Attached files
file | filename |
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EX-10.7 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-7.htm |
EX-10.1 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-1.htm |
EX-21.1 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex21-1.htm |
EX-10.3 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-3.htm |
EX-4.2 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex4-2.htm |
EX-10.4 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-4.htm |
EX-10.6 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-6.htm |
EX-10.2 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex10-2.htm |
EX-4.1 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex4-1.htm |
EX-4.4 - PERPETUAL TECHNOLOGIES, INC. | v174209_ex4-4.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of report (Date of
earliest event reported): February 12, 2010
Perpetual
Technologies, Inc
(Exact
Name of Registrant as Specified in Charter)
Delaware
|
000-53010
|
90-0475058
|
||
(State
or Other Jurisdiction
|
(Commission
File Number)
|
(IRS
Employer
|
||
of
Incorporation)
|
Identification
No.)
|
Shishan
Industrial Park
Nanhai
District, Foshan City, Guangdong Province, PRC
(Address
of Principal Executive Offices)
Registrant's
telephone number, including area code: 011-86-757-86683197
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
¨ Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
¨ Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
TABLE
OF CONTENTS
Item No.
|
Description
of Item
|
Page
No.
|
|||
Item
1.01
|
Entry
Into a Material Definitive Agreement
|
4 | |||
Item
2.01
|
Completion
of Acquisition or Disposition of Assets
|
8 | |||
Item
3.02
|
Unregistered
Sales of Equity Securities
|
52 | |||
Item
5.01
|
Changes
in Control of Registrant
|
52 | |||
Item
5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers
|
52 | |||
Item
5.03
|
Amendments
to Articles of Incorporation or By Laws; Change in Fiscal
Year
|
53 | |||
Item
5.06
|
Change
in Shell Company Status
|
53 | |||
Item
9.01
|
Financial
Statements and Exhibits
|
54 |
2
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains some forward-looking statements. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements include statements regarding, among other
things, (a) our projected sales, profitability and cash flows, (b) our growth
strategies, (c) anticipated trends in our industries, (d) our future financing
plans and (e) our anticipated needs for working capital. They are generally
identifiable by use of the words "may," "will," "should," "anticipate,"
"estimate," "plans," "potential," "projects," "continuing," "ongoing,"
"expects," "management believes," "we believe," "we intend" or the negative of
these words or other variations on these words or comparable terminology. These
statements may be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in this report
generally. In particular, these include statements relating to future actions,
prospective product approvals, future performance or results of current and
anticipated sales efforts, expenses, the outcome of contingencies such as legal
proceedings, and financial results.
Any or
all of our forward-looking statements in this report may turn out to be
inaccurate, as a result of inaccurate assumptions we might make or known or
unknown risks or uncertainties. Therefore, although we believe that these
statements are based upon reasonable assumptions, including projections of
operating margins, earnings, cash flows, working capital, capital expenditures
and other projections, no forward-looking statement can be guaranteed. Our
forward-looking statements are not guarantees of future performance, and actual
results or developments may differ materially from the expectations they
express. You should not place undue reliance on these forward-looking
statements.
Information
regarding market and industry statistics contained in this report is included
based on information available to us which we believe is accurate. We have not
reviewed or included data from all sources, and cannot assure stockholders of
the accuracy or completeness of this data. Forecasts and other forward-looking
information obtained from these sources are subject to these qualifications and
the additional uncertainties accompanying any estimates of future market size,
revenue and market acceptance of products and services.
These
statements also represent our estimates and assumptions only as of the date that
they were made and we expressly disclaim any duty to provide updates to them or
the estimates and assumptions associated with them after the date of this filing
to reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events.
We
undertake no obligation to publicly update any predictive statement in this
report, whether as a result of new information, future events or
otherwise. You are advised, however, to consult any additional disclosures
we make in reports we file with the SEC on Form 10-K, Form 10-Q and Form
8-K.
Currency,
exchange rate, and “China” and other references
Unless
otherwise noted, all currency figures in this filing are in U.S. dollars.
References to "yuan" or "RMB" are to the Chinese yuan, which is also known as
the renminbi. According to the currency exchange website www.xe.com,
on February 9, 2010, $1.00 was equivalent to 6.82750 RMB.
References
in this report to the “PRC” or “China” are to the People’s Republic of
China.
References
to “Foshan” are to Foshan SLP Special Materials Co, Ltd., a PRC
company that we control.
Unless
otherwise specified or required by context, references to “we,” “our” and “us”
refer collectively to (i) Perpetual Technologies, Inc.,
(ii) Perpetual’s subsidiary Hong Hui Holdings
Limited, a British Virgin Islands
company, (iii) Hong Hui’s subsidiary Technic
International Limited, a Hong Kong company and
(iii) Technic’s subsidiary Foshan.
3
Explanatory
Note
This
current report on Form 8-K is being filed by Perpetual Technologies, Inc. (“we,”
“us” or the “Company”) in connection with a reverse merger transaction which
closed on February 12, 2010, through which we acquired control of Foshan, an
operating company in China, and a private placement of convertible notes and
warrants which closed on February 12, 2010.
This
report describes those transactions, the agreements through which they were
executed, the nature of the business we now conduct through Foshan, our
newly-acquired operating company.
Through
the reverse merger, we ceased to be a shell company as that term is defined in
Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) and
are now engaged in the manufacture, sale, and research and development of
advanced spun-bond PET (polyester) non-wovens in Guangdong Province in the
PRC.
Item 1.01. Entry
into a Material Definitive Agreement
Background
On
February 12, 2010, we acquired control of Foshan S.L.P. Special Materials Co.,
Ltd., a PRC-based company located in Foshan, Guangdong Province in the PRC, in a
share exchange transaction which closed on that date.
Foshan is
engaged in the manufacture sale, and research and development of advanced
spun-bond PET, or polyester, non-wovens.
In the
share exchange or “reverse merger” we acquired control of Hong Hui
Holdings Limited (“Hong Hui”), a British Virgin Islands company
and the owner of all of the stock of Technic International Limited
(“Technic”), a Hong Kong holding company which in turn is the owner of all of
the stock of Foshan, by issuing to the Hong Hui stockholders an
aggregate of 72,551,020 shares our of common stock in exchange for all of the
outstanding capital stock of Hong Hui. The Hong Hui stockholders with
whom we completed the share exchange are as set forth below, each of
whom is a company incorporated in the British Virgin Islands and each
of whom received the number of shares set forth beside their respective
names:
Bestyield
Group Limited, 21,765,306;
Proudlead
Limited, 21,765,306;
Newise
Holdings Limited, 11,608,163;
Pilot
Link International Limited, 8,343,367;
High
Swift Limited, 5,441,327; and
China
Investment Management Inc., 3,627,551.
Bestyield
Group Limited is controlled by Jie Li, our chief executive officer and a
director. Proudlead Limited is controlled by Law Wawai, our president
of sales and a director. Newise Holdings Limited is controlled by Li
Jun, a PRC resident. Pilot Link International Limited is controlled
by Li Shiyl and Yang Wei, both PRC residents. High Swift Limited is
controlled by Han Hung Yuk and China Investment Management Inc. is controlled by
Song Huaying.
Immediately
prior to the share exchange, 12,640,000 shares of common stock held by a number
of our shareholders were surrendered for cancellation in exchange for $40,000 in
cash paid by Joseph Nemelka. At that time our former directors, Seth Winterton
and Joseph Nemelka resigned and appointed Jie Li and Chris Bickel as our
directors. The new board appointed Jie Li as chief executive officer,
Ting (Maggie) Wang as chief financial officer, Law Wawai as president of sales
and a director, Shijun Zeng, chief technology officer and Yang Wei as
secretary and approved the share exchange and private
financing.
4
Our
current structure, after the reverse merger, is set forth in the diagram
below:
On
February 12, 2010 we completed a financing transaction in which we raised gross
proceeds of $4,140,000 through a private placement of convertible notes and
warrants to certain accredited investors. The private placement was
exempt from the registration requirements of the Securities Act of 1933 (the
“Act”), under Section 4(2) of the Act as a result of our compliance with Rule
506 of Regulation D promulgated under the Act.
5
The
material agreements through which the reverse merger and private placement
transactions were carried out, the transactions themselves, and the notes and
warrants are described in detail below.
Share
Exchange Agreement
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of
the share exchange agreement we issued and delivered to the Hong Hui
stockholders a total of 72,551,020 shares of our common stock in exchange for
all of the outstanding shares of Hong Hui. As a result of the share
exchange or reverse merger, Hong Hui became our wholly-owned subsidiary, and the
Hong Hui stockholders became holders of 72,551,020 shares of our common
stock. When we acquired direct control of Hong Hui in the reverse
merger, we acquired indirect control of Foshan, as Foshan is a wholly-owned
subsidiary of Technic International Inc., a Hong Kong company which is a
wholly-owned subsidiary of Hong Hui. As a result, at the
closing of the share exchange we ceased to be a shell company as that term is
defined in Rule 12b-2 under the Exchange Act. We describe our new
operating company below in Item 2.01 of this report.
A copy of
the share exchange agreement is attached as Exhibit 10.1 to this
report.
Note
Purchase Agreement
On
February 12, 2010, immediately following the closing of a share exchange
agreement we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants. The closing of the
sale of the notes and warrants occurred on February 12, 2010. The
terms of the notes and warrants is set forth below. The note purchase agreement
contains representations, warranties and covenants which are customary for
transactions of this nature.
The note
purchase agreement is attached to this report as Exhibit 10.2.
Terms
of the Notes
The notes
have the following material terms:
Maturity: The notes mature after
one year. If principal is not is not paid on maturity then 150% of
the principal amount shall be payable.
Interest: 10%
per annum payable quarterly increasing to 15% if there is a default. $204,464 is
being held in escrow out of the closing proceeds to cover the first six months
interest.
Conversion: In
the event of the closing of any equity or series of related financings resulting
in aggregate gross proceeds to the Company of at least $20,000,000 (or such
lesser amount as shall be approved in writing by the holder(s) of notes
evidencing at least 50% of the principal amount of the notes then outstanding),
a “qualified financing,” prior to the maturity
date of the notes, the principal amount of
the notes converts automatically into the securities sold in such financing at a
65% discount to the offering price of such securities.
The form
of note is filed as Exhibit 4.1 to this report.
Terms
of the Warrants
Set forth
below are the material terms of the warrants issued at the
closing:
6
Exercisable: The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $2,000,000. The warrants cannot be
exercised if no financing is consummated within five-year period after the issue
date and become void if the notes automatically convert into common
stock.
Number of
Shares: The warrants represent the right to purchase 8% of the
total shares of common stock outstanding (on a fully-diluted basis) immediately
after the closing of the financing.
Exercise
Price: The warrants are exercisable at the price for
which the shares of common stock (or common stock equivalent if derivative
securities are sold) are sold in the financing. If the financing
includes more than one type of security, the exercise price shall equal the
lowest price per share of common stock or common stock equivalent included in
the financing.
The form
of warrant is filed as Exhibit 4.2 to this report.
Limited
Recourse Guaranty and Pledge Agreement
Our
obligations under the note are guaranteed by Bestyield Group Limited, a BVI
company controlled by Mr. Li, our chief executive officer, and Proudlead
Limited, a BVI company controlled by Mr. Law, our president of sales and a
director, the “management shareholders,” under a limited recourse guaranty which
is secured by a pledge by the management shareholders of the 43,530,612 shares
of our common stock received by the management shareholders in the reverse
merger.
The limited recourse
guaranty is attached to this report as Exhibit 10.4. The pledge agreement is
attached to this report as Exhibit 4.4.
Registration
Rights Agreement
Under the
registration rights agreement we agreed that if we file a registration statement
in connection with a “qualified financing,” we will include in that registration
statement for resale the securities issuable on conversion of the notes or the
warrants, as the case may be, for an offering to be made on a continuous basis
pursuant to Rule 415.
In event
the Securities and Exchange Commission, pursuant to Rule 415, does not permit us
to register all of the applicable registrable securities in the initial
registration statement, we will use our best efforts to register the
registrable securities that were not registered in the initial registration
statement, as soon as the Commission permits us to do so.
In the
case of an underwritten public offering, if the managing underwriter(s) or
underwriter(s) reasonably objects to the inclusion of the registrable
securities in any registration statement, then if we, after consultation with
the managing underwriter, determine that the inclusion of such registrable
securities would significantly harm the offering contemplated in such
registration statement, and recommend inclusion in such registration statement
of fewer or none of the registrable securities, then (x) the number of
registrable securities included in the registration statement shall be reduced
pro-rata among such holders (based upon the number of registrable securities
requested to be included in the registration), or (y) none of the
registrable securities shall be included in the registration statement. If
securities are being offered for the account of other persons as well as us then
the reduction shall not represent a greater fraction of the number of
registrable securities than the fraction of similar reductions imposed on such
other persons (other than the company).
In
addition, we granted the investors certain demand rights and customary piggyback
rights with respect to the securities issuable on conversion of the notes and on
exercise of the warrants.
7
If (a) we
fail to file a registration statement within 30 days of a demand notice, the
“demand file date” or (b) the registration statement is not effective within 180
days after filing (or, in the case of subsequent registration statements filed
under Rule 415, 90 days after filing or 120 days in the event that registration
statement receives a full review), we have agreed to pay the investors two
percent (2%) of the aggregate principal amount of the notes for each month (or
part thereof) that it is late (capped at 10%). No liquidated damages are payable
with respect to any shares required to be omitted as a result of the operation
of Rule 415.
The
registration rights agreement is attached to this report as Exhibit
4.3.
Item 2.01 Completion
of Acquisition or Disposition of Assets.
As a
result of the reverse merger described in Item 1.01 above, which was completed
on February 12, 2010 we became the parent company of Hong Hui and the indirect
parent of Hong Hui’s indirect wholly-owned subsidiary, Foshan.
Foshan,
based in the PRC, is engaged in the manufacture sale, and research and
development of advanced spun-bond PET (polyester) non-wovens.
As a
result of the reverse merger we ceased being a shell company.
Organizational
History of Perpetual Technologies.
Perpetual
Technologies was organized as Molokai Enterprises, Inc., on November 27, 1996
under the laws of the State of Colorado.
Form 1996
to 2006 Molokai was dormant.
Molokai
changed its domicile from Colorado to Delaware in April 2007 by merging with and
into Perpetual Technologies, Inc., a Delaware corporation organized for that
purpose on March 15, 2007.
Prior to
the reverse merger Perpetual had no operations or substantial assets.
Accordingly, Perpetual was deemed to be a "blank check" or shell company, that
is, a development-stage company that has no specific business plan or purpose or
has indicated that its business plan is to engage in a merger or other
acquisition with an unidentified company or companies, or other entity or
person.
On
February 12, 2010, immediately prior to the share exchange, 12,640,000 shares of
common stock held by a number of our shareholders were surrendered for
cancellation in exchange for $40,000 in cash paid by Joseph Nemelka, at which
time our two former directors, Joseph Nemelka and Seth Winterton, appointed Jie
Li and Chris Bickel, as directors and immediately thereafter resigned themselves
as our directors and officers. On February 12, 2010, our new directors, Jie Li
and Chris Bickel appointed Jie Li as chief executive officer, Ting (Maggie) Wang
as chief financial officer, Law Wawai as president of sales and a director,
Shijun Zeng, chief technology officer and Wei Yang as secretary and approved the
reverse merger and private financing.
On
February 12, 2010, our new board of directors approved (i) a one-for-five
reverse split of our issued and outstanding common stock and (ii) the change of
our name from Perpetual Technologies to Chinese Special Materials Co. Ltd.
Stockholders holding shares representing a majority of the votes entitled to be
cast at a shareholders’ meeting consented in writing to these actions. On
February 12, 2010, contemporaneously with the filing of this Current Report on
Form 8-K, we filed an information statement on Schedule 14C relating to the
reverse split and our proposed name change. The reverse split will be effective
on filing a certificate of amendment to our certificate of incorporation with
the Secretary of State for the State of Delaware which we plan to do 20 days
after the mailing of the definitive information statement to our
stockholders.
8
Perpetual
Technologies has no operations or substantial assets other than those of Foshan,
and prior to the share exchange its business plan was to seek out and obtain
candidates with which it could merge or whose operations or assets could be
acquired through the issuance of common stock and possibly debt.
Organizational
History of Hong Hui
Hong Hui
is a holding company which was incorporated in the British Virgin Islands on
January 6, 2010.
Prior to
the share exchange, the shares of Hong Hui were owned by the following BVI
entities:
Bestyield
Group Limited, 30%
Proudlead
Limited BVI, 30%
Newise
Holdings, 16%
Pilot
Link International Limited, 11.5%
High
Swift Limited, 7.5 %
China
Investment Inc. 5%
As a
result of the share exchange all of the shares of Hong Hui are held by us and
Hong Hui is our wholly owned subsidiary.
Organizational
History of Foshan S.L.P. Special Materials Co. Ltd.
Introduction
Foshan
was established in 2000 as a joint venture under PRC law and it became a
wholly-owned foreign enterprise, or “WOFE”, in 2005 with all of its equity
interests now held by Technic.
Origins
Foshan
was created as a limited liability company in Foshan, China, under the name
Foshan S.L.P. Special Materials Co., Ltd., upon issuance by the Foshan Bureau of
Commerce of a business license. At that time, Foshan was licensed to
engage in the manufacture sale and research and development of advanced spun
bond PET polyester non-wovens.
9
Our
Business
Overview
Foshan is
a technologically advanced nonwovens company engaged in the manufacturing and
sale, and research and development, of spun-bond PET (polyester) nonwoven
fabrics in the PRC.
We
distribute our nonwoven products principally in the
PRC. Approximately 81.67% and 77.1%, respectively, of our
revenues during the fiscal years ended September 30, 2008 and 2009 were derived
from sales in the PRC. In recent years, our products were
successfully launched in Europe, North America and South East
Asia. Our products have won significant acceptance and we enjoy a
substantial reputation for quality with both domestic and foreign
customers.
For the
fiscal years ended September 30, 2009 and 2008 we had total sales revenues of
$11.8 and $11.6 million, respectively and net profits of $2.4 million and $2.7
million, respectively, for the same periods.
We
recently developed a continuous filament, spun-bond, needle-punched
manufacturing production process to manufacture polyphenylene sulfide fiber or
PPS, a specialized type of high temperature resistant nonwoven fabric. We
believe that we are the first company in the world to develop this process and
have applied for a process patent in the PRC for this process (Patent No. PRC:
201010102660.2) and we intend to apply for patent protection in North America
& Europe. In comparison to filtering materials currently
available, we believe that our nonwoven fabric will be stronger, have lower
production and operating costs, and will have higher filtration
efficiency. We have tested our PPS material non woven fabric
and, although the material has not yet been deployed by any industrial end user
we believe that our material has the potential to replace the materials and
products currently available in the market and become the most popular
filtration material in the high temperature environment.
We
believe that due to our substantial research and development expertise, in the
areas of technology, equipment and products, we could become one of the leading
manufacturers of high-tech special environmental protection materials in the
world.
Nonwovens
Nonwoven
fabrics are flat, flexible porous sheets produced by interlocking or entangling
fibers or filaments or by perforating films mechanically, thermally or
chemically. They are not made by weaving or knitting and do not
require converting the fibers to yarn. Nonwovens provide certain
qualities similar to those found in textiles but at a significantly lower
cost. Nonwoven fabrics can be either a limited life, single-use
fabric or a very durable fabric. Nonwoven fabrics provide specific
functions such as absorbency, liquid repellency, resilience, stretch, softness,
strength, flame retardancy, washability, cushioning, filtering, bacterial
barrier and sterility. These properties are often combined to create fabrics
suited for specific jobs, while achieving a good balance between product
use-life and cost. They can mimic the appearance, texture and strength of a
woven fabric and can be as bulky as the thickest padding. In
combination with other materials they provide a spectrum of products with
diverse properties, and are used alone or as components of apparel, home
furnishings, health care, engineering, and industrial and consumer
goods.
Our
Existing Products
We
currently manufacture:
|
·
|
normal
polyester (PET) filament spun-bond thermal calendared nonwoven fabrics;
and
|
|
·
|
polyester
(PET) filament spun-bond needle-punching geo-membrane and waterproof
materials.
|
Our
existing products are sold principally to converters that manufacture a wide
range of end-use products, including filter media, road construction material,
home furnishings, automotive interior insulation, and industrial
packaging.
10
Polyester
(PET) filament spun-bond thermal calendared nonwoven fabric
This
product is made from polyester. Our products are 15-260g/m2 in
weight filament fine 1 .0-3.0dpf, width maximum 3.3m.and performs effectively in
high temperatures, is anti-corrosive, anti-aging and has a long life for usage
(1-2 years for filtration; 5 years to 10 years for auto decoration; and 5 years
for other applications). It also maintains its shape and
penetration. This product is used for filtration, water-drainage,
packing and automobile inner decoration and insulation.
For the
fiscal years ended September 30, 2009 and 2008 sales of this product accounted
for $9,007,185 and $11,612,000, or 76% and 100%, respectively, of our total
sales for such periods.
Our main
customers for this product 2009 were manufacturers of filters and home
furnishings
Polyester (PET)
filament spun-bond needle-punched geo-membrane and waterproof materials.
This
product is made from polyester and is one of the most important new construction
materials being used in the PRC – the traditional construction materials have
been brick, wood, steel and cement.
In
February 2009 we installed a production line with annual capacity of 4,000 tons
for the production of polyester (PET) filament, needle punched, geo-membrane and
water-proof materials. Sales of these products were $2,842,101 in
fiscal 2009 representing 24.5 % or our total revenue for 2009.
Geo-membranes
are permeable fabrics which, when used in association with soil, have the
ability to separate, filter, reinforce, protect, and/or drain. Geo-membranes can
be used in an innovative way to improve soil strength instead of the
conventional manner of soil nailing. The cost to improve soil
strength in this way is much less expensive than soil nailing. In addition, with
the use of geo-membrane, steep slopes can be planted with vegetation to enhance
the aesthetic value. Geo-membranes are the largest group of geo synthetics in
terms of volume and are used in geo- technical engineering, heavy construction,
building and pavement construction, hydrogeology, and environment
engineering. Overall, these materials can yield certain benefits in
geotechnical and environmental engineering designs. These products have a wide
range of applications and are currently used with significant advantages in many
civil engineering applications including roads, airfields, railroads,
embankments, retaining structures, reservoirs, canals, dams, soil bank
protection and coastal engineering.
This
product is also an important construction material based on its excellent
waterproofing capabilities and performance. It is mainly used for
roofing waterproofing. PET waterproofing materials were popularized
in Europe at the end of 1980 and account for over 40% of the market of
waterproof materials. In China, as of 2000, less than 20 million
square meters of this kind of material were used, however, the volume has been
increasing rapidly year over year. The market volume of PET waterproofing
materials increased to 70 million square meters in 2002. It is estimated that
the market will continue to increase rapidly in the coming years and will reach
over 200 million square meters in 2010. At present, geo-membranes
consume 20% of the total market of waterproofing materials in China. Foshan
expects to increase their market share of geo-membrane and waterproofing
materials as the popularity for the use of waterproofing increases in
China.
New
Product Development
New
Proprietary Production Process for Extremely High Temperature resistant
polyphenylene-sulfide fiber, or PPS.
We
recently developed a continuous filament, spun-bond, needle-punched
manufacturing production process for the manufacture of polyphenylene-sulfide
fiber, or PPS fiber. This material is suitable for high temperature
applications in smoke stacks and other waste emissions filtering.
We plan
to install three production (3) lines to begin commercialization of this process
in July 2010. These three production lines will have an
annual output capacity of 3,600 tons of PPS fiber.
11
Polyphenylene-sulfide
fiber, known as PPS fiber, features one new type of high-tech fiber material
with a multitude of advantages — excellent heat resistance, corrosion-proof, and
flame retardant. This product can be applied widely, reaching many sectors,
specifically, environmental protection, chemical industry filtration, and the
military. PPS’ specific uses include high temperature bag filters for coal-fired
power plant dust-removal, garbage incinerators, bag filters for cement
factories, various protective cloths, heat-resistant fabric, insulating
material, electrolysis membranes, friction pieces for brakes, filtering material
for hot corrosive reagents as well as special paper for the electronic
industry.
PPS
needle-punching filtration materials have been utilized in the bag filters of
coal burning boilers in Europe and the US since 1979. Currently, bag dust
cleaning equipment is used in approximately 80% of coal power and coal burning
boiler dust clean equipment processes. The filtration bags all use PPS fabrics.
During the past decade, the annual growth rate for PPS fabric demand in coal
power generation and coal burning boiler industries in Europe, the US, and Japan
has been 25%. With the increasing importance of global environmental protection
in developing countries such as India and Brazil, the use of the dust cleaning
bag technique has increased and thereby the demand for PPS fabrics has increased
worldwide.
Our PPS
high temperature resistance filter bag material is produced by the filament
spun-bond needle-punching method. This technology is exclusive worldwide. This
product can bear consecutive 190 0C high
temperatures with advantages of anti-acid, anti-alkali, anti-oxidizer and
stability. By comparison to the current PPS filter materials, our product is of
longer life (3 years at 190-230 0C),
stronger strength (because of filament), and lower operation and production
costs. This product promises to be the best filter bag material for high
temperature, humid and chemical environments in the world.
Application
of the PPS fiber in environmental protection, chemical filtration and flame
retardant fabric is difficult to replace by the use of any other kind of fabric.
China is currently in the midst of industrialization with an enormous economic
volume. China’s output of iron and steel, cement, coal, fertilizer and power
generation all rank as first or second in the world. China’s consumption also
ranks in the top two (2) in the world. Due to outdated technology and equipment
in China’s chemical industries, raw materials industries, and energy industries
- China encounters problems of severe consumption of energy and resources, as
well as heavy pollution due to accelerated urbanization. Bag filters are the
solution to pollutants of smoke dust and powder dust because they feature high
efficiency in air pollution reduction. Adopting PPS fiber as a filtration
material, in combination with other treatment technology, pollutants of powder
dust, smoke dust, sulfur dioxide and dioxin can be controlled and contained.
With increasing demand for environmental protection, high temperature resistant,
acid and alkali proof needle- punched felt becomes more necessary and in demand.
This is especially true in Japan where government regulation has shut down
dioxin emissions from incinerators and the government has demanded dust
collection at low temperature for incinerators.
As
China’s government imposes stricter policies upon environmental protection,
industrial gaseous dust emission limits have become stricter. These emissions
are targeted to be less than 50mg/m3 by the
end of 2010. Already, some of the larger, more developed cities have
independently improved their own standard to 20-30mg/m3. As a
comparison, the standard in North America and Europe is normally 10-20mg/m3, and
1-5mg/m3 for
waste incinerators. Reducing emission pollution has been a focus for the Chinese
Central Government for several years and is expected to keep that focus moving
forward. In accordance with such governmental regulations, existing water foam
and static dust removal technology is not capable of meeting the demands of the
government regulations. This, in turn, increases the demand for filter bag type
dust removal techniques. As PPS felt is most applicable to exhaust dust removal
of coal-fired power plants, the metallurgical industry, and garbage
incinerators, the demand for fiber grade PPS products will increase
substantially.
Thermal
power plants (mostly coal fired) are our target customers – those without
automatic scrubbing systems installed – that utilize filter bags for carbon
emissions control.
12
Additionally,
we will pursue the Steel industry as high temperature emissions are a major
source of pollution. Their demand for bag filters is large. Steel output in
China has exceeded 300 million tons. At Baosteel (the largest Steel manufacturer
in China) the total demand for filtration materials is 21 million m2, most of
which are chemical fiber filtration materials. Assuming 3.5 year average life of
the filters, the annual demand for changing filtration material is about 7
million m2.
In recent
years in cement industry with the use of new dry method cement production lines
has become a targeted industry for high temperature emissions control and
consequently, the demand for bag filters is increasing. The newly built cement
ovens with production output of 3,000t/d, 5,000t/d, 10,000t/d have large demand
for bag filters and demand for PPS filtration materials.
Aside
from the environment protection sector, PPS fibers can also be used in chemical
filtration which requires strong performance in anti-corrosion and high heat
resistance such as organic acid and nonorganic acid, phenol and strong
solvents.
Our
customers for the PPS product are filter bag manufacturers and engineering
companies.
Currently,
the materials used for high temperature emissions are: PTFE, fibre glass, P84,
PBI, PMIA, PSA, PPS, etc. The end use products are PPC needle punched felt,
Metamax needle punched felt, P84 needle punched felt, PTE needle punched felt,
etc.
Growth
Strategy
Our
growth strategy in the near term is to:
|
·
|
Expand
our export markets for our existing products. We have significant
advantages over our international competitors in that we produce all of
our products in the PRC where we enjoy lower production costs than our
competitors which will enable us to compete effectively in the export
market; and
|
|
·
|
Create
additional applications for our existing products, both domestically and
internationally;
|
Our
growth strategy in the medium and long term is to:
|
·
|
Increase
production and sale of our existing products by adding additional lines of
production. We are currently operating in a market where
we cannot meet the demand for our existing products and output can be
increased by the addition of lines of production which we plan
to do by raising additional
capital;
|
|
·
|
Commence
production of a special type of spun-bond, needle punched PPS
fiber suitable for use in high temperature applications using our
proprietary process. (Process Patent Application file No. in PRC:
201010102660.2).
|
Our
growth is restricted by our lack of production capacity. In order to
increase our production capacity we will need to raise additional
capital.
In
February 2009 we completed the installation of an additional spun-bond,
needle-punched production line with annual capacity of 4,000 tons of polyester
(PET) filament, needle punched, geo-membrane and water-proof
material. The addition of this production line contributed
$2,842,101, or 24.5%, or our total revenue of $11,611,719 for all of
2009.
13
Customers
We sell
to over 200 customers in the domestic and international marketplace.
Approximately 81.2% of our 2009 net sales were to entities in the PRC and
approximately 6.3% and approximately 7.42% were made to entities
in North America and Europe, respectively. Chengdu Sanya,
our largest customer, accounted for approximately 9% of our 2009 net
sales. Sales to our top 20 customers represented approximately
9% of our total 2009 net sales.
We sell
primarily to manufacturers and converters, which incorporate our products into
their finished goods.
The
following chart shows our major customers in 2009:
#
|
Top
10 customers of Foshan Special Material Co., Ltd-2009
|
|
|
Annual
|
|
|||||||||||
|
Location
|
Customer
|
revenue
|
%
of
|
||||||||||||
Company
Name
|
地理位置
|
since
|
Product
|
($)
|
Sales
|
|||||||||||
1
|
Chengdu
Sanya
|
Chengdu
|
2009
|
Geotextiles
|
1,068,438 | 9.01 | % | |||||||||
2
|
Xiantao
Ruixin
|
Xiantao
|
2009
|
Geotextiles
|
1,037,883 | 8.75 | % | |||||||||
3
|
Sichuan
Tianqiang
|
Sichuan
|
2009
|
Geotextiles
|
706,286 | 5.95 | % | |||||||||
4
|
Geolink
|
Dalian
|
2009
|
Geotextiles
|
583,192 | 4.92 | % | |||||||||
5
|
Shenzhen
Yaming Civil Engineering Equipment Co.,
|
Shenzhen
|
2005
|
Filtration
|
570,567 | 4.81 | % | |||||||||
6
|
Pentair
Water
|
USA
|
2008
|
Filtration
|
517,467 | 4.36 | % | |||||||||
7
|
Guangzhou
Baiyun Meihao Filter Cleaner Factory
|
Guangzhou
|
2003
|
Filtration
|
435,380 | 3.67 | % | |||||||||
8
|
Shanghai
Rundong Nonwoven Fabric Co., Ltd.
|
Shanghai
|
2006
|
Filtration
|
422,559 | 3.56 | % | |||||||||
9
|
Foshan
Nanhai Yingsheng Trading Co., Ltd.
|
Foshan
|
2003
|
Trading
|
257,546 | 2.17 | % | |||||||||
10
|
Guangzhou
Groundsill Basis Engineering Co., Ltd.
|
Guangzhou
|
2003
|
Filtration
|
227,259 | 1.92 | % | |||||||||
Total
|
$ | 5826581 | 49.13 | % |
Long
Term Contracts
We have
the long term supply contracts with the following customers, both nationally and
internationally:
14
Name of Company
|
Location
|
Annual Revenues (approx)
|
Product Sold
|
|||
CUSTOMERS IN EUROPE
|
||||||
Nordic
Air Filtration A/S
|
Denmark
|
$0.9
million USD/ year
|
Filtration
|
|||
Stamoid
AG
|
Switzerland
|
$0.1
million USD/ year
|
construction
backing
|
|||
Burmuller
& Co. GMBH
|
Germany
|
$0.25
million USD/ year
|
roofing
materials
|
|||
Copernit
SPA
|
Italy
|
$0.15
million USD/ year
|
roofing
materials
|
|||
Cidieffe
SRL
|
Italy
|
$0.07
million USD/ year
|
construction
backing
|
|||
CUSTOMERS IN NORTH AMERICA
|
||||||
Pentair
Water Pool and Spa
|
USA
|
$0.22
million USD/ year
|
water
filtration
|
|||
KT
America Corp.
|
USA
|
$0.3
million USD/year
|
Industrial
|
|||
TDC
Filter Manufacturing INC.
|
USA
|
$0.297
million USD/year
|
Filtration
|
|||
DuPont
|
USA
|
$0.05
Million USD/ year
|
Construction
|
|||
CUSTOMERS IN ASIA
|
||||||
Tex
Master Co., Ltd.
|
Korea
|
$0.3
million USD/ year
|
Automotive
|
|||
Freudenberg
Fareast
|
Taiwan
|
$0.33
million USD/ year
|
Automotive
|
|||
Jarel
Trading
|
|
Philippines
|
|
40.28
million USD/year
|
|
Printing
|
The
customers for this product will mainly be the bag filters manufacturers for
coal-fired boilers, especially coal-fired power plants. We will focus on the
application in the coal-fired power plants initially as this is currently the
most suitable and largest market for PPS filtration materials. China has the
largest coal-fired power plant industry in the world. Presently, China has 620
million KW of installed capacity – according to 2009 data. Given 50% (it is 80%
in US and Europe) of the facilities utilize bag filters, the consumption of
filtration materials is 0.25sqm/kw (500g/m2). The
demand of filtration materials for 620 million KW of installed capacity in 2009
was 40,750 tons. Given the life of the PPS material - three (3) years - there is
ongoing demand of 13,600 tons for replacement annually. It is estimated that the
installed capacity of coal-fired power plants will be 859 million KW by the end
of 2010. This will create an additional 15,000 tons of PPS demand for new
installations and an additional 15,000 tons for replacement
annually. (Source:
China Power)
Raw
Materials
The
primary raw material used in the manufacture of most of our products is
polyester resin The price of this is a function of, among
other things, capacity, demand and the price of crude oil.
Our major
suppliers or raw materials are Foshan Chemical Fibers Co.,
Ltd., Kaiping Chunhui Co., Ltd., and Zhuhai Yuhua Polyester Co.,
Ltd. We believe that
the loss of any one or more of its suppliers would not have a long-term material
adverse effect on our business because other manufacturers with whom we conduct
business would be able to fulfill our requirements.
During
fiscal 2007, 2008 and 2009 we paid approximately $4.2 million, $5.2 million and
$5.6 million for the purchase of raw materials.
Manufacturing
Facility
Our
manufacturing facility is located in Foshan City in Guangdong Province in the
PRC and has over 10,000 square meters of operating space and sits on 40,000
square meters of land. We use state of the art manufacturing
equipment imported from Germany.
15
We
believe that the quality of our manufacturing operations and the breadth of our
nonwovens process technologies gives us a competitive advantage in meeting the
current and future needs of our customers and in leading the development of an
expanded range of applications for nonwovens.
Existing
Lines of Production
We
currently operate three spun-bond production lines. Two of these
production lines are thermal calendared lines with annual capacity of 4,000 tons
of polyester filament, thermal calendared, nonwoven fabric. The third
spun bond line is a needle-punching production line which commenced operation in
February 2009. This production line has an annual capacity of
4,000 tons of polyester filament, needle punched, geo-membrane and
water-proofing material.
New
Lines of Production
We plan
to begin production of the first filament, spun-bond, needle-punching production
lines in the world in July 2010 with the addition of three high tech production
lines. These three (3) lines will have an annual output capacity of
3,600 tons of PPS high temperature resistant filtration material.
Manufacturing
Processes
Our
competitive strengths include low-cost, high-quality manufacturing processes and
a broad range of process technologies, which allow us to offer our customers the
best-suited product for each respective application. Additionally, we
have made significant capital investments in modern technology and have
developed proprietary processes. We believe that we exceed industry standards in
productivity, reduction of variability and delivery lead time.
Spun-bond
Polymer
pellets are introduced into an extruder which produces continuous filaments that
are cooled and stretched to give them strength. The filaments are then laid on a
moving belt to form a web that is then thermally bonded between two temperature
controlled steel rolls. Some bonding rolls have a pattern that is embossed into
the web. Spun-bonds are typically made from homopolymers such as polypropylene,
polyester, or nylon. Some spun-bond materials are made from two polymer families
creating a bicomponent fabric
Spun-laced
Nonwovens
Baled
staple fiber is introduced to a carding machine to create a batt. The batt of
unbonded fibers is then transferred via a mesh conveyor or perforated cylinders
where it is processed through a high pressure water system that entangles the
fibers to create the finished product. Fiber blends and finishes can vary
depending on desired properties.
Needle-punch
Nonwovens
Baled
staple fibers are introduced to a carding machine that distributes the fibers
based on the desired basis weight. The batt of fiber is then needled by an
oscillating needle board. The fibers are mechanically bonded by barbed needles
entangling the fibers. The density of the fabric is controlled by the number of
needle boards used.
Sales
and Marketing
Our non
woven products are distributed throughout the PRC in all 20
provinces. In 2003, our products were successfully launched in
Europe, North America and South East Asia. In fiscal 2009, 81% and 18.8% of our
sales revenues were generated from sales made in the PRC and internationally,
respectively, compared 77.1% and 22.9%, in 2008.
16
As of
January 2010, we employed ten direct sales representatives, 8 of whom are
engineers who have advanced technical knowledge of our products and the
applications for which they are used. Six of these sales
representatives are responsible for national sales and four are responsible for
international sales. Representatives receive a salary plus commission
for the revenues they generate.
The sales
process consists of identifying potential customers through cold calls,
responses to marketing efforts, and customer references. Once a
potential customer is identified, our sales people aid in identifying the
prospect’s technical requirements and help the customer’s engineers to produce
drawings of the finished products desired. Armed with this technical
information, our sales personnel then quote pricing, production quantities, and
lead times. Most of our customers are repeat customers and the sales force is
also responsible for after-sale support, including quality assurances, dispute
resolution, and relationship-building.
We
promote our products primarily through exhibitions, internet advertising and
marketing, and referrals from existing customers as well as
suppliers.
Markets
for our Existing Products
Because
we are strategically located in a market where supply is not sufficient to meet
demand, the output and sale of our core products will be increased merely by
adding production capacity. We expect to further penetrate the market
immediately and increase the sale and use of our products into 2010 and
beyond
Research
and Development
We
believe, that due to our substantial research and development
expertise, we could become one of the leading manufacturers of
high-tech special environmental protection materials in the world.
Our
research & development department has what we believe to be the strongest
research and development capabilities in the development of products, processes
and equipment in the nonwovens industry in China.
As of
September 30, 2009, our research and development staff consisted of 20
scientists, professional, engineering and technical personnel. Our
research and development team is lead by Mr. Yao Mu,, a senior engineer in the
industry and former president of Northwestern Polytechnical
University. Additionally, Mr. Zeng Shijun, is employed by our R&D
department and is qualified as a senior engineer in the industry and holds 5
patents. These 5 patents are currently being transferred to the
Company. In addition, our senior managers possess
comprehensive technical backgrounds. Mr. Li Jie, our
chief executive officer and a senior engineer is a certified chemical
engineer. Mr. Li is the Associate President of the China
Industrial Textile Association and an expert in his field. His
independent research is funded by the Department of State. Mr.
Ye Xi-Ping, Vice President of Production, is a senior engineer and certified
automation engineer.
Intellectual
Property
Our
business depends upon the significant know-how and proprietary technology we
have developed. To protect this know-how and proprietary
technology, we rely on a combination of trade secret laws, patents, trademarks
and confidentiality agreements. The effect of these intellectual
property rights is to define zones of exclusive use of the covered intellectual
property.
We have
the following four process patents in the PRC:
17
Name
|
Applicant
|
Patent
Application
Date
|
Patent
Application
Number
|
Remarks
|
||||||
1
|
Polyphenylene
sulfide nonwoven spunbond needle production method and
device
|
Foshan
SLP Special Materials Company
|
January
26, 2010
|
2010101026602
|
Invention.
|
|||||
2
|
Tube-type
air distraction apparatus
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011528.3
|
Utility
model
|
|||||
3
|
new
spinning box structure
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011529.8
|
Utility
model
|
|||||
4
|
Lapper
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
19, 2009
|
200920012058.2
|
Utility
model
|
The three
pending patent applications applied by Dalian Huayang Chemical Fiber Engineering
technology Co., Ltd (“Dalian”) are being transferred from Dalian to Foshan. When
the patents are issued the issue date will be in March, 2009 and the name of the
holder will be Foshan.
The
duration of patent rights in the PRC generally is 20 years from the date of
filing of priority application. No significant patents are
expected to expire in the next five years. We expect that additional patent
applications will be filed as more processes are developed and specific
applications are identified.
We have
the following trademark in the PRC:
Trademark
|
Registrant
|
Registration
Number
|
Term of Validity
|
|||
Jinglong
Nonwoven
(锦龙无纺)
|
Foshan
SLP Special Materials Company
|
3571234
|
October
21, 2005 to
October
20,
2015
|
We have
applied for the following two trademarks in the PRC:
Trademark
Application
|
Applicant
|
Application
Number
|
Application Date
|
|||
S.L.P
|
Foshan
SLP Special Materials Company
|
7161477
|
January
12, 2009
|
|||
Si
Le Pu
(斯乐普)
|
Foshan
SLP Special Materials Company
|
7161478
|
January
12,
2009
|
18
The
duration of patent rights in the PRC generally is 20 years from the date of
filing of priority application. No significant patents are expected
to expire in the next five years. We expect that additional patent applications
will be filed as more processes are developed and specific applications are
identified.
Foshan
products have been listed as the products of famous brand in Guangdong Province,
P.R. China.
Trade
Secrets and Confidentiality
To
safeguard our proprietary knowledge, trade secrets, and technology, we rely
heavily on trade secret protection and non-disclosure/confidentiality agreements
with our employees, consultants and third party collaboration partners with
access to our confidential information.
Competition
We
primarily face domestic competition for our existing products. Our
main competitors in the PRC for our existing products are Jiangxi Guoqiao and
Shaoxing Yaolong. We
compete based on our reputation for quality, product innovation, performance,
service and technical support.
Competitors
of our PPS nonwoven fabric material will be the PPS filament suppliers such as
Japanese Toray, Toyobo, and Kureha. For the PPS staple fibers
products, our competitor is Jiangsu Ruitai. There is no current manufacturer of
the PPS continuous filament needle punched filter media – PPS nonwoven fabric
that we will produce.
Environmental
Regulation
As a
manufacturer we are subject to a broad range of national, provincial and local
laws and regulations relating to the pollution and protection of the
environment. Among the many environmental requirements
applicable to us are laws relating to air emissions, wastewater discharges and
the handling, disposal and release of solid and hazardous substances and wastes.
Based on continuing internal review and advice from independent consultants, we
believe that we are currently in substantial compliance with applicable
environmental requirements.
Actions
by provincial and local governments in the PRC concerning environmental matters
could result in laws or regulations that could increase the cost of producing
our products. Some risk of environmental liability is inherent,
however, in the nature of our business, and there can be no assurance that
material environmental liabilities will not arise. It is also possible that
future developments in environmental regulation could lead to material
environmental compliance or cleanup costs.
19
Employees
As of
January 15, 2010, we had a total of 165 employees, including over 20
engineers. The following chart shows the number of our
employees involved in the various aspects of our business:
Category
|
Number of Employees
|
|||
Manufacturing
|
99 | |||
Sales
and Marketing
|
10 | |||
Research
and Development
|
5 | |||
Administrative
|
11 | |||
Finance
|
4 | |||
Quality
Control
|
8 | |||
Equipment
|
15 | |||
Logistics
|
13 |
Employee
compensation is composed of a salary plus subsidies based on position, education
level, length of service, performance and bonus incentives based on monthly
revenues.
Quality
Control
We
received the ISO9001-9002 Quality Management System Certification in 2003 and
again in 2006. We adopted what we believe to be the highest quality standards in
the industry and maintain quality control and product quality at high
levels. We have strictly embraced the ISO9001 Management System
Standards in order to integrate our quality management process and enhance the
management system and manufacturing process. We provide for strict
inspection of our products to guarantee quality according to Q/NHJL1-2008
Enterprise Quality Standards. To that end, we strictly control the manufacturing
process and quality control before any products leave our factory.
20
THE NONWOVEN INDUSTRY – GLOBAL
OVERVIEW
Technical
textiles are one of the two fastest growing sectors of the textile industry
worldwide. Since 1985, the global market size of this particular sector has, on
an average, grown by 3.8% per year. In 2004 global nonwoven capacity
was 4.5 million tons with a value of US$16 billion and is expected to grow at a
annual rate of 6% growth until 2010. (Source: Nonwoven Industry
Magazine - “Development & Expectation of Nonwoven Industry of
China & Overseas.”
In 2006,
China’s technical textiles capacity reached 4.537 million tons, 24% higher than
2005. Total consumption of technical textiles in 2008 reached
19.60 million tons, is expected to reach 33.8 million tons in 2010.
(Source: Textile
Lead.)
THE
NON-WOVEN INDUSTRY IN THE PRC
History
In 1965
China entered the industrialized production of nonwovens.
In 1980
the total output of nonwovens in China was less than 10,000 tons.
Since
1980 China’s nonwovens industry has enjoyed continuous and rapid
growth. The average annual growth rate reached 19.6% in the 1980’s,
18.8% in the 1990s and 19.7% since 2000.
In 2002
China’s output of nonwovens exceeded 600,000 tons an increase of 50%
compared with 2001, and ranked No. 2 in the world next to the U.S.
As China
deepened its understanding of the utility of nonwovens, its applications grew
rapidly. The current demand in both domestic and overseas markets is increasing
rapidly, specifically in the overseas markets for medical, cosmetic and
disposable goods.
As
of September 2009, China’s total output was 926,918 tons, a year over
year increase of 25.15%. Due to the financial crisis during the first
half of 2009 the exports of nonwovens decreased by 4% and by midyear this
decline was slowing and the industry appeared to improving. Nonwovens
enterprises in the Yangtze River Delta and Zhujiang River Delta are improving
and, the quality of products is improving, therefore companies are building
their own brand names while consumption is increasing.
In 2008,
China’s nonwovens production capacity was 2 million tons, ranking it at No. 1 in
the world and was expected to increase to 2.4 million tons in
2009 (with 1 million tons of these being spunbonded
nonwovens.)
In 2009
the demand for auto nonwovens exceeded 58,000 tons of
product, 112,000 tons for home textile product, 20,000 tons for
vertical drain material for construction engineering, 118,000 tons for
waterproof material, 56,500 tons for various filtration
materials and 76,000tons for geo-textile. (Source: China Industrial Textile
Association)
In the
foregoing products, the export demand for waterproof material of 130g-160 g/m²
and various filtration materials of 160-260g/m² will exceed 30,000
tons and 50,000 tons, respectively. (Source: National Nonwovens
Tech-info Centre)
21
China’s
Consumption of Nonwovens is Growing
China’s
consumption of technical nonwovens is growing, with an annual average growth of
11% since 1998. The demand for nonwovens comes from several sectors
including the construction, clothing and automobiles industries. This
increasing demand cannot be covered by existing domestic production
alone.
Production
of nonwovens in the PRC for the nine month period ending September
2009 reached 926,918 tons, representing an 25.2% increase over the
corresponding period in the prior year. (Source: Chinese Technical Textiles and
Nonwovens Industry, 2009).
Rapid
Growth in China’s Nonwovens Industry
According
to the China Nonwovens & Industrial Textiles Association, or CNITA, the
nonwoven industry of China continued to grow during 2009. The
aggregate production of all kinds of nonwovens was projected in excess of 1.6
million tons. The fastest growing fields were spun-bond and needle-punch
nonwovens.
From
January to August of 2009, China exported $486.4 million of nonwovens, a
decrease of 4.27% year on year. The domestic market continues to grow
as well with several major nonwovens producers based in China. While these
producers tend to largely sell products to local converters, their output
continues to become more sophisticated as does the export rate.
Currently
in the PRC, there are an estimated 500-600 nonwovens manufacturers' producing
nonwovens on an estimated 1,000 to 1,500 lines. (Source: Chinese Technical Textiles and
Nonwovens Industry, 2009
In 2008
there were 23 manufacturers of PET nonwovens in the PRC, 27 production
lines with a total capacity of 66,500 tons (Source: Guangdong Nonwoven
Association).
Most of
the nonwovens industry is centered in the eastern industrialized areas of the
country. For example, the province of Guangdong, which borders Hong Kong, is one
of the principal nonwovens production areas within China and accounts for
one-third of the country’s total nonwovens production.
Opportunity
to Increase Exports
As the
utility and popularity of nonwovens increases, so does the opportunity to expand
exports. Exports of nonwovens steadily increased from 2000-2007.
Continued
Rapid Growth of Nonwovens in China
The
market for nonwovens in China continues to grow due to both foreign investment
and domestic initiatives. In 2008, industry estimates put the size of
the Chinese nonwovens market at over 2 million tons. This remarkable growth has
increased China’s share in the global nonwovens market. The country now makes
about 20% of the world’s nonwovens compared to just 3.7% in 1989, according to
statistics recently released by INDA (Association of the Nonwoven Fabrics
Industry) in North America and EDANA (European Disposables and Nonwovens
Association) in Europe. We expect this share to rise to 25% by
2015.
In 2008,
spunbonded meltblown material capacity was 678,000 tons, with percentage of
50.33%, needlepunched material 325,000 tons, chemical bonded material
89,000 tons, thermal bonded material 89,000 tons, spunlace material 112,000
tons, stitch bond material 13,000 tons ( data source: Asian Nonwoven Industry’s
statistics report of China’s nonwovens capacity in 2008) , currently in China,
near half of nonwovens are thermal bonded and meltblown process, other main
technic includes needlepunched 290,000 tons, chemical bonded 84,000 tons,
spunlace 92,000 tons. (Source: “Chinese Market Creates New
Opportunities For Global Nonwovens Industry October 2009, Karen
McIntyre)
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Explosive
Growth in 2008
According
to statistics from the National Bureau of Statistics of China, from January to
September 2009, China’s nonwovens production rose 25.2% from a year earlier to
926,918 tons. (Source:
“Chinese Market Creates New Opportunities For Global Nonwovens Industry
October 2009, Karen
McIntyre)
China’s
Nonwovens Industry Will Continue to Grow
Nonwovens
activity has been heating up in China as the industry looks to cash in on the
tremendous growth opportunity this huge country presents. With a population of
nearly 1.4 billion, this massive consumer audience could be just the spot major
converters of nonwoven materials, such as diaper producers, are looking for to
grow their businesses in the 21st
century. In 2004, China accounted for nearly half of the nonwovens output in the
Asia-Pacific region, according to statistics furnished by INDA, Association of
the Nonwoven Fabrics Industry, and it is estimated that the nonwovens industry
in China will grow 12% per year during the next several years. In the past 10
years, output there has increased more than five-fold, from 115,000 to 650,000
tons. (Source Emerging Markets China, India, Latin
America, Central/Eastern Europe August 1, 2006, Karen
McIntyre
In recent
years, the nonwovens segment has witnessed dynamic growth in both quality and
quantity. The global output of nonwovens was about 6.1 million tons
in 2008, of which, 32.8%came from China,
representing 2 million tons. (Source: Textile & Nonwoven Industry
Global Market Research )
Technical
nonwovens accounted for 15.42% of the total output of textile and fiber
production in China in 2007, up 12.97% from the previous year, according to
industry estimates. The actual output of nonwovens production was 1.72 million
tons in 2007, up 23.27% from the previous year. (Source: China – Nonwovens May See Bright
Future In Dark Time November 25,
2008)
Factors
Driving Expansion of Nonwovens in China
There is
a significant gap between the nonwovens industry in China and the nonwovens
industry in Europe and the US in terms of technical level, quality level, and
competitiveness. China’s nonwovens market is still emerging and, therefore, the
timing is optimum for Foshan to capitalize on those aspects of the nonwovens
industry that have made it difficult for Chinese nonwoven companies to emerge
historically.
Some of
the reasons the Chinese nonwovens market is ripe for expansion are as
follows:
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Lack of market
segments: Nonwoven products are applied to various
fields such as industry, garment and interior decor. The existing market
is expanding and new markets are emerging. China’s nonwoven
industry production capacities are still concentrated on normal
traditional products, such as polyester wadding, interlining, geo-textile,
hygiene, packaging materials and normal filtration materials. Companies do
not possess clear market focus and are competing in the same market
segments which has caused capacity concentration and fierce
competition.
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Strength for market and
product development is not substantial: In China, the
demand for the higher technology based PET spin-bonded products is
currently over 40 million m2.
These products are currently all imported, mainly from Freudenberg
(Taiwan). The price for these products is over USD $5,000/ton. Some of the
domestic Chinese companies have been trying to develop these products but,
to date; no such products have been launched. If such products are
developed at a lower cost in the domestic market, then the Chinese
domestic market for highly technical nonwovens will be
expanded.
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The size of private companies
is small and those companies, therefore, lack international
competitiveness: In 2008, average production capacity of
spunbonded companies are 4000 tons, exact production capacity is 2700
tons, production lines total
307.
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The products are
low-end: Currently, it is not possible to provide
several products that are necessary to special applications within the
domestic and international markets.
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China’s
nonwovens industry has a large capacity to develop and expand. The nonwoven
output will increase substantially when the nonwoven industry expands and meets
the technical demands of the international market. Although Foshan is
significant in terms of capacity and output is integral that we increase and
expand our technical capabilities, output capacity, research and development
abilities and innovative capabilities. With an increase in the size of Foshan,
there will be a greater degree of participation and competitiveness within both
the international and domestic markets.
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RISK
FACTORS
Risks
Related to Our Business
We
need to increase output capacity in order to grow; to increase our output we
need to raise capital to buy additional production equipment; we also need to
raise capital to fully commercialize our products in development; if we are
unable to raise capital we will be unable to expand.
Our
growth strategy requires us to raise output capacity and commercialize our
products in development. This will requires us to purchase additional
equipment for which we will need to raise additional
capital. We plan to raise additional financing through public
or private equity offerings and/or debt financings. We cannot be
certain that additional funding will be available on acceptable terms, if at
all. To the extent that we raise additional funds by issuing equity securities,
our stockholders may experience significant dilution and the price of our common
stock could be materially negatively affected. Any debt financing, if available,
would result in us incurring costs relating to interest payments and we may be
required to pledge assets as security for the debt and may be constrained by
restrictive financial and/or operational covenants. If we are unable
to raise additional capital, when required, or on acceptable terms, we may have
to significantly delay, scale back or discontinue the development and /or the
commercialization of one or more of our products. Accordingly, any failure to
raise adequate capital in a timely manner would have a material adverse effect
on our business, operating results, financial condition and future growth
prospects.
Our
success will depend in part on the market acceptance of our PPS nonwoven fabric,
for use in air bag filters for control of pollutant emissions, by thermal power
plants, steel manufacturers, operators of garbage incinerators and other
potential users.
We
recently developed a continuous filament, spun-bond, needle-punched
manufacturing production process for the manufacture of polyphenylene-sulfide
fiber, or PPS nonwoven fabric, which is a specialized type of high temperature
resistant nonwoven fabric. PPS nonwoven fabric has many
applications including filtration of pollutant emissions and chemical industry
filtration. We believe PPS nonwoven fabric can be used as the
material to manufacture high temperature bag filters for coal-fired power plant
dust-removal, garbage incinerators and cement factories. PPS can also
be used as heat-resistant fabric, insulating material, electrolysis membranes,
friction pieces for brakes, filtering material for hot corrosive reagents as
well as special paper for the electronic industry.
Although
our PPS nonwoven fabric has been tested in laboratories a prototype has not been
tested on site by any thermal power plant or other potential end
user. Our new PPS nonwoven fabric may never achieve broad
market acceptance, due to any number of factors, including:
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the
product may prove to be ineffective on site;
and
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competitive
material may be introduced which renders our products and technologies too
expensive or obsolete;
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Market
acceptance will also depend on our ability to demonstrate that our products and
technologies are an attractive alternative to existing emission control
options. Our ability to do so will depend on the users’ evaluations
of the safety, efficacy, ease of use, reliability and cost-effectiveness of
these products and technologies.
If our
products and technologies are not broadly accepted in the marketplace, we may
not achieve a competitive position in the market and we will not achieve
anticipated profits and our business will suffer.
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Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
commenced production of spun-bond thermal calendaring nonwovens in 2000 and so
we have a limited operating history. Prior to February 2009 we had
two production lines of spun-bond thermal calendaring nonwovens. In
February 2009 we added a third production line for spun-bond needle-punching or
spun bound polyester filament needle- punched
nonwovens. Accordingly, you should consider our future
prospects in light of the risks and uncertainties experienced by early-stage
companies in evolving markets such as that of nonwovens manufacturers in the PRC
such as our ability to:
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develop and successfully
commercialize new products;
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attract new customers and retain
existing customers;
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increase awareness of our
products and continue to develop customer
loyalty;
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respond to competitive market
conditions;
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respond to changes in our
regulatory environment;
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manage risks associated with
intellectual property
rights;
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maintain effective control of our
costs and expenses;
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raise sufficient capital to
sustain and expand our business;
and
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attract, retain and motivate
qualified personnel
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Because
we are a relatively new company, we may not be experienced enough to address all
the risks in our business or in our planned expansion, in a short period of
time. If we are unsuccessful in addressing any of these risks and uncertainties,
our business may be materially and adversely affected.
If
we are unable to adequately protect our intellectual property, we could lose a
significant competitive advantage.
Our
success depends, in part, on our ability to protect our unique processes against
competitive pressure and to defend our intellectual property
rights. If we fail to adequately protect our intellectual property
rights, competitors may use our processes, and manufacture and market similar
products using similar processes, which could harm our market share and results
of operations. We consider our process patents to be important to our
business and seek to protect our proprietary know-how in part through process
patent registrations in the PRC. We have applied for a
number of process patents in the PRC and maintain certain trade secrets for
which, in order to maintain the confidentiality of such trade secrets, we have
not sought patent protection. Existing or future patents or licenses may not
provide competitive advantages for our products. Our competitors may challenge,
invalidate or avoid the application of any existing or future patents,
trademarks, or other intellectual property rights that we receive or
license. In addition, patent rights may not prevent our competitors
from developing their own processes that produce products that are similar or
functionally equivalent to our products. The loss of protection for
our intellectual property could reduce the market value of our products, reduce
product sales, lower our profits, and impair our financial
condition.
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Rapid
technological changes could render one of more of our technologies or products
obsolete resulting in reduced demand for our products.
Technologies
change rapidly in our industry. If one of our competitors
successfully introduces a technology or product which is superior to our
technology or products one or more or our products could become obsolete and the
demand for our products will be harmed.
We
face intense competition, which could result in reduced acceptance and demand
for our products and technologies.
We
compete with a number of companies in the PRC and internationally that engage in
the manufacture and development of nonwovens that have similar applications as
our products. Many of our competitors have much greater
financial, technical, research, marketing, distribution, service and other
resources than we have. Moreover, our competitors may offer a broader
array of products and technologies or may have greater name recognition than we
do in the marketplace. Our competitors, including several development
stage companies, may develop or market technologies that are more effective or
commercially attractive than ours, or that may render our technologies
obsolete.
The
loss of a few of our large volume customers could significantly reduce our
revenues and profits.
A
significant amount of our products are sold to a relatively small number of
customers. For example, sales to Chengdu Sanya represented
approximately 9% of our net sales in fiscal 2009. Sales to our top 20
customers represented approximately 58.2% of our net sales in fiscal
2009. As a result, a decrease in business from, or the loss of, any
large volume customer such as Chengdu Sanya could significantly reduce our
product sales and lower our profits.
Increases
in prices for raw materials or the unavailability of raw materials could reduce
our profit margins.
The
primary raw material used to manufacture most of our products is
polyester. In 2009, polyester products accounted for
approximately 71% of our cost of sales. The price of polyester is a
function of, among other things, manufacturing capacity, demand and the price of
crude oil. To the extent that we are able to pass along at least a
portion of raw material price increases to some of our customers, there is often
a delay between the time we are required to pay the increased raw material price
and the time we are able to pass the increase on to our customers. To the extent
we are not able to pass along all or a portion of such increased prices of raw
materials, our cost of goods sold would increase and our operating income would
correspondingly decrease. There can be no assurance that the price of
polyester will not increase in the future or that we will be able to pass on any
increases to our customers. Material increases in raw material prices
that cannot be passed on to customers could harm on our profit margins, results
of operations and financial condition.
We
have limited capacity in our manufacturing facilities; a material interruption
or breakdown in our machinery could prevent or limit our ability to manufacture
our products and we may lose revenue.
We
manufacture all of our products in our existing facility. We
currently have three lines of production in operation. Any disruption of
machinery would result in us being incapable of manufacturing products to meet
our production requirements. This may cause us to lose revenue and
impair our relationships with our customers. Without our
existing production facilities, we would have no other means of manufacturing
products until we were able to restore the manufacturing capability at the
facility. We do not carry business interruption insurance to cover
lost revenue and profits.
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We
could incur substantial costs to comply with environmental laws, and violations
of such laws may increase costs or require us to change certain business
practices.
We use a
variety of chemicals in our manufacturing operations. As a result, we
are subject to a broad range of environmental laws and regulations. These
environmental laws govern, among other things, air emissions, wastewater
discharges, the handling, storage and release of wastes and hazardous
substances. We regularly incur costs to comply with environmental
requirements, and those costs could increase significantly with changes in legal
requirements or their interpretation or enforcement. We could incur
substantial costs as a result of violations of environmental
laws. Failure to comply with environmental requirements could also
result in enforcement actions that materially limit or otherwise affect our
operations at our manufacturing facilities involved.
Our
business may be adversely affected by economic downturns
In
2008 and 2009, general worldwide economic conditions and economic condition in
the PRC have experienced a downturn due to the sequential effects of the
subprime lending crisis in the United States, the credit market and banking
crisis, collateral effects on the finance and banking industries, increased
energy costs, concerns about inflation, slower economic activity, decreased
consumer confidence, reduced corporate profits and capital spending, adverse
business conditions and liquidity concerns. These conditions made it
difficult for our customers, our vendors and us to accurately forecast and plan
future business activities, and they could cause businesses to slow spending on
our products. Although we believe that economic conditions have begun
to improve we cannot predict the timing or duration of any economic slowdown or
the timing or strength of a subsequent economic recovery, worldwide, or in the
specific end markets we serve.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
We
rely on Mr. Jie Li, our chief executive officer, for the management of our
business, and the loss of his services could significantly harm our business and
prospects.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Jie Li, our chief
executive officer, for the direction of our business. The loss of the services
of Mr. Li for any reason could have a material adverse effect on our business
and prospects. We cannot assure you that the services of Mr. Li will continue to
be available to us, or that we will be able to find a suitable replacement for
Mr. Li. We have entered into an employment contract with Mr. Li, but
that agreement does not guarantee Mr. Li’s continuing to manage the
company. We do not have key man insurance on Mr. Li, and if he were
to die and we were unable to replace him for a prolonged period of time, we
could be unable to carry out our long-term business plan, and our future
prospects for growth, and our business, could be harmed.
We
may not have adequate internal accounting controls. While we have
certain internal procedures in our budgeting, forecasting, and management and
allocation of funds, our internal controls may not be adequate.
We are
constantly striving to improve our internal accounting controls. We hope to
develop an adequate internal accounting control to budget, forecast, manage and
allocate our funds and account for them. There is no guarantee that these
improvements will be adequate or successful or that such improvements will be
carried out on a timely basis. If we do not have adequate internal accounting
controls, we may not be able to appropriately budget, forecast and manage our
funds, we may also be unable to prepare accurate accounts on a timely basis to
meet our continuing financial reporting obligations and we may not be able to
satisfy our obligations under U.S. securities laws.
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Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require us to provide an annual assessment of our internal control over
financial reporting, and beginning with the fiscal year ended 2010 will require
us to provide an attestation of this assessment by our independent registered
public accountants. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence may be negatively impacted.
We
have inadequate insurance coverage.
We do not
presently maintain product liability insurance, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.
Risks
related to doing business in the People’s Republic of China
Our
business operations are conducted entirely in the PRC. Because China’s economy
and its laws, regulations and policies are different from those typically found
in the west and are continually changing, we will face risks including those
summarized below.
The
PRC is a developing nation governed by a one-party government and may be more
susceptible to political, economic, and social upheaval than other nations; any
such upheaval could cause us to temporarily or permanently cease operations.
China is
a developing country governed by a one-party government that imposes
restrictions on individual liberties that are significantly stricter than those
typically found in western nations. China has an extremely large population,
significant levels of poverty, widening income gaps between rich and poor and
between urban and rural residents, large minority ethnic and religious
populations, and growing access to information about the different social,
economic, and political systems to be found in other countries. China has also
experienced rapid economic growth over the last decade, and its legal and
regulatory systems have changed rapidly to accommodate this growth. These
conditions make China unique and may make it susceptible to major structural
changes. Such changes could include a reversal of China’s movement to encourage
private economic activity, labor disruptions or other organized protests,
nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If
any of these events were to occur, it could damage China’s economy and impair
our business.
We
are subject to comprehensive regulation by the PRC legal system, which is
uncertain. As a result, it may limit the legal protections available to you and
us and we may not now be, or remain in the future, in compliance with PRC laws
and regulations.
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Foshan,
our operating company, is incorporated under and is governed by the laws of the
PRC; all of our operations are conducted in the PRC. The PRC
government exercises substantial control over virtually every sector of the PRC
economy, including the production, distribution and sale of
nonwovens. In particular, we are subject to regulation by local and
national branches of the Ministries of Environment Commerce and Health, as well
as the General Administration of Quality Supervision, the State Administration
of Foreign Exchange, and other regulatory bodies. In order to operate
under PRC law, we require valid licenses, certificates and permits, which must
be renewed from time to time. If we were to fail to obtain the necessary
renewals for any reason, including sudden or unexplained changes in local
regulatory practice, we could be required to shut down all or part of our
operations temporarily or permanently.
Foshan is
subject to PRC accounting laws, which require that an annual audit be performed
in accordance with PRC accounting standards. The PRC foreign-invested enterprise
laws require that our subsidiary, Foshan SLP Special Materials Co., Ltd. submit
periodic fiscal reports and statements to financial and tax authorities and
maintain its books of account in accordance with Chinese accounting laws. If PRC
authorities were to determine that we were in violation of these requirements,
we could lose our business license and be unable to continue operations
temporarily or permanently.
The legal
and judicial systems in the PRC are still rudimentary. The laws governing our
business operations are sometimes vague and uncertain and enforcement of
existing laws is inconsistent. Thus, we can offer no assurance that we are, or
will remain, in compliance with PRC laws and regulations.
Anti-inflation
measures could harm the economy generally and could harm our
business.
The PRC
government exercises significant control over the PRC economy. In
recent years, the PRC government has instituted anti-inflationary measures to
curb the risk of inflation. These measures have included devaluations of the
RMB, restrictions on the availability of domestic credit, and limited
re-centralization of the approval process for some international transactions.
These austerity measures may not succeed in controlling inflation, or they may
slow the economy below a healthy growth rate and lead to economic stagnation or
recession; in the worst-case scenario, the measures could slow the economy
without curbing inflation, causing “stagflation.” The PRC government
could adopt additional measures to further combat inflation, including the
establishment of price freezes or moratoriums on certain projects or
transactions. These measures could harm the economy generally and hurt our
business by limiting the income of our customers available to purchase our
merchandise, by forcing us to lower our profit margins, and by limiting our
ability to obtain credit or other financing to pursue our expansion plans or
maintain our business.
Governmental
control of currency conversions may affect the value of our stock.
All of
our revenue is earned in RMB, and current and future restrictions on currency
conversions may limit our ability to use revenue generated in RMB to make
dividend or other payments in U.S. dollars. Although the PRC
government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still
remain, including the restriction that foreign-invested enterprises like us may
buy, sell or remit foreign currencies only after providing valid commercial
documents at PRC banks specifically authorized to conduct foreign-exchange
business.
In
addition, conversion of RMB for capital account items, including direct
investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign-exchange accounts
for capital account items. There is no guarantee that PRC regulatory authorities
will not impose additional restrictions on the convertibility of the
RMB. These restrictions could prevent us from distributing dividends
and thereby reduce the value of our stock.
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Fluctuation
of the exchange rate of the RMB against the US dollar could result in foreign
currency losses.
In 2005,
the PRC government changed its decade-old policy of pegging the value of the RMB
to the United States dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an appreciation of the RMB
against the United States dollar of approximately 17.5% from July 1, 2005
through September 1, 2009. There remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the RMB against the United States dollar.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB. For example, to the extent that we need to convert
U.S. dollars we receive from an offering of our securities into RMB,
appreciation of the RMB against the U.S. dollar could reduce the value in RMB of
the proceeds of the financing. Conversely, if we decide to convert
our RMB into U.S. dollars for the purpose of declaring dividends on our common
stock or for other business purposes, and the U.S. dollar appreciates against
the RMB, the U.S. dollar equivalent of our earnings from our business and
dividends would be reduced. In addition, the depreciation of
significant U.S. dollar-denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
The
RMB is not a freely convertible currency, which could limit our ability to
obtain sufficient foreign currency to support our business operations in the
future.
We
receive all of our revenues in RMB. The PRC government imposes
controls on the convertibility of RMB into foreign currencies and, in certain
cases, the remittance of currency out of the PRC. Shortages in the availability
of foreign currency may restrict our ability to remit sufficient foreign
currency to pay dividends, or otherwise satisfy foreign currency denominated
obligations. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange (“SAFE”) by
complying with certain procedural requirements. However, approval from
appropriate governmental authorities is required where RMB are to be converted
into foreign currency and remitted out of the PRC to pay capital expenses, such
as the repayment of bank loans denominated in foreign currencies.
The PRC
government could also restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay certain expenses as they come
due.
Our
PRC stockholders are required to register with SAFE; their failure to do so
could cause us to lose our ability to remit profits out of the PRC as
dividends.
SAFE has
promulgated several regulations, including Circular No. 75 (“Circular 75”),
which became effective in November 2005, requiring PRC residents, including both
PRC legal person residents and PRC natural person residents, to register with
the competent local SAFE branch before establishing or controlling any company
outside of the PRC for the purpose of equity financing with assets or equities
of PRC companies, referred to in the Circular 75 as an “offshore special purpose
company.” PRC residents that have established or controlled an offshore special
purpose company, which has finished a round-trip investment before the
implementation of Circular 75, are required to register their ownership
interests or control in such “special purpose vehicles” with the local offices
of SAFE. Under Circular 75, the term “PRC legal person residents” as used in
Circular 75 refers to those entities with legal person status or other economic
organizations established within the territory of the PRC. The term “PRC natural
person residents” as used in Circular 75 includes all PRC citizens and all other
natural persons, including foreigners, who habitually reside in the PRC for
economic benefit. The term “special purpose vehicle” refers to an offshore
entity established or controlled, directly or indirectly, by PRC residents or
PRC entities for the purpose of seeking offshore equity financing using assets
or interests owned by such PRC residents or PRC entities in onshore companies,
and the term “round-trip investment” refers to the direct investment in PRC by
PRC residents through “special purpose vehicles,” including without limitation,
establishing foreign invested enterprises and using such foreign invested
enterprises to purchase or control (by way of contractual arrangements) onshore
assets.
31
In
addition, any PRC resident that is the shareholder of an offshore special
purpose company is required to amend his/her/its SAFE registration with the
local SAFE branch upon (i) injection of equity interests or assets of an onshore
enterprise to the offshore entity, or (ii) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any
material change in the shareholding or capital of the offshore entity not
involving a round-trip investment, such as changes in share capital, share
transfers and long-term equity or debt investments or, already organized or
gained control of offshore entities that have made onshore investments in the
PRC before Circular 75 was promulgated must register with their shareholdings in
the offshore entities with the local SAFE branch on or before March 31,
2006.
Under
Circular 75, PRC residents are further required to repatriate into the PRC all
of their dividends, profits or capital gains obtained from their shareholdings
in the offshore entity within 180 days of their receipt of such dividends,
profits or capital gains. The registration and filing procedures under the
Circular 75 are prerequisites for other approval and registration procedures
necessary for capital inflow from the offshore entity, such as inbound
investments or shareholders loans, or capital outflow to the offshore entity,
such as the payment of profits or dividends, liquidating distributions, equity
sale proceeds, or the return of funds upon a capital reduction.
To
further clarify the implementation of Circular 75, SAFE issued Circular No. 106
(“Circular 106”) on May 9, 2007, which is a guidance that SAFE issued to its
local branches with respect to the operational process for SAFE registration
that standardizing mores specific and stringent supervision on the registration
relating to the Circular 75. Under Circular 106, PRC subsidiaries of an offshore
special purpose company are required to coordinate and supervise the filing of
SAFE registrations by the offshore holding company’s shareholders who are PRC
residents in a timely manner. If these shareholders and/or beneficial owners
fail to comply, the PRC subsidiaries are required to report such failure to the
local SAFE authorities and, if the PRC subsidiaries do report the failure, the
PRC subsidiaries may be exempted from any potential liability to them related to
the stockholders’ failure to comply. The failure of these shareholders and/or
beneficial owners to timely amend their SAFE registrations pursuant to the
Circular 75 and Circular 106 or the failure of future shareholders and/or
beneficial owners of our company who are PRC residents to comply with the
registration procedures set forth in the Circular 75 and Circular 106 may
subject such shareholders, beneficial owners and/or our PRC subsidiaries to
fines and legal sanctions and may also limit our ability to contribute
additional capital into our PRC subsidiaries, limit our PRC subsidiaries ability
to distribute dividends to our company or otherwise adversely affect our
business.
These
regulations apply to our stockholders who are PRC residents. In the event that
our PRC-resident stockholders do not follow the procedures required by SAFE, we
could (i) be exposed to fines and legal sanctions, (ii) lose the ability to
contribute additional capital into our PRC subsidiaries or distribute dividends
to our company, (iii) face liability for evasion of foreign-exchange
regulations, and/or (iv) lose the ability to consolidate the financial
statements of our PRC subsidiaries under applicable accounting
principals.
Enforcement
against us or our directors and officers may be difficult and you could be
unable to collect amounts due to you in the event that we or any officer or
director violates applicable law.
Our
operating company, Foshan, is located in the PRC and substantially all of our
assets are located in the PRC. Most of our current officers and
directors are residents of the PRC, and most of their assets are located in the
PRC. As a result, it could be difficult for investors to effect
service of process on us or those persons in the United States, or to enforce a
judgment obtained in the United States against us or any of these
persons.
32
Risks
related to an investment in our common stock
Our
chief executive officer beneficially owns a significant portion of our
common stock and will be able to exert significant influence through his
position and stock ownership and his interests may differ from yours, and he could cause us to
take actions that are contrary to your interests and that could reduce the value
of your stock.
Our chief
executive officer, Mr. Li, beneficially owns 28% of our common
stock. Even assuming conversion of all of the outstanding
notes and the exercise of all our warrants, Mr. Li will own a significant
portion of our outstanding common stock. As a result, Mr. Li will be able to
influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporate transactions such as business
combinations. In any such stockholder vote, Mr. Li’s interests may differ from
that of other stockholders and he could cause us to take actions that are
contrary to your interests and that could reduce the value of your
stock..
We do not intend to pay cash
dividends in the foreseeable future; this may affect the price of our
stock.
We
currently intend to retain all future earnings for use in the operation and
expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances
dictate. Should we decide in the future to do so, as a holding
company, our ability to pay dividends and meet other obligations depends upon
the receipt of dividends or other payments from our operating affiliate based in
the PRC, which, from time to time, may be subject to restrictions on its ability
to make distributions to us, including as a result of restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. See “Risks related to doing business in the People’s
Republic of China” above.
There
is currently no trading market for our common stock; you may not be able to sell
your shares.
You may
not be able to sell your shares due to the absence of an established trading
market.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
We intend
for this discussion to provide the reader with information that will assist in
understanding the financial statements of Technic, the changes in certain
key items in those financial statements from year to year, and the primary
factors that accounted for those changes, as well as how certain accounting
principles affect our financial statements. This discussion should be read in
conjunction with our financial statements and accompanying notes as of September
30, 2009, and for the years then ended.
Foshan,
our PRC based [illegible] company, is a technologically advanced nonwovens
company engaged in the manufacturing, sales and research and development of
spun-bond PET (polyester) nonwovens in the PRC.
Nonwoven
fabrics are broadly defined as sheet or web structures bonded together by
entangling fiber or filaments (and by perforating films) mechanically, thermally
or chemically. They are flat, porous sheets that are made directly from separate
fibers or from molten plastic or plastic film. They are not made by weaving or
knitting and do not require converting the fibers to yarn.
Our major
market is the Chinese market. In recent years, our products have been
successfully launched in the European, North American and South East Asian
markets. These products have won significant acceptance and we enjoy a
substantial reputation for quality with both domestic and foreign
customers.
Currently,
our major products are spun-bond, thermal calendaring and needle-punched
industrial non-woven PET (polyester) and PP (polypropylene) fabrics, and their
derivative products. These products are used as filtration media and
infrastructure engineering material, among other uses.
We
currently operate three spun-bond production lines. Two lines are spun-bond,
thermal calendaring production lines with a total annual capacity of 4,000 tons
of spun-bond polyester filament thermal calendaring nonwoven. In
February 2009, we added the third line, spun-bond needle-punching production
line with an annual capacity of 4,000 tons of spun-bond polyester filament,
needle-punched nonwoven fabric.
We had
revenues of $11.8 million and $11.6 million in fiscal 2009 and 2008,
respectively, with $2.4 million and $2.7 million in net income for the same
periods.
Our
fiscal year ends on September 30. Throughout this section we refer to
the fiscal years ended September 30, 2009, and 2008 as “2009,” and “2008”
respectively.
Results
of Operations
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in US dollars and as a percentage of net sales
(percentages may not add due to rounding). See the financial statements of the
Company and the related notes thereto and other financial information included
elsewhere in this report.
34
Year
ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Sales
|
11,849,712 | 100 | % | 11,611,719 | 100 | % | ||||||||||
Costs
of Sales
|
7,906,614 | 67 | % | 8,123,804 | 70 | % | ||||||||||
Gross
Profit
|
3,943,098 | 33 | % | 3,487,915 | 30 | % | ||||||||||
SG&A
expense
|
1,219,114 | 10 | % | 792,366 | 7 | % | ||||||||||
Bad
debt expense (recovery)
|
11,497 | 0 | % | (129,885 | ) | -1 | % | |||||||||
Operating
Income
|
2,712,487 | 21 | % | 2,825,434 | 24 | % | ||||||||||
Other
Expenses
|
269,849 | 2 | % | 150,570 | 1 | % | ||||||||||
Net
Income before taxes
|
2,445,652 | 18 | % | 2,699,175 | 23 | % | ||||||||||
Net
Income
|
2,445,652 | 18 | % | 2,699,175 | 23 | % |
2009
COMPARED TO 2008
Sales
Net sales
increased $237,993, or 2%, to $11,849,712 from $11,611,719 in 2009 compared to
2008. In February 2009, we installed a new production line, spun-bond needle
punching production line. The sales of new needle-punching products in 2009 were
$2,842,101. The sales of products from the thermal calendaring production line
in 2009 were $9,007,161, a decrease of $2,604,108 compared to $11,611,719 in
2008 due to the slowdown of the world economy. The increase of new
product sales offset by the decrease of existing products resulted in a net
increase of $237,993 in total sales in 2009.
Cost
of Goods Sold
Cost of
goods sold decreased $217,190 or 3% from $8,123,804 in 2008 to
$7,906,614 in 2009. Cost of goods sold principally
consists of the cost of raw materials, labor, and manufacturing overhead
expenses.
Raw
material expenses decreased from 49% of sales in 2008 to 47% of sales in 2009,
reflecting a mix of less expensive raw materials associated with 2009 sales.
Labor expenses were 3% of sales in 2009 and were at about the same rate in 2008.
Overhead expenses decreased from 16% of net sales in 2009 compared to 18% of net
sales in 2008 due to the lower electricity expenses and repair and maintenance
expenses.
Gross
Profit
Gross
profit increased by $455,123 or 13%, to $3,943,098 in 2009 compared to 3,487,915
in 2008. As a percentage of net sales, gross profit was 33% in
2009 as compared to 30% in 2008. This was primarily due to a slight
increase of sales and a decrease in the cost of goods sold in 2009.
Selling,
Marketing and Administrative Expenses
Selling,
general and administrative expenses increased $426,778 from $792,366 in 2008 to
$1,219,114 in 2009 primarily due to increases of (i) $76,980 in legal
and accounting fees and $175,036 in expenses incurred in our efforts to raise
external financing in the United States, and (ii) $120,795 in employee salaries
and benefits, and (iii) $57,882 in transportation expenses due to the change of
transportation company in order to better satisfy customers’
requirements. Additionally, we have increased our sales and marketing
capacity to support the development of our new products and expansion into new
geographic markets. As a result, selling, marketing and
administrative expenses as a percentage of net sales increased from 6.8% in 2008
to 10.2% in 2009.
35
Other
Expenses
Interest
expense increased $119,279 from $150,570 in 2008 to $269,849 in
2009. Interest expense as a percentage of sales increased to 2.3% in
2009 from 1.3% in 2008. The increase in interest expense was
principally due to a higher average amount of indebtedness outstanding in
2009.
Net
Income
Net
income decreased by $253,523, from net income of $2,699,175 in 2008 to
$2,445,652 in 2009, as a result of (i) increase in general administrative
expenses due to the increased costs incurred to seek external financing, (ii)
increase in interest expense due to a higher average amount of indebtedness
outstanding in 2009.
Foreign
Currency Translation Adjustments
Throughout
2009, the RMB rose steadily against the US dollar. As a result of the
appreciation of the RMB, we recognized a foreign currency translation loss of
$57,078. Given the uncertainty of exchange rate fluctuations, we cannot estimate
the effect of these fluctuations on our future business, product pricing,
results of operations or financial condition, but the fluctuation of the
renminbi may materially and adversely affect your investment if the current
trend of appreciation of RMB s reversed.
All of
our revenue and expenses in 2009 were denominated in renminbi. Our income
statement accounts were translated at the yearly average exchange rate of $1 to
6.83RMB and the balance sheet items, except the equity accounts, were translated
at the year-end rate of $1 to 6.83RMB. The equity accounts were stated at their
historical rate when the corresponding transactions occurred.
Net
foreign currency translation losses were $57,078, or 0.05% of sales, in 2009 as
compared with the previous year's net foreign currency translation gain of
$1,020,734, or 8.8% of sales.
Liquidity
and Capital Resources
We
generally finance our business with cash flows from operations and short-term
bank loans and we use shareholders’ equity investment and retained earnings to
fund capital expenditures.
Working
capital consists mainly of cash, accounts receivable, advances to suppliers and
inventory. Cash, inventory and accounts receivable account for the majority of
our working capital.
Our
working capital requirements may be influenced by many factors, including cash
flow, competition, relationships with suppliers, and the availability of credit
facilities and financing alternatives, none of which can be predicted with
certainty.
At
September 30, 2009, we had several bank loans for the total amount of RMB31
million with Agriculture Bank of China, Foshan Branch and these loans are
repayable in September 2010. We have the highest credit rating
for that bank.
Cash
from Operating Activities
2009
compared with 2008
Net cash
generated from operating activities for 2009 was approximately $2.7 million,
representing a decrease of $0.7 million, or 21%, from approximately $3.4 million
for 2008. The decrease was due primarily to a decrease in net income,
increase in receivables, advances to suppliers and inventory and a decrease in
accounts payable and accrued liabilities.
36
Cash
in Investing Activities
2009
compared with 2008
Net cash
used in investing activities for 2009 was approximately $1.2 million, a decrease
of $3.2 million from approximately $4.4 million for 2008. The greater investment
costs of 2008 were due to our purchases of equipment and expenses relating to
outfitting our facilities.
We
satisfied this cash expenditure with cash reserves and cash generated from 2009
operations.
Cash
in Financing Activities
Recent
Events
On
February 12, 2010, we completed a private placement of an aggregate principal
amount of $4,140,000 secured convertible notes. We received net
proceeds of $3,205,349 million from that financing. For a description
of that financing, please refer to Item 1.01 of this report, “Entry into a
Material Definitive Agreement.”
2009
compared with 2008
Net cash
used in financing activities for 2009 was approximately $0.6 million, an
increase of $0.5 million compared with net cash used in financing activities of
$0.1 million for 2008. The change was caused by our bank loan of
approximately $0.6 million.
Loans
The
balance of our outstanding short-term bank loans at the end of 2009 was
approximately $4.6 million, compared with $5.2 million at the end of
2008. We repaid our loan of $0.6 million in
2009.
Other
than disclosed in the financial statements, we have has no long term debt,
capital lease obligations, operating leases or any other long term obligations
at the end of 2009.
Future
Cash Commitments
We have
ambitious capital investment plans for our PPS projects in 2010 which will
require significant investment capital. This demand for investment
capital will be met by the proceeds from the February private placement, and by
additional outside financing that we intend to raise as needed to continue our
expansion.
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. Our
financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” We believe that the following paragraphs reflect the more
critical accounting policies that currently affect our financial condition and
results of operations:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method accounting for
financial reporting purposes. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States and have been
consistently applied in the presentation of financial statements, which are
compiled on the accrual basis of accounting.
37
Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Management makes these estimates using the best information available
at the time the estimates are made; however actual results could differ
materially from those estimates.
Economic
and political risks
Our
operations are conducted in the PRC. Accordingly, our business,
financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
Our
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. Our results may be
adversely affected by changes in political and social conditions in the PRC and
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
Revenue
recognition
Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, and the seller’s price to the buyer is fixed or
determinable
Land
use rights
Land use
rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method.
Estimated useful lives range from 20 to 50 years.
Property,
plant and equipment
Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of plant and equipment are as follows:
Buildings
|
15-35
years
|
||
Machinery
and equipment
|
10
years
|
||
Office
equipment
|
6-10
years
|
||
Motor
vehicles
|
6-8
years
|
||
Other
assets
|
6-10
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
38
Accounting
for the Impairment of Long-Lived Assets
The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the
assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
PROPERTIES
All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants or allocates landholders a “land use
right,” which we sometimes refer to informally as land ownership. There are four
methods to acquire land use rights in the PRC:
|
·
|
grant of the right to use
land;
|
|
·
|
assignment of the right to use
land;
|
|
·
|
lease of the right to use land;
and
|
|
·
|
allocated land use
rights
|
Granted
land use rights are provided by the government in exchange for a grant fee, and
carry the rights to pledge, mortgage, lease, and transfer within the term of the
grant. Land is granted for a fixed term, generally 70 years for residential use,
50 years for industrial use, and 40 years for commercial and other use. The term
is renewable in theory. Unlike the typical case in Western nations, granted land
must be used for the specific purpose for which it was granted.
Allocated
land use rights are generally provided by the government for an indefinite
period (usually to state-owned entities) and cannot be pledged, mortgaged,
leased, or transferred by the user. Allocated land can be reclaimed by the
government at any time. Allocated land use rights may be converted into granted
land use rights upon the payment of a grant fee to the
government.
39
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth, as of the close of business on February 12, 2010,
certain information with respect to the beneficial ownership of our common
stock, by (i) any person or group with more than 5% of any class of voting
securities, (ii) each director, (iii) our chief executive officer and each other
executive officer whose cash compensation for the most recent fiscal year
exceeded $100,000 and (iv) all executive officers and directors as a
group. The table reflects the ownership of our equity securities by
the foregoing parties before the 1 for 5 reverse stock split which will occur on
the filing of a certificate of amendment with the Secretary of State of the
State of Delaware which filing will be made at least 20 days after the date the
Information Statement on Schedule 14C is first mailed to the our
shareholders.
Name and
Address of
Shareholder
|
Amount and
Nature of
Beneficial
Ownership
|
Percent of Class
(1) (2)
|
Amount and
Nature
of Beneficial
Ownership
|
Percent of Class
(1) (2)
|
||||||||||||
Owners
of more than 5% of Class
|
Pre
Reverse Split
(3)
|
Pre
Reverse Split
(3)
|
Post
Reverse Split
(3)
|
Post
Reverse
Split (3)
|
||||||||||||
Bestyield
Group Limited (4)
|
21,765,305 | 28.7 | % | 4,353,061 | 28.7 | % | ||||||||||
Proudlead
Limited (5)
|
21,765,305 | 28.7 | % | 4,353,061 | 28.7 | % | ||||||||||
Li
Jun (6)
|
13,421,940 | 17.7 | % | 2,684,388 | 17.7 | % | ||||||||||
Pilot
Link International Limited (7)
|
8,343,365 | 11 | % | 1,668,673 | 11 | % | ||||||||||
High
Swift Limited (8)
|
5,441,325 | 7.2 | % | 1,088,265 | 7.2 | % | ||||||||||
Directors
and officers (9)
|
||||||||||||||||
Li
Jie (chief executive officer and director) (4)
|
21,765,305 | 28.7 | % | 4,353,061 | 28.7 | % | ||||||||||
Law
Wawai (president of sales and a director) (5)
|
21,765,305 | 28.7 | % | 4,353,061 | 28.7 | % | ||||||||||
Ting
(Maggie) Wang (chief financial officer)
|
0 | - | 0 | - | ||||||||||||
Shijun
Zeng (chief technology officer)
|
0 | - | 0 | - | ||||||||||||
Wei
Yang (secretary)
|
0 | - | 0 | - | ||||||||||||
Chris
Bickel (director) (10)
|
1,453,776 | 1.9 | 290,755 | 1.9 | ||||||||||||
Li
Jun (6)
|
13,421,940 | 17.7 | % | 2,684,388 | 17.7 | % | ||||||||||
Directors
and officers as a group (7 persons)
|
58,406,326 | 77 | % | 11,681,265 | 77 | % |
40
(1) As
of the close of business on February 12, 2010, there were 75,818,571 shares of
our common stock outstanding.
(2) In
determining beneficial ownership of the common stock, the number of shares shown
includes shares which the beneficial owner may acquire upon exercise of
convertible securities, warrants or options which may be acquired within 60 days
of February 12, 2010. There are no such securities
outstanding. In accordance with Rule 13d-3 in determining the
percentage of common stock owned by a person on February 12, 2010, (a) the
numerator is the number of shares of the class beneficially owned by such
person, including shares which the beneficial owner may acquire within 60 days
upon conversion or exercise of the warrants and other convertible
securities, and (b) the denominator is the sum of (i) the total shares of that
class outstanding on February 12, 2010, and (ii) the total number of shares that
the beneficial owner may acquire upon conversion or exercise of other
securities. Unless otherwise stated, each beneficial owner has sole power to
vote and dispose of the shares.
(3) A
1 for 5 reverse stock split will be effective on the filing of a certificate of
amendment with the Secretary of State of the State of Delaware which filing will
be made at least 20 days after the date an Information Statement on Schedule 14C
is first mailed to the our shareholders. The Schedule 14C is being
filed contemporaneously with the filing of this Current Report on Form
8-K.
(4) Bestyield
Group is a BVI company controlled by Li Jie our Chief Executive
Officer. Its address is PO Box 957 Offshore Incorporations Center,
Road Town, Tortola, British Virgin Islands Mr. Li has sole
voting power with respect to the shares. Bestyield has guaranteed our
obligations to the investors under the notes. These shares have been
pledged to secure the performance of that guaranty.
(5) Proudlead
Limited is a BVI company controlled by Law Wawai our president of sales and a
director. Its address is PO Box 957 Offshore Incorporations Center,
Road Town, Tortola, British Virgin Islands. Mr. Law has sole
voting power with respect to the shares. Proudlead has guaranteed our
obligations to the investors under the notes. These shares have been pledged to
secure the performance of that guaranty.
(6) Represents 11,608,164
shares held by Newise Holdings, a BVI company controlled by Li Jun, one of
our directors. Its address is PO Box 957 Offshore
Incorporations Center, Road Town, Tortola, British Virgin
Islands. Mr. Jun has sole voting power with respect to the
shares. In addition, under the terms of an agreement between Foshan
and United Best Investment Limited, a company controlled by Mr
Jun, United received, as a transaction fee following the closing of
the share exchange agreement, 1,813,776 shares of our common
stock. In addition under that agreement, if prior
to February 12, 2011, we issue any shares of our common stock (or any securities
convertible into or exercisable for its common stock ), then United will be
issued such number of shares of our common stock which, when added to
the 1,813776, will
total 2.5% of the our shares then outstanding,
determined on a fully-diluted basis.
(7) Pilot
Link International is a BVI company controlled by Li Shiyi and Yang Wei, PRC
residents. Its address is PO Box 957 Offshore Incorporations Center,
Road Town, Tortola, British Virgin Islands. Li Shiyi and Yang Wei
have shared voting power with respect to the shares.
(8) High
Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC
resident. Its address is PO Box 957 Offshore Incorporations
Center, Road Town, Tortola, British Virgin Islands. Mr. Hung has sole
voting power with respect to the shares.
41
(9) The
address of the directors and executive officers listed in the table
is: Perpetual Technologies, Inc. Shishan Industrial Park Nanhai
District, Foshan City, Guangdong Province, PRC
(10) Chris
Bickel is President of Primary Capital LLC the placement agent in the private
financing. Under the
terms of an agreement between Foshan and Primary
capital, Primary received, at
the closing of the share exchange agreement, 1,453,776
shares of
our common stock.
AND
CONTROL PERSONS
Our
Directors and Executive Officers
In
connection with the change in control of the company described in Item 5.01 of
this report, effective immediately prior to the reverse merger which was
effective on February 12, 2010, Seth Winterton and Joseph Nemelka, our former
directors appointed Jie Li and Chris Bickel as directors, Messrs. Winterton and
Nemelka resigned as our officers and directors. The new Board appointed the
persons set forth below as our officers.
The
following table sets forth information concerning our current directors and
executive officers:
Directors and Executive
Officers
|
Position/Title
|
|
Jie
Li
|
Chief
Executive Officer and director
|
|
Ting
(Maggie) Wang
|
Chief
Financial Officer
|
|
Law
Wawai
|
President
of Sales and director
|
|
Shijun
Zeng
|
Chief
Technology Officer
|
|
Wei
Yang
|
Secretary
|
|
Chris
Bickel
|
Director
|
|
Li Jun |
Director
|
Except
for Mr. Chris Bickel and Ms. Maggie Wang, all of our officers and directors are
residents of the PRC. As a result, it may be difficult for investors to
effect service of process within the United States upon any of them or to
enforce court judgments obtained against them in the United States
courts.
The
following is a summary of the biographical information of our
directors and officers:
42
Jie Li: Mr. Li was
elected director and appointed as our Chief Executive Officer on February 12,
2010. Mr. Li has served as Chief Executive Officer and Managing
Director of Foshan SLP Special Materials Co., Ltd. since its inception in
2000. He also serves as Director General of the China Industrial
Textile Committee. From 1980 to 2000 he served as R&D director of
Dalian Synthetic Fiber Research Institute. From 1970 to 1980 he worked at Dalian
Hongguang Chemical Factory. From September 1976 to July 1980 Mr. Li
Studied Chemical Fiber Technique at Dalian Light Industry School and received a
bachelor’s degree in Engineering. From 1995 to 1998 he studied
economic management at Chinese Academy of Social Sciences and received his
master’s degree. From 2000 to 2003 he also studied for an MBA at
Southwest International University.
Ting (Maggie)
Wang: Ms. Wang was appointed as our Chief Financial
Officer on February 12, 2010. Ms. Wang has served as Chief
Financial Officer of Foshan since November 2008. From May 2007
to July 2008 she served as Manager of Finance of Epic Data International,
Inc. Epic is based Vancouver, British Columbia and has subsidiaries
in the United States Europe, is listed on the Toronto Stock Exchange and is a
provider of manufacturing operations management and real time data
collection. From November 2006 to May 2007 Ms.
Wang was a senior accountant at Hunter Dickinson, Inc. Based in
Vancouver, BC, Hunter is a private Canadian company which provides services
to publicly traded companies around the world in mineral exploration,
development and production. From June 2003 to November 2006 Ms. Wang
was an accountant at the Vancouver Symphony Society. From 1989
to 1993 she attended Jiangsu Technology University and received her BA in
Accounting in 1993.
Law Wawai, 45: Mr.
Law was appointed as our President of Sales on February 12,
2010. Form 1197 to 2010 Mr. Law served as director and general
manager of Nanhai Wanzhi Trading Co. From 1987 to 1997 he was sales
manger Nanhai Polyester Factor. From 1983 to 1987 he studies
business management at Nanhai Television University and received his bachelors
degree in 1987.
Yang Wei, 30: Yang
Wei was appointed as our Secretary on February 12,
2010. Ms. Wang has served as administrative director of Foshan
since November 2008. From May 2008 until November 2008 she
worked as office manager for the Beijing Chaoyand District Jinzhan Park Managing
Committee. From September 2006 to May 2008 she served as
general manager Dalian Beisuo Co Ltd. From 1988 to 1992 she
attended Dalian University Engineering College and received her bachelors degree
in mechanical engineering in 1992.
Zeng Shijun,
48. Zeng
Shijun was appointed as our Technical Director on February 12,
2010. He has worked for Foshan and its predecessors since
1984. He received his bachelors degree from Dalian
University of Technology where
Chris Bickel: Mr.
Bickel was elected director on February 12, 2010. Mr. Bickel is the
President of Primary Capital and responsible for business development in China.
From 2005 through October of 2009 Mr. Bickel, and his investment banking team,
provided a full range of investment banking, due diligence and business advisory
services to private China based companies interested in listing in the US
markets, as well as advisory services to US based investment banking firms
interested in identifying investment banking clients in China. These services
were provided under Rosewood Capital Group, LLC, previously an affiliate of
Primary Capital LLC, and now a branch office. Mr. Bickel was instrumental in
originating and financing the following transactions: Fushi Copperweld, listed
FSIN on NASDAQ, Dalian Rino, listed RINO on NASDAQ, Wuhan General, listed WUHN
on NASDAQ and Sinogas, listed SGAS on the OTC BB. From 2001 through 2004 Mr.
Bickel was the Chairman and CEO of Sino UJE Ltd., a Hong Kong based company
which is a distributor of medical and industrial instrumentation and technology
products. The company distributes products from the US, Japan and Europe into
China through its headquarters in Hong Kong and representative Chinese offices
in Guangzhou and Shanghai. From 1997 to 2001 Chris Bickel was the President of
eV Products, which is now eV Microelectronics, a division of Endicott
Interconnect Technologies. eV develops and manufactures solid state X-ray
detectors, Gamma –ray detectors which have industrial, medical, laboratory and
homeland security applications. From 1983 to 1996 Mr. Bickel was based in Hong
Kong and was employed by Honeywell. He was responsible for the management of
offices in Korea, Japan, Taiwan, Indonesia, Malaysia, Australia and the PRC, for
the distribution of sensors, lasers, radioisotopes and control
instrumentation.
Li Jun: Mr. Li Jun
is the owner and manager of Shanghai Primary Capital Management Co., Ltd., a
business advisory firm incorporated in Shanghai China, which he started in
200. He provides advisory services to China business owners seeking
capital and advisory services related to listing their company on a US
exchange.
He has
over twenty years of experience working in China in various fields and in
various capacities. Mr. Li Jun founded Shanghai Rosewood Investment Consulting
Co., Ltd in 2005 and participated in four listing and financing transactions in
which China based companies received funding from US based investors and listed
on in the US. Mr. Li Jun was instrumental in originating and advising on the
following transactions: Fushi Copperweld, listed FSIN on NASDAQ, Dalian Rino,
listed RINO on NASDAQ, Wuhan General, listed WUHN on NASDAQ and Sinogas, listed
SGAS on the OTC BB.
From 2001
through 2008 Mr. Li Jun has been the Managing Director of SINO UJE, Ltd., a Hong
Kong based company which is a distributor of medical and industrial
instrumentation and technology products throughout Asia. From 1994 through 2000,
Mr. Li Jun was employed by Nanchang Minerals Machinery Imp and Exp Co., Ltd
initially as a salesman, followed by promotions to department director and vice
president. During his five year tenure as vice president he was credited with
growing the company’s revenue from two million dollars to over twenty million
dollars annually. From 1987 through 1994 Mr. Li Jun served as an instructor at
the University of Military Science and Technology and he retired as a Major from
the Chinese People’s Liberation Army. From 1980 through 1987 Mr. Li Jun studied
at Shanghai Jiaotong University where he received his Bachelor’s and his
Master’s degree of Science.
All of
our directors hold their positions on the board until our next annual meeting of
the stockholders, and until their successors have been qualified after being
elected or appointed. Officers serve at the discretion of the board of
directors.
There are
no family relationships among our directors and executive officers. There is no
arrangement or understanding between or among our executive officers and
directors pursuant to which any director or officer was or is to be selected as
a director or officer, and there is no arrangement, plan or understanding as to
whether non-management shareholders will exercise their voting rights to
continue to elect the current board of directors.
Our
directors and executive officers have not, during the past five
years:
43
·
|
had
any bankruptcy petition filed by or against any business of which was a
general partner or executive officer, either at the time of the bankruptcy
or within two years prior to that
time,
|
·
|
been
convicted in a criminal proceeding and is not subject to a pending
criminal proceeding,
|
·
|
been
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities; or
|
·
|
been
found by a court of competent jurisdiction (in a civil action), the
Securities Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or
vacate
|
Audit
Committee Financial Expert
Our board
of directors currently acts as our audit committee. Because we only
recently completed the share exchange, our Board of Directors is still in the
process of finding an “audit committee financial expert” as defined in
Regulation S-K and directors that are “independent” as that term is used in
Section 10A of the Securities Exchange Act.
Audit
Committee
We have
not yet appointed an audit committee. At the present time, we believe that
the members of Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting. We do, however, recognize the
importance of good corporate governance and intend to appoint an audit committee
comprised entirely of independent directors, including at least one financial
expert, in the near future.
Compensation
Committee
We
do not presently have a compensation committee. Our board of directors
currently acts as our compensation committee.
Nominating
Committee
We
do not presently have a nominating committee. Our board of directors
currently acts as our nominating committee.
44
EXECUTIVE
COMPENSATION
The
following is a summary of the compensation we paid to our former chief executive
officers, for the last two fiscal years ended September 30, 2009 and 2008. No
executive officer received compensation in excess of $100,000 for any of those
two years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
Seth
Winterton
(former
CEO(1)
|
2009
2008
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0—
0-
|
|||||||||||||||
Joseph
Nemelka (former CEO)(2)
|
2009
2008
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
(1)
|
Seth
Winterton served as CEO of Perpetual Technologies from December 29, 2008
until February 12, 2010.
|
(2)
|
Joseph
Nemelka served as Chief Executive Officer of Perpetual Technologies from
January 2008 until December 29,
2008.
|
The
following is a summary of the compensation paid by Foshan to Jie Li, its
President and Chief Executive Officer, for the last two fiscal years ended
September 30, 2009 and 2008, respectively. No executive
officer of Foshan received compensation in excess of $100,000 for any of these
two years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)(1)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||
Jie
Li
(President
and Chief
Executive
Officer
)
|
2009
2008
|
44,117
44,117
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
[Please
provide]
(1) The
relevant exchange rates for fiscal years ended September 2009 and 2008 are $1 to
RMB 6.8 and RMB 6.8, respectively.
45
Compensation
Discussion and Analysis
We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar
locations.
It is not
uncommon for PRC private companies to have base salaries as the sole form of
compensation. The base salary level is established and reviewed based on the
level of responsibilities, the experience and tenure of the individual and the
current and potential contributions of the individual. The base salary is
compared to the list of similar positions within comparable peer companies and
consideration is given to the executive’s relative experience in his or her
position. Base salaries are reviewed periodically and at the time of
promotion or other changes in responsibilities.
We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.
We will
also consider forming a compensation committee to oversee the compensation of
our named executive officers. The majority of the members of the
compensation committee would be independent directors.
Compensation
of Directors
The
following is a summary of the compensation we paid to our former directors,
Joseph Nemelka and Seth Winterton, during the fiscal year
ended 2009.
Name and
Principal
Position
|
Fiscal
Year
|
Fees
Earned
or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||
Joseph
Nemelka (former
director)(1)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
Seth
Winterton (former director (2)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1)
|
Joseph
Nemelka and Seth Winterton resigned as directors effective February 12,
2010.
|
As of the
date of this report, we have no formal or informal arrangements or agreements to
compensate our directors for services they provide as directors. We plan to
implement a compensation program for our independent directors, as and when they
are appointed, which we anticipate will include such elements as an annual
retainer, meeting attendance fees and stock options. The details of that
compensation program will be negotiated with each independent
director.
46
The
directors for Foshan are not compensated for their service as
directors.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Except as
set forth below, since October 1, 2007, the Company was
not a party to any transaction (where the amount involved exceeded
the lesser of $120,000 or 1% of the average of our assets for the last two
fiscal years) in which an director, executive officer, holder of more than five
percent of our common stock, or any member of the immediate family of any such
person have or will have a direct or indirect material interest and no such
transactions are currently proposed.
Chris
Bickel is a director of the company. He is also President of
Primary. Under the terms of the placement agency agreement dated November
17, 2009 between Primary and our company, Primary was paid a fee of $202,000 at
the closing of the private financing. In addition, on automatic conversion
of the notes, Primary shall receive a five-year warrant to purchase that number
of securities equal to 5% of the number of securities issued on such conversion,
exercisable at the price at which the notes converted. If no such
conversion occurs, Primary shall receive a five-year warrant to purchase that
number of shares of common stock, if any, equal to 5% of the common stock
underlying the warrants issued to the investors in the private financing,
exercisable at the same price at which those investor warrants are
exercisable. At the closing of the share exchange, Primary also
received 1,813,776 shares of our common stock with certain anti-dilution
protections. In particular, if prior to February 12, 2011 we issue
any shares of our common stock (or any securities convertible into or
exercisable for our common stock, other than certain securities issued to
employees, directors and the like), then Primary will be issued such number
of additional shares of our common stock (the “Adjustment Shares”) which, when
added to the 1,813,776 shares (plus any previously issued Adjustment Shares),
will total 2.5% of the shares of our common stock then outstanding,
determined on a fully-diluted basis.
Li Jun is
a director and is a holder of more than 5% of our common stock. Under the
terms of an agreement between United Best and the company, United Best was paid
a fee of $202,000 at the closing of the private financing. In addition, on
automatic conversion of the notes, United Best shall receive a five-year warrant
to purchase that number of common stock equal to 5% of the number
of securities issued on such conversion, exercisable at the price at which
the notes converted. If no such conversion occurs, United Best
shall receive a five-year warrant to purchase that number of shares of common
stock, if any, equal to 5% of the common stock underlying the warrants issued to
the investors in the private financing, exercisable at the same price at which
those investor warrants are exercisable. At the closing of the share
exchange agreement, united also received 1,813,776 shares of our common stock
with certain and dilution protection. In particular, if prior to February 12,
2011, we issue any shares of our common stock (or any securities convertible
into or exercisable for our common stock ), (other than certain securities
issued to employees directors and the like) then United Best will be
issued such number of shares of our common stock which, when added to
the 1,813,776, will total 2.5% of the our shares then outstanding,
determined on a fully-diluted basis.
In each
of June 2007 and in February 2008 and May 2008, Joseph Nemelka, our former
President, advanced funds to the Company in the total aggregate amount of
$15,000. The advances were due on demand and bears interest at 8% per
annum. This indebtedness was forgiven in February 2010 prior to the
reverse merger.
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.
47
Except
for the foregoing, no executive officer or director any member of these
individuals’ immediate families, any corporation or organization with whom any
of these individuals is an affiliate or any trust or estate in which any of
these individuals serve as a trustee or in a similar capacity or has a
substantial beneficial interest in is or has been indebted to the Company at any
time since the beginning of the Company’s last fiscal year.
LEGAL
PROCEEDINGS
We know
of no material, active, pending or threatened proceeding against us
or our subsidiaries, nor are we, or any subsidiary, involved as a
plaintiff or defendant in any material proceeding or pending
litigation.
48
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANTS
COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock does not trade and is not quoted on any public
market. We intend to apply to have our stock quoted on the
over-the-counter Bulletin Board.
As of the
close of business on February 12, 2010, we had approximately 219
shareholders of record of our common stock. The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Holders of the common stock
have no preemptive rights and no right to convert their common stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the common stock
Dividends
We have
not paid dividends on our common stock and do not anticipate paying such
dividends in the foreseeable future. We will rely on dividends from Foshan for
our funds and PRC regulations may limit the amount of funds distributed to us
from Foshan, which will affect our ability to declare any
dividends.
Securities
authorized for issuance under equity compensation plans
As of the
date of this report, we do not have any securities authorized for issuance under
any equity compensation plans and we do not have any equity compensation
plans.
RECENT
SALES OF UNREGISTERED SECURITIES
For
descriptions of our recent sales of unregistered securities, please refer to
Item 1.01, “Entry into a Material Definitive Agreement,” and Item 3.02,
“Unregistered Sales of Equity Securities”
The
issuance of common stock under the share exchange agreement and the issuance
of our notes and warrants under the note purchase agreement was
exempt from registration, in the case of the common stock issued
under the share exchange agreement, under Regulation S and, in the
case of the notes and warrants issued under the note purchase
agreement under Section 4(2) of the Securities Act and Regulation
D. Each of the recipients of the notes and warrants has such
knowledge and experience in financial and business matters that such recipient
is capable of evaluating the merits and risks of an investment in our securities
under Rule 506 of Regulation D.
DESCRIPTION
OF SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to this report. The following discussion is qualified in its
entirety by reference to such exhibits.
General
We are
authorized to issue 200,000,000 shares of common stock, par value $.001 per
share, and 10,000,000 shares of blank-check preferred stock, par value $.001 per
share.
49
On
February 12, 2010, immediately prior to the closing of the share exchange
agreement, shareholders holding 12,640,000 of the 13,000,000 shares of our then
outstanding common stock agreed to surrender their shares for
cancellation in payment by Joe Nemelka of an aggregate amount
of $40,000, pursuant to stock purchase agreements entered
into between Joe Nemelka and each such holder. Under the share
exchange agreement we issued an aggregate of 72,551,020 shares of common stock
to the stockholders of Hong Hui. In
addition, immediately following the closing of the share exchange agreement we
issued 1,813,776
and 1,453,776 shares of
our common stock to
United
Best and Primary Capital as a transaction fee in
connection with the closing
of the reverse
merger and private financing. In
addition there are 360,000 shares held by round lot
shareholders. Accordingly,
as of February 12, 2010 following the closing of all of these transactions there
were 75,818,571 shares
of common stock issued and outstanding.
As more
fully described in an Information Statement on Schedule 14C being
filed with the Commission contemporaneously with this report, on
February 12, 2010 the board of directors and the holders of majority of our
outstanding shares entitled to vote thereon approved the following corporate
actions:
|
to
change the name of the Company to Chinese Special
Materials Co., Ltd; and
|
|
a
one for five (1:5) reverse stock split of our shares of common
stock.
|
These corporate actions will become
effective on the filing with the Secretary of State of Delaware of a certificate
of amendment to our certificate of incorporation which will be filed at least 20
days after the date of the mailing of this Information Statement on Schedule 14C
to the shareholders.
The
following is a summary of the material terms of our capital stock.
Each
share of our common stock has one vote on all matters including election of
directors, without provision for cumulative voting. The common stock is not
redeemable and has no conversion or preemptive rights. In the event
we are liquidated, the holders of common stock will share equally in any balance
of our assets available for distribution to them after satisfaction of creditors
and preferred shareholders. The holders of our common stock are entitled to
equal dividends and distributions per share with respect to the common stock
when, as, and if declared by the board of directors from funds legally
available.
In
addition to the 200,000,000 shares of common stock, we are authorized to issue
10,000,000 shares of preferred stock. Shares of our preferred stock
may be issued from time to time in one or more classes or series, each of which
class or series shall have such distinctive designation or title as shall be
fixed by the board of directors prior to the issuance any shares
thereof.
The
issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For instance, the issuance of a series of preferred stock might impede a
business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
common stock. Although the board of directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of our stockholders, the board of directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock. The board of directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized preferred
stock, unless otherwise required by law.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Our
by-laws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against attorney's fees and other
expenses incurred by them in any litigation to which they become a party arising
from their association with or activities on our behalf. We will also bear the
expenses of such litigation for any of our directors, officers, employees, or
agents, upon such persons promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to indemnification.
This indemnification policy could result in substantial expenditures by us,
which it may be unable to recoup.
50
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
following selected consolidated statement of operations data contains
consolidated statement of operations data for each of the years in the two-year
period ended September 30, 2009 and the consolidated balance sheet data as of
year-end for each of the years in the two-year period ended September 30,
2009.
The
consolidated statement of operations data and balance sheet data were derived
from the audited consolidated financial statements. Such financial data should
be read in conjunction with the consolidated financial statements and the notes
to the consolidated financial statements starting on page F-1 and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
2009
|
2008
|
|||||||
Sales
|
$ | 11,849,712 | 11,611719 | |||||
Cost
of sales
|
||||||||
Gross
profit
|
$ | 3,943,098 | 3,487,915 | |||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
1,219,114 | 792.366 | ) | |||||
Bad
Debt (recovery) expense
|
11,497 | (129,885 | ) | |||||
Operating
income
|
$ | 2,712,487 | 2,825,434 | |||||
Other
expenses (income)
|
266,835 | 126,259 | ||||||
Net
Income before income taxes
|
$ | 2,445,652 | 2,699,175 | |||||
Income
taxes
|
- | - | ) | |||||
Net
income
|
$ | 2,445,652 | 2,445,652 | |||||
Other
comprehensive income:
|
||||||||
Foreign
currency translation adjustment
|
(57,078 | ) | 1,020,734 | |||||
Total Comprehensive
income
|
2,388,574 | 3,719,909 | ||||||
$ |
51
Consolidated Balance Sheets
|
Fiscal Year
ended
September
30, 2009
($)
|
Fiscal Year
ended
September
30, 2008
($)
|
||||||
Current
Assets
|
6,650,979 | 5,564,017 | ||||||
Total
Assets
|
18,673,866 | 17,363,372 | ||||||
Current
Liabilities
|
5,064,425 | 6,142,505 | ||||||
Total
Liabilities and Stockholders’ Equity
|
18,673,866 | 17,363,372 |
Item 3.02 Unregistered
Sales of Equity Securities.
Please
refer to Item 1.01 - “Entry into a Material Definitive Agreement” for a
description of the unregistered sales of equity securities pursuant to the share
exchange agreement and the note purchase agreement, which is incorporated in its
entirety into this Item 3.02.
Please
refer to the section of this report entitled “Certain Relationships and Related
Transactions” in Item 2.01 - “Completion of Acquisition or Disposition of
Assets,” which section is incorporated in its entirety into this Item 3.02, for
a description of our other recent unregistered sales of securities.
Item 5.01 Changes
in Control of Registrant
Please
refer to Item
2.01 - “Completion of Acquisition or Disposition of Assets “- “Our
Directors and Executive Officers” above, which description is in its entirety
incorporated by reference to this Item 5.01 of this report.
On
February 12, 2010, we acquired control of Foshan in a share exchange transaction
which closed on that date. Immediately prior to the share exchange,
12,640,000 shares of common stock held by a number of our shareholders were
surrendered for cancellation in exchange for $40,000 in cash paid by Joseph
Nemelka. At that time our former directors, Seth Winterton and
Joseph Nemelka resigned and appointed Jie Li and Chris Bickel as our
directors. Accordingly there was a change in the entirety of our
board of directors at that time. The new Board then
proceeded to approve the share exchange, the private financing and appointed the
current officers of the company.
As a
result of these transactions, the former Hong Hui shareholders became our
controlling shareholders.
Item 5.02. Departure
of Directors or Principal Officers; Election of Directors, Appointment of
Directors
Please
refer to Item
2.01 - “Completion of Acquisition or Disposition of Assets “- “Our
Directors and Executive Officers” and Item 5.01 - “Changes in Control of
Registrant” above, which description is in its entirety incorporated by
reference to this Item 5.02 of this report.
Item 5.03. Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
As more
fully described in an Information Statement on Schedule 14C being
filed with the Commission contemporaneously with this report, on
February 12, 2010 the board of directors and the holders of majority of our
outstanding shares entitled to vote thereon approved the following corporate
actions:
|
to
change the name of the Company to Chinese Special Materials Co.
Ltd.; and
|
|
a
one for five (1:5) reverse stock split of our shares of common
stock.
|
These corporate actions will become
effective on the filing with the Secretary of State of Delaware of a Certificate
of Amendment to the Company’s Certificate of Incorporation which will be filed
at least 20 days after the date of the mailing of this Information Statement on
Schedule 14C to the shareholders.
52
On
February 12, 2010 the board of directors determined to change our fiscal year
end from December 31 to September 30. A transition report is not
required to be filed covering the transition period.
Item. 5.06 Change in
Shell Company Status
As a
result of our acquisition of all of the outstanding capital stock of Hong Hui as
described in Item 2.01, which description is incorporated by reference in this
Item 5.06 of this report, we 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)
|
Pro
forma financial information concerning the acquisition of the business
operations of
Foshan.
|
(b)
|
The
financial statements of Technic and Perpetual are appended to this report
beginning on page F-1.
|
(c)
|
The
following exhibits are filed with this
report:
|
3.1
|
Certificate of
Incorporation.
|
3.2
|
Bylaws.
|
3.3
|
Specimen
of Common Stock certificate.
|
4.1
|
Form
of Note
|
4.2
|
Form
of Warrant
|
4.4
|
Stock
Pledge Agreement, dated as of February 12, 2010, by and among the Company
and certain stockholders of the Company.
|
10.1
|
Share
Exchange Agreement, dated as of February 12, 2010 between the Company,
Hong Hui and the former stockholders of Hong Hui.
|
10.2
|
Note
Purchase Agreement, dated as of February 12, 2010 between the Company and
the investors.
|
10.3
|
Escrow
Agreement, dated as of February 12, 2010, by and between the Company, each
of the investors, and Interwest Transfer Agent , as escrow
agent
|
10.4
|
Non
Recourse Guaranty Agreement dated as of February 12, 2010, by and among
the Company and certain stockholders of the Company.
|
10.5
|
Engagement
Letter Agreement, dated November 17, 2009, by and between Foshan and
Primary Capital LLC, as amended.
|
10.6
|
Registration Rights Agreement dated as of February 12, 2010 by and between the Company and the Investors. |
10.7
|
Voting Agreement dated as of February 12, 2010 by and among the Company, the Investors, Bestyield Limited and [illegible] Limited. |
21.1
|
List
of Subsidiaries.
|
53
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Basis
of Presentation
The
unaudited pro forma consolidated financial statements of PERPETUALTECHNOLOGIES,
INC. (the “Shell”) in the opinion of management include all material adjustments
directly attributable to the reverse merger transactions, which include a share
exchange transaction and a note purchase agreement. The Share
Exchange Agreement, dated February 11, 2010, are among Hong Hui Holdings Limited
(the”Hong Hui”), the Shell and all of the shareholders of the Hong Hui. Pursuant
to the Share Exchange Agreement, Shell issues to the shareholders of the Hong
Hui 72,551,020 shares of common stock in exchange for all of the issued and
outstanding capital stock of the Hong Hui. In addition, 4,640,000 shares are
issued to placement agents as part of the reverse merger transaction and
12,640,000 shares of Shell are cancelled. As a result of the Share
Exchange Agreement or reverse merge, Hong Hui’s becomes a wholly-foreign owned
subsidiary. The transaction is accounted for as a reverse
acquisition, except that no goodwill or other intangible should be recorded. The
recapitalization is considered to be a capital transaction in substance, rather
than a business combination.
Hong Hui
was formed in January, 2010 in the territory of the British Virgin Islands by
the shareholders of Technic International Inc. (the “Technic”). Upon the
formation, each shareholders transfered their ownership of Technic to Hong Hui.
As a result of this transaction, Technic becaome a wholly-foreign owned
enterprise under PRC law. This acquisition was accounted for as a transfer of
entities under common control.
Simultaneously,
on February 11, 2010, we entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes and warratns in the
aggregate principal amount of $4,000,000, net proceeds for $3,800,000 after
finance cost. The notes require quarterly interest payments at a rate
of 10% per annum. The warrants becomed void if notes automatically converted and
it is not excercisable if no financing is consummated within 5
years. The management believe the warrants value to be
insiginificant. The note is convertible to common stock at a 65% discount upon a
future qualified financing event. According to the Standards for contingent
convertible debt, the intrinsic value of the beneficial conversion feature is
calculated for $2,470,000 at the commitment date. However, the amount would only
be recorded at the date a qualified financing event is completed.
The pro
forma consolidated statement of operations includes the accounts of the Shell,
Hong Hui and Technic.
The
statements of operations were prepared as if the above mentioned acquisition of
the Hong Hui by the Shell were consummated on October 1, 2008, respectively, and
the balance sheet was prepared as if they were consummated on September 30,
2009. The historical information of Shell is based on the Company’s financial
statements in its Form 10-Q filed with the SEC for the nine months ended
September 30, 2009; the historical information of Technic was derived from the
books and the records of Hong Hui for the year ended September 30,
2009.
These pro
forma consolidated financial statements have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the transaction occurred on the dates
indicated and are not necessarily indicative of the results that may be expected
in the future.
|
a)
|
To
record the elimination of share capital of Hong Hui and accumulated
deficit of Shell.
|
To record
64,551,020 shares of common stocks increased during the reverse merger
transaction pursuant to the Share Exchange Agreement.
b)
|
To
record activity pursuant to note purchase agreement.
$4,000,000.
|
F-1
PERPETUAL
TECHNOLOGIES, INC.
Unaudited
Pro Foma Consolidated Balance Sheet
As
of September 30, 2009
(Expressed
in US dollars)
Pro forma
|
Pro forma
|
||||||||||||||||||||
Shell
|
Hong Hui
|
Technic
|
Adjustments
|
Total
|
|||||||||||||||||
Assets
|
|||||||||||||||||||||
Current
assets
|
|||||||||||||||||||||
Cash
and cash equivalents
|
$ | 2,402 | $ | - | $ | 3,297,648 |
(b)
|
3,800,000 | $ | 7,100,050 | |||||||||||
Accounts
receivable - Net
|
1,424,835 | 1,424,835 | |||||||||||||||||||
Advance
to suppliers
|
685,551 | 685,551 | |||||||||||||||||||
Inventory
|
1,197,289 | 1,197,289 | |||||||||||||||||||
Prepaid
expenses and other current assets
|
324 | 45,656 | 45,980 | ||||||||||||||||||
Total
current assets
|
2,726 | - | 6,650,979 | 10,453,705 | |||||||||||||||||
Receivable
from related parties
|
773,672 | 773,672 | |||||||||||||||||||
Property
and equipment - Net
|
1,659 | 10,711,865 | 10,713,524 | ||||||||||||||||||
Land
use rights - Net
|
537,350 | 537,350 | |||||||||||||||||||
Total
Assets
|
$ | 4,385 | $ | - | $ | 18,673,866 | $ | 22,478,251 | |||||||||||||
Liabilities
and Shareholders' Equity
|
|||||||||||||||||||||
Current
liabilities
|
|||||||||||||||||||||
Short-term
loans
|
$ | - | $ | - | $ | 4,578,409 | $ | 4,578,409 | |||||||||||||
Convertible
debt, net of discount $200,000
|
(b)
|
3,800,000 | 3,800,000 | ||||||||||||||||||
Accounts
payable and accrued liabilities
|
410,114 | 410,114 | |||||||||||||||||||
Related
party payable
|
22,138 | - | 22,138 | ||||||||||||||||||
Clients'
deposits
|
75,176 | 75,176 | |||||||||||||||||||
Taxes
payable
|
726 | 726 | |||||||||||||||||||
Total
current liabilities
|
22,138 | - | 5,064,425 | 8,886,563 | |||||||||||||||||
Shareholders'
equity
|
|||||||||||||||||||||
Common
stock, $.001
par value,200,000,000 shares authorized,13,000,000 issued
and outstanding
|
13,000 |
(a)
|
64,551 | 77,551 | |||||||||||||||||
Common
stock, $.1215
par value, 10,000 shares authorized, issued, and
outstanding
|
1,215 |
(a)
|
(1,215 | ) | - | ||||||||||||||||
Additional
paid in capital
|
24,290 | 7,562,047 |
(a)
|
(118,379 | ) | 7,467,958 | |||||||||||||||
Retained
earnings (deficits)
|
(55,043 | ) | 4,500,532 |
(a)
|
55,043 | 4,500,532 | |||||||||||||||
Accumulated
other comprehensive income
|
1,545,647 | 1,545,647 | |||||||||||||||||||
Total
shareholders' equity
|
(17,753 | ) | - | 13,609,441 | 13,591,688 | ||||||||||||||||
Total
Liabilities and Shareholders' Equity
|
$ | 4,385 | $ | - | $ | 18,673,866 | $ | 22,478,251 |
See
accompanying notes to Pro forma financial statements
F-2
PERPETUAL
TECHNOLOGIES, INC.
Unaudited
Pro Forma Consolidated Statements of Income and Comprehensive Income
(Loss)
(Expressed
in US dollars)
Shell
|
Hong Hui
|
Technic
|
|||||||||||||||
Nine months ended
|
Year ended
|
Year ended
|
Pro forma
|
Pro forma
|
|||||||||||||
September 30, 2009
|
September 30, 2009
|
September 30, 2009
|
Adjustment
|
Total
|
|||||||||||||
Sales
|
$ | - | $ | - | $ | 11,849,712 | $ | 11,849,712 | |||||||||
Cost
of sales
|
- | 7,296,327 | 7,296,327 | ||||||||||||||
Cost
of sales - related party
|
- | 610,287 | 610,287 | ||||||||||||||
Gross
margin
|
- | - | 3,943,098 | 3,943,098 | |||||||||||||
Operating
expenses:
|
|||||||||||||||||
Selling,
general and administrative
|
17,604 | 1,219,114 | 1,236,718 | ||||||||||||||
Bad
debt (Recovery) expense
|
11,497 | 11,497 | |||||||||||||||
17,604 | - | 1,230,611 | 1,248,215 | ||||||||||||||
Operating
income
|
(17,604 | ) | - | 2,712,487 | 2,694,883 | ||||||||||||
Other
expenses (income):
|
|||||||||||||||||
Interest
income
|
(3,014 | ) | (3,014 | ) | |||||||||||||
Interest
expense
|
916 | 269,849 | 270,765 | ||||||||||||||
916 | 0 | 266,835 | 267,751 | ||||||||||||||
Net
income before income taxes
|
(18,520 | ) | - | 2,445,652 | 2,427,132 | ||||||||||||
Income
taxes
|
- | - | |||||||||||||||
Net
income
|
(18,520 | ) | - | 2,445,652 | 2,427,132 | ||||||||||||
Other
comprehensive income (loss):
|
|||||||||||||||||
Foreign
currency translation adjustments
|
(57,078 | ) | (57,078 | ) | |||||||||||||
Total
comprehensive income
|
$ | (18,520 | ) | $ | - | $ | 2,388,574 | $ | 2,370,054 | ||||||||
Earnings
per share - basic
|
$ | (0.00 | ) | $ | - | $ | 244.57 | $ | 0.03 | ||||||||
Earnings
per share - diluted
|
$ | (0.00 | ) | $ | - | $ | 244.57 | $ | 0.03 | ||||||||
Basic
shares outstanding
|
13,000,000 | - | 10,000 |
64,541,020
|
77,551,020 | ||||||||||||
Diluted
shares outstanding
|
13,000,000 | - | 10,000 |
72,704,285
|
85,714,285 |
See
accompanying notes to unaudited pro forma consolidated financial
statements
F-3
TECHNIC
INTERNATIONAL LTD.
|
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS
ENDED
SEPTEMBER
30, 2009 AND 2008
(Expressed
in US dollars)
F-4
TECHNIC
INTERNATIONAL LTD.
September
30, 2009
Index to
Consolidated Financial Statements Contents Page(s)
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
F-7 | ||
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years
Ended September 30, 2009 and 2008
|
F-8 | ||
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009 and
2008
|
F-9 | ||
Consolidated
Statements of Stockholders’ Equity for the Years Ended September 30, 2009
and 2008
|
F-10 | ||
Notes
to Consolidated Financial Statements
|
F-11 |
F-5
|
|||
Douglas
W. Child, CPA
Marty
D. Van Wagoner, CPA
J.
Russ Bradshaw, CPA
William
R. Denney, CPA
Russell
E. Anderson, CPA
Scott
L. Farnes
1284
W. Flint Meadow Dr. #D
Kaysville,
Utah 84037
Telephone
801.927.1337
Facsimile
801.927.1344
5296
S. Commerce Dr. #300
Salt
Lake City, Utah 84107
Telephone
801.281.4700
Facsimile
801.281.4701
Suite
A, 5/F
Max
Share Centre
373
King’s Road
North
Point, Hong Kong
Telephone
852.21.555.333
Facsimile
852.21.165.222
www.cpaone.net
|
To
The Board of Directors and Stockholders of
Technic
International Ltd.
No.
5 Junye S. Rd., Area C. Shishan Science & Technology Industrial Park,
Nanhai District
Foshan
City, Guandong, China
We
have audited the accompanying consolidated balance sheets of Technic
International Ltd. (the Company) as of September 30, 2009 and 2008, and
the related consolidated statements of income and comprehensive income,
changes in shareholders’ equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. The company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits 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 consolidated financial statements, assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In
our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Technic International Ltd. as of September 30, 2009 and 2008, and the
consolidated 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.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
December
1,
2009
|
F-6
TECHNIC
INTERNATIONAL LTD.
Consolidated
Balance Sheets
(Expressed
in US dollars)
September 30
|
September 30
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,297,648 | $ | 2,367,570 | ||||
Accounts
receivable - Net
|
1,424,835 | 963,203 | ||||||
Advance
to suppliers
|
685,551 | 398,152 | ||||||
Advance
to suppliers - related parties
|
- | 614,265 | ||||||
Inventory
|
1,197,289 | 846,575 | ||||||
Prepaid
expenses and other current assets
|
45,656 | 374,252 | ||||||
Total
current assets
|
6,650,979 | 5,564,017 | ||||||
Receivable
from related parties
|
773,672 | 462,165 | ||||||
Property
and equipment - Net
|
10,711,865 | 6,297,389 | ||||||
Construction
in progress
|
- | 4,487,029 | ||||||
Land
use rights - Net
|
537,350 | 552,772 | ||||||
Total
Assets
|
$ | 18,673,866 | $ | 17,363,372 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities
|
||||||||
Short-term
loans
|
$ | 4,578,409 | $ | 5,207,385 | ||||
Accounts
payable and accrued liabilities
|
410,114 | 810,712 | ||||||
Clients'
deposits
|
75,176 | 94,081 | ||||||
Taxes
payable
|
726 | 30,327 | ||||||
Total
current liabilities
|
5,064,425 | 6,142,505 | ||||||
Shareholders'
equity
|
||||||||
Common
stock, $.1215 par value, 10,000 shares authorized, issued, and
outstanding
|
1,215 | 1,215 | ||||||
Additional
paid in capital
|
7,562,047 | 7,562,047 | ||||||
Retained
earnings
|
4,500,532 | 2,054,880 | ||||||
Accumulated
other comprehensive income
|
1,545,647 | 1,602,725 | ||||||
Total
shareholders' equity
|
13,609,441 | 11,220,867 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 18,673,866 | $ | 17,363,372 |
See
accompanying notes to consolidated financial statements
F-7
TECHNIC
INTERNATIONAL LTD.
Consolidated
Statements of Income and Comprehensive Income (Loss)
(Expressed
in US dollars)
Year ended September 30
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$ | 11,849,712 | $ | 11,611,719 | ||||
Cost
of sales
|
7,296,327 | 7,409,624 | ||||||
Cost
of sales - related party
|
610,287 | 714,180 | ||||||
Gross
margin
|
3,943,098 | 3,487,915 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
1,219,114 | 792,366 | ||||||
Bad
debt (Recovery) expense
|
11,497 | (129,885 | ) | |||||
1,230,611 | 662,481 | |||||||
Operating
income
|
2,712,487 | 2,825,434 | ||||||
Other
expenses (income):
|
||||||||
Interest
income
|
(3,014 | ) | (24,311 | ) | ||||
Interest
expense
|
269,849 | 150,570 | ||||||
266,835 | 126,259 | |||||||
Net
income before income taxes
|
2,445,652 | 2,699,175 | ||||||
Income
taxes
|
- | - | ||||||
Net
income
|
2,445,652 | 2,699,175 | ||||||
Other
comprehensive income (loss):
|
||||||||
Foreign
currency translation adjustments
|
(57,078 | ) | 1,020,734 | |||||
Total
comprehensive income
|
$ | 2,388,574 | $ | 3,719,909 | ||||
Earnings
per share - basic and diluted
|
$ | 244.57 | $ | 269.92 | ||||
Basic
and diluted shares outstanding
|
10,000 | 10,000 |
See
accompanying notes to consolidated financial statements
F-8
TECHNIC
INTERNATIONAL LTD.
Consolidated
Statements of Cash Flows
(Expressed
in US dollars)
Year ended September 30
|
||||||||
2009
|
2008
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
income
|
$ | 2,445,652 | $ | 2,699,175 | ||||
Adjustments
to reconcile net income to net cash flow provided by operating
activities:
|
||||||||
Depreciation
|
929,995 | 785,729 | ||||||
Amortization
|
12,458 | 11,996 | ||||||
Provision
(recovery) for doubtful accounts
|
11,497 | (129,885 | ) | |||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(477,736 | ) | 126,149 | |||||
Advance
to suppliers
|
(289,192 | ) | 238,160 | |||||
Advance
to suppliers - related parties
|
610,287 | (587,651 | ) | |||||
Inventory
|
(354,825 | ) | 107,495 | |||||
Prepaid
expenses and other current assets
|
326,225 | 50,857 | ||||||
Accounts
payable & accrued liabilities
|
(466,410 | ) | 333,060 | |||||
Clients'
deposits
|
(18,383 | ) | (270,658 | ) | ||||
Taxes
payable
|
(29,406 | ) | 17,355 | |||||
Net
cash provided by operating activities
|
2,700,162 | 3,381,782 | ||||||
Cash
flow from investing activities:
|
||||||||
Proceeds
from related parties receivable
|
- | 410,236 | ||||||
Payments
to related parties receivable
|
(313,614 | ) | - | |||||
Acquisition
of property and equipment
|
(844,419 | ) | (475,941 | ) | ||||
Investment
in construction in progress
|
- | (4,292,625 | ) | |||||
Net
cash (used in) provided by investing activities
|
(1,158,033 | ) | (4,358,330 | ) | ||||
Cash
flow from financing activities:
|
||||||||
Proceeds
from short-term loans
|
- | 1,408,961 | ||||||
Payments
on short-term loans
|
(600,498 | ) | (323,715 | ) | ||||
Cash
dividends paid
|
- | (1,178,220 | ) | |||||
Net
cash used in financing activities
|
(600,498 | ) | (92,974 | ) | ||||
Effects
of exchange rates on cash
|
(11,553 | ) | 326,912 | |||||
Net
increase (decrease) in cash and cash equivalents
|
930,078 | (742,610 | ) | |||||
Cash
and cash equivalents, beginning of year
|
2,367,570 | 3,110,180 | ||||||
Cash
and cash equivalents, end of year
|
$ | 3,297,648 | $ | 2,367,570 | ||||
Supplemental
information of cash flows
|
||||||||
Cash
paid for interest
|
$ | 269,849 | $ | 150,570 | ||||
Cash
paid for income taxes
|
$ | - | $ | - |
See
accompanying notes to consolidated financial statements
F-9
TECHNIC
INTERNATIONAL LTD.
Consolidated
Statements of Changes in Shareholders' Equity
(Expressed
in US dollars)
Common Stock
|
||||||||||||||||||||||||
No. of Shares
|
Amount
|
Additional Paid-in
Capital
|
Other
Comprehensive
Income
|
Retained Earnings
|
Total
|
|||||||||||||||||||
Balance, September
30, 2007
|
10,000 | $ | 1,215 | $ | 7,562,047 | $ | 581,991 | $ | 533,925 | $ | 8,679,178 | |||||||||||||
Net
income
|
2,699,175 | 2,699,175 | ||||||||||||||||||||||
Cash
dividend paid
|
(1,178,220 | ) | (1,178,220 | ) | ||||||||||||||||||||
Foreign
currency translation adjustments
|
1,020,734 | 1,020,734 | ||||||||||||||||||||||
Balance,
September 30, 2008
|
10,000 | 1,215 | 7,562,047 | 1,602,725 | 2,054,880 | 11,220,867 | ||||||||||||||||||
Net
income
|
2,445,652 | 2,445,652 | ||||||||||||||||||||||
Foreign
currency translation adjustments
|
(57,078 | ) | (57,078 | ) | ||||||||||||||||||||
Balance,
September 30, 2009
|
10,000 | $ | 1,215 | $ | 7,562,047 | $ | 1,545,647 | $ | 4,500,532 | $ | 13,609,441 |
See
accompanying notes to consolidated financial statements
F-10
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
1.
|
Nature
of business:
|
Technic
International Ltd. (the “Company”) was incorporated under the laws of Hong Kong.
The Company has no business activities and it owns 100% equity interest of
Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong
Province, the People’s Republic of China (“China”). Jin Long was established in
the year 2000 under the laws of China. In September 2005, Jin Long became the
wholly-owned subsidiary of the Company. In April 2009, Jin Long
changed its name to Foshan S.L.P. Special Materials Co., Ltd
(“SLP”).
The
principal business activity of SLP includes production of polyester spunbonded
nonwoven fabrics, polyester needle-punch nonwovens, and related further process
products, polylactic acid nonwovens, and special functions nonwovens ( flame
retardant, anti-static, oil & water repellent, etc).
2.
|
Summary
of significant accounting policies:
|
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). This basis differs from that used in the statutory accounts
of our subsidiary in China, which were prepared in accordance with the
accounting principles and relevant financial regulations applicable to
enterprises in China. All necessary adjustments have been made to
present the financial statements in accordance with U.S. GAAP. The significant
accounting policies are as follows:
(a)
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All material intercompany accounts and
transactions have been eliminated.
(b)
|
Use
of estimates:
|
Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses.
Examples include estimates of valuation of accounts receivable, inventories, and
useful life of property and equipment, etc. Actual results and outcomes may
differ from those estimates.
(c)
|
Cash
and cash equivalents:
|
Cash and
cash equivalents include cash on hand and demand deposits held by banks. As of
September 30, 2009, 99% of the cash and cash equivalents were placed with banks
in China. The remittance of these funds out of China is subject to exchange
control restrictions imposed by the Chinese government.
F-11
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
2.
|
Significant
accounting policies (continued):
|
(d)
|
Allowance
for doubtful accounts:
|
The
allowance for doubtful accounts reflects our best estimate of probable losses
inherent in the accounts receivable balance. We determine the allowance based on
known troubled accounts, historical experience, and other currently available
evidence.
(e)
|
Inventory:
|
Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market, using the average cost method. Cost includes
materials, labor, and manufacturing overhead related to the purchase and
production of inventories. We regularly review inventory quantities on hand,
future purchase commitments with our suppliers, and the estimated utility of our
inventory. If our review indicates any obsolete or idle inventory or a reduction
in utility below carrying value, we reduce our inventory to a new cost
basis.
|
(f)
|
Property
and equipment:
|
Property
and equipment is stated at cost and depreciated using the straight-line method
over the estimated life of the asset, ranging from 5 to 20 years. The annual
depreciation rates are as follows:
Asset
|
Useful lives
|
|
Building
and plant
|
20
years
|
|
Machinery
|
10
years
|
|
Office
equipment and computers
|
5
years
|
|
Vehicles
|
10
years
|
(g)
|
Land
use rights:
|
According
to the laws of China, the government owns all of the land in China. Companies or
individuals are authorized to use the land only through land use rights granted
by the Chinese government. Accordingly, the Company paid in advance for land use
rights. Prepaid land use rights are being amortized and recorded as amortization
expenses using the straight-line method over the use terms of the lease, which
is 50 years.
(h)
|
Construction
in progress:
|
Construction
in progress represents the cost of constructing buildings and the new needle
punch production line. The major cost includes materials, labor and
overhead.
F-12
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
2.
|
Significant
accounting policies (continued):
|
|
(i)
|
Intangible
assets:
|
The
Company adopted the provisions of FASB ASC 350 Intangibles – Goodwill and Other
Assets. Goodwill and indefinite lived intangible assets are not amortized, but
are reviewed annually for impairment, or more frequently, if indications of
possible impairment exist. The Company has no indefinite lived
intangible assets.
|
(j)
|
Impairment
of long-lived assets:
|
Long-lived
assets are tested for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cash flows
attributable to such assets. During the reporting periods, the Company has not
identified any indicators that would require testing for
impairment.
(k)
|
Revenue
recognition:
|
Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are delivered to and accepted by its customers, the price is fixed or
determinable as stated on the sales contract, and collectability is reasonably
assured. Customers do not have a general right of return or warranty
on products shipped. There are no post-shipment obligations, price
protection, or bill and hold arrangements.
|
(l)
|
Product
development costs:
|
Product
development costs are expensed as incurred, and the Company had no product
development expenses for 2009 and 2008.
(m)
|
Advertising
expenses:
|
Advertising
costs are expensed as incurred. The Company incurred $5,679 and $3,955 in
advertising costs for the years ended September 30, 2009 and 2008.
(n)
|
Shipping
and handling costs:
|
Shipping
and handling costs related to costs of raw materials purchased is included in
cost of sales.
Shipping
and handling amounts billed to customers in related sale transactions are
included in sales revenues. The out-bound freight expenses of $156,911 and
$99,029 for 2009 and 2008, respectively, are recorded in the Consolidated
Statement
of Income and Comprehensive Income as a component of selling, general, &
administrative expenses.
F-13
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
2.
|
Significant
accounting policies (continued):
|
(o)
|
Accumulated
other comprehensive income:
|
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
(p)
|
Segment
Reporting
|
ASC Topic
280, “Disclosure about Segments of an Enterprise and Related Information”
requires use of the management approach model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. Accordingly, the Company has reviewed its business
activities and determined that multiple segments do not exist to be
reported.
(q)
|
Fair
value of financial instruments:
|
The
carrying amount of the Company’s cash and cash equivalents approximate their
fair value due to the short maturity of those instruments. The carrying amounts
of the Company’s receivables, short-term loans, payables and accrued liabilities
approximated their fair value as of the balance sheet dates due to their short
maturities and the interest rates currently available.
(r)
|
Reclassification:
|
Certain
amounts in the 2008 financial statements have been reclassified to conform to
the 2009 financial statement presentation. Such reclassification had
no effect on net income.
(s)
|
Taxes:
|
Income
taxes expense is based on reported income before income taxes. Deferred income
taxes reflect the effect of temporary differences between assets and liabilities
that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. In accordance with FASB ASC 740, these deferred taxes are
measured by applying currently enacted tax laws.
The
Company has implemented FASB ASC 740, which provides for a
liability approach to accounting for income taxes. Deferred income taxes result
from the effect of transactions that are recognized in different periods for
financial and tax reporting
purposes. The Company had no material adjustments to its liabilities for
unrecognized income tax benefits according to the provisions of FASB ASC
740.
F-14
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
2.
|
Significant
accounting policies
(continued):
|
|
(t)
|
Foreign
currency transactions:
|
The
functional currency of the Company is Renminbi (“RMB”). Assets and liabilities
recorded in RMB are translated at the exchange rate on the balance sheet date.
Revenue and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments
resulting from this process are charged or credited to Other Comprehensive
Income.
(u)
|
Earnings
per share:
|
Earnings
per share is determined by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding. At September 30, 2009 and 2008, there were
no dilutive securities.
3.
|
Accounts
receivable:
|
As of
|
September 30,
|
September 30,
|
||||||
|
2009
|
2008
|
||||||
Accounts
receivable
|
$ | 1,461,721 | $ | 988,714 | ||||
Less: Allowance for doubtful
accounts
|
(36,886 | ) | (25,511 | ) | ||||
Accounts receivable – Net
|
$ | 1,424,835 | $ | 963,203 |
As of
September 30, 2009 and 2008, customer accounts receivable balances exceeding 10%
of the total balance are as follows:
September 30, 2009
|
||||||||
|
Amount
|
Percentage
|
||||||
Customers:
|
||||||||
Wujiang
Jinshan
|
$
|
434,556
|
30.45
|
%
|
||||
Shenzhen
Yaming Water Drainage Board Co.
|
185,625
|
13.01
|
%
|
|||||
Xiantao
Ruixin
|
181,260
|
12.70
|
%
|
September
30, 2008
|
||||||||
Shenzhen
Yaming Water Drainage Board Co.
|
$ | 170,715 | 18.89 | % |
F-15
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
4.
|
Inventory:
|
As of
|
September 30,
|
September 30,
|
||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 40,126 | $ | 97,158 | ||||
Work
in progress
|
50,443 | 21,621 | ||||||
Finished goods
|
1,106,720 | 727,796 | ||||||
$ | 1,197,289 | $ | 846,575 |
5.
|
Property
and equipment:
|
As of
|
|
|
September 30,
2009
|
|||||||||
|
Accumulated
|
Net book
|
||||||||||
Cost
|
depreciation
|
value
|
||||||||||
Building
and plant
|
$ | 2,958,978 | $ | 526,654 | $ | 2,432,324 | ||||||
Machinery
|
11,174,517 | 3,096,112 | 8,078,405 | |||||||||
Office
equipment and other equipment
|
771,829 | 668,448 | 103,381 | |||||||||
Vehicles
|
139,753 | 41,998 | 97,755 | |||||||||
$ | 15,045,077 | $ | 4,333,212 | $ | 10,711,865 |
As of
|
|
|
September 30,
2008
|
|||||||||
|
Accumulated
|
Net book
|
||||||||||
Cost
|
depreciation
|
value
|
||||||||||
Building
and plant
|
$ | 2,036,198 | $ | 416,730 | $ | 1,619,468 | ||||||
Machinery
|
6,782,795 | 2,299,115 | 4,483,680 | |||||||||
Office
equipment and other equipment
|
775,971 | 674,185 | 101,786 | |||||||||
Vehicles
|
122,829 | 30,374 | 92,455 | |||||||||
$ | 9,717,793 | $ | 3,420,404 | $ | 6,297,389 |
During
fiscal years 2009 and 2008, depreciation expense of $847,057 and $650,997 was
included in cost of sales and $82,938 and $134,732 was included in selling,
general, and administrative expenses, for a total of $929,995 and $785,729,
respectively.
F-16
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
6.
|
Land
use rights:
|
As of
|
September 30, 2009
|
September 30, 2008
|
||||||||||||||
USD
|
RMB
|
USD
|
RMB
|
|||||||||||||
Cost
|
$ | 622,578 | 4,249,920 | $ | 625,918 | 4,249,920 | ||||||||||
Less: accumulated
amortization
|
(85,228 | ) | (581,792 | ) | (73,146 | ) | (496,652 | ) | ||||||||
$ | 537,350 | 3,668,128 | $ | 552,772 | 3,753,268 |
During
fiscal years 2009 and 2008, amortization expense was $12,458 and $11,996,
respectively.
7.
|
Short-term
loans:
|
The
Company has several loans with Agricultural Bank of China, Foshan Branch and
these loans are repayable in September 2010. The interest on the outstanding
balance is payable every month at an average rate of 7.755% per annum. During
the fiscal years of 2009 and 2008, the Company recorded interest expense of
$269,849 and $150,570, respectively.
8.
|
Income
taxes:
|
The
Company’s subsidiary Foshan S.L.P. Special Materials Co., Ltd. is located in
Foshan, China; thus, it is subject to China’s Enterprise Income Tax (“EIT”) at
25%. Pursuant to the relevant Chinese tax laws and regulations, as the Company’s
subsidiary is a wholly-foreign owned enterprise engaged in manufacturing which
was duly approved by the China tax authority, it was entitled to two years’
exemption, from the first profit making calendar year of operations after offset
of accumulated taxable losses, followed by 50% tax reduction of national tax and
full exemption of local tax for the immediate next three calendar
years.
The
effective income tax expenses differ from the EIT tax rate of 25% as
follows:
As of
|
September 30,
|
September 30,
|
||||||
2009
|
2008
|
|||||||
Tax
at statutory rate of 25%
|
$ | 546,960 | $ | 674,793 | ||||
Tax holiday
|
(546,960 | ) | (674,793 | ) | ||||
$ | - | $ | - |
F-17
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
8.
|
Income
taxes (continued):
|
The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provision of FASB ASC 740. The Company has
recorded no deferred tax assets or liabilities as of September 30, 2009 and
2008, since nearly all differences in tax basis and financial statement carrying
values are permanent differences.
9.
|
Related
party transactions:
|
Amount due from related parties
|
September 30
|
September 30
|
||||||
2009
|
2008
|
|||||||
Loan
receivable from shareholder (a)
|
$ | 0 | $ | 199,503 | ||||
Advance
to former shareholders (b)
|
259,538 | 262,662 | ||||||
Advance
to current shareholders (c)
|
1,413 | 0 | ||||||
Advance to director (d)
|
73,246 | 0 | ||||||
Subtotal
|
334,197 | $ | 462,165 | |||||
Advance
to Heng Tung Resources Ltd.(e)
|
614,265 | |||||||
Receivable from related companies
(f)
|
439,475 | 0 | ||||||
$ | 773,672 | $ | 1,076,430 |
(a)
|
Loan
receivable from shareholder:
|
The
Company has a loan receivable from one of its shareholders. This
shareholder is responsible for the usage and repayment of principal and interest
on the loan to Communication Bank of China, Hong Kong Branch. The loan carries
an interest rate of prime minus 1.25%, or 4.25% per annum, and was fully paid in
June 2009.
(b)
|
Advance
to former shareholders:
|
The
advance to former shareholders includes advances to four of the former
shareholders. The advance is non-interest bearing and due on
demand.
(c)
|
Advance
to current shareholders:
|
The
advance to current shareholders includes advances to six current shareholders.
The advance is non-interest bearing and due on demand.
(d)
|
Advance
to director:
|
The
advance to director includes an advance to one of the directors. The advance
is
non-interest bearing and due on demand.
F-18
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed
in US dollars)
|
9.
|
Related
party transactions (continued):
|
(e)
|
Advance
to Heng Tung Resources Ltd.:
|
During
the fiscal years of 2009 and 2008, the Company purchased $610,287 and $714,180,
respectively, of raw materials from Heng Tung Resources Ltd. (“Heng Tung”). One
of the shareholders of the Company is also the shareholder of Heng Tung. The
balance in this account represents the advance to Heng Tung for the purchase of
raw materials. The above transaction is in the normal course of
operations and is measured at the exchange amount of consideration established
and agreed to by the related parties. As of September 30, 2009, there is no
outstanding balance due to Heng Tung Resources Ltd.
(f)
|
Receivable
from related companies:
|
The
receivable from related companies includes funds lent to three companies which
have common shareholders of the Company. The loans are non-interest bearing and
due on demand.
10.
|
Concentration of credit risks
and uncertainties:
|
Concentration
of credit risk exists when changes in economic, industry or geographic factors
similarly affect groups of counter parties whose aggregate credit exposure is
material in relation to the Company’s total credit exposure.
The
Company’s exposure to foreign currency exchange rate risk primarily relates to
cash and cash equivalents denominated in the U.S. dollar. Any
significant revaluation of RMB may materially and adversely affect the cash
flows, revenues, earnings and financial position of the Company.
11.
|
Recent
pronouncements:
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
F-19
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
11.
|
Recent
pronouncements (continued):
|
In June
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-1, “Topic 105
— Generally Accepted Accounting Principles” which amended ASC 105, “Generally
Accepted Accounting Principles” to establish the Codification as the source
of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All previous
references to the superseded standards in our consolidated financial statements
have been replaced by references to the applicable sections of the Codification.
The adoption of these sections did not have a material impact on the Company’s
condensed consolidated financial statements.
In June
2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No. 46(R)”,
which was included in ASC Topic 810-10-05 “Variable Interest Entities”. The
provisions of ASC Topic 810-10-05 amend the definition of the primary
beneficiary of a variable interest entity and will require the Company to make
an assessment each reporting period of its variable interests. The provisions of
this pronouncement are effective January 1, 2010. The Company is evaluating the
impact of the statement on its consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a
consensus of the FASB Emerging Issues Task Force)” which amends ASC 605-25,
“Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses
how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting and how to allocate consideration to each unit
of accounting in the arrangement. This ASU replaces all references to fair value
as the measurement criteria with the term selling price and establishes a
hierarchy for determining the selling price of a deliverable. ASU No. 2009-13
also eliminates the use of the residual value method for determining the
allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires
expanded disclosures. This ASU will become effective for us for revenue
arrangements entered into or materially modified on or after April 1, 2011.
Earlier application is permitted with required transition disclosures based on
the period of adoption. The Company is currently evaluating the application date
and the impact of this standard on its condensed consolidated financial
statements.
F-20
TECHNIC
INTERNATIONAL LTD.
|
Notes
to Consolidated Financial
Statements
|
Years
ended September 30, 2009 and 2008
|
(Expressed in US dollars) |
12.
|
Subsequent
events:
|
The
Company has evaluated subsequent events from the balance sheet date through
December 1, 2009 with the date being the date that the financial statements are
issued or are available to be issued.
F-21
PERPETUAL
TECHNOLOGIES, INC.
[A Development Stage
Company]
CONDENSED
BALANCE SHEETS
(Unaudited)
|
||||||||
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 2,402 | $ | 14,680 | ||||
Prepaid
expenses
|
324 | 2,309 | ||||||
Total
Current Assets
|
2,726 | 16,989 | ||||||
PROPERTY
& EQUIPMENT, net
|
1,659 | - | ||||||
Total
Assets
|
$ | 4,385 | $ | 16,989 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accrued
interest – related party
|
$ | 2,138 | $ | 1,222 | ||||
Stockholder
advances – related party
|
20,000 | 15,000 | ||||||
Total
Current Liabilities
|
22,138 | 16,222 | ||||||
Total
Liabilities
|
22,138 | 16,222 | ||||||
STOCKHOLDERS'
EQUITY (DEFICIT):
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, no shares issued
and outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 200,000,000 shares authorized, 13,000,000 and
13,000,000 shares issued and outstanding, respectively
|
13,000 | 13,000 | ||||||
Capital
in excess of par value
|
24,290 | 24,290 | ||||||
Deficit
accumulated during the development stage
|
(55,043 | ) | (36,523 | ) | ||||
Total
Stockholders' Equity (Deficit)
|
(17,753 | ) | 767 | |||||
Total
Liabilities and Stockholders’ Equity (Deficit)
|
$ | 4,385 | $ | 16,989 |
The
accompanying notes are an integral part of these unaudited condensed financial
statements.
F-22
PERPETUAL
TECHNOLOGIES, INC.
[A Development Stage
Company]
UNAUDITED
CONDENSED STATEMENTS OF OPERATIONS
For the Three
Months Ended
September 30,
|
For the Nine
Months Ended
September 30,
|
Cumulative
totals from
Reactivation
on Oct. 26,
2006 through
September 30,
|
||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
||||||||||||||||
REVENUE
|
$ | - | $ | $ | 1,000 | $ | - | $ | 1,000 | |||||||||||
EXPENSES:
|
||||||||||||||||||||
General
and administrative
|
2,895 | 3,070 | 18,313 | 10,914 | 52,324 | |||||||||||||||
Depreciation
expense
|
97 | - | 291 | - | 291 | |||||||||||||||
(2,992 | ) | 3,070 | 18,604 | 10,914 | 52,615 | |||||||||||||||
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
(2,992 | ) | (3,070 | ) | (17,604 | ) | (10,914 | ) | (51,615 | ) | ||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||||||
Interest
Expense
|
- | (134 | ) | - | (600 | ) | (1,289 | ) | ||||||||||||
Interest
Expense – related party
|
(316 | ) | (100 | ) | (916 | ) | (713 | ) | (2,139 | ) | ||||||||||
Total
Other Income (Expense)
|
(316 | ) | (234 | ) | (916 | ) | (1,313 | ) | (3,428 | ) | ||||||||||
LOSS
BEFORE INCOME TAXES
|
(3,808 | ) | (3,304 | ) | (18,520 | ) | (12,227 | ) | (55,043 | ) | ||||||||||
INCOME
TAXES
|
- | - | - | - | - | |||||||||||||||
NET
LOSS
|
$ | (3,808 | ) | $ | (3,304 | ) | $ | (18,520 | ) | $ | (12,227 | ) | $ | (55,043 | ) | |||||
LOSS
PER COMMON SHARE:
|
$ | (.00 | ) | $ | (.00 | ) | $ | (.00 | ) | $ | (.00 | ) | ||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES
|
13,000,000 | 11,000,000 | 13,000,000 | 11,000,000 |
The
accompanying notes are an integral part of these unaudited condensed financial
statements.
F-23
PERPETUAL
TECHNOLOGIES, INC.
[A Development Stage
Company]
UNAUDITED
CONDENSED STATEMENTS OF CASH FLOWS
For the nine
Months Ended
September 30,
|
Cumulative
totals from
Reactivation
on Oct. 26,
2006 through
September 30,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Net
loss
|
$ | (18,520 | ) | $ | (12,227 | ) | $ | (55,043 | ) | |||
Adjustments
to reconcile net loss to net cash provided (used) by operating
activities:
|
||||||||||||
Changes
in assets and liabilities:
|
||||||||||||
Non-cash
expenses
|
- | - | 1,290 | |||||||||
Depreciation
expense
|
291 | - | 291 | |||||||||
Decrease
(increase) in prepaid expense
|
1,985 | - | (324 | ) | ||||||||
Increase
(decrease) in accounts payable
|
- | 300 | - | |||||||||
Increase
in accrued interest
|
- | 600 | ||||||||||
Increase
in accrued interest – related party
|
916 | 713 | 2,138 | |||||||||
Net
Cash Provided (Used) by Operating Activities
|
(15,328 | ) | (10,614 | ) | (51,648 | ) | ||||||
Cash
Flows from Investing Activities
|
||||||||||||
Purchase
of property and equipment
|
(1,950 | ) | - | (1,950 | ) | |||||||
Net
Cash (Used) by Investing Activities
|
(1,950 | ) | - | (1,950 | ) | |||||||
Cash
Flows from Financing Activities:
|
||||||||||||
Stockholder
advances
|
5,000 | 10,000 | 20,000 | |||||||||
Convertible
notes payable
|
- | - | 10,000 | |||||||||
Proceeds
from common stock issuances
|
- | - | 26,000 | |||||||||
Net
Cash Provided by Financing Activities
|
5,000 | 10,000 | 56,000 | |||||||||
Net
Increase (Decrease) in Cash
|
(12,278 | ) | (614 | ) | 2,402 | |||||||
Cash
at Beginning of Period
|
14,680 | 1,994 | - | |||||||||
Cash
at End of Period
|
$ | 2,402 | $ | 1,380 | $ | 2,402 | ||||||
Supplemental
Disclosures of Cash Flows Information:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$ | - | $ | - | $ | - | ||||||
Income
taxes
|
$ | - | $ | - | $ | - |
Supplemental
Schedule of Non-cash Investing and Financing Activities:
For the
nine months ended September 30,2009:
None
For the
nine months ended September 30,2008:
None
The
accompanying notes are an integral part of these unaudited condensed financial
statements.
F-24
PERPETUAL
TECHNOLOGIES, INC.
[A Development Stage
Company]
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2009 and 2008
and for the periods then ended have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company’s December 31, 2008 audited financial
statements as part of the Company’s 2008 annual report on Form 10-K. The results
of operations for the periods ended September 30, 2009 and 2008 are not
necessarily indicative of the operating results for the full year.
Recently Enacted Accounting Standards
- In June 2009 the FASB established the Accounting Standards Codification
("Codification" or "ASC") as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with generally accepted
accounting principles in the United States ("GAAP"). Rules and interpretive
releases of the Securities and Exchange Commission ("SEC") issued under
authority of federal securities laws are also sources of GAAP for SEC
registrants. Existing GAAP was not intended to be changed as a result of
the Codification, and accordingly the change did not impact our financial
statements. The ASC does change the way the guidance is organized and
presented.
Statement
of Financial Accounting Standards ("SFAS") SFAS No. 165 (ASC Topic 855),
"Subsequent Events", SFAS No. 166 (ASC Topic 810), "Accounting for Transfers of
Financial Assets-an Amendment of FASB Statement No. 140", SFAS No. 167 (ASC
Topic 810), "Amendments to FASB Interpretation No. 46(R)", and SFAS No. 168 (ASC
Topic 105), "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles-a replacement of FASB Statement No.
162" were recently issued. SFAS No. 165, 166, 167, and 168 have no current
applicability to the Company or their effect on the financial statements would
not have been significant.
Accounting
Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures - Overall, ASU No. 2009-13 (ASC Topic 605),
Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985),
Certain Revenue Arrangements that include Software Elements, and various other
ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company or
their effect on the financial statements would not have been
significant.
F-25
PERPETUAL
TECHNOLOGIES, INC.
[A Development Stage
Company]
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has a working capital deficit of $19,412 as of September 30, 2009, has incurred
net losses of $18,520 and $12,227 during the nine months ended September 30,
2009 and 2008, respectively, has negative cash flows from operating activities,
and has minimal revenue-generating activities. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. In this
regard, management is proposing to raise any necessary additional funds not
provided by operations through loans, advances, or through additional sales of
common stock. There is no assurance that the Company will be successful in
raising this additional capital or in achieving profitable operations. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
NOTE
3 – RELATED PARTY TRANSACTIONS
Advances from a Stockholder
– In September
2007, February and May 2008, and in September 2009 officers or stockholders of
the Company advanced a total of $20,000 to the Company. The advances are due on
demand and bear interest at 8% per annum. At September 30, 2009 the accrued
interest on the advances totaled $2,138.
NOTE
4 – CONVERTIBLE NOTES PAYABLE
In
February 2007, the Company issued two convertible promissory notes for $2,500
each. In August 2007, the Company issued an additional two convertible
promissory notes for $2,500 each. In December 2008, the Company issued 1,000,000
shares of common stock on conversion of the four convertible promissory
notes of $10,000 along with accrued interest of $1,290.
NOTE
5 - INCOME TAXES
The
Company has available at September 30, 2009, net operating loss carryforwards of
approximately $55,043 which may be applied against future taxable income and
which expire in 2029 and 2028. The net deferred tax assets are approximately
$8,256 and $5,478 as of September 30, 2009 and December 31, 2008, respectively,
with an offsetting valuation allowance of the same amount. The change in the
valuation allowance for the nine-month period ended September 30, 2009 is
approximately $2,778. The Company used the incremental federal income tax rate
of 15% in computing its deferred tax assets.
NOTE
6 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events from the balance sheet date through
November 3, 2009 and determined there were no events to
disclose.
F-26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date:
February 12, 2010
|
||
PERPETUAL
TECHNOLOGIES, INC.
|
||
|
||
By:
|
/s/
Jie Li
|
|
Jie
Li
|
||
Chief
Executive
Officer
|
55