Security Ownership of Certain Beneficial Owners and Management

 

As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable.  As of February 14, 2011 we had a total of 14,632,553 shares of common stock and 19,200 shares of Series A Preferred Stock outstanding.  Holders of Series A Preferred Stock vote with the holders of common stock on all matters on an as-converted to common stock basis, based on an assumed post 1-for-18.29069125 reverse split (to retroactively take into account the Reverse Split). 

 

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The following table sets forth, as of  February 14, 2011: (a) the names and addresses of each beneficial owner of more than five percent of our Common Stock known to us, the number of shares of common stock beneficially owned by each such person, and the percent of our Common Stock and Series A Preferred Stock so owned; and (b) the names and addresses of each director and executive officer, the number of shares our common stock beneficially owned, and the percentage of our Common Stock so owned, by each such person, and by all of our directors and executive officers as a group.  Unless otherwise indicated, the business address of each of our directors and executive offices is Long Shan Development Area, Han Jiang Town, ShiShi City Fujian, PRC.  Each person has sole voting and investment power with respect to the shares of our common stock, except as otherwise indicated.  Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

 

Name and Address of Beneficial Owner		Title of Class		Amount and Nature of Beneficial Ownership(1)		Percentage of Series A Preferred Stock		Percentage of Common Stock		Percent of Combined Voting Power of Common Stock and Series A Preferred Stock(2)
Ang Kang Han, Chairman President(3)		Common Stock Series A Preferred Stock		-0- 16,608(4)		-0- 86.5%		-0- -0-		83.0%
Huang Jin Bei Vice President;  Chief Financial Officer		Common Stock Series A Preferred Stock		-0- -0-		-0- -0-		-0- -0-		-0-
Wu Li Cong, Chief Operating Officer		Common Stock Series A Preferred Stock		-0- 16,608(5)		-0- 86.5		-0- -0-		83.0%
Wu Hong Wei, Secretary		Common Stock Series A Preferred Stock		-0- -0-		-0- -0-		-0- -0-		-0-
R.C. Cunningham, Director(3) 127 Northwest 62nd Street, Suite A Oklahoma City, OK		Common Stock Series A Preferred Stock		9,133,443 -0-		-0- -0-		62.4% -0-		2.5%
All Officers & Directors as a Group (5 people)		Common Stock Series A Preferred Stock		9,133,443 16,608		-0- 86.5%		62.4% -0-		85.5%
More than 5% Holders
China Changsheng Investment Limited(4)		Common Stock Series A Preferred Stock		-0- 15,648		-0- 81.5%		-0- -0-		78.2%
China Longshan Investment Limited(4)		Common Stock Series A Preferred Stock		-0- 960		-0- 5.0%		-0- -0-		4.8%
High -Reputation Assets Management Longshan Limited		Common Stock Series A Preferred Stock		-0- 960		-0- 5.0%		-0- -0-		4.8%

 

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Footnotes

(1) As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Includes shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants and such are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group.

 

(2) Common Stock shares have one vote per share.  Excludes shares of Series A Preferred Stock which will automatically convert into shares of common stock on the basis of one share of Series A Preferred Stock for 1,000 shares of common stock upon the effectiveness of a planned 1-for-18.29069125 reverse split of our outstanding common stock.  Holders of Series A Preferred Stock vote with the holders of common stock on all matters on an as-converted to common stock basis, based on an assumed post 1-for-18.29069125 reverse split (to retroactively take into account the Reverse Split).  For example, assuming 100 shares of Series A Preferred Stock are issued and outstanding on the record date for any stockholder vote, such shares, voting in aggregate, would vote a total of 1,829,069 voting shares.

 

(3) Only Mr. Ang and Mr. Cunningham are directors of Sooner Holdings as of the date of this filing.  Messrs. Ang, Huang and Wu and Ms. Wu are also officers of Sooner Holdings.  It is anticipated that Mr. Huang and Wu will be elected as directors after Sooner Holdings files its Schedule 14f-1 with the SEC.  Concurrent with their election, Mr. Cunningham will resign as a director.

 

(4) Represents 16,608 shares of Series A Preferred Stock registered in the name of China Changsheng Investment Limited, and China Longshan Investment Limited.   The owners for each of these entities are nominees for Mr. Ang, our director, president and majority shareholder.  Accordingly, Mr. Ang ultimately holds voting and discretionary power as to these shares of Series A Preferred Stock.

 

(5) Ms. Wu is the spouse of Mr. Ang and may be deemed to a beneficial owners to shares held or attributed to Mr. Ang.

 

Certain Relationships and Related Transactions, and Director Independence

 

On February 2011, we issued 1,593,351 shares of common stock to Mr. R.C. Cunningham II, our former director, Chief Executive Officer, in exchange for the cancellation of indebtedness owed to him by us in the amount of $143,401.59.

 

As of December 31, 2009 and 2008, and September 30, 2010, we owed Mr. Ang Kang Han $379,299, $ 159,243 and $ 332,871, respectively.

 

At December 31, 2008 and 2009, and September 30, 2010, we had a receivable from Mr. Ang, our director, executive officer and majority shareholder, for approximately $295,239, $387,929, and $951,225, respectively.  We also had payable to Mr. Ang for $159,243, $379,299, and $332,871 as of December 31, 2008 and 2009, and September 30, 2010, respectively.  No note was signed by either parties and there is not a specific due date, and no interest is paid on the receivables or payables. Money is transferred between Mr. Ang and us mainly for cash flow purposes.  The amounts loaned and borrowed are short term in nature and the balances at both year-ends are considered at the fair market value of the amounts owed.  Mr. Ang repaid the entire outstanding balance of his receivable on December 31, 2010.  As of January 15, 2011, all amounts had been repaid by Mr. Ang, and the related party receivable and payable balance was zero.

 

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At December 31, 2008 and 2009, and September 30, 2010, we had a payable to Shishi Changsheng for $122,121, $432,347, and receivable for $3,568,798, respectively.  Shishi Changsheng is 100% owned by Mr. Ang, our director, executive officer and majority shareholder.  Shishi Changsheng holds the land use rights for the land under the footwear factory.  Pursuant to a lease dated December 21, 2007 with Shishi Changsheng, we rent 3,914.18 meters of manufacturing space from Shishi Changsheng for an annual rent of $35,652 (RMB 234,851).  We pay Shishi Changsheng rent under a four year agreement, which expires on December 31, 2011.  For the years ended December 31, 2008 and 2009, and the nine months ended September 30, 2009 and 2010, we had  rental expense of approximately $34,000, $34,000, $26,000, and $26,000, respectively, in accordance with the rental agreement.  The receivable and payable is related to the payment of rent and transfers for cash flow purposes.  As of January 15, 2011, we had a receivable from Shishi Changsheng for $5,697,454.

 

On January 17, 2011, we agreed to the assignment of the receivable from Shishi Changsheng to Mr. Ang, our director, executive officer and majority shareholder, and then from Mr. Ang to HK Weituo.  The assignment was in consideration of an option agreement for HK Weituo to purchase FFP.

 

At December 31, 2008 and 2009, and September 30, 2010, we had a receivable from FFP of $0, $255,953, and $578,011, respectively.  FFP is a China WFOE 100% owned by Mr. Ang, our director, executive officer and majority shareholder.  FFP was incorporated on June 24, 2008 for the purpose of building a second factory for the production of PU leather in Fujian.  Cash is being transferred between the two companies for cash flow purposes without a formal note or interest payments on the amounts loaned.  The construction of the new plant has not started yet while FFP secures the land use rights from the Chinese government.  As of January 15, 2011, we had a payable to FFP for $125,994.

 

On January 17, 2011, FFP, Mr. Ang, and HK Weituo entered into a call option agreement (“FFP Agreement”) whereby HK Weituo has the right to purchase FFP from Mr. Ang for 90% of the net tangible asset value of FFP.  The net tangible asset value will be determined by an independent third-party appraiser.  The FFP Agreement will expire January 17, 2014.  In consideration of the FFP Agreement, the $5,697,454 owed to us from Shishi Changsheng was assigned to HK Weituo with our agreement.  The consideration will be applied towards the purchase price if the FFP Agreement is exercised.  The FFP Agreement also stipulates that FFP and we are separate entities and that there are not any guarantees or commitments for us to perform or be liable for any of the debts or commitments of FFP or Mr. Ang as the owner of FFP.

 

At September 30, 2010, we had a payable to Feiying Industrial Co., Ltd. (San Ming) of approximately $449,232.  San Ming is a China WFOE 100% owned by Mr. Ang.  San Ming was incorporated on July 20, 2010 for the purpose of building a third factory for the production of PU leather in San Ming city.  Cash is being transferred between the two companies for cash flow purposes without a formal note or interest payments on the amounts loaned.  Construction on the new plant facility began in June 2010.  As of January 15, 2011, we had a receivable from San Ming for $83,490.  On January 17, 2011, HK Weituo, Mr. Ang, and San Ming entered into a call option agreement (San Ming Agreement) whereby HK Weituo has the right to purchase San Ming from Mr. Ang for 90% of the net tangible asset value of San Ming.  The net tangible asset value will be determined by an independent third-party appraiser.  The San Ming Agreement will expire January 17, 2012.  In consideration of the San Ming Agreement, $83,490 owed to us from San Ming was assigned to HK Weituo with our agreement.  The consideration will be applied towards the purchase price if the San Ming Agreement is exercised.  The San Ming Agreement also stipulates that we and San Ming are separate entities and that there are not any guarantees or commitments for us to perform or be liable for any of the debts or commitments of San Ming or Mr. Ang as the owner of San Ming.

 

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On December 24, 2007, we entered into a sales contract with Shishi Changsheng, pursuant to which we purchased certain equipment for a price of $354,759 (RMB 2,336,865).

 

On January 1, 2008, we entered into a trademark license contract with Shishi Changsheng.  Pursuant to the trademark license contract, Shishi Changsheng granted ShiShi Feiying the exclusive right to use the trademark “WINTOP” at an annual fee of $3,036 (RMB 20,000).

 

On April 24, 2008, we signed a lease contract with Fujian Shishi Rural Cooperative Bank, pursuant to which we rented a room owned by us to Fujian Shishi Rural Cooperative Bank.  The duration of lease is from May 1, 2008 to April 30, 2013, and the annual rent is $1,093 (RMB 7,200).  We own 1,850,000 shares of Fujian Shishi Rural Cooperative Bank as an investment.

 

Related Entities

 

China Changsheng Investment Limited. China Changsheng Investment Limited (“China Changsheng”) is our major shareholder which will own approximately 81.5% of our common stock on completion of the share exchange.  China Changsheng is held by Ms. Tsoi Sau Lun who holds the shares in trust for Mr. Ang, our director and president.

 

China Longshan Investment Limited.  China Longshan Investment Limited (“China Longshan”) is a shareholder which will own approximately 5% of our common stock.  China Longshan is held by Ms. Tsoi Sau Lun who holds the shares in trust for Mr. Ang, our director and president.

 

Joint Rise Investment Limited.  Joint Rise Investment Limited (“Joint Rise Investment”) is a shareholder which will own approximately 4.5% of our common stock.  Joint Rise Investment is owned by Mr. Lee Hon Wah.

 

W-Link Investment Limited.  W-Link Investment Limited. (“W-Link Investment”) is a shareholder which will own approximately 4.0% of our common stock.  W-Link Investment is owned by Mr. Li Chung Ying Peter.

 

High-Reputation Assets Management Longshan Limited.  High-Reputation Assets Management Longshan Limited. (“High-Reputation”) is a shareholder which will own approximately 5.0% of our common stock.  High Reputation is owned by Ms. LiLing,

 

Market Price of and Dividends on Our Common Equity and Related Stockholder Matters.

 

Market Information

 

Our common stock was quoted on the Pink Sheets until April 10, 2008 when it became eligible to be quoted on the OTC Bulletin Board under the symbol “SOON.”  The high and low bid information for the stock during the quarter ended December 31, 2010 and years ended September 30, 2010 and 2009 is set forth below.  The information was obtained from the OTC BB and Pink Sheets and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:

 

Fiscal  Year Ending September 30, 2011		High				Low
First Quarter		$	0.10			$	0.05
Fiscal  Year Ended September 30, 2010		High				Low
First Quarter		$	0.1			$	0
Second Quarter		$	0			$	0
Third Quarter		$	0			$	0
Fourth Quarter		$	0			$	0
Fiscal  Year Ended September 30, 2009		High				Low
First Quarter		$	0.23			$	0.04
Second Quarter		$	0.12			$	0.04
Third Quarter		$	0.1			$	0.04
Fourth Quarter		$	0.28			$	0.03

 

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Shareholders

 

As of December 23, 2010, we had 569 shareholders of record and 12,688,016 shares issued and outstanding.  This does not include the holders whose shares are held in a depository trust in “street” name.  As of September 30, 2010, 1,896,139 shares (or approximately 11.2 %) of the issued and outstanding stock were held by Depository Trust Company in “street name.”

 

Dividend Policy

 

We presently do not expect to declare or pay such dividends in the foreseeable future and expect to reinvest all undistributed earnings to expand our PRC operations, which the management would be most benefit our shareholder.  Undistributed earnings will be reinvested in our operations in PRC.  Payment of dividends to our shareholders would require payment of dividends by our PRC subsidiary to us.  PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which is required to be set aside for certain reserve funds.  Our inability to receive all of the revenues from our PRC subsidiary’s operations may provide an additional obstacle to our ability to pay dividends if we so decide in the future.  The declaration of dividends, if any, will be subject to the discretion of our board of directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others.  Please refer to the risk factors for a more detailed discussion on the limitations on the payment of dividends to us by our subsidiary.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We have no compensation plans under which equity securities are authorized for issuance.

 

Recent Sales Of Unregistered Securities

 

Reference is made to the disclosure set forth Item 3.02 of this report, which disclosure is incorporated by reference into this section.

 

Description Of Securities

 

We are authorized to issue up to 110,000,000 shares of capital stock consisting of 100,000,000 shares of common stock, par value $0.001 per share and 10,000,000 undesignated shares, par value  $0.001 per share.

 

Common Stock

 

Each outstanding share of common stock entitles the holder thereof to one vote per share on all matters.  Our bylaws provide that any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors.  Shareholders do not have pre-emptive rights to purchase shares in any future issuance of our common stock.

 

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The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors.  Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future.  Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition, our operating subsidiary in the PRC, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.  In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.

 

All of the issued and outstanding shares of our common stock are duly authorized, validly issued, fully paid and non-assessable.  To the extent that additional shares of our common stock are issued, the relative interests of existing shareholders will be diluted.

 

Undesignated Shares

 

We may issue up to 10,000,000 undesignated shares, par value of $0.001 in one or more classes or series within a class as may be determined by our board of directors, who may establish, from time to time, one or more classes or series of shares, the number of shares to be included in each class or series, fix the designation, powers, preferences and relative rights of the shares of each such class or series and any qualifications, limitations or restrictions thereof.  Any undesignated share so issued by the board of directors may rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.  Moreover, under certain circumstances, the issuance of undesignated shares or the existence of the un-issued undesignated shares might tend to discourage or render more difficult a merger or other change in control.

 

Series A Convertible Preferred Stock

 

In accordance with our Certificate of Incorporation, our Board of Directors unanimously approved the filing of a Certificate of Designation designating and authorizing the issuance of up to 19,200 shares of our Series A Preferred Stock.  The Certificate of Designation was filed on February 11, 2011.

Shares of Series A Preferred Stock will automatically convert into shares of common stock on the basis of one share of Series A Preferred Stock for 1,000 shares of common stock upon the effectiveness of a planned 1-for-18.29069125 reverse split (the “Reverse Split”) of our outstanding common stock.  Upon the Reverse Split, the 19,200 outstanding shares of Series A Preferred Stock will automatically convert into 19,200,000 shares of common stock, which pursuant to the Share Exchange Agreement, will constitute approximately 96% of our outstanding common stock subsequent to the Reverse Split.

Holders of Series A Preferred Stock vote with the holders of common stock on all matters on an as-converted to common stock basis, based on an assumed post 1-for-18.29069125 reverse split (to retroactively take into account the Reverse Split).  For example, assuming 100 shares of Series A Preferred Stock are issued and outstanding on the record date for any stockholder vote, such shares, voting in aggregate, would vote a total of 1,829,069 voting shares.

The holders of our Series A Preferred Stock are entitled to vote on all matters together with all other classes of stock.  Holders of Series A Preferred Stock have protective class voting veto rights on certain matters, such as increasing the authorized shares of Series A Preferred Stock and modifying the rights of Series A Preferred Stock.

 

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Following the reverse acquisition as of February 14, 2011, we had 19,200 shares of Series A Preferred Stock outstanding.  Following the effectiveness of the Reverse Split and the conversion of the Series A Preferred Stock into common stock, there will be 20,000,000 shares of our common stock issued and outstanding.

Anti-takeover Effects of Our Certification of Incorporation and By-laws

 

Our Certificate of Incorporation and bylaws contain certain provisions that may have anti-takeover effects, making it more difficult for or preventing a third party from acquiring control of us or changing its board of directors and management.  Our Certificate of Incorporation provides for the issuance of up to 10,000,000 undesignated shares.  In addition, our certificate of incorporation provides for a staggered board of directors.  The combination of the present ownership by a few shareholders of a significant portion of our issued and outstanding common stock, the ability of the board of directors to issue undesignated shares with rights, preferences and privileges as determined by the board of directors and that our board of directors provide for a staggered board, makes it more difficult for other shareholders to replace our board of directors or for a third party to obtain control of us by replacing its board of directors.

 

Anti-takeover Effects of Oklahoma Law

 

Business Combinations With Interested Shareholders

 

The provisions of Section 18-1090.3 of the Oklahoma General Corporations regarding business combinations with interested shareholders, prohibit a Oklahoma corporation from engaging in various “combination” transactions with any interested shareholder for a period of three years after the date of the transaction in which the person became an interested shareholder, unless the (i) prior to that time, the board of directors approved either the business combination or the transaction which resulted in the person becoming an interest shareholder; (ii) upon consummation of the transaction with resulted in the person becoming an interested shareholder, the interest shareholder owned at least eighty-five percent (85%) of the outstanding voting stock  or (ii) the business combination is approved by the board of directors and holders of at least sixty-five percent (65%) of the outstanding common stock excluding the interested shareholder.

 

A “business combination” is defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, with an “interested shareholder” having: (a) an aggregate market value equal to 10% or more of the aggregate market value of the assets of the corporation or (b) an aggregate market value equal to 10% or more of the aggregate market value of all outstanding shares of the corporation.

 

In general, an “interested shareholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock.  The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire our company even though such a transaction may offer our shareholders the opportunity to sell their stock at a price above the prevailing market price.

 

Control Share Acquisitions

 

The “control share” provisions of Sections 1145 to 1155, inclusive, of the Oklahoma General corporate statutes which apply to Oklahoma corporations, including Oklahoma shareholder with at least 100 shareholders, and (i) more than ten percent (10%) of its shareholders resident in Oklahoma, (ii)more than ten percent (10%) of its shares owned by Oklahoma residents, or (iii) ten thousand (10,000) shareholders resident in Oklahoma, and which conduct business directly or indirectly in Oklahoma, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation's disinterested shareholders.  The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power.  Once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested shareholders restore the right.  These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other shareholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.

 

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Our Certificate of Incorporation state that we have elected not to be governed by the “control share” provisions, therefore, they currently do not apply to us.

 

Transfer Agent And Registrar

 

Our independent stock transfer agent is Securities Transfer Corporation.  Their mailing address is 2591 Dallas Parkway Suite 102, Frisco Texas 75034.

 

Indemnification Of Directors And Officers

 

Under Oklahoma corporation law, a corporation is authorized to indemnify officers, directors, employees and agents who are parties or threatened to be made parties to any civil, criminal, administrative or investigative suit or proceeding by reason of the fact that they are or were a director, officer, employee or agent of the corporation or are or were acting in the same capacity for another entity at the request of the corporation.  Such indemnification includes reasonable expenses (including attorneys' fees), judgments, fines and amounts paid in settlement if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation.

 

With respect to any criminal action or proceeding, these same indemnification authorizations apply if these persons had no reasonable cause to believe their conduct was unlawful.

 

In the case of any action by the corporation against such persons, the corporation is authorized to provide similar indemnification.  But, if any such persons should be adjudged to be liable for negligence or misconduct in the performance of duties to the corporation, the court conducting the proceeding must determine that such persons are nevertheless fairly and reasonably entitled to indemnification.

 

To the extent any such persons are successful on the merits in defense of any such action, suit or proceeding, Oklahoma law provides that they shall be indemnified against reasonable expenses, including attorney fees.  A corporation is authorized to advance anticipated expenses for such suits or proceedings upon an undertaking by the person to whom such advance is made to repay such advances if it is  ultimately determined that such person is not entitled to be indemnified by the corporation.

 

Indemnification and payment of expenses provided by Oklahoma law are not deemed exclusive of any other rights by which an officer, director, employee or agent may seek indemnification or payment of expenses or may be entitled to under any bylaw, agreement, or vote of stockholders or disinterested  directors.  In such regard, a Oklahoma corporation behalf of any person who is or was a director, officer, employee or agent of the corporation.

 

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Our Certificate of Incorporation and Bylaws provide that we shall indemnify and advance expenses, and our board of directors is expressly authorized to indemnify any person, director, officer, employee or agent to the fullest extent allow under the Oklahoma General Corporation Act.  In addition, our Certificate of incorporation provides that none of our directors shall be personally liable to us or our shareholders for monetary damage for breach of fiduciary duty by such director as a director in accordance with Oklahoma law.  As a result of such corporation law, we may, at some future time, be legally obligated to pay judgments (including amounts paid in settlement) and expenses in regard to civil or criminal suits or proceedings brought against one or more of its officers, directors, employees or agents, as such.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the company pursuant to the foregoing  provisions or otherwise, we have been advised that in the opinion of the Securities and Exchange  Commission such indemnification  is against  public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding, which may result in a claim for such indemnification.

 

Item 3.02 Unregistered Sales Of Equity Securities

 

On February 14, 2011, pursuant to a Securities Exchange Agreement, we issued 19,200 shares of our Series A Preferred Stock.  Of these shares, 19,200 shares of Series A Preferred Stock were issued in the aggregate to China Changesheng Investment Limited, China Longshan Investment Limited, High-Reputation Assets Management Longshan Limited, Joint Rise Investment Limited and W-Link Investment Limited (collectively, the “Chinese Weituo Shareholders”), in exchange for all the outstanding shares of Chinese Weituo.  The number of our shares of Series A Preferred Stock issued to China Changesheng Investment Limited, China Longshan Investment Limited, High-Reputation Assets Management Longshan Limited, Joint Rise Investment Limited and W-Link Investment Limited was determined based on an arms-length negotiation.  The issuance of our shares to China Changesheng Investment Limited, China Longshan Investment Limited, High-Reputation Assets Management Longshan Limited, Joint Rise Investment Limited and W-Link Investment Limited was made in reliance on the exemption provided by Section 4(2) and Regulation D promulgated thereunder of the Securities Act, as amended for the offer and sale of securities not involving a public offering.  We also relied on Regulation S promulgated under the Securities Act.

 

In instances described above where we issued securities in reliance upon Regulation D, we relied upon Rule 506 of Regulation D of the Securities Act.  These shareholders who received the securities in such instances made representations in substance that (a) the shareholder is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (b) the shareholder agrees not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (c) the shareholder has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in us, (d) the shareholder had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (e) the shareholder has no need for the liquidity in its investment in us and could afford the complete loss of such investment. Management made the determination that the investors in instances where we relied on Regulation D are accredited investors (as defined in Regulation D) based upon management's inquiry into their sophistication and net worth. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.

 

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In instances described above where we indicate that we relied upon Section 4(2) of the Securities Act in issuing securities, our reliance was based upon the following factors: (a) the issuance of the securities was a private transaction by us which did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree and us.

 

In addition, China Changesheng Investment Limited, China Longshan Investment Limited, High-Reputation Assets Management Longshan Limited, Joint Rise Investment Limited, and W-Link Investment Limited are not U.S. Persons within in the meaning of Regulation S of the Securities Act.

 

Item 5.01 Changes In Control Of Registrant

 

Reference is made to the disclosure set forth under Item 2.01 of this report, which disclosure is incorporated herein by reference.

 

In connection with the acquisition, there was a change of control of Sooner Holdings.  As a result of the closing of the Securities Exchange Agreement, China Changsheng Investment Limited, China Longshan Investment Limited, High -Reputation Assets Management Longshan Limited, Joint Rise Investment Limited, and W-Link Investment Limited, former shareholders of Chinese Weituo Technical Limited, collectively acquired 19,200 shares of Series A Preferred Stock 96.0% of the total voting power of all our outstanding voting securities assuming a proposed share consolidation.  In addition, Mr. Ang Jiang Han was appointed to our board of directors as chairman of the board effective as of the close of the Securities Exchange Agreement.  Our board of directors intends to appoint Huang Jin Bei, and Wu Hong Wei to our board of directors.  These appointments will become effective upon the tenth day following our mailing of an Information Statement to our shareholders.

 

Item 5.02. Departure Of Directors Or Certain Officers; Election Of Directors; Appointment Of Certain Officers; Compensatory Arrangements Of Certain Officers

 

Reference is made to the disclosure set forth under Item 2.01 of this report, which disclosure is incorporated herein by reference.

 

Upon the closing of the Securities Exchange Agreement on February 14, 2011, R.C. Cunningham III, one of our directors, submitted a resignation letter pursuant to which he resigned his position as our director.  The resignation of R.C. Cunningham III was not in connection with any known disagreement with us on any matter.

 

On the same date, our board of directors appointed Mr. Ang Jiang Han to fill the vacancy created by such resignation and to serve as Chairman of the Board.. Mr. Ang’s appointment became effective upon the closing of the Securities Exchange Agreement on February 14, 2011.  In addition, our board of directors appointed Mr. Ang to serve as President, Mr. Huang to serve as our Vice President and Chief Financial Officer, Ms. Wu Li Cong as Chief Operating Officer and Mr. Wu Hong Wei as Secretary effective immediately at the close of the Securities Exchange Agreement.

 

54

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Our board of directors intends to appoint Mr. Huang Jin Bei and Mr. Wu Hong Wei to our board of directors.  In addition, in connection with these appointments, it is anticipated that R.C. Cunningham II will concurrently resign upon the appointment of these directors.  These appointments will become effective upon the tenth day following our mailing of the Information Statement to our shareholders.  For certain biographical and other information regarding the newly appointed officers and directors, see the disclosure under Item 2.01 of this report, which disclosure is incorporated herein by reference.

 

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

 

On February 11, 2011, we filed an amendment to our Certificate of Incorporation to provide for the authorization of 19,200 shares of Series A Preferred Stock.  Each share of Series A Preferred Stock is convertible into 1,000 shares of common stock upon the effective date of an amendment to our Certificate of Incorporation providing for among other things a share consolidation.  Each share of Series A Preferred Stock has a liquidation value of $0.50 per share and voting rights equal the number of shares of common stock into which the Series A Preferred Stock may be converted voting together with the common stock as class.

 

Item 5.06 Change In Shell Company Status

 

As a result of acquisition disclosed under Item 2.01 and 5.01 of this report, which description  is in its entirety incorporated by reference in this Item 5.06, Sooner Holdings ceased being a shell company as such term is defined in Rule 12b-2 under the Exchange Act.

 

Item 9.01 Financial Statements And Exhibits

 

(a)  Financial Statements of Business Acquired

 

Filed herewith are unaudited balance sheet of Shishi Feiying Plastic Co., Ltd as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009, and audited balance sheets of Shishi Feiying Plastic Co., Ltd as of December 31, 2009 and 2008 and years ended December 31, 2009 and 2008.

 

Pro Forma Financial Information

 

Filed herewith is unaudited pro forma combined financial information of Chinese Weituo Technical Limited and its subsidiaries.

 

(b)  Exhibits

 

2.1		Securities Exchange Agreement dated February 14, 2011 by and among Sooner Holdings, Inc., an Oklahoma corporation; certain shareholders of Sooner; Chinese Weituo Technical Limited and the shareholders of Chinese Weituo*
3.1		Certificate of Incorporation, as amended(1)
3.2		Certificate of Designations, Preferences,  and Rights of Convertible Series A Preferred Stock*
3.3		Bylaws(1)
10.1		Land Plot Transfer Agreement with Respect to Fujian Longshan Electronics Co., Ltd., dated October 10, 2003*
10.2		Trademark License Contract by and between the Company and Shishi Changsheng Shoes Industry Co., Ltd., dated December 21, 2007*
10.3		Premises Lease Contract by and between the Company and Shishi Changsheng Shoes Industrial Co., Ltd., dated December 25, 2007*

 

55

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10.4		Maximum Mortgage Contract No. 0170 by and between Industrial and Commercial Bank of China and Shishi Changsheng Shoes Industry Co., Ltd., dated January 4, 2008*
10.5		Premises Lease Agreement by and between the Company and Fujian Shishi Rural Cooperative Bank, dated February 15, 2008*
10.6		Premises Lease Agreement by and between the Company and Fujian Shishi Rural Cooperative Bank, dated April 24, 2008*
10.7		Maximum Mortgage Contract No. 0081 by and between Industrial and Commercial Bank of China and Shishi Changsheng Shoes Industry Co., Ltd., dated December  17, 2008*
10.8		Maximum Mortgage Contract No. 0080 by and between Industrial and Commercial Bank of China and Shishi Changsheng Shoes Industry Co., Ltd., dated December 24, 2008*
10.9		RMB Borrowing Contract by and between the Company and China Construction Bank Shishi Branch, dated January 26, 2009*
10.10		Maximum Guarantee Contract by and between Shishi Lixiang Foods Co., Ltd. and China Construction Bank Shishi Branch, dated September 9, 2009*
10.11		Maximum Mortgage Contract by and between the Company and China Construction Bank Shishi Branch, dated December 2, 2009*
10.12		Working Capital Borrowing Contract No. 0545 dated December 21, 2009*
10.13		Working Capital Borrowing Contract No. 0546 dated December 21, 2009*
10.14		Working Capital Borrowing Contract No. 0549, dated December 23, 2009*
10.15		Premises Lease Contract by and between the Company and Shishi Fengyuansheng Weaving Co., Ltd *
10.16		Short-Term Loan Agreement by and between the Company and SPD Bank Fuzhou Branch, dated February 2, 2010*
10.17		Call Option Agreement between HongKong Weituo Technical Limited and Hong Jiang Han and Fujian Feiying Plastic Co., Ltd. *
10.18		Call Option Agreement between HongKong Weituo Technical Limited and Hong Jiang Han and Feiying Industrial Co., Ltd (San Ming) *
21.1		List of Subsidiaries*
99.1		Pro Forma Unaudited Condensed Consolidated Financial Statements as of and for the Year Ended December 31, 2010*

 

---

	*	Filed herewith
	(1)	Incorporated by reference to Form 10-KSB for the year ended December 31, 1995

 

56

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	Sooner Holdings, Inc., an Oklahoma Corporation
Dated:  February 14, 2011	/s/ Ang Kang Han
	Ang Kang Han, President

 

57

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Shishi Feiying Plastic Co., Ltd.

____________

 

Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

 

---

 

Shishi Feiying Plastic Co., Ltd.

____________

 

 

Contents

 

		Page
Independent Auditors’ Report			F-1
Balance Sheets			F-2
Statements of Operations			F-3
Statements of Equity			F-4
Statements of Cash Flows			F-5
Notes to Financial Statements			F-6 - F-23

 

---

 

Independent Auditors’ Report

 

To the Board of Directors

of Shishi Feiying Plastic Co., Ltd.:

We have audited the accompanying balance sheets of Shishi Feiying Plastic Co., Ltd. (the Company) (a Company Limited registered in the People’s Republic of China) as of December 31, 2008 and 2009, and the statements of operations, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. We were not engaged to perform an audit of the Company’s 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 Shishi Feiying Plastic Co., Ltd. as of December 31, 2008 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ Burr Pilger Mayer, Inc.

Burr Pilger Mayer, Inc.

San Francisco, California

January 21, 2011

(except for Notes 13 and 14, as to

which the date is February 14, 2011)

 

F-1

---

 

SHISHI FEIYING PLASTIC CO., LTD.

BALANCE SHEETS

December 31, 2009 and 2008, and September 30, 2010 (unaudited)

____________

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
ASSETS
Current assets:
Cash		$	352,486			$	1,619,559			$	1,391,929
Restricted cash			724,071				486,164				497,749
Accounts receivable			1,831,402				680,991				7,954,338
Prepaid expenses			406,037				275,529				382,663
Related party receivable			295,239				643,882				5,098,035
Inventories			2,143,051				5,262,099				4,580,278
Total current assets			5,752,286				8,968,224				19,904,992
Plant and equipment, net			10,212,597				10,757,954				10,720,695
Land use rights, net			904,499				883,442				886,599
Long-term investment			145,896				146,259				149,744
Total assets		$	17,015,278			$	20,755,879			$	31,662,030
LIABILITIES AND EQUITY
Liabilities:
Short-term loans and notes payable		$	6,342,096			$	6,966,302			$	11,872,442
Related party payable			281,364				1,001,782				976,770
Accounts payable and accrued expenses			2,310,012				1,251,096				1,412,342
Customer deposits			844,502				774,412				1,161,588
Income tax payable			80,511				329,110				941,793
Total liabilities			9,858,485				10,322,702				16,364,935
Equity:
Owner’s capital			4,999,603				4,999,603				4,999,603
Capital surplus			27,344				27,344				27,344
Retained earnings			1,757,163				4,804,412				8,471,813
Accumulated other comprehensive income			372,683				601,818				1,798,335
Total equity			7,156,793				10,433,177				15,297,095
Total liabilities and equity		$	17,015,278			$	20,755,879			$	31,662,030

 

F-2

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SHISHI FEIYING PLASTIC CO., LTD.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2009 and 2008, and

nine months ended September 30, 2010 and 2009 (unaudited)

____________

 

		Year Ended								Nine Months Ended
		December 31,								September 30,
		2008				2009				2009				2010
										(unaudited)
Revenues		$	18,971,048			$	21,223,079			$	15,274,726			$	23,462,790
Cost of revenues			15,892,604				16,490,716				12,332,716				17,897,594
Gross profit			3,078,444				4,732,363				2,942,010				5,565,196
Operating expenses:
Selling			282,135				348,500				249,703				421,386
General and administrative			551,094				614,992				370,254				522,908
Total operating expenses			833,229				963,492				619,957				944,294
Income from operations			2,245,215				3,768,871				2,322,053				4,620,902
Other income (expense):
Interest expense and bank fees			(313,008	)			(383,238	)			(290,937	)			(414,874	)
Foreign exchange transaction loss			(140,959	)			(5,801	)			-				-
Other income (expense), net			60,613				121,120				61,269				(2,525	)
Total other income (expense)			(393,354	)			(267,919	)			(229,668	)			(417,399	)
Income before provision
for income taxes			1,851,861				3,500,952				2,092,385				4,203,503
Provision for income taxes			244,425				453,703				261,551				536,102
Net income		$	1,607,436			$	3,047,249			$	1,830,834			$	3,667,401

 

F-3

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SHISHI FEIYING PLASTIC CO., LTD.

STATEMENTS OF EQUITY

For the years ended December 31, 2009 and 2008, and

nine months ended September 30, 2010 (unaudited)

____________

 

														Accumulated
														Other
		Owner’s				Capital				Retained				Comprehensive				Owner’s
		Capital				Surplus				Earnings				Income				Equity
Balance at December 31, 2007		$	4,999,603			$	27,344			$	149,727			$	-			$	5,176,674
Net income			-				-				1,607,436				-				1,607,436
Currency translation adjustment			-				-				-				372,683				372,683
Comprehensive income																			1,980,119
Balance at December 31, 2008			4,999,603				27,344				1,757,163				372,683				7,156,793
Net income			-				-				3,047,249				-				3,047,249
Currency translation adjustment			-				-				-				229,135				229,135
Comprehensive income																			3,276,384
Balance at December 31, 2009			4,999,603				27,344				4,804,412				601,818				10,433,177
Net income*			-				-				3,667,401				-				3,667,401
Currency translation adjustment*			-				-				-				1,196,517				1,196,517
Comprehensive income*																			4,863,918
Balance at September 30, 2010*		$	4,999,603			$	27,344			$	8,471,813			$	1,798,335			$	15,297,095
*unaudited

 

F-4

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SHISHI FEIYING PLASTIC CO., LTD.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2010 (unaudited)

____________

 

										Nine Months
		Year Ended								Ended
		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Cash flows from operating activities:
Net income		$	1,607,436			$	3,047,249			$	3,667,401
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization			554,372				596,047				381,152
Change in assets and liabilities:
Accounts receivable			(1,831,402	)			1,150,411				(7,273,347	)
Prepaid expenses			921,192				130,508				(107,134	)
Inventories			(1,021,753	)			(3,119,048	)			681,821
Accounts payable and accrued expenses			(3,763,758	)			(1,058,916	)			161,246
Customer deposits			(330,859	)			(70,090	)			387,176
Income tax payable			330,429				248,599				612,683
Net cash (used in) provided by operating activities			(3,534,343	)			924,760				(1,489,002	)
Cash flows from investing activities:
Purchase of plant and equipment			(789,060	)			(987,274	)			(177,593	)
Restricted cash for issuance of bank notes payable			724,071				237,907				(11,585	)
Capital expenditures
Deposits for capital expenditures
Purchase of long term investment			-				-				-
Net cash used in investing activities			(64,989	)			(749,367	)			(189,178	)
Cash flows from financing activities:
Proceeds from issuance of short-term borrowings			6,467,228				1,772,656				5,989,755
Payment on short-term borrowings			(4,431,980	)			(1,392,383	)			-
Proceeds from issuance of short-term notes payable			7,118,263				6,217,458				-
Payment on short-term notes payable			(8,371,171	)			(5,989,294	)			(1,249,613	)
Related party receivable			(451,261	)			(348,643	)			(4,454,153	)
Related party payable			437,386				720,418				(25,012	)
Net cash provided by financing activities			768,465				980,212				260,977
Net (decrease) increase in cash			(2,830,867	)			1,155,605				(1,417,203	)
Effect of exchange rate changes			628,478				111,468				1,189,573
Cash at beginning of year			-				(2,202,389	)			(935,316	)
Cash at end of year		$	(2,202,389	)		$	(935,316	)		$	(1,162,946	)
Supplemental disclosure of cash flow information:
Interest paid		$	308,063			$	327,265			$	387,487
Income taxes paid (refunded), net		$	86,004			$	205,103			$	(76,580	)

 

F-5

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Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

1.	Business of the Company and Liquidity

Shishi Feiying Plastic Co., Ltd. (we, our, SFP, or the Company) is one of the largest synthetic polyurethane leather (PU leather) manufacturers for the shoe industry in Fujian Province, China. The Company’s primary business is the design, manufacturing, and sale of PU leather for the shoe manufacturing industry in China. In addition, the Company manufactures flip-flops and slippers (footwear) for sale in China and abroad.

The Company operates two factories, one for the production of PU leather (PU leather factory) and one for the production of flip-flops and slippers (footwear factory). The PU leather factory is strategically located in Fujian Province, the shoe manufacturing center in China. This puts the Company in close proximity to our target customers. The footwear facility is a short distance from the PU leather factory.

The Company registered in China as a wholly foreign owned enterprise (WFOE) under Chinese law in December 2003 and started producing PU leather in 2006. The Company reorganized in November 2010 and is now 100% owned by Hong Kong Weituo Technical Limited (HKWT), a company incorporated under the laws of Hong Kong. Through a trust agreement, Mr. Hong beneficially owns 86.5% of the Company and operates the Company through his role as Chairman of the Board of Directors and Chief Operating Officer (majority owner).

In 2007, SFP acquired all of the assets of their footwear business from Shishi Changsheng Shoe Co., Ltd. (Shishi Changsheng), a wholly foreign owned enterprise under Chinese law. Shishi Changsheng had been manufacturing footwear since 1998. The transfer of assets was treated as a transfer of assets between entities under common control. Accordingly, the assets were transferred at their book value at the time of the transfer (see Note 10).

As a result of business activities and the rapid growth undertaken in the last year, the Company has significantly increased short-term debt obligations. The Company also has significantly increased its certain current assets, accounts receivable, and related party receivables. The Company believes with the collection of these current assets they will have sufficient cash from operations and access to other sources of funding to fund operations and continue the growth plans of the Company for the next 12 months. If the Company cannot fund its obligations from operating cash flows, they will be forced to seek additional equity or debt funding.

2.	Summary of Significant Accounting Policies

Basis of Presentation

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

 

 

 

 

 

Continued

F-6

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Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Basis of Presentation, continued

 

The interim financial information as of September 30, 2010, and for the nine months ended September 30, 2009 and 2010, is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates and assumptions are used for, but not limited to: (1) allowance for accounts receivable, (2) economic lives of property, plant, and equipment, (3) asset impairments, and (4) contingency reserves. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

Cash

Cash consists primarily of cash on hand or cash deposits in banks that are available for withdrawal without restriction.

Restricted Cash

Restricted cash represents cash that is held by the banks as collateral for notes payable. The banks have collateral requirements ranging from 20% to 100% of the outstanding notes payable.

Accounts Receivable

Accounts receivable are reported at net realizable value. Based upon factors pertaining to the credit risks of specific customers, historical trends, age of the receivable, and other information, management has determined that no allowance for doubtful accounts was necessary as of December 31, 2008 and 2009, and September 30, 2010. Delinquent accounts are written off when it is determined that the amounts are uncollectible.

 

 

 

 

 

Continued

F-7

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Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Concentration of Credit and Other Risks

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, restricted cash, accounts receivable, and related party receivable. The Company holds all its bank deposits with banks in China. In China, there is no equivalent federal deposit insurance as in the United States; as such, these amounts held in banks in China are not insured. The Company has not experienced any losses in such bank accounts through September 30, 2010. In an effort to mitigate any potential risk, we periodically evaluate the credit quality of the financial institutions which hold the bank deposits and the Company holds its cash in multiple banks supported by the local and Central Government of the People’s Republic of China (PRC).

The Company does not require collateral or other security to support the trade receivables. We are exposed to credit risk in the event of nonpayment by customers to the extent of amounts recorded on the balance sheet. One distributor accounted for 58%, 88%, and 75% of our trade receivables balance as of December 31, 2008 and 2009, and September 30, 2010, respectively. One distributor individually accounted for 40%, 26%, and 19% of our revenue in the years ended December 31, 2008 and 2009, and for the nine months ended September 30, 2010, respectively.

The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economical, and legal environment in the PRC. The Chinese Government controls its foreign currency reserves through restrictions on imports and conversion of Renminbi (RMB) into foreign currency. In July 2005, the Chinese Government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During January 2008 to January 2009, the exchange rate between RMB and U.S. Dollars (USD) has fluctuated from USD $1.00 to RMB 7.3141 and USD $1.00 to RMB 6.8542, respectively. Since January 2009, the exchange rate has been relatively stable, and was approximately at USD $1.00 to RMB 6.68. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate or depreciate against the U.S. Dollar. The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which its earnings and obligations are denominated.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on an average cost basis, which approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolescence and are charged to cost of revenues.

 

 

 

 

 

Continued

F-8

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Plant and Equipment

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line basis over the estimated useful lives of the related assets as follows:

 

Machinery and equipment	10-20 years
Building and improvements	30-40 years
Transportation equipment	5 years
Office equipment	5 years

 

Repairs and maintenance costs are expensed as incurred. Gains or losses on disposals are immaterial and included in general and administrative expense for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2009 and 2010.

The Company capitalizes interest attributable to capital construction projects, if material, in accordance with Accounting Standards Codification (ASC) Subtopic 835-20, Capitalization of Interest, which defines that interest shall be capitalized for assets that are constructed or otherwise produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.

Land Use Rights

In the PRC there is no land ownership, but land use rights can be obtained. Land use rights are stated at cost less accumulated amortization. Amortization expense is recorded on a straight-line basis over the term of the land use rights. Land use rights are an intangible asset. The Company reviews intangible assets for impairment periodically and at least annually.

Long-term Investment

Long-term investment represents an investment the Company has in a regional bank within China. The Company did not hold a greater than 5% interest and we have determined that we did not have significant control or influence in the bank. Accordingly, we record the investment at cost. Dividend income from the investment is recorded in other income (expense), net. Our investment is in a private company where there is not a market to determine the value of the investment.

Impairment of Long-Lived Assets

Long-lived assets held and used by the Company, including long-term investments, are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted cash flows from use and disposition), then an impairment loss is recognized. The impairment loss is measured as the excess of the carrying amount over the asset’s or asset group’s fair value. Through September 30, 2010, the Company has not recorded any impairment of its long-lived assets.

 

 

 

 

 

Continued

F-9

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Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Fair Value of Financial Instruments

On December 31, 2008, the Company adopted SFAS 157, Fair Value Measurements, now known as the provisions of ASC Subtopic 820-10, Fair Value Measurements and Disclosures (ASC 820-10), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. ASC 820-10 applies whenever other statements require or permit assets or liabilities to be measured at fair value.

ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1–inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2–observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3–instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.

The Company’s financial instruments consist mainly of cash, restricted cash, related party receivable, and debt obligations. Related party receivable are reflected in the accompanying financial statements at historical cost, which approximates fair value due to the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

 

 

 

 

Continued

F-10

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Fair Value of Financial Instruments, continued

In January 2008, the Company adopted SFAS 159, the Fair Value Option for Financial Assets and Financial Liabilities, now known as the provisions of ASC Subtopic 825-10, Fair Value Option for Financial Assets and Financial Liabilities, and have elected not to measure any of our current eligible financial assets or liabilities at fair value. SFAS 159 was issued to allow entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies that unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. SFAS 159 is effective January 1, 2008. We did not elect the fair value option for our financial assets and liabilities existing on January 1, 2008, and did not elect the fair value option for any financial assets or liabilities transacted during the twelve months ended December 31, 2009.

Surplus Reserve

In accordance with PRC regulations, the Company is required to make appropriations to the statutory surplus reserve during the years that dividends are distributed, based on after-tax net income determined in accordance with PRC GAAP. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the Company’s registered capital. Surplus reserve is nondistributable other than in liquidation.

Foreign Currency Translation

The accompanying financial statements are presented in United States Dollars. The functional currency of our Company is the Renminbi, the official currency of the People’s Republic of China. Capital accounts of the financial statements are translated into United States Dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2009 and 2010. Currency translation adjustment results from translation to U.S. Dollars for financial reporting purposes are recorded in other comprehensive income as a component of owner’s equity. Transactional gains and losses from sales outside the PRC are recorded when realized in other income (expense).

Foreign exchange losses recorded in other comprehensive income for the years ended December 31, 2008 and 2009, and the nine months ended September 30, 2010 represent $372,683, $229,135, and $1,196,517, respectively.

 

 

 

 

 

Continued

F-11

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Foreign Currency Translation, continued

A summary of the conversion rates for the periods presented is as follows:

 

		December 31,
		2008				2009
Year end RMB: U.S. Dollar exchange rate			6.85420				6.83720
Average RMB: U.S. Dollar exchange rate			6.96225				6.84090

 

		September 30,
		2009				2010
		unaudited
Period end RMB: U.S. Dollar exchange rate			6.83760				6.67807
Average RMB: U.S. Dollar exchange rate			6.84251				6.81640

 

Accumulated Other Comprehensive Income

We report comprehensive income in accordance with the provisions of ASC Topic 220, Comprehensive Income, which establishes standards for reporting comprehensive income or loss and its components in the financial statements. The accumulated other comprehensive income represents foreign currency translation adjustments.

Revenue Recognition

Revenue is recognized when: (1) there is persuasive evidence of an arrangement; (2) customers have accepted receipt of the goods in accordance with the shipping terms; (3) the amount to be paid by the customer is fixed or determinable; and (4) collectability is reasonably assured.

Sales Returns Allowance

We estimate future product returns related to current period product revenue. We analyze historical returns, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant management judgment and estimates must be made and used in connection with establishing the sales returns allowance in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. Based on our analysis, we did not record any provision for sales returns as of December 31, 2008 and 2009, and September 30, 2010.

 

 

 

 

 

Continued

F-12

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Shipping and Handling Costs

Shipping and handling costs billed to customers are recorded net of the amount collected. Shipping and handling expense included in sales and marketing expenses amounted to $249,467, $306,538, $262,421, and $212,925 for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2009 and 2010, respectively.

Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes (ASC 740) (formerly SFAS 109, Accounting for Income Taxes). ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company adopted accounting policies in accordance to U.S. GAAP as its basis for filing Chinese tax returns. Therefore, there were no significant deferred tax assets or liabilities during the years ended December 31, 2008 and 2009, and nine months ended September 30, 2010.

We adopted the provisions of ASC 740, Income Taxes, on January 1, 2009 that clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in our financial statements. The Interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires additional disclosure on an annual basis. The adoption had no effect on our financial statements. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense. Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense). 

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168), in June 2009, which approved the FASB Accounting Standards Codification (Codification) as the single source of authoritative United States accounting and reporting standards for all nongovernmental entities, except for guidance issued by the Securities and Exchange Commission. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in these financial statements, all references made to generally accepted accounting principles in the United States (U.S. GAAP) use the new Codification numbering system prescribed by the FASB. The adoption of this standard did not have an impact on the results of operations or the Company’s financial statements.

 

 

 

 

 

Continued

F-13

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

2.	Summary of Significant Accounting Policies, continued

Recent Accounting Pronouncements, continued

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 was primarily codified into ASC 815, Derivatives and Hedging (ASC 815), and requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Currently, the Company does not engage in derivative and hedging activities and, accordingly, there was no impact upon adoption of this standard.

In May 2009, the FASB issued SFAS 165, Subsequent Events, codified under ASC 855, Subsequent Events, which is effective for interim and annual periods ending after June 15, 2009. ASC 855 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted the provisions of ASC 855 in 2009 and it did not have a material impact on its financial position, results of operations, or cash flows.

 

3.	Related Party Receivable

The components of the Company’s related party receivable as of December 31, 2008 and 2009, and September 30, 2010 consists of amounts due from Mr. Hong, the Company’s majority owner, and from two companies Mr. Hong also owns. Money is borrowed and repaid on an ongoing basis, thus, there has never been a formal note or any interest paid from or to any of these parties (see Note 10).

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Jianghan Hong		$	295,239			$	387,929			$	951,226
Fujian Feiying Plastic Co., Ltd.			-				255,953				578,011
Shishi Changsheng Shoes Co., Ltd.			-				-				3,568,798
		$	295,239			$	643,882			$	5,098,035

 

 

 

 

 

Continued

F-14

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

4.	Inventories

The components of the Company’s inventories are as follows:

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Raw materials		$	1,093,324			$	964,300			$	1,542,937
Work in process			608,746				2,299,125				2,824,659
Finished goods			440,981				1,998,674				212,682
Total inventories		$	2,143,051			$	5,262,099			$	4,580,278

 

5.	Plant and Equipment, net

The components of the Company’s plant and equipment are as follows:

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Machinery and equipment		$	4,717,948			$	4,916,396			$	5,164,678
Office equipment			43,507				60,489				75,012
Transportation equipment			60,349				60,499				62,249
Buildings and improvements			5,899,884				5,914,553				6,055,490
			10,721,688				10,951,937				11,357,429
Less accumulated depreciation			(767,697	)			(1,236,915	)			(1,629,646	)
			9,953,991				9,715,022				9,727,783
Construction in progress and construction
material			258,606				1,042,932				992,912
Total plant and equipment, net		$	10,212,597			$	10,757,954			$	10,720,695

 

Depreciation expense related to property and equipment was $531,485, $572,754, and $363,620 for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2010, respectively.

 

 

 

 

 

Continued

F-15

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

6.	Land Use Rights, net

The components of the Company’s land use rights are as follows:

 

		Estimated
		Remaining			December 31,								September 30,
		Life			2008				2009				2010
													(unaudited)
Land use rights–Shishi Feiying		44 years			$	272,825			$	273,504			$	280,021
Land use rights–Shishi Feiying		34 years				736,845				738,676				756,278
						1,009,670				1,012,180				1,036,299
Less accumulated amortization						(105,171	)			(128,738	)			(149,700	)
Total land use rights, net					$	904,499			$	883,442			$	886,599

 

Amortization expense related to land use rights was $22,887, $23,293, and $17,532 for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2010, respectively.

Amortization of land use rights attributable to future periods is as follows:

 

Period ending December 31:
2010		$	23,293
2011			23,293
2012			23,293
2013			23,293
2014			23,293
Thereafter			766,977
		$	883,442

 

 

 

 

 

Continued

F-16

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

7.	Short-Term Loans and Notes Payable

The components of the Company’s short-term loans and notes payable are as follows:

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Short-term loans:
Loans due to financial institutions		$	4,953,167			$	5,345,756			$	11,462,893
Notes payable:
Loans due to financial institutions			1,388,929				1,620,546				409,549
Total short-term loans and notes
payable		$	6,342,096			$	6,966,302			$	11,872,442

 

All short-term loans are due within one year and have interest rates ranging from 5.31% to 7.2% during 2008 and 2009. As of December 31, 2009, all of the loans, with the exception of one, are secured by the Company’s real estate and one borrowing is secured by an individual guarantor.

Notes payable are due to financial institutions with maturity dates of less than one year. All have interest rates ranging between 5.31% to 7.47% during 2008 and 2009. The notes payable are not secured, but do require cash to be held in reserve of 20% to 100% of the total outstanding notes payable. Restricted cash related to these notes payable was $724,071, $486,164, and $497,749 at December 31, 2008 and 2009, and September 30, 2010, respectively.

 

8.	Customer Deposits

The components of the Company’s customer deposits consists of amounts payable to various customers for deposits received.

 

 

 

 

 

Continued

F-17

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

9.	Related Party Payable

The components of the Company’s payable to related party consist of a payable to Shishi Changsheng Shoe Co., Ltd. for rent and transfers for cash flow purposes, payables to the Company’s majority owner, Mr. Hong, and other payables to related parties (see Note 10).

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
Jianghan Hong		$	159,243			$	379,299			$	332,871
Shishi Changsheng Shoes Co., Ltd.			122,121				432,347				-
Feiying Industrial Co., Ltd. (San Ming)			-				-				449,232
Other–employees			-				190,136				194,667
		$	281,364			$	1,001,782			$	976,770

 

10.	Related Party Transactions

At December 31, 2008 and 2009, and September 30, 2010, the Company had a receivable from its majority owner, Mr. Hong, for approximately $295,239, $387,929, and $951,226, respectively. The Company also had payable to Mr. Hong for $159,243, $379,299, and $332,871 as of December 31, 2008 and 2009, and September 30, 2010, respectively. The Company and Mr. Hong have not signed a note, there is not a specific due date, and no interest is paid on the receivables or payables. Money is transferred between Mr. Hong and the Company mainly for cash flow purposes. The amounts loaned and borrowed are short-term in nature and the balances at both year-ends are considered at the fair market value of the amounts owed. Mr. Hong repaid the entire outstanding balance of his receivable on December 31, 2010. As of January 15, 2011 (unaudited), all amounts had been repaid by Mr. Hong, and the related party receivable and payable balance was zero.

At December 31, 2008 and 2009, and September 30, 2010, the Company had a payable to Shishi Changsheng for $122,121, $432,347, and receivable for $3,568,798, respectively. Shishi Changsheng is 100% owned by Mr. Hong, the majority owner of the Company. Shishi Changsheng holds the land use rights for the land under the footwear factory. The Company pays Shishi Changsheng rent under a four-year agreement, which expires on December 31, 2011. For the years ended December 31, 2008 and 2009, and the nine months ended September 30, 2009 and 2010, the Company had rental expense of approximately $34,000, $34,000, $26,000, and $26,000, respectively, in accordance with the rental agreement. The receivable and payable is related to the payment of rent and transfers for cash flow purposes. As of January 15, 2011 (unaudited), the Company had a receivable from Shishi Changsheng for $5,697,454. On January 17, 2011, the Company agreed to the assignment of the receivable from Shishi Changsheng to Mr. Hong, and then from Mr. Hong to HKWT. The assignment was in consideration of an option agreement for HKWT to purchase Feiying Industrial Co., Ltd.

 

 

 

 

 

Continued

F-18

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

10.	Related Party Transactions, continued

At December 31, 2008 and 2009, and September 30, 2010, the Company had a receivable from Fuijian Feiying Plastic Co., Ltd. (FFP) of $0, $255,953, and $578,011, respectively. FFP is a China WFOE 100% owned by Mr. Hong, the Company’s majority owner. FFP has been determined to be a variable interest entity (VIE), in which the Company holds a significant variable interest due to the relationship with Mr. Hong and HKWT. The Company does not have any direct exposure to losses as a result of its involvement with FFP; therefore, the Company is not deemed to be the primary beneficiary and the VIE should not be consolidated by the Company at this time. FFP was incorporated on June 24, 2008 for the purpose of building a second factory for the production of PU leather in Fujian. Cash is being transferred between the two companies for cash flow purposes without a formal note or interest payments on the amounts loaned. The construction of the new plant has not started yet while FFP secures the land use rights from the Chinese government. As of January 15, 2011 (unaudited), the Company had a payable to FFP for $125,994. On January 17, 2011, FFP, Mr. Hong, and HKWT entered into a call option agreement (FFP Agreement) whereby HKWT has the right to purchase FFP from Mr. Hong for 90% of the net tangible asset value of FFP. The net tangible asset value will be determined by an independent third-party appraiser. The FFP Agreement will expire January 17, 2012. In consideration of the FFP Agreement, HKWT will pay Mr. Hong $152,000. The consideration will be applied towards the purchase price if the FFP Agreement is exercised. The FFP Agreement also stipulates that FFP and the Company are separate entities and that there are not any guarantees or commitments for the Company to perform or be liable for any of the debts or commitments of FFP or Mr. Hong as the owner of FFP.

At September 30, 2010, the Company had a payable to Feiying Industrial Co., Ltd. (San Ming) of approximately $449,232. San Ming is a China WFOE 100% owned by Mr. Hong, the Company’s majority owner. San Ming has been determined to be a variable interest entity (VIE), in which the Company holds a significant variable interest due to the relationship with Mr. Hong and HKWT. The Company does not have any direct exposure to losses as a result of its involvement with San Ming; therefore, the Company is not deemed to be the primary beneficiary and the VIE should not be consolidated by the Company at this time. San Ming was incorporated on July 20, 2010 for the purpose of building a third factory for the production of PU leather in San Ming city. Cash is being transferred between the two companies for cash flow purposes without a formal note or interest payments on the amounts loaned. Construction on the new plant facility began in June 2010. As of January 15, 2011 (unaudited), the Company had a receivable from San Ming for $83,490. On January 17, 2011, HKWT, Mr. Hong, and San Ming entered into a call option agreement (San Ming Agreement) whereby HKWT has the right to purchase San Ming from Mr. Hong for 90% of the net tangible asset value of San Ming. The net tangible asset value will be determined by an independent third-party appraiser. The San Ming Agreement will expire January 17, 2014. In consideration of the San Ming Agreement, the $5,697,454 owed to the Company from Shishi Changsheng and the $83,490 receivable from San Ming was assigned to HKWT with the Company’s agreement. The consideration will be applied towards the purchase price if the San Ming Agreement is exercised. The San Ming Agreement also stipulates that San Ming and the Company are separate entities and that there are not any guarantees or commitments for the Company to perform or be liable for any of the debts or commitments of San Ming or Mr. Hong as the owner of San Ming.

 

 

 

 

 

Continued

F-19

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

11.	Income Taxes

The Company is subject to applicable local tax statutes and is governed by the Income Tax Law of the PRC concerning wholly foreign owned enterprises (WFOE) and local income tax laws (the PRC Income Tax Law). Pursuant to the PRC Income Tax Law, the Company is subject to tax at a statutory rate of 12.5% for the years ended December 31, 2008 and 2009. The Company will continue to be subject to a 12.5% tax rate for the year ending December 31, 2010, and will thereafter be subject to the standard statutory rate of 25%. The tax savings due to tax holiday is approximately $218,000, $421,000, and $514,000 for the years ended December 31, 2008 and 2009, and the nine months ended September 30, 2010, respectively. As of December 31, 2008 and 2009, the Company is not in any uncertain tax positions and thus has no accrued interest and penalties related to those matters. The differences between U.S. GAAP net income and PRC taxable income are considered as permanent differences and thus the Company did not record any deferred taxes.

Per PRC tax regulations, the tax authority can review tax returns for three years. If the amount of underpaid or unpaid taxes exceeds RMB 100,000, the tax authority has five years to challenge the return. There is no time limit for tax evasion.

Income before provision of income taxes:

 

		December 31,								September 30,
		2008				2009				2010
										(unaudited)
U.S. Operations		$	-			$	-			$	-
China Operations			1,851,861				3,500,952				4,203,503
Total		$	1,851,861			$	3,500,952			$	4,203,503

 

The provision for income taxes includes:

 

										Nine Months Ended
		Year Ended December 31,								September 30,
		2008				2009				2009				2010
										(unaudited)
Current:
Chinese Operations		$	244,425			$	453,703			$	261,551			$	536,102
Income tax provision		$	244,425			$	453,703			$	261,551			$	536,102

 

 

 

 

 

Continued

F-20

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

12.	Foreign Operations

As of December 31, 2009, all of our revenues and assets are associated with operations conducted in the PRC.

13.	Segment Reporting

The Company operates in two reportable segments: the PU leather segment and the footwear segment. In the PU leather segment, the Company manufactures synthetic polyurethane leather. In the footwear segment, the Company manufactures flip-flops and slippers. Our revenues arise from the sale of PU leather and footwear.

Revenue information shown by geographic region is as follows:

 

										Nine Months Ended
		Year Ended December 31,								September 30,
		2008				2009				2009				2010
										(unaudited)
China		$	11,007,084			$	16,270,393			$	10,671,904			$	19,299,448
Middle East			2,103,681				2,254,958				1,923,749				2,317,441
Africa			5,860,283				2,697,728				2,679,073				1,845,901
		$	18,971,048			$	21,223,079			$	15,274,726			$	23,462,790

 

Revenues are attributed to countries based on location of end customers.

 

 

 

 

 

Continued

F-21

---

 

Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

13.	Segment Reporting, continued

Information on reportable segments for the years ended December 31, 2008 and 2009, and nine months ended September 30, 2009 and 2010 is as follows:

										Nine Months Ended
		Year Ended December 31,								September 30,
		2008				2009				2009				2010
										(unaudited)
Net sales:
PU leather		$	10,875,283			$	15,210,827			$	10,671,904			$	16,492,775
Footwear			8,095,765				6,012,252				4,602,822				6,970,015
Total			18,971,048				21,223,079				15,274,726				23,462,790
Cost of revenues:
PU leather			8,648,030				11,031,666				8,085,902				13,701,047
Footwear			7,244,574				5,459,050				4,246,814				4,196,547
Total			15,892,604				16,490,716				12,332,716				17,897,594
Operating expenses:
Unallocated			833,229				963,492				619,957				944,294
Total			833,229				963,492				619,957				944,294
Income from operations		$	2,245,215			$	3,768,871			$	2,322,053			$	4,620,902
Plant and equipment, net
PU leather		$	9,750,821			$	10,279,212			$	10,354,784			$	10,248,707
Footwear			461,776				478,742				484,590				471,988
Total identifiable assets		$	10,212,597			$	10,757,954			$	10,839,374			$	10,720,695

 

 

 

 

 

Continued

F-22

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Shishi Feiying Plastic Co., Ltd.

 

Notes to Financial Statements

 

For the years ended December 31, 2008 and 2009, and

nine months ended September 30, 2009 and 2010 (unaudited)

____________

 

14.	Subsequent Events

The Company has evaluated all events occurring subsequent to December 31, 2009 through February 14, 2011, the date which these financial statements were available to be issued, during which time, nothing has occurred outside the normal course of business operations, except the following:

On February 2, 2010 (effective date), the Company entered into two agreements as a debt guarantor. The Company agreed to act as a guarantor for Nixiang Food, Ltd. The guaranteed amounts were approximately $6.2 million and $6.5 million on the date they were effective. The guarantee was part of a cross agreement whereby Nixiang Food, Ltd. also guaranteed $10.22 million of the Company’s debt with the same lender.

On December 31, 2010, the Company paid off the balance in related party receivable and payable for Jianghan Hong (see Note 10).

On January 17, 2011, HKWT, Mr. Hong, San Ming, and FFP entered into two separate call option agreements giving HKWT the option to purchase FFP within one year and San Ming within three years (see Note 10).

The Company is currently negotiating with the stockholders of Sooner Holdings, Inc. in contemplation of entering into a securities exchange agreement.

F-23

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