), acrylonitrile butadiene styrene
(“ABS”), and other recycled plastics products, using imported raw material in
the form of plastic waste. Weixin HK is a window for the group to handle the
business outside China, as at the quarter ended September 30, 2010, Weixin HK
sells lock parts to overseas clients.
F-7
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
preparation
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States
of America. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
In the
opinion of the management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 2010, and the results
of operations and cash flows for the nine months ended September 30, 2010 and
2009. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Future results could be materially affected if actual results
were to differ from these estimates and assumptions.
Risk and
uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
foreign currency exchange rates and the volatility of public
markets.
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As of
September 30, 2010, December 31, 2009 and 2008, substantially all of the
Company’s cash were held by major financial institutions located in the PRC and
Hong Kong, which management believes are of high credit quality. Most of the
Company’s sales are credit sales which are primarily to customers whose ability
to pay is dependent on the industry economies prevailing in their respective
areas; however, concentration of credit risk with respect to trade accounts
receivable is limited due to generally short payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risks.
Fair value of financial
instruments
The
Company adopted ASC 820 “Fair Value Measurements,” which defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosure requirements for fair value measures.
Current assets and current liabilities qualified as financial instruments and
management believes their carrying amounts are a reasonable estimate of fair
value because of the short period of time between the origination of such
instruments and their expected realization and, if applicable, their current
interest rate is equivalent to interest rates currently
available. The three levels are defined as follow:
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand, bank deposits and highly liquid
investments with an original maturity of three months or less when
purchased.
F-8
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
Accounts
receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
allowance on uncollectible accounts receivable reflects management’s best
estimate of probable losses determined principally on the basis of historical
experience. The allowance for uncollectible accounts receivable is determined
primarily on the basis of management’s best estimate of probable losses,
including specific allowances for known troubled accounts. All accounts or
portions thereof deemed to be uncollectible or to require an excessive
collection cost are written off to the allowance for uncollectible accounts
receivable. When facts subsequently become available to indicate that the
amount provided as the allowance was incorrect, an adjustment which is
classified as a change in estimate is made.
Inventories
Inventories
consist of finished goods, work in progress, and raw materials. Inventories are
valued at the lower of cost, as determined on a weighted average basis, or
market. Market value is determined by reference to selling prices after the
balance sheet date or to management’s estimates based on prevailing market
conditions. Management writes down the inventories to market value if it is
below cost. Management also regularly evaluates the composition of its
inventories to identify slow-moving and obsolete inventories to determine if
valuation allowance is required. Costs of raw material inventories include
purchase and related costs incurred in bringing the products to their present
location and condition. Finished goods are comprised of direct materials, direct
labor, and an appropriate proportion of overhead.
Property and
equipment
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of property and equipment are capitalized.
These capitalized costs may include structural improvements, equipment and
fixtures. All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets:
Building
|
20
years
|
Machinery
and Equipment
|
5
years
|
Office
Equipment
|
5
years
|
Construction-in-progress
Construction-in-progress
consists of amounts expended for plant construction. Construction-in-progress is
not depreciated until such time as the assets are completed and put into
service. Once plant construction is completed, the cost accumulated in
construction-in-progress is transferred to property, plant, and
equipment.
Impairment of long-lived
assets
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
Intangible
assets
The
Company’s intangible assets consist of land use rights at September 30, 2010 and
December 31, 2009. According to the laws of China, the government owns all the
land in China. Companies or individuals are authorized to possess and use the
land only through land use rights granted by the Chinese government. Land use
rights are being amortized using the straight-line method over 50 years, the
lease term of the rights.
F-9
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
Comprehensive
income
The
Company has adopted ASC 220, Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. The Company’s accumulated other
comprehensive income represents the accumulated balance of foreign currency
translation adjustments.
Revenue
recognition
The four
companies of the Subsidiaries Four are identical in their operations and
generate revenue from the sale of manufactured HDPE, LDPE, ABS and PS grains.
These companies recognize revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, as evidenced by an agreement with the
customer, delivery of the goods has occurred, customer acceptance has been
obtained, which means the significant risks and ownership have been transferred
to the customer, the price is fixed or determinable and collectability is
reasonably assured. Sales contracts, invoices and shipping documents are
utilized to facilitate the sales process. Revenue is recognized when customers
acknowledges the sale and delivery and the title of the goods is properly
transferred to the customers.
There is
no shipping charge involved as all the manufactured goods are picked up by the
customers at the Company's warehouse. Customer acceptance is obtained at the
point of delivery. No return allowance is made as products returns are
insignificant based on historical experience. The Company does not provide
warranties, rebates, price protection, or similar privileges among customers.
The prices of the products are predetermined and fixed based on contractual
agreements.
The
Subsidiaries Four also generate revenue from the sale of purchased recyclable
plastic materials, which are recognized on the same basis as the sales of
manufactured HDPE, LDPE, ABS and PS grains. The Company recognizes revenue from
the sale of these materials on a gross basis because it is responsible for
fulfillment and takes title to the materials before they are ordered by a
customer and acts as the principal obligor in the transaction. The revenue is
recorded when delivery of the goods has occurred, customer acceptance has been
obtained, and the significant risks and ownership have been transferred to the
customer, the price is fixed or determinable, and collectability is reasonably
assured.
Weixin HK
generates revenue from selling lock parts. Weixin HK records revenue net of
pass-through charges as the Company believes the key indicators of the business
suggest that the Company generally acts as an agent on behalf of its
customers.
Cost of goods
sold
Cost of
goods sold consists primarily of raw materials, utility and supply costs
consumed in the manufacturing process, manufacturing labor, depreciation expense
and direct overhead expenses necessary to manufacture finished goods as well as
warehousing and distribution costs such as inbound freight charges, shipping and
handling costs, purchasing and receiving costs.
Income
taxes
The
Company accounts for income and deferred tax under the provision of ASC 740
“Income Taxes”. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. ASC 740 also requires the recognition of the future
tax benefits of net operating loss carry forwards. A valuation allowance is
established when the deferred tax assets are not expected to be realized within
a reasonable period of time.
Value added
tax
The
Company is subject to value added tax (“VAT”). The applicable VAT rate is
different based on the different structure of business under PRC tax law. Some
of the Company’s transactions are levied at a VAT tax rate of 17% for products
sold in the PRC. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold (output
VAT) less VAT paid on purchases made with the relevant supporting invoices
(input VAT). Some of transactions are levied at a VAT tax rate of 7%,
such as shipping services and other transportation services.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company subsidiaries are local currencies, primarily the PRC currency
Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Exchange
gains or losses on transaction are included in earnings.
F-10
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
Earnings per
share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. At September 30,
2010 and December 31, 2009 and 2008, respectively, the Company had no common
stock equivalents that could potentially dilute future earnings per
share.
Related
parties
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
Segment
reporting
ASC 280,
“Disclosure about Segments of an Enterprise and Related Information”, requires
disclosure of reportable segments used by management for making operating
decisions and assessing performance. Reportable segments are categorized by
products and services, geography, legal structure, management structure, or any
other manner in which management disaggregates a company. ASC 280 has no effect
on the Company’s financial statements as substantially all of the Company’s
operations and management are conducted as a single operating
segment.
Recently issued accounting
pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value
as well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In May
2009, the FASB issued new guidance on the treatment of subsequent events which
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this new guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that occurred for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
that occurred after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This new guidance was effective for
fiscal years and interim periods ended after June 15, 2009 and must be applied
prospectively. We adopted and applied the provisions of the new guidance in the
third quarter of 2009.
F-11
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
In
February 2010, subsequent to our adoption of the new guidance discussed above,
the FASB issued updated guidance on subsequent events, amending the May 2009
guidance. This updated guidance revised various terms and definitions within the
guidance and requires us, as an "SEC filer," to evaluate subsequent events
through the date the financial statements are issued, rather than through the
date the financial statements are available to be issued. Furthermore, we no
longer are required to disclose the date through which subsequent events have
been evaluated. The updated guidance was effective for us immediately upon
issuance. As such, we adopted and applied the provisions of the updated guidance
in the first quarter of 2010. Our adoption of both the new and updated guidance
did not have an impact on our consolidated financial position or results of
operations.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
adoption did not have a material impact on the Company’s consolidated results of
operations or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at
Fair Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this standard did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activities of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption did not have a material impact on the Company’s consolidated
results of operations or financial condition.
NOTE
3 - ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Accounts
receivable
|
$ | 3,302,566 | $ | 4,167,100 | $ | 1,568,187 | ||||||
Allowance
for doubtful accounts
|
- | - | - | |||||||||
Accounts
receivable, net
|
$ | 3,302,566 | $ | 4,167,100 | $ | 1,568,187 |
F-12
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
4 – INVENTORIES
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Raw
materials
|
$ | 1,187,245 | $ | 1,371,583 | $ | 471,064 | ||||||
Work
in progress
|
39,067 | 17,754 | 9,085 | |||||||||
Finished
goods
|
72,079 | 46,882 | 36,865 | |||||||||
Total
Inventory, net
|
$ | 1,298,391 | $ | 1,436,219 | $ | 517,014 |
NOTE
5 - ADVANCES FOR INVENTORY PURCHASE
Advances
for inventory purchases represent amounts prepaid for raw material purchases,
which consist of the following:
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Advances
for inventory purchase
|
$ | 1,108,268 | $ | 743,184 | $ | 351,062 |
At
September 30, 2010, two suppliers accounted for approximately 66% and 34% of
total advances for inventory purchase, respectively.
At
December 31, 2009, two suppliers accounted for approximately 96% and 4% of total
advances for inventory purchase, respectively.
At
December 31, 2008, one supplier accounted for approximately 100% of total
advances for inventory purchase.
NOTE
6 – NOTE RECEIVABLE
The
Company advanced $526,570 to a third party in September 2010. The note
receivable carries a monthly interest at 5% and is due in two months. The loan
is unsecured and was paid off in November.
NOTE
7 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Building
|
$ | 2,103,614 | $ | 2,061,286 | $ | 2,061,253 | ||||||
Machinery
and equipment
|
1,801,803 | 1,765,548 | 995,444 | |||||||||
Office
equipment
|
16,935 | 12,237 | 11,928 | |||||||||
Total
at cost
|
3,922,352 | 3,839,071 | 3,068,625 | |||||||||
Less:
Accumulated depreciation
|
1,064,387 | 698,671 | 252,890 | |||||||||
Total
property and equipment, net
|
$ | 2,857,965 | $ | 3,140,400 | $ | 2,815,735 |
Depreciation
expense for the year ended December 31, 2009, 2008 and 2007 are $445,515 and
$247,944 and $356, respectively.
Depreciation
expense for the nine months ended September 30, 2010 and 2009 are $345,267 and
$330,900, respectively.
F-13
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
8 – CONSTRUCTION IN PROGRESS
During
November, 2009, the Company started the construction to build a factory in
Guangzhou. Costs incurred as of September 30, 2010 and December 31, 2009 amount
to $1,970,319 and $28,926, respectively. The amounts mainly represent
installment payments and deposits paid to contractors.
NOTE
9 - OTHER ASSETS
Other
assets are the advances paid for the lease of the land located in Zhaoqing City
for Subsidiaries Four. The lease period is 20 years expiring October 2026. The
cost of the lease is being amortized over the lease term of 20 years.
Amortization expenses for the year 2009, 2008 and 2007 are $44,274, $43,514 and
$9,945, respectively. Amortization expenses for the nine months ended September
30, 2010 and 2009 is $33,318 and $33,203, respectively.
NOTE
10 - INTANGIBLE ASSETS
Intangible
assets consist of the following land use rights as of September 30, 2010 and
December 31, 2009:
September 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Cost
of land use rights
|
1,124,128 | 1,101,506 | ||||||
Less:
accumulated amortization
|
20,610 | 3,670 | ||||||
Land
use rights, net
|
$ | 1,103,518 | $ | 1,097,836 |
Amortization
expense for the nine months ended September 30, 2010 was $16,569. Amortization
expense for the year ended December 31, 2009 is $3,670.
Amortization
expense for the next five years and thereafter is as follows:
2010
(for the remaining three months)
|
$ | 5,523 | ||
2011
|
22,092 | |||
2012
|
22,092 | |||
2013
|
22,092 | |||
2014
|
22,092 | |||
2015
|
22,092 | |||
Thereafter
|
987,535 | |||
Total
|
$ | 1,103,518 |
NOTE
11 – SHORT TERM DEBT
In
September 2010, the Company entered into a 60-day debt agreement with a pawn
company. The principal amount of the debt is $748,500 (RMB 5,000,000). The debt
is collateralized by the Company’s land use rights and guaranteed by Wan,
Hongbin, shareholder, Zhang, Hongyu, former shareholder, and Liang, Yanfang,
accounting manager. Finance fee for the debt is at 3.5% per month. The short
term debt is amortized under the effective interest method and the principal
balance net of the unamortized discount at September 30, 2010 is $705,656. The
loan was paid off in November 2010.
F-14
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
12 - RELATED PARTY TRANSACTIONS
Due from
related party consists of the following:
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Due
from Luo, Jianhua, Legal Representitive
|
$ | - | $ | 5,868 | $ | - | ||||||
Due
from Liu, Xiao, Director
|
- | - | 179,894 | |||||||||
$ | - | $ | 5,868 | $ | 179,894 |
Due to
related party consists of the following:
September
30,
|
December
31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
||||||||||||
Due
to Wan, Hongbing, Director
|
$ | 636,219 | $ | 4,231,403 | $ | 5,175,060 | ||||||
Due
to Liu, Xiao, Director
|
44,615 | 1,143,272 | - | |||||||||
$ | 680,834 | $ | 5,374,675 | $ | 5,175,060 |
Borrowings
from the directors were non-interest bearing, unsecured and have no set
repayment date.
NOTE
13 - SHAREHOLDERS’ EQUITY
As
stipulated by the relevant laws and regulations for enterprises operating in the
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company as decided by the
board of directors. The Company has allocated $591,173, $123,092, and $4,904
statutory reserve fund for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTE
14 - INCOME TAX
The
Company is incorporated in the BVI and conducts its primary business operations
through the Subsidiaries Four in the PRC. Under the current laws of the BVI, the
Company is not subject to tax on income or capital gains. Additionally, upon
payments of dividends by the Company to its shareholders, no BVI withholding tax
will be imposed.
Hong
Kong
Weixin HK
is incorporated in Hong Kong, China. Under the current Hong Kong Inland Revenue
Ordinance, the Company is subject to 16.5% income tax on its taxable income
generated from operations in Hong Kong. For the periods presented, provision for
Hong Kong tax has been made by the Company but insignificant as Weixin HK’s
operations have been limited since Weixin HK’s inception.
PRC
Companies
established in China are governed by the Income Tax Law of the PRC
concerning the private-run enterprises, which are generally subject to tax at a
statutory rate of 33% prior to January 1, 2008 and 25% afterwards on income
reported in the statutory financial statements after appropriate tax
adjustments.
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
F-15
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
The
provision for taxes on earnings consisted of:
September
30,
|
December
31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
Current
income taxes expenses:
|
||||||||||||||||||||
PRC
Enterprises Income Taxes
|
$ | 1,885,457 | $ | 1,353,887 | $ | 2,030,996 | $ | 441,337 | $ | 33,235 | ||||||||||
United
States Federal Income Taxes
|
- | - | - | - | - | |||||||||||||||
Total
|
$ | 1,885,457 | $ | 1,353,887 | $ | 2,030,996 | $ | 441,337 | $ | 33,235 |
There are
no significant permanent or temporary differences between book and tax
income.
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Company’s provision for income tax is as follows:
September
30,
|
December
31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
U.S.
statutory rate
|
34 | % | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||||
Foreign
income not recognized in the U.S.
|
-34 | % | -34 | % | -34 | % | -34 | % | -34 | % | ||||||||||
PRC
preferential enterprise income tax rate
|
25 | % | 25 | % | 25 | % | 25 | % | 33 | % | ||||||||||
Tax
holiday and relief granted to the Company
|
- | - | - | - | - | |||||||||||||||
Other
|
- | - | 1 | % | 1 | % | 21 | % | ||||||||||||
Provision
for income tax
|
25 | % | 25 | % | 26 | % | 26 | % | 54 | % |
Accounting for Uncertainty
in Income Taxes
The
Company accounts for uncertainty in income taxes in accordance with applicable
accounting standards, which prescribe a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. These accounting standards also
provide guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
NOTE
15 - OPERATING LEASE
The
Company has entered into multiple rental agreements for the lease of office
premises. The Company’s commitments for minimum lease payments under these
non-cancelable operating leases for the next five years are as
follows:
Year
Ended December 31,
|
||||
2010
|
$ | 18,930 | ||
2011
|
13,026 | |||
2012
|
13,678 | |||
Total
|
$ | 45,634 |
Rent
expense was $16,124, $15,649, and $12,456 for the years ended December 31, 2009,
2008 and 2007, respectively. Rent expense was $14,405 and $13,213 for the nine
months ended September 30, 2010 and 2009, respectively.
F-16
CHINA WESEN RECYCLING TECHNOLOGY,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the nine months ended September 30, 2010 and 2009 are
unaudited)
NOTE
16 - OPERATING RISK
Country
risk
The
Company has significant operating risk in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Credit
risk
A
significant portion of the Company’s cash at September 30, 2010, December 31,
2009, 2008 and 2007 is maintained at various financial institutions in the PRC
which do not provide insurance for amounts on deposit. The Company
has not experienced any losses in such accounts and believes it is not exposed
to significant credit risk in this area.
Exchange
risk
The
Company cannot guarantee the Renminbi, and US dollar exchange rate will remain
steady. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
Concentration
risk
For the
nine months ended September 30, 2010, three customers had net sales exceeding
10% of the Company’s total sales for the year at 44%, 29%, and 12%,
respectively. For the year ended December 31, 2009, three customers had net
sales exceeding 10% of the Company’s total sales for the year at 42%, 31%, and
14%, respectively. For the year ended December 31, 2008, two customers had
net sales exceeding 10% of the Company’s total sales for the year at 63% and
29%, respectively. For the year ended
December 31, 2007, one customer accounted for 100% of the sales of the
year.
For the
nine months ended September 30, 2010, three suppliers had net transactions
exceeding 10% of the Company’s total purchases for the year at 57%, 15% and 10%,
respectively. For the year ended December 31, 2009, four suppliers had net
transactions exceeding 10% of the Company’s total purchases for the year at 29%,
26%, 22%, and 21%, respectively. For the year ended December 31, 2008, two
suppliers had net transactions exceeding 10% of the Company’s total purchases
for the year at 53% and 40%, respectively. For the year ended
December 31, 2007, two suppliers had net transactions exceeding 10% of the
Company’s total purchases for the year at 89% and 11%,
respectively.
Lack of
Insurance
The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. As a result, the Company may incur uninsured liabilities and
losses as a result of the conduct of its business. There can be no guarantee
that the Company will be able to obtain additional insurance coverage in the
future, and even if it can obtain additional coverage, the Company may not carry
sufficient insurance coverage to satisfy potential claims. Should uninsured
losses occur, any purchasers of the Company’s common stock could lose their
entire investment.
NOTE 17 - SUBSEQUENT EVENTS
On
November 12, 2010, the Company entered into a Share Exchange Agreement (the
“Exchange Agreement”) with Weixin BVI, and the shareholders of Weixin BVI
(“Weixin Shareholders”). Pursuant to the Exchange Agreement, the Company agreed
to issue an aggregate of 7,865,556 shares of its common stock to the Weixin
Shareholders in exchange for all of the issued and outstanding securities of
Weixin BVI (the “Share Exchange”). The Share Exchange closed on
November 23, 2010. Concurrently with the closing of the Share
Exchange, the Company consummated an initial closing of a private placement of
shares of the Company’s Common Stock (the “Private
Placement”). Pursuant to subscription agreements entered into with
the investors in the Private Placement, the Company sold an aggregate of
1,111,099 shares of Common Stock at $2.25 per share, for gross proceeds of
approximately $2.5 million. Prior to the closing of the Share Exchange and the
initial closing of the Private Placement, the stockholders of the Company agreed
to cancel an aggregate of 6,679,899 shares of common stock held by them. As a
result of the Share Exchange, Weixin BVI became the Company’s wholly-owned
subsidiary and the former shareholders of Weixin BVI became controlling
stockholders of the Company. The transaction was accounted for as a
reverse merger and recapitalization whereby Weixin BVI is the accounting
acquirer and the Company is the acquired party.
F-17
[INSIDE
BACK COVER].
1,200,000 Shares
of Common Stock
China Wesen
Recycling Technology, Inc.
PROSPECTUS
WestPark
Capital, Inc.
_________,
2011
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange
Commission becomes effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities
in any state where the offer or sale is not
permitted.
|
PRELIMINARY
PROSPECTUS Subject
to
Completion February
11, 2011
2,457,167
SHARES
China
Wesen Recycling Technology, Inc.
COMMON
STOCK
This
prospectus relates to the resale by the selling stockholders of up to 2,457,167
shares of our common stock. The selling stockholders may sell common stock from
time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions. We will not receive any
proceeds from the sales by the selling stockholders. The selling
stockholders named herein may be deemed underwriters of the shares of common
stock which they are offering.
Our
shares of common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We intend
to apply for the listing of our common stock on the NASDAQ Global Market or the
NYSE Amex Equities under the symbol “[___].” There can, however, be
no assurance that our common stock will be accepted for listing on either such
exchange.
Since
there is currently no public market established for our securities, the selling
security holders will sell at a fixed price that is equal to the price at which
we sell shares in our public offering pursuant to the registration statement of
which this prospectus is a part. Once, and if, our shares of common stock are
quoted on the NASDAQ Global Market or the NYSE Amex Equities and there is an
established market for these resale shares, the selling stockholders may sell
the resale shares from time to time at the market price prevailing on the NASDAQ
Global Market or the NYSE Amex Equities at the time of offer and sale, or at
prices related to such prevailing market prices or in negotiated transactions or
a combination of such methods of sale directly or through brokers.
The
Selling Stockholders have entered into lock-up agreements pursuant to which they
agreed that (i) if the Company’s proposed public offering is for $10 million or
more, then the investors would not be able to sell or transfer their shares
until at least six months after the public offering’s completion, and (ii) if
the offering is for less than $10 million, then one-tenth of their shares would
be released from the lock-up restrictions ninety days after the offering and
there would be a pro rata release of the shares thereafter every 30 days over
the following nine months. WestPark Capital, Inc., the placement agent in
the private placement in which the Selling Stockholders acquired their shares
and an underwriter to the public offering, in its discretion, may also release
some or all the shares from the lock-up restrictions earlier.
The purchase of the securities
involves a high degree
of risk. See section entitled “Risk Factors” beginning on page 11.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The Date
of This Prospectus Is: ____________________, 2011
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
1
|
SUMMARY
FINANCIAL DATA
|
10
|
RISK
FACTORS
|
11
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
29
|
USE
OF PROCEEDS
|
30
|
DIVIDEND
POLICY
|
31
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
33
|
ACCOUNTING
FOR THE SHARE EXCHANGE
|
34
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
35
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
36
|
DESCRIPTION
OF BUSINESS
|
53
|
MANAGEMENT
|
63
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
68
|
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
72
|
DESCRIPTION
OF SECURITIES
|
74
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
77
|
SELLING
STOCKHOLDERS
|
80A
|
PLAN
OF DISTRIBUTION
|
80
|
LEGAL
MATTERS
|
83
|
EXPERTS
|
83
|
ADDITIONAL
INFORMATION
|
83
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
II-1
|
SIGNATURES
|
II-7
|
Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.
You
should rely only on information contained in this prospectus. We have not
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that
date.
i
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
Offering
Common
stock offered by selling stockholders
|
2,457,167
shares
|
Common
stock outstanding
|
13,430,178
shares (1)
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the common stock by the
selling stockholders.
|
(1)
|
Based
on 13,430,178 shares of common stock issued and outstanding as of the date
of this prospectus, and excludes (i) 1,200,000 shares of common stock
being registered for issuance in a public offering, (ii) the underwriter’s
warrants to purchase up to 120,000 shares of common stock, and (iii)
782,545 shares of common stock that are issuable upon the exercise of
outstanding warrants, exercisable at $0.0001 per
share.
|
The
Selling Stockholders have entered into lock-up agreements pursuant to which they
agreed that (i) if the Company’s proposed public offering is for $10 million or
more, then the investors would not be able to sell or transfer their shares
until at least six months after the public offering’s completion, and (ii) if
the offering is for less than $10 million, then one-tenth of their shares would
be released from the lock-up restrictions ninety days after the offering and
there would be a pro rata release of the shares thereafter every 30 days over
the following nine months. WestPark Capital, Inc., the placement agent in the
private placement in which the Selling Stockholders acquired their shares and an
underwriter to the public offering, in its discretion, may also release some or
all the shares from the lock-up restrictions earlier. We currently expect the
public offering to be in an amount less than $10 million. There can be no
assurance on the size of the public offering.
9
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of common stock by the
selling stockholders.
30
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
The
following table provides as of the date of this prospectus information regarding
the beneficial ownership of our common stock held by each of the selling
stockholders, including:
|
·
|
the
number of shares owned by each stockholder prior to this
offering;
|
|
·
|
the
percentage owned by each stockholder prior to completion of the
offering;
|
|
·
|
the
total number of shares that are to be offered for each
stockholder;
|
|
·
|
the
total number of shares that will be owned by each stockholder upon
completion of the offering; and
|
|
·
|
the
percentage owned by each stockholder upon completion of the
offering.
|
On, we
received gross proceeds of approximately $5.5 million in the private placement
transaction (the “Private Placement”) which closed in two tranches on November
23, 2010 and December 6, 2010. Pursuant to subscription agreements entered into
with the investors, we sold an aggregate of 2,457,167 shares of Common Stock at
$2.25 per share. We sold the shares to an aggregate of 130 investors. We
paid WestPark Capital a placement agent commission equal to 10.0% with a
non-accountable fee of 4.0% of the gross proceeds from the financing. We also
agreed to retain WestPark Capital for a period of six months following the
closing of the Private Placement to provide us with financial consulting
services for which we will pay WestPark Capital $4,000 per month.
We agreed to file a registration
statement covering the common stock sold in the Private Placement within 30 days
of the final closing of the Private Placement pursuant to the subscription
agreement entered into with each investor. The 2,457,167 shares are being
registered under this prospectus.
The
Selling Stockholders have entered into lock-up agreements pursuant to which they
agreed that (i) if the Company’s proposed public offering is for $10 million or
more, then the investors would not be able to sell or transfer their shares
until at least six months after the public offering’s completion, and (ii) if
the offering is for less than $10 million, then one-tenth of their shares would
be released from the lock-up restrictions ninety days after the offering and
there would be a pro rata release of the shares thereafter every 30 days over
the following nine months. WestPark Capital, Inc., the placement agent in the
private placement in which the Selling Stockholders acquired their shares and an
underwriter to the public offering, in its discretion, may also release some or
all the shares from the lock-up restrictions earlier. We currently expect the
public offering to be in an amount less than $10 million. There can be no
assurance on the size of the public offering.
Name of Selling Stockholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
Percentage of
Shares of
Common Stock
Beneficially
Owned Prior to
the Offering(1)
|
Number of
Shares of
Common Stock
Registered for
Sale Hereby
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|||||||||||||||
Schwartzberg,
Gil N.
|
315,208 | (3) |
2.6%
|
44,444 |
270,764
|
2.2%
|
||||||||||||||
Continuum
Capital Partners LLP
|
222,222 | (4) |
1.8%
|
222,222 | — | — | ||||||||||||||
J&N
Invest LLC
|
177,777 | (5) |
1.5%
|
177,777 | — | — | ||||||||||||||
MidSouth
Investor Fund LP
|
133,333 | (6) |
1.1%
|
133,333 | — | — | ||||||||||||||
Douglas
Kuber
|
111,111 |
*
|
111,111 | — | — | |||||||||||||||
David
H. Clarke
|
90,000 | * | 90,000 | — | — | |||||||||||||||
Naylor,
David Michael
|
88,888 | * | 88,888 | — | — | |||||||||||||||
Berg,
Howard
|
88,888 | * | 88,888 | — | — | |||||||||||||||
Frederic
Colman
|
66,666 | * | 66,666 | — | — | |||||||||||||||
Metsch,
Richard
|
55,555 | * | 55,555 | — | — | |||||||||||||||
Pandey,
Yogesh
|
50,000 | * | 50,000 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Frederick Berdon R/O IRA #4284-6540 C/O
Legent Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
44,450 | (7) | * | 44,450 | — | — | ||||||||||||||
DLK
Ret. Trust (David L. Kagel) TTEE
|
44,444 | (8) | * | 44,444 | — | — |
80A
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Stockholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
Percentage of
Shares of
Common Stock
Beneficially
Owned Prior to
the Offering(1)
|
Number of
Shares of
Common Stock
Registered for
Sale Hereby
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|||||||||||||||
Clarke,
David H.
|
43,333 | * | 43,333 | — | — | |||||||||||||||
deSejournet,
Antoine
|
35,000 | * | 35,000 | — | — | |||||||||||||||
Shai
Arahoni
|
33,333 | * | 33,333 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Paul Masters Roth IRA #6477-2985 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
33,300 | (9) | * | 33,300 | — | — | ||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO S Michael Rosenberg R/O IRA #5993-9479 C/O
Legent Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
31,111 | (10) | * | 31,111 | — | — | ||||||||||||||
Ernest
William Houston IRA
|
25,000 | * | 25,000 | — | — | |||||||||||||||
Stellar
Capital Fund LLC.
|
25,000 | (11) | * | 25,000 | — | — | ||||||||||||||
Lesniak,
Richard J Irrev. Trust
|
25,000 | * | 25,000 | — | — | |||||||||||||||
David
L. Boyer
|
22,222 | * | 22,222 | — | — | |||||||||||||||
The
BDB Irrevocable Family Trust
|
22,222 | (12) | * | 22,222 | — | — | ||||||||||||||
Christensen,
Kelsy
|
22,000 | * | 22,000 | — | — | |||||||||||||||
Rosenblatt,
Marvin
|
20,000 | * | 20,000 | — | — | |||||||||||||||
Richard
A. and Donna C. Hoefer
|
17,777 | * | 17,777 | — | — | |||||||||||||||
Charles
M. Merkel
|
17,777 | * | 17,777 | — | — | |||||||||||||||
Richard
Pawliger
|
17,777 | * | 17,777 | — | — | |||||||||||||||
Lahr,
John W.
|
17,777 | * | 17,777 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Linda Rosenberg R/O IRA #3570-9445 C/O
Legent Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
17,777 | (13) | * | 17,777 | — | — | ||||||||||||||
Steven
Rothstein
|
17,000 | * | 17,000 | — | — | |||||||||||||||
Becker,
Stanley
|
16,800 | * | 16,800 | — | — | |||||||||||||||
Jordan,
David L
|
15,555 | * | 15,555 | — | — | |||||||||||||||
Miriam
Mooney Trust FBO Catherine Sotto
|
15,555 | (14) | * | 15,555 | — | — | ||||||||||||||
Miriam
Mooney Trust FBO Joan Connolly
|
15,555 | (15) | * | 15,555 | — | — | ||||||||||||||
Michael
Sobeck SEP IRA
|
14,222 | * | 14,222 | — | — | |||||||||||||||
Joel
A. Shumrak
|
13,333 | * | 13,333 | — | — | |||||||||||||||
William
W. and Ann Y. Collins JTWROS
|
13,333 | * | 13,333 | — | — | |||||||||||||||
Scott
Francis Jasper
|
13,333 | * | 13,333 | — | — | |||||||||||||||
MSL
Investment Assoc. LLC
|
13,333 | (16) | * | 13,333 | — | — | ||||||||||||||
Katz,
David C.
|
13,333 | * | 13,333 | — | — | |||||||||||||||
Miriam
Mooney Trust FBO David Forrer
|
13,333 | (17) | * | 13,333 | — | — | ||||||||||||||
Charles,
Thomas IRA
|
13,333 | * | 13,333 | — | — | |||||||||||||||
Lawrence
Silverberg
|
12,000 | * | 12,000 | — | — | |||||||||||||||
James
Tocco
|
11,500 | * | 11,500 | — | — | |||||||||||||||
Gerald
E. Pheiffer
|
11,111 | * | 11,111 | — | — | |||||||||||||||
William
Lurie
|
11,111 | * | 11,111 | — | — |
80B
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Stockholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
Percentage of
Shares of
Common Stock
Beneficially
Owned Prior to
the Offering(1)
|
Number of
Shares of
Common Stock
Registered for
Sale Hereby
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|||||||||||||||
Lipcon,
Mitchell J PSP Keough Plan
|
11,111 | (18) | * | 11,111 | — | — | ||||||||||||||
Lauren
Topelsohn
|
11,111 | * | 11,111 | — | — | |||||||||||||||
Tangiers
Investors LP
|
11,111 | * | 11,111 | — | — | |||||||||||||||
Rosetta
(JTWROS), Bruce C. and Roxanne S.
|
11,000 | * | 11,000 | — | — | |||||||||||||||
Doetzel,
Chad Peter
|
11,000 | * | 11,000 | — | — | |||||||||||||||
Roger
Morrison
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Leslie
F. Olson ROTH IRA
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Charles
Barnes Darwin II
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Richard
and Tammie P. Schmidt
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Clinical
Consultant Assistant Inc.
|
10,000 | (19) | * | 10,000 | — | — | ||||||||||||||
Nielsen,
Mark
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Kendall,
Peter M
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Rosenblatt,
Kenneth
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Curtiss,
Douglas M.
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Barry Fuller R/O IRA #2761-8721 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
10,000 | (20) | * | 10,000 | — | — | ||||||||||||||
Hinkson,
Chris P. and Shannon M
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Brimhall,
Kirk M
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Andrew
Irrevocable Trust U/A 5/4/94
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Tasker,
Geoffrey and Mary Jill
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Collins,
Jerry D. and Pam JTWROS
|
10,000 | * | 10,000 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Victor Sibila IRA #3015-3181 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
10,000 | (21) | * | 10,000 | — | — | ||||||||||||||
David
Keith Newton
|
8,888 | * | 8,888 | — | — | |||||||||||||||
Paul,
Melvyn
|
8,888 | * | 8,888 | — | — | |||||||||||||||
Lavoie,
Karine
|
8,880 | * | 8,880 | — | — | |||||||||||||||
Grossman,
Martin
|
8,878 | * | 8,878 | — | — | |||||||||||||||
Del
Neal Wisler
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Douglas
Hartley ROTH IRA
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Steve
Jon Palmatier
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Raymond
S. and Joan Huber
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Brian
Anthony Whittle
|
7,500 | * | 7,500 | — | — | |||||||||||||||
David
W. Stange
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Aguilar,
David
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Silber,
Michael
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Denise A Webster R/O IRA #7439-1732 C/O
Legent Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
7,500 | (22) | * | 7,500 | — | — | ||||||||||||||
Lesniak,
Richard J
|
7,500 | * | 7,500 | — | — | |||||||||||||||
Gino
and Joseph Tedesco JTWROS
|
7,000 | * | 7,000 | — | — |
80C
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Stockholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
Percentage of
Shares of
Common Stock
Beneficially
Owned Prior to
the Offering(1)
|
Number of
Shares of
Common Stock
Registered for
Sale Hereby
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Eric J Pearson Roth IRA #4975-2227 C/O
Legent Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
6,888 | (23) | * | 6,888 | — | — | ||||||||||||||
Zeev
Tafel
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Fredrick
J. and Lynn Shimek
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Mike
Glantz
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Reiff,
Jerry
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Taylor,
Richard C.
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Forrer,
John
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Chambers,
Timothy E. and Heather L.
|
6,666 | * | 6,666 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Fred Williams R/O IRA #7201-7149 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
6,666 | (24) | * | 6,666 | — | — | ||||||||||||||
Hardy,
John
|
6,500 | * | 6,500 | — | — | |||||||||||||||
Chazanovitz,
David
|
6,500 | * | 6,500 | — | — | |||||||||||||||
Hayden,
Rhett G
|
6,000 | * | 6,000 | — | — | |||||||||||||||
Koondel,
Ira
|
5,500 | * | 5,500 | — | — | |||||||||||||||
McClary,
John A.
|
5,500 | * | 5,500 | — | — | |||||||||||||||
Ken
Jerkins
|
5,000 | * | 5,000 | — | — | |||||||||||||||
George
Centauro
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Daniel
Magalnick
|
5,000 | * | 5,000 | — | — | |||||||||||||||
James
R. Gutglass
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Norman
W.Getz
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Paideia
Capital Private Ltd.
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Robert
and Deborah Cohen
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Stancil,
Donald Ray
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Sasson Joury R/O IRA #4313-7761 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
5,000 | (25) | * | 5,000 | — | — | ||||||||||||||
Berke,
Joel N. & Yulin
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Wang,
Luo
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Jacobs,
James A.
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Ernie
Graham Oil, Inc.
|
5,000 | (26) | * | 5,000 | — | — | ||||||||||||||
Podobinski,
Daniel T. and Evelyn A.
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Evans,
Michael J & Kathleen A
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Hampton,
Dr. William
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Golusin,
Albert
|
5,000 | * | 5,000 | — | — | |||||||||||||||
Gary
M. Goldstein
|
4,500 | * | 4,500 | — | — | |||||||||||||||
Frank
D. Cole
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Lauran
A. Daman
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Billy
A. Joiner
|
4,444 | * | 4,444 | — | — |
80D
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Stockholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
Percentage of
Shares of
Common Stock
Beneficially
Owned Prior to
the Offering(1)
|
Number of
Shares of
Common Stock
Registered for
Sale Hereby
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|||||||||||||||
Delaware
Charter Tax id #51-0099493 FBO Jeffrey Todd Cole IRA #1486-3724 C/O Legent
Clearing 9300 Underwood, Suite 400 Omaha, NE, 68114
|
4,444 | (27) | * | 4,444 | — | — | ||||||||||||||
Simon,
Steve
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Walker,
James
|
4,444 | * | 4,444 | — | — | |||||||||||||||
DeCotis,
James and Lynita
|
4,444 | * | 4,444 | — | — | |||||||||||||||
DeCotis,
James A. IRA
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Hall,
Warren James
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Jelcada
LP
|
4,444 | (28) | * | 4,444 | — | — | ||||||||||||||
Sklanka,
Edward
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Bishop,
Leslie J.
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Storey,
Edward and Carol
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Schlenker,
Ralph & Donna
|
4,444 | * | 4,444 | — | — | |||||||||||||||
Adler,
Orrin
|
4,444 | * | 4,444 | — | — |
* Less
than 1%
(1)
|
Based
on 12,230,178 shares of common stock outstanding as of the date of this
prospectus. The number of shares of our common stock outstanding excludes
(i) up to 1,200,000 shares of our common stock to be offered by us in a
firm commitment public offering concurrently herewith and (ii) 782,545
shares of common stock that are issuable upon the exercise of outstanding
warrants. Also (i) excludes the 120,000 shares underlying warrants that we
will issue to the Underwriters upon the closing of the public offering,
(ii) excludes the 54,000 shares of our common stock that we may issue upon
the Underwriter’s over-allotment option exercise in a public offering and
(iii) is not affected by the 126,000 shares that the Underwriter may
purchase from selling stockholders in such public
offering.
|
(2)
|
Represents
the amount of shares that will be held by the selling stockholders after
completion of this offering based on the assumption that all shares
registered for sale hereby will be sold. However, the selling stockholders
may offer all, some or none of the shares pursuant to this prospectus, and
to our knowledge there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares that may be
held by the selling stockholders after completion of this
offering.
|
(3)
|
Includes
159,022 shares of common stock and 65,240 shares of common stock issuable
upon the exercise of outstanding warrants, each held by Debbie
Schwartzberg, who is the spouse of the selling stockholder. Also includes
32,974 shares of common stock and 13,528 shares of common stock issuable
upon the exercise of outstanding warrants held in such amounts by each of
the Julie Schwartzberg Trust dated 2/9/2009 and the David N. Sterling
Trust dated 2/3/2000. The selling stockholder is a co-trustee of the
foregoing trusts. As a result, the selling stockholder may be deemed the
indirect beneficial owner of these securities and disclaims beneficial
ownership of the securities except to of his pecuniary interest in the
securities. Excludes the shares held by Continuum Capital Partners, LP
listed in the table above and footnote (4)
below.
|
(4)
|
Gil
N. Schwartzberg, as manager of the general partner, has voting and
investment control over the shares owned by this entity. Mr. Schwartzberg
is the spouse of Debbie Schwartzberg. Excludes shareholdings discussed
under footnote (3), above.
|
(5)
|
Jeffrey
Rubin, as manager, has voting and investment control over the shares owned
by this entity.
|
(6)
|
Lyman
O. Heidtke, as general partner, has voting and investment control over the
shares owned by this entity.
|
(7)
|
Frederick
Berdon has voting and investment controls over the shares owned by this
entity.
|
(8)
|
David
L. Kagel has voting and investment control over the shares owned by this
entity.
|
(9)
|
Paul
Masters has voting and investment control over the shares owned by this
entity. Based on information provided to us by this selling stockholder,
Mr. Masters is an affiliate of a broker-dealer but the selling stockholder
acquired these securities in the ordinary course of business and that at
the time of the acquisition of these securities, it had no agreements or
understandings, directly or indirectly, with any person to distribute
these securities.
|
80E
[RESALE
PROSPECTUS ALTERNATE PAGE]
(10)
|
Michael
Rosenberg has voting and investment control over the shares owned by this
entity.
|
(11)
|
Richard
Schmidt, as managing member, has voting and investment control over the
shares owned by this entity.
|
(12)
|
Duane
H. Butcher, as Trustee has voting and investment control over the shares
owned by this entity.
|
(13)
|
Linda
S. Rosenberg has voting and investment control over the shares owned by
this entity.
|
(14)
|
John
O. Forrer, as trustee, has voting and investment control over the shares
owned by this entity.
|
(15)
|
John
O. Forrer, as trustee, has voting and investment control over the shares
owned by this entity.
|
(16)
|
Marilyn
Lefkowitz, as manager, has voting and investment control over the shares
owned by this entity.
|
(17)
|
John
O. Forrer, as trustee, has voting and investment control over the shares
owned by this entity.
|
(18)
|
Mitchell
J. Lipcon, as trustee, has voting and investment control over the shares
owned by this entity.
|
(19)
|
Keith
Foulis, as president, has voting and investment control over the shares
owned by this entity.
|
(20)
|
Barry
Fuller has voting and investment control over the shares owned by this
entity.
|
(21)
|
Victor
Sibila has voting and investment control over the shares owned by this
entity.
|
(22)
|
Denise
Webster has voting and investment control over the shares owned by this
entity.
|
(23)
|
Eric
J. Pearson has voting and investment control over the shares owned by this
entity.
|
(24)
|
Fred
Williams has voting and investment control over the shares owned by this
entity.
|
(25)
|
Sasson
Joury has voting and investment control over the shares owned by this
entity.
|
(26)
|
Brian
R. Olson, as controller/owner, has voting and investment control over the
shares owned by this entity.
|
(27)
|
Jeffrey
Todd Cole has voting and investment control over the shares owned by this
entity.
|
(28)
|
John
O. Forrer, as general partner, has voting and investment control over the
shares owned by this entity.
|
80F
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
selling stockholders of our common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
•
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
•
|
privately
negotiated transactions;
|
•
|
settlement
of short sales entered into after the date of this
prospectus;
|
|
•
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
•
|
a
combination of any such methods of
sale;
|
|
•
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
•
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities Act”), if available, rather than under
this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating to
its sales of shares to exceed what is customary in the types of transactions
involved. The maximum commission or discount to be received by any FINRA member
or independent broker-dealer, however, will not be greater than eight (8)
percent for the sale of any securities being registered hereunder pursuant to
Rule 415 of the Securities Act.
WestPark
Capital, Inc. (the “Underwriter”) is an underwriter of up to 1,200,000 shares of
our common stock (excluding an underwriters’ option to purchase an additional
180,000 shares to cover over-allotments) to be offered by us in a firm
commitment public offering concurrently herewith, may dispose of shares on
behalf of its account holders who are also selling stockholders. The maximum
commission or discount to be received by the Underwriter will not be greater
than eight percent (8%) for the sale of any securities being registered
hereunder. Additionally, any securities acquired by any participating FINRA
members during the 180-day period preceding the date of the filing of the
prospectus with the Commission will be subject to lock-up restrictions under
FINRA Rule 5110(g), unless an exemption is available under FINRA Rule
5110(g)(2). FINRA Rule 5110(g) provides that such securities shall not be sold
during our public offering or sold, transferred, assigned, pledged or
hypothecated, or be the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the date
of effectiveness of sales of our public offering.
80
[RESALE
PROSPECTUS ALTERNATE PAGE]
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under this prospectus. Each selling stockholder has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We agreed
to keep this prospectus effective for twelve (12) months. The resale shares will
be sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two business
days prior to the commencement of the distribution. In addition, the selling
stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the selling
stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
81
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by K&L Gates LLP, Los Angeles, California. Legal matters as to PRC law
will be passed upon for us by Han Kun Law Offices. K&L Gates LLP may rely
upon Han Kun Law Offices with respect to matters governed by PRC law. An
affiliate of a partner of Han Kun Law Offices owns 120,000 shares of common
stock of our company.
EXPERTS
The consolidated
financial statements of China Wesen Recycling Technology, Inc. as of December
31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007
appearing in this prospectus and registration statement have been audited by
MaloneBailey, LLP, an independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the shares of common stock in this
offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedules that were filed with the registration
statement may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of the
website is www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports, and other information, are
available for inspection and copying at the regional offices, public reference
facilities and website of the Securities and Exchange Commission referred to
above.
83
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered.
Securities
and Exchange Commission registration fee(1)
|
$ | 1,849 | ||
FINRA
Filing Fee(1)
|
[____
|
] | ||
Exchange
Listing Fee(1)
|
[____
|
] | ||
Transfer
Agent Fees(1)
|
[____
|
] | ||
Accounting
fees and expenses(1)
|
[____
|
] | ||
Legal
fees and expenses(1)
|
[____
|
] | ||
Blue
Sky/Underwriters’ counsel fees and expenses(1)
|
[____
|
] | ||
Research
and Investor Relations fees and expenses(1)
|
[____
|
] | ||
Printing
fees and expenses(1)
|
[____
|
] | ||
Roadshow
fees and expenses(1)
|
[____
|
] | ||
Miscellaneous(1)
|
[____
|
] | ||
Total
|
$
|
[____
|
] |
(1)
|
All
amounts are estimates other than the Commission’s registration fee, FINRA
filing fee and Exchange listing
fee.
|
Item
14. Indemnification of directors and officers
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our Certificate of Incorporation provides for the
indemnification, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, as amended from time to time, of officers, directors,
employees and agents of the Company. We may, prior to the final disposition of
any proceeding, pay expenses incurred by an officer or director upon receipt of
an undertaking by or on behalf of that director or executive officer to repay
those amounts if it should be determined ultimately that he or she is not
entitled to be indemnified under the bylaws or otherwise. We shall indemnify any
officer, director, employee or agent upon a determination that such individual
has met the applicable standards of conduct specified in Section 145. In the
case of an officer or director, the determination shall be made by (a) a
majority vote of directors who are not parties to such proceeding, even though
less than a quorum; (b) a committee of such directors designated by majority
vote of such directors, even though less than a quorum; (c) if there are no such
directors, independent legal counsel in a written opinion or (d) the
stockholders.
Our
certificate of incorporation provides that, pursuant to Delaware law, our
directors shall not be liable for monetary damages for breach of the directors’
fiduciary duty of care to us and our stockholders. This provision in the
certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of no monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director’s duty of loyalty to us or our stockholders, for acts or omissions not
in good faith or involving intentional misconduct or knowing violations of the
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
II-1
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by its director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
in which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
Item
15. Recent sales of unregistered securities
On November 23, 2009, pursuant to the
terms of the Exchange Agreement, Weixin BVI, Weixin HK, Kelida, Hua Su, Chuang
Yi, Xin Ye, Li Jun, and all of the shareholders of Weixin BVI (collectively, the
“Weixin Shareholders”)., SRKP 23 issued 7,865,556 shares of common stock to
the Weixin Shareholders in exchange for all of the issued and outstanding
securities of Weixin BVI. All of the securities were offered and issued in
reliance upon an exemption from registration pursuant to Regulation S of the
Securities Act of 1933, as amended. We complied with the conditions of Rule 903
as promulgated under the Securities Act including, but not limited to, the
following: (i) each recipient of the shares is a non-U.S. resident and has not
offered or sold their shares in accordance with the provisions of Regulation S;
(ii) an appropriate legend was affixed to the securities issued in accordance
with Regulation S; (iii) each recipient of the shares has represented that it
was not acquiring the securities for the account or benefit of a U.S. person;
and (iv) each recipient of the shares agreed to resell the securities only in
accordance with the provisions of Regulation S, pursuant to a registration
statement under the Securities Act of 1933, as amended (the “Securities Act”),
or pursuant to an available exemption from registration. We will refuse to
register any transfer of the shares not made in accordance with Regulation S,
after registration, or under an exemption.
On
November 23, 2010, we received gross proceeds of approximately $2.5 million in
an initial closing of a private placement transaction. Pursuant to subscription
agreements entered into with the investors, we sold an aggregate of 1,111,099
shares of Common Stock at $2.25 per share. On December 16, 2010, we conducted a
second and final closing of the private placement, pursuant to which we sold an
aggregate of 1,346,068 shares of Common Stock at $2.25 per share for gross
proceeds of approximately $3.0 million. Accordingly, we sold a total of
2,457,167 shares of common stock in the private placement for aggregate gross
proceeds of approximately $5.5 million (the “Private Placement”). The securities
were offered and sold to investors in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Rule
506 promulgated thereunder. Each of the persons and/or entities receiving our
securities qualified as an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended).
II-2
On October 11, 2007, we offered and
sold an aggregate of 7,096,390 shares of common stock for aggregate proceeds
equal to $5,000.12, pursuant to the terms and conditions set forth in those
certain common stock purchase agreements, and warrants to purchase an aggregate
of 7,096,390 shares of common stock) for aggregate proceeds equal to $2,500.05,
pursuant to the terms and conditions set forth in those certain warrant purchase
agreements. On November 23, 2010, 5,434,753 of the shares and 6,414,693 of the
warrants were cancelled. The Warrants have an exercise price equal to $0.0001.
The Warrants are immediately exercisable and terminate five years from November
23, 2010, the date the Company ceased to be a “shell company” and a “blank check
company.” The Company sold these shares of common stock and Warrants under the
exemption from registration provided by Section 4(2) of the Securities Act and
Regulation D promulgated thereuner.
On November 3, 2010, we offered and
sold an aggregate of 1,490,964 shares of common stock for aggregate proceeds of
$1,050.00 and warrants to purchase an aggregate of 1,490,958 shares of common
stock for aggregate proceeds of $525.00. The warrants have an exercise price
equal to $0.0001 and expire on November 23, 2015. These securities were the only
items of value received by any such stockholders from SRKP 23, Inc. The Company
sold these shares of common stock and Warrants under the exemption from
registration provided by Section 4(2) of the Securities Act and Regulation D
promulgated thereuner.
Item
16. Exhibits
Exhibit
No.
|
Description
|
1.1*
|
Form
of Underwriting Agreement.
|
2.1
|
Share
Exchange Agreement dated November 12, 2010, by and among the Registrant,
Weixin International Co., Limited, Wei Xin Holding Group Limited, Gangzhou
Kelida Intelligent Equipment Co., Ltd., Zhaoqing Hua Su Plastic Trading
Company, Zhaoqing Chuang Yi Resources Recycle Co., Ltd., Zhaoqing Xin Ye
Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co., Ltd. and the
shareholders of Weixin International Co., Limited (incorporated by
reference from Exhibit 2.1 to the Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on February 1,
2011).
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53019) filed with
the Securities and Exchange Commission on January 16,
2008).
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53019) filed with the Securities and
Exchange Commission on January 16, 2008).
|
3.3
|
Certificate
of Ownership and Merger effecting name change filed with the Office of
Secretary of State of Delaware on November 24, 2010 (incorporated by
reference from Exhibit 3.3 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 30,
2010).
|
4.1
|
Specimen
Certificate of Common Stock.
|
4.2
|
Form of
Warrant (incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form 10-SB (File No. 000-53019) filed with the
Securities and Exchange Commission on January 16,
2008).
|
4.3
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Quarterly
Report on Form 10-Q (File No. 000-53019) filed with the Securities and
Exchange Commission on November 8, 2010).
|
4.4*
|
Form
of Underwriter’s Warrant.
|
5.1*
|
Opinion
of K&L Gates LLP.
|
10.1
|
Share
and Warrant Cancellation Agreement dated November 12, 2010 entered into by
and between the Registrant and certain stockholders of the Registrant
(incorporated by reference from Exhibit 10.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on November 30,
2010).
|
10.2
|
Registration
Rights Agreement dated November 23, 2010 entered into by and between the
Registrant, Weixin International Co., Limited and certain stockholders of
the Registrant (incorporated by reference from Exhibit 10.2 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
November 30, 2010).
|
10.3
|
Land
Tenancy Contract executed September 25, 2007 by and among Dinghu District
Guicheng Office Longyi Residents’ Committee Team No. 15 and Zhaoqing Hua
Su Plastic Trading Company, Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd., Zhaoqing Xin Ye Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co.,
Ltd. (translated to English) (incorporated by reference from Exhibit 10.3
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30,
2010).
|
II-3
Exhibit
No.
|
Description
|
10.4
|
Transfer
Contract for State-Owned Construction Land Use Right dated November 12,
2007 by and between the Bureau of Land Resources and Housing Management
Guangzhou Municipality and Gangzhou Kelida Intelligent Equipment Co., Ltd.
(translated to English) (incorporated by reference from Exhibit 10.4 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30, 2010).
|
10.5
|
Sold
Note, Bought Note and Instrument of Transfer by and between Wan Hongbing
and Weixin International Co., Limited (incorporated by reference from
Exhibit 10.5 to the Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on February 1, 2011).
|
10.6
|
Form
of Share Transfer Contract by and between Gangzhou Kelida Intelligent
Equipment Co., Ltd. and the persons and the related companies listed on
Schedule A (translated to English) (incorporated by reference from Exhibit
10.6 to the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on February 1, 2011).
|
10.7
|
Form
of Master Agreement by and between Canvas Valley LLC and the companies
listed on Schedule A (incorporated by reference from Exhibit 10.7 to the
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on February 1, 2011).
|
10.8
|
Form
of Master Agreement by and between Global Green Lands LLC and the
companies listed on Schedule A (incorporated by reference from Exhibit
10.8 to the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on February 1, 2011).
|
10.9
|
Master
Agreement by and between Zhaoqing Hua Su Plastic Trading Company and
Tonghe Environmental Holdings Ltd. dated January 5, 2009 (incorporated by
reference from Exhibit 10.9 to the Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on February 1,
2011).
|
10.10
|
Placement
Agency Agreement dated as of November 23, 2010 by and among
the Company, Weixin International Co., Limited and WestPark Capital,
Inc. (incorporated by reference from Exhibit 10.10 to the Current Report
on Form 8-K/A filed with the Securities and Exchange Commission on
February 1, 2011).
|
10.11
|
Form
of Purchasing Contracts with suppliers (incorporated by reference from
Exhibit 10.11 to the Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on February 1,
2011).
|
16.1
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated
February 1, 2011 (incorporated by reference from Exhibit 16.1 to the
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on February 1, 2011).
|
21.1
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30, 2010).
|
23.1
|
Consent
of MaloneBailey LLC.
|
23.2*
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
23.3*
|
Consent
of Han Kun Law Offices.
|
24.1
|
Power
of Attorney (included on signature
page).
|
* to be filed by amendment
Item
17. Undertakings
The
undersigned registrant hereby undertakes with respect to the securities being
offered and sold in this offering:
The
undersigned Registrant hereby undertakes that to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
i.
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
II-4
|
ii.
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement;
|
|
iii.
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change in such information in registration
statement.
|
That, for
the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
To remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
For
determining liability of the undersigned registrant under
the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned registrant
undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to the purchaser:
|
i.
|
in
any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
|
|
|
|
ii.
|
any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the
undersigned registrant;
|
|
|
|
iii.
|
the
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
|
|
iv.
|
any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by the registrant of
expenses incurred and paid by a director, officer or controlling person of the
registrant in
the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The
undersigned Registrant hereby undertakes that it will:
|
(i)
|
for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it
effective.
|
II-5
|
(ii)
|
for
determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those
securities.
|
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that:
(i) if the undersigned registrant is
relying on Rule 430B:
|
(a)
each prospectus filed by the undersigned registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of
the date the filed prospectus was deemed part of and included in the
registration statement; and
|
|
(b)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x)
for the purpose of providing the information required by section 10(a) of
the Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date;
or
|
(ii) if the undersigned registrant is
subject to Rule 430C:
(a) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
II-6
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Guangzhou, People’s Republic of China, on the
10th
day of February, 2011.
China
Wesen Recycling Technology, Inc.
|
||
By:
|
/s/ Xiao
Liu
|
|
Name:
|
Xiao
Liu
|
|
Title:
|
Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Xiao Liu, as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign (1) any and all
amendments to this Form S-1 (including post-effective amendments) and (2) any
registration statement or post-effective amendment thereto to be filed with the
Securities and Exchange Commission pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
and any other regulatory authority, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE
|
TITLE
|
DATE
|
||
/s/
Xiao Liu
|
Chief
Executive Officer and Director (Principal
Executive
Officer)
|
February
10, 2011
|
||
Xiao
Liu
|
||||
/s/
Yonghua Deng
|
Senior Accounting
Manager (Principal Financial and Accounting Officer)
|
February
10, 2011
|
||
Yonghua
Deng
|
||||
/s/
Hongbing Wan
|
Chairman
of the Board and Chief Operating
Officer
|
February
10, 2011
|
||
Hongbing
Wan
|
||||
/s/
Xiaozhu Pang
|
Director
|
February
10, 2011
|
||
Xiaozhu
Pang
|
||||
/s/
Yuhong Hu
|
Director
|
February
10, 2011
|
||
Yuhong
Hu
|
II-7
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
1.1*
|
Form
of Underwriting Agreement.
|
|
2.1
|
Share
Exchange Agreement dated November 12, 2010, by and among the Registrant,
Weixin International Co., Limited, Wei Xin Holding Group Limited, Gangzhou
Kelida Intelligent Equipment Co., Ltd., Zhaoqing Hua Su Plastic Trading
Company, Zhaoqing Chuang Yi Resources Recycle Co., Ltd., Zhaoqing Xin Ye
Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co., Ltd. and the
shareholders of Weixin International Co., Limited (incorporated by
reference from Exhibit 2.1 to the Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on February 1,
2011).
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53019) filed with
the Securities and Exchange Commission on January 16,
2008).
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53019) filed with the Securities and
Exchange Commission on January 16, 2008).
|
|
3.3
|
Certificate
of Ownership and Merger effecting name change filed with the Office of
Secretary of State of Delaware on November 24, 2010 (incorporated by
reference from Exhibit 3.3 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 30,
2010).
|
|
4.1
|
Specimen
Certificate of Common Stock.
|
|
4.2
|
Form of
Warrant (incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form 10-SB (File No. 000-53019) filed with the
Securities and Exchange Commission on January 16,
2008).
|
|
4.3
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Quarterly
Report on Form 10-Q (File No. 000-53019) filed with the Securities and
Exchange Commission on November 8, 2010).
|
|
4.4*
|
Form
of Underwriter’s Warrant.
|
|
5.1*
|
Opinion
of K&L Gates LLP.
|
|
10.1
|
Share
and Warrant Cancellation Agreement dated November 12, 2010 entered into by
and between the Registrant and certain stockholders of the Registrant
(incorporated by reference from Exhibit 10.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on November 30,
2010).
|
|
10.2
|
Registration
Rights Agreement dated November 23, 2010 entered into by and between the
Registrant, Weixin International Co., Limited and certain stockholders of
the Registrant (incorporated by reference from Exhibit 10.2 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
November 30, 2010).
|
|
10.3
|
Land
Tenancy Contract executed September 25, 2007 by and among Dinghu District
Guicheng Office Longyi Residents’ Committee Team No. 15 and Zhaoqing Hua
Su Plastic Trading Company, Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd., Zhaoqing Xin Ye Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co.,
Ltd. (translated to English) (incorporated by reference from Exhibit 10.3
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30, 2010).
|
|
10.4
|
Transfer
Contract for State-Owned Construction Land Use Right dated November 12,
2007 by and between the Bureau of Land Resources and Housing Management
Guangzhou Municipality and Gangzhou Kelida Intelligent Equipment Co., Ltd.
(translated to English) (incorporated by reference from Exhibit 10.4 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30, 2010).
|
|
10.5
|
Sold
Note, Bought Note and Instrument of Transfer by and between Wan Hongbing
and Weixin International Co., Limited (incorporated by reference from
Exhibit 10.5 to the Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on February 1, 2011).
|
|
10.6
|
Form
of Share Transfer Contract by and between Gangzhou Kelida Intelligent
Equipment Co., Ltd. and the persons and the related companies listed on
Schedule A (translated to English) (incorporated by reference from Exhibit
10.6 to the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on February 1, 2011).
|
|
10.7
|
Form
of Master Agreement by and between Canvas Valley LLC and the companies
listed on Schedule A (incorporated by reference from Exhibit 10.7 to the
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on February 1,
2011).
|
II-8
Exhibit No.
|
Description
|
|
10.8
|
Form
of Master Agreement by and between Global Green Lands LLC and the
companies listed on Schedule A (incorporated by reference from Exhibit
10.8 to the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on February 1, 2011).
|
|
10.9
|
Master
Agreement by and between Zhaoqing Hua Su Plastic Trading Company and
Tonghe Environmental Holdings Ltd. dated January 5, 2009 (incorporated by
reference from Exhibit 10.9 to the Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on February 1,
2011).
|
|
10.10
|
Placement
Agency Agreement dated as of November 23, 2010 by and among
the Company, Weixin International Co., Limited and WestPark Capital,
Inc. (incorporated by reference from Exhibit 10.10 to the Current Report
on Form 8-K/A filed with the Securities and Exchange Commission on
February 1, 2011).
|
|
10.11
|
Form
of Purchasing Contracts with suppliers (incorporated by reference from
Exhibit 10.11 to the Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on February 1,
2011).
|
|
16.1
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated
February 1, 2011 (incorporated by reference from Exhibit 16.1 to the
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on February 1, 2011).
|
|
21.1
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 30, 2010).
|
|
23.1
|
Consent
of MaloneBailey LLC.
|
|
23.2*
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
|
23.3*
|
Consent
of Han Kun Law Offices.
|
|
24.1
|
Power
of Attorney (included on signature
page).
|
* to be
filed by amendment.
II-9