Attached files
| file | filename |
|---|---|
| EX-21 - Longhai Steel Inc. | v178718_ex21.htm |
| EX-3.3 - Longhai Steel Inc. | v178718_ex3-3.htm |
| EX-2.1 - Longhai Steel Inc. | v178718_ex2-1.htm |
| EX-10.5 - Longhai Steel Inc. | v178718_ex10-5.htm |
| EX-10.2 - Longhai Steel Inc. | v178718_ex10-2.htm |
| EX-10.1 - Longhai Steel Inc. | v178718_ex10-1.htm |
| EX-10.3 - Longhai Steel Inc. | v178718_ex10-3.htm |
| EX-10.6 - Longhai Steel Inc. | v178718_ex10-6.htm |
| EX-10.8 - Longhai Steel Inc. | v178718_ex10-8.htm |
| EX-10.7 - Longhai Steel Inc. | v178718_ex10-7.htm |
| EX-10.4 - Longhai Steel Inc. | v178718_ex10-4.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 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): March 26, 2010
Action
Industries, Inc.
(Exact
name of registrant as specified in its charter)
|
Nevada
|
000-52455
|
11-3699388
|
||
|
(State or other jurisdiction of
incorporation or organization)
|
(Commission File Number)
|
(IRS Employer Identification No.)
|
No. 1
Jingguang Road, Neiqiu County
Xingtai
City, Hebei Province, China
Telephone
- +86 0319-686-1111
(Former
Address)
8744
Riverside House Path
Brewerton,
New York 13029
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):
|
o
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
o
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a
-12)
|
|
o
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d -2(b))
|
|
o
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e -4(c))
|
This
report contains forward-looking statements. The forward-looking statements are
contained principally in the sections entitled “Description of Business,” “Risk
Factors,” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking statements include, among other things,
statements relating to:
|
|
·
|
Our
ability to produce steel wire at a consistently profitable margin as we
have historically.
|
|
|
·
|
the
impact that a downturn or negative changes in the steel market may have on
sales.
|
|
|
·
|
our
ability to obtain additional capital in future years to fund our planned
expansion;
|
|
|
·
|
economic,
political, regulatory, legal and foreign exchange risks associated with
our operations; or
|
|
|
·
|
the
loss of key members of our senior management and our qualified sales
personnel.
|
Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. You should read this report and the documents that we
reference and filed as exhibits to the report completely and with the
understanding that our actual future results may be materially different from
what we expect. Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the
future.
Use
of Certain Defined Terms
Except
where the context otherwise requires and for the purposes of this report
only:
|
|
·
|
the
“Company,” “we,” “us,” and “our” refer to the combined business of (i)
Action Industries, Inc. or “Action Industries”, a Nevada corporation, (ii)
Kalington Limited, or “Kalington,” a Hong Kong limited company and
wholly-owned subsidiary of Action Industries, (iii) Xingtai
Kalington Consulting Service Co., Ltd., or “Kalington Consulting”, a
Chinese limited company and wholly-owned subsidiary of Kalington, and (iv)
Xingtai Longhai Wire Co., Ltd., or “Longhai ,” a Chinese limited company
which is effectively and substantially controlled by Kalington Consulting
through a series of captive agreements, as the case may
be;
|
|
|
·
|
“Exchange
Act” refers to the Securities Exchange Act of 1934, as
amended;
|
|
|
·
|
“Hong
Kong” refers to the Hong Kong Special Administrative Region of the
People’s Republic of China;
|
|
|
·
|
“PRC,”
“China,” and “Chinese,” refer to the People’s Republic of China (excluding
Hong Kong and Taiwan);
|
|
|
·
|
“Renminbi”
and “RMB” refer to the legal currency of
China;
|
- 2
-
|
|
·
|
“Securities
Act” refers to the Securities Act of 1933, as amended;
and
|
|
|
·
|
“U.S.
dollars,” “dollars” and “$” refer to the legal currency of the United
States.
|
ITEM
1.01
ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT
On March
26, 2010, we entered into and closed a share exchange agreement, or the Share
Exchange Agreement, with Kalington, the shareholders of Kalington, Goodwin
Ventures, Inc. and Longhai, pursuant to which we acquired 100% of the issued and
outstanding capital stock of Kalington in exchange for 10,000 shares of our
Series A Convertible Preferred Stock (Series A Preferred Stock), which
constituted 98.5% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
transactions contemplated by the Share Exchange Agreement.
The
foregoing description of the terms of the Share Exchange Agreement is qualified
in its entirety by reference to the provisions of the agreement filed as Exhibit
2.1 to this report, which are incorporated by reference herein.
ITEM
2.01
COMPLETION
OF ACQUISITION OR DISPOSITION OF ASSETS
On March
26, 2010, we completed an acquisition of Kalington pursuant to the Share
Exchange Agreement. The acquisition was accounted for as a recapitalization
effected by a share exchange, wherein Kalington is considered the acquirer for
accounting and financial reporting purposes. The assets and liabilities of the
acquired entity have been brought forward at their book value and no goodwill
has been recognized.
As a
result of the acquisition, our consolidated subsidiaries include Kalington, our
wholly-owned subsidiary which is incorporated under the laws of Hong Kong,
Kalington Consulting, a wholly-owned subsidiary of Kalington which is
incorporated under the laws of the PRC, and Longhai, a limited liability company
incorporated under the laws of the PRC which is effectively and substantially
controlled by Kalington Consulting through a series of captive
agreements.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, on March 26, 2010, we acquired Kalington in
a reverse acquisition transaction. Item 2.01(f) of Form 8-K states
that if the registrant was a shell company like we were immediately before the
reverse acquisition transaction disclosed under Item 2.01, then the registrant
must disclose the information that would be required if the registrant were
filing a general form for registration of securities on Form 10.
Accordingly,
we are providing below the information that would be included in a Form 10 if we
were to file a Form 10. Please note that the information provided
below relates to the combined enterprises after the acquisition of Kalington,
except that information relating to periods prior to the date of the reverse
acquisition only relate to Kalington and its consolidated subsidiaries unless
otherwise specifically indicated.
- 3
-
DESCRIPTION
OF BUSINESS
Business
Overview
Xingtai
Longhai Wire Co., Ltd. (Longhai) was established in August 2008 as a result of
the separation of Longhai from Xingtai Longhai Steel Group Co., Ltd. (the
“Longhai Steel Group”) at that time. Prior to its establishment as a
stand-alone company, Longhai was a division within the Longhai Steel
Group. The Longhai Steel Group was founded in
2003. Longhai is a leading producer of steel wire products in
northeastern China. Demand for our steel wire is driven primarily by
spending in the construction and infrastructure industries. We have
benefited from strong fixed asset investment and construction growth as the PRC
has rapidly grown increasingly urbanized and invested in modernizing its
infrastructure.
Our
principal business is the production of steel wire ranging from 6mm to 10mm in
diameter. We operate two wire production lines which have a combined
annual capacity of approximately nine hundred thousand tons per
year. Our products are sold to a number of distributors who transport
the wire to nearby wire processing facilities. Our wire is then
further processed by third party wire refiners into a variety of products such
as nails, screws, and wire mesh for use in reinforced concrete and
fencing. Our facilities and head offices are located in the town of
Xingtai in southern Hebei.
Our
revenues increased from $238,644,939 in fiscal year 2007 to $511,487,983 in
fiscal year 2008, representing a growth rate of approximately
114%. While our revenues dropped in 2009 to $373,660,461 due to a
sharp decline in the price of steel wire, our gross margins improved markedly as
we improved our operational efficiency.
Action
Industries, Inc. was originally incorporated under the laws of the State of
Georgia on December 4, 1995. On March 14, 2008, the Georgia
corporation was merged with and into a newly formed Nevada corporation also
named Action Industries, Inc. and all of the outstanding shares of the Georgia
corporation were exchanged for shares in the surviving Nevada
corporation. Prior to our reverse acquisition of Kalington, Action
Industries was primarily in the business of providing prepaid long distance
calling cards and other telecommunication products and was in the development
stage and had not commenced planned principal operations.
As a
result of our reverse acquisition of Kalington, we are no longer a shell company
and active business operations were revived. We plan to amend our
Articles of Incorporation to change our name to “Longhai Steel Inc.” to reflect
the current business of our company.
Acquisition
of Kalington Limited
On March
26, 2010, we completed a reverse acquisition transaction through a share
exchange with Kalington and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Kalington in
exchange for 10,000 shares of our Series A Preferred Stock which constituted
98.5% of our issued and outstanding capital stock on a as-converted basis as of
and immediately after the consummation of the reverse acquisition. As a result
of the reverse acquisition, Kalington became our wholly-owned subsidiary and the
former shareholders of Kalington became our controlling
stockholders. The share exchange transaction with Kalington and the
Shareholders, or Share Exchange, was treated as a reverse acquisition, with
Kalington as the acquirer and Action Industries, Inc. as the acquired party.
Unless the context suggests otherwise, when we refer in this report to business
and financial information for periods prior to the consummation of the reverse
acquisition, we are referring to the business and financial information of
Kalington and its consolidated subsidiaries.
- 4
-
Immediately
prior to the Share Exchange, the common stock of Kalington was owned by the
following persons in the indicated percentages: William Hugh Luckman (3.51%);
Wealth Index Capital Group LLC (a US company) (7.3%); K International Consulting
Ltd. (a BVI company) (2.08%); Merrill King International Investment Consulting
Ltd. (a BVI company) (0.31%); Shanchun Huang (3.12%); Xiucheng Yang (1.53%);
Jianxin Wang (0.92%); Xingfang Zhang (29.45%); and Merry Success Limited (a BVI
company) (51.78%). Jinhai Guo, a U.S. citizen, owns 100% of the
capital stock of Merry Success Limited. Jinhai Guo and Chaojun Wang,
our Chief Executive Officer, are the directors of Merry Success
Limited. On March 18, 2010, Chaojun Wang, our Chief Executive
Officer, entered into a call option agreement (the “Merry Success Option
Agreement”) with Jinhai Guo, the sole shareholder of Merry Success Limited, our
principal shareholder after the reverse acquisition. Under the Merry
Success Option Agreement, Mr. Wang has the right to acquire up to 100% or the
shares of Merry Success Limited for fixed consideration within the next three
years. The Merry Success Option Agreement also provides that Mr. Guo
shall not dispose any of the shares of Merry Success Limited without Mr. Wang’s
consent. As a result of the Merry Success Option Agreement, Chaojun
Wang, our Chief Executive Officer, beneficially owns a majority of the capital
stock and voting power of Action Industries, Inc., as well as Longhai and the
Longhai Steel Group.
Immediately
following closing of the reverse acquisition of Kalington, certain Shareholders
transferred 625 of the shares of Series A Convertible Preferred Stock issued to
them under the Share Exchange to certain persons who provided services to
Kalington’s subsidiary and/or controlled affiliate.
Upon the
closing of the reverse acquisition, Inna Sheveleva, our sole director and
officer, submitted a resignation letter pursuant to which she resigned from all
offices that she held effective immediately and from her position as our
director that will become effective on the tenth day following the mailing by us
of an information statement, or the Information Statement, to our stockholders
that complies with the requirements of Section 14f-1 of the Exchange
Act. In addition, our board of directors on March 25, 2010 increased
the size of our board of directors to three directors and appointed Chaojun
Wang, Jing Shen and Chaoshui Wang to fill the vacancies created by such
increase, which appointments will become effective upon the effectiveness of the
resignation of Inna Sheveleva on the tenth day following the mailing by us of
the Information Statement to our stockholders. In addition, our
executive officers were replaced by Longhai’s executive officers upon the
closing of the reverse acquisition as indicated in more detail
below.
As a
result of our acquisition of Kalington, we now own all of the issued and
outstanding capital stock of Kalington, which in turn owns all of the issued and
outstanding capital stock of Kalington Consulting. In addition, we
effectively and substantially control Longhai through a series of captive
agreements with Kalington Consulting.
Longhai,
our operating affiliate, was established in the PRC on August 26, 2008 as a
result of the division of the Longhai Steel Group for the purpose of engaging in
the production of steel wire. Chaojun Wang serves as the Chairman of
the Board of Directors and General Manager of Longhai and owns 80% of the
capital stock in Longhai. Longhai’s additional shareholders are
Wealth Index International (Beijing) Investment Co., Ltd. (15% owner) and Wenyi
Chen (5% owner). Chaojun Wang also owns 80% of the capital stock of
and is the chief executive officer of the Longhai Steel Group.
Longhai
leases a five-story office space and the building which houses our production
facilities from the Longhai Steel Group. Longhai purchased 100% of
its steel billet from the Longhai Steel Group until 2008. Since 2009, Longhai
has purchased steel billet from third party vendors. Steel Billet is
the principal raw material used in our production of steel
wire. Longhai also purchases production utilities from the Longhai
Steel Group.
On March
19, 2010, prior to the reverse acquisition transaction, Kalington Consulting and
Longhai entered into a series of agreements known as variable interest
agreements (the “VIE Agreements”) pursuant to which Longhai became Kalington
Consulting’s contractually controlled affiliate. The use of VIE
agreements is a common structure used to acquire PRC corporations, particularly
in certain industries in which foreign investment is restricted or forbidden by
the PRC government. The VIE Agreements included:
- 5
-
|
|
(1)
|
A
Consulting Services Agreement through which Kalington Consulting has the
right to advise, consult, manage and operate Longhai and collect and own
all of the net profits of Longhai;
|
|
|
(2)
|
an
Operating Agreement through which Kalington Consulting has the right to
recommend director candidates and appoint the senior executives of
Longhai, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Longhai, and guarantee the
contractual performance by Longhai of any agreements with third parties,
in exchange for a pledge by Longhai of its accounts receivable and
assets;
|
|
|
(3)
|
a
Proxy Agreement under which the three owners of Longhai have vested their
collective voting control over Longhai to Kalington Consulting and will
only transfer their respective equity interests in Longhai to Kalington
Consulting or its designee(s);
|
|
|
(4)
|
an
Option Agreement under which the owners of Longhai have granted to
Kalington Consulting the irrevocable right and option to acquire all of
their equity interests in Longhai;
and
|
|
|
(5)
|
an
Equity Pledge Agreement under which the owners of Longhai have pledged all
of their rights, titles and interests in Longhai to Kalington Consulting
to guarantee Longhai’s performance of its obligations under the Consulting
Services Agreement.
|
The
foregoing description of the terms of the Consulting Services Agreement, the
Operating Agreement, the Proxy Agreement, the Option Agreement and the Equity
Pledge Agreement is qualified in its entirety by reference to the provisions of
the agreements filed as Exhibit 10.4, 10.5, 10.6, 10.7 and 10.8 to this report,
respectively, which are incorporated by reference herein.
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
Because
of the common control between Kalington, Kalington Consulting and Longhai, for
accounting purposes, the acquisition of these entities has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Our
Corporate Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries and controlled affiliate. The chart below presents our corporate
structure.
- 6
-
Our
Industry
China is
the world’s largest producer of steel and it is estimated that annual
production capacity in 2009 was over 660M metric tons. Japan,
the second largest producer, produces less than 30% of that
figure. In total, China accounts for roughly 45% of global steel
production. China’s steel industry, while enormous in total scale, is
a fractured industry where a great number producers account for a small
amount of total output. China’s steel industry includes a wide range
of producers, including smaller, inefficient backyard operations,
huge state owned enterprises burdened with unnecessarily large, unionized
labor forces and their accompanying pension burdens as well as newly
constructed steel plants possessing the facilities built according to the
highest technology and efficiency standards in the world.
PRC
Macroeconomic Drivers:
The steel
industry is a fundamental cornerstone of the economy and growth in the
steel industry has coincided with consistent and strong growth in the PRC
economy as a whole. It is estimated that real GDP year over year
quarterly growth has been well over an average of 9% since 2000, with a low of
6.1% in the first quarter of 2009:
- 7
-
We
believe that GDP growth will gradually slow but remain positive on the whole as
China industrializes further.
Steel
Consumption, Construction and Fixed Asset Investment:
Steel
consumption in the PRC is highly correlated with nominal fixed asset
investment. Construction is the largest driver of steel usage in
China. The following table details steel consumption by economic
sector, construction a consumes the most steel by a wide margin.
Construction
growth has been strong and has rebounded from the financial downturn in late
2008 robustly. We expect to continue to benefit from the housing and
commercial needs created by urbanization trends and infrastructure trends in the
furture:
- 8
-
There is
also a close relationship between steel consumption and fixed asset investment
(FAI) in China. The PRC’s fixed asset investment as a portion of GDP
has been historically strong and growing. It is estimated that in
2009, fixed asset investment comprised as much as 70% of GDP. The
graph below details the rapid and strong growth in FAI:
The
Steel Wire Market:
China is
estimated to have produced roughly 80MMT of steel wire rod in
2009. Steel wire is used in a variety of products and serves the
construction industry.
- 9
-
The chart
below details average steel wire prices we experienced over the past two years
in our local market:
Steel
wire prices, along with the majority of other commodities, had a strong run up
in prices leading to a large collapse in 2008. Throughout the rapid
increase and decline in commodity prices, we were able to maintain positive
gross and net margins. We believe steel wire prices have stabilized and we
expect them to rise over 2010 as demand increases due to new and ongoing
construction projects.
Our
Growth Strategy
We
believe that the market for high quality steel wire will continue to grow in the
PRC. The PRC has placed a temporary moratorium on new steel wire
plant construction in an effort to encourage consolidation, therefore our
expansion plan is to build capacity through the acquisition of facilities at
attractive prices from competitors who lack our management experience and
efficient labor force. We plan to continue to improve margins through
increased efficiencies in our production process.
We intend
to pursue the following strategies to achieve our goal:
|
1)
|
Identify
and acquire high quality producers at low valuations compared to earnings
and assets to increase our market
share.
|
|
2)
|
Expand
operations to greater capitalize on economies of scale to produce at
higher margins and leverage suppliers and producers for greater cost
control.
|
|
3)
|
Expand
downstream and capitalize on vertically integrated product synergies to
capitalize on higher margins.
|
Our
Products:
Our
products are steel wires of diameters ranging in diameter from 6.5mm to
10mm. All our wires are manufactured in accordance to ISO9001-2000 quality
management system standards, and those of 6.5mm in diameter meet national
standard GB/700-88. We ensure a low quantity of oxide in our
wire to provide our downstream customers the highest quality wire for further
processing. Our end customers process the wire into a variety of end
products vital to construction and infrastructure, including but not limited to
nails, screws, wire mesh, and fencing.
- 10
-
Longhai
Steel Wire Products coming off production line and loading onto
transport trucks
The
principal raw material used in our products is steel billet. In 2009, steel
billet accounted for more than 95% of our production costs. We
generally purchase billet only after a customer has made a wire order, and
therefore avoid a large inventory of billet. This insulates us from
commodity price fluctuation risk associated with holding large quantities of raw
materials. We are generally able to pass higher costs due to
fluctuations in raw material costs through directly to our
customers.
Until
2008, we purchased 100% of our billet from the Longhai Steel
Group. The Longhai Steel Group is controlled by our CEO Chaojun Wang.
Since 2009, Longhai has purchased steel billet from third party vendors. Our
purchasing team monitors and tracks movements in steel billet prices daily and
provides regular guidance to management to respond quickly to market conditions
and aid in long term business planning.
We sell
our products to a number of distribution companies. These companies
are responsible for pickup and transport of our wire to nearby wire
processors. Our products are manufactured on an on-demand basis and
we usually collect payment in advance. This allows us to
maintain a low inventory of both wire and billet, and protects us from exposure
to commodity price volatility. During the year ended December 31,
2009, our top five distributers accounted for 39% of our
revenues. In order to increase sales and be competitive in the
market, we occasionally offer discounted wholesale prices to larger
purchasers. Our sales efforts are directed toward developing long term
relationships with customers who are able to purchase in large
quantities. We pride ourselves on our ability to meet our customers’
demand for high quality products, fast turnaround and timely delivery, and
customer support. We believe that our ability to consistently meet or
exceed these standards is critical to our success and market share. Our
sales department currently has 20 full time employees.
Sales
prices are set at the market price for wire on a daily basis. Our
customers generally prepay for their orders, and the final price may be
adjusted to the market price on the day of manufacture and pick
up. We sometimes provide discounts to newer or larger customers at
our discretion to encourage higher sales volumes.
- 11
-
We sell
100% of our products in the PRC. Within China, the biggest market for
our products is in Hebei Province, where approximately 80% of our products
are sold. The industrial area in and around the nearby city of
Hengshui contains one of the largest collective wire processing
capacities in the world. Much our wire is distributed in
this area for further processing. Domestic economic growth is
a demand driver of our products. More specifically, fixed asset investment
in construction and infrastructure projects is the major macroeconomic driver of
our growth.
The table
below contains a breakdown of our current employees by department as
of December 31, 2009:
|
Department
|
Staff
|
|
|
Management
|
10
|
|
|
Administrative
|
12
|
|
|
Accounting
|
14
|
|
|
Sales
|
20
|
|
|
Production
|
402
|
|
|
Total
|
458
|
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Unemployment Insurance Law, the PRC Provisional Insurance Measures for Maternity
of Employees, PRC Interim Provisions on Registration of Social Insurance, PRC
Interim Regulation on the Collection and Payment of Social Insurance Premiums
and other related regulations, rules and provisions issued by the relevant
governmental authorities for our operations in the
PRC. According to the PRC Labor Contract Law, we are required to
enter into labor contracts with our employees and to pay them no less than local
minimum wage.
Intellectual
Property Rights
We
protect our intellectual property primarily by maintaining strict control over
the use of production processes. All our employees, including key
employees and engineers, have signed our standard form of labor contracts,
pursuant to which they are obligated to hold in confidence any of our trade
secrets, know-how or other confidential information and not to compete with
us. In addition, for each project, only the personnel associated with
the project have access to the related intellectual property. Access
to proprietary data is limited to authorized personnel to prevent unintended
disclosure or otherwise using our intellectual property without proper
authorization. We will continue to take steps to protect our
intellectual property rights.
Our
facilities are in located in Xingtai, Hebei. We lease a 5 story
office space and the building which our production facilities occupy from the
Longhai Steel Group. In total, the area covered by our facilities is
more than 107,000 square meters. The production facilities include a
fifth generation Morgan steel rolling mill. We utilize a double
chamber heating furnace which feeds one coarse and one intermediate rolling
mill, and then splits into two wire production lines arranged in a Y-shaped
layout. We believe our rolling and drawing facilities are among the
most advanced in the world. We have a capacity of approximately nine
hundred thousand metric tons of wire per year.
- 12
-
Longhai
Facilities:
Competition
Competition
within the steel industry in the PRC is intense. There is an
estimated capacity of 600MMT of steel capacity in China. Our
competitors range from small private enterprises to extremely large state owned
enterprises. Our operating subsidiary, Longhai, is located in
Xingtai, Hebei. Hebei is the largest producer of steel by province in
the PRC, therefore we are located near to numerous wire
facilities. We are the largest non state owned steel wire
manufacturer in Hebei.
The table
below details our major competitors:
|
Company
|
Production Lines
|
Est. Capacity
|
Line Speed (m/s)
|
Ownership
|
||||
|
Xingtai
Steel Company
|
2
|
2MMT
|
90
|
State
Owned
|
||||
|
Hebei
Xinjin Company
|
1
|
0.5MMT
|
90
|
Private
|
||||
|
Wuan
Minglao Steel Company
|
1
|
0.5MMT
|
75
|
Private
|
||||
|
Yongnian
Jianfa Company
|
1
|
0.3MMT
|
49
|
Private
|
In
comparison, we operate two production lines with a combined yearly capacity of
nine hundred thousand metric tons, line speed of 90 meters per second and the
most advanced production equipment on the market.
Private
steel product manufacturers in China generally focus on low-end products. Many
of our competitors are significantly smaller than we are and use outdated
equipment and production techniques. Due to our
high quality equipment, economies of scale and management experience, we produce
steel wire at higher efficiencies and lower prices
than these competitors. The larger state owned enterprises with whom
we compete often have oversized, unionized labor forces and associated pension
and healthcare liabilities and cannot match our production
efficiency. We distinguish ourselves in the market based on our
extremely fast turnaround, high quality and low prices.
- 13
-
Regulation
Because
our principal operating subsidiary, Longhai, is located in the PRC, our business
is regulated by the national and local laws of the PRC. We believe our conduct
of business complies with existing PRC laws, rules and regulations.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
Regulation
of Income Taxes
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and its implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
- 14
-
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
“Risk Factors – Risks Related to Our Business – Under the New EIT Law, we may be
classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
stockholders.”
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.
The New
EIT Law and its implementing rules generally provide that a 10% withholding tax
applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. Kalington Consulting is considered an FIE and
is directly held by our subsidiary Kalington in Hong Kong. According to a 2006
tax treaty between the Mainland and Hong Kong, dividends payable by an FIE in
China to the company in Hong Kong who directly holds at least 25% of the equity
interests in the FIE will be subject to a no more than 5% withholding tax. We
expect that such 5% withholding tax will apply to dividends paid to Kalington by
Kalington Consulting, but this treatment will depend on our status as a
non-resident enterprise.
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. Our operating controlled affiliate
Longhai has received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that
their business operations are in material compliance with the relevant PRC
environmental laws and regulations. We are not currently subject to any
pending actions alleging any violations of applicable PRC environmental
laws.
Insurance
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we could
face liability from the interruption of our business as summarized under “Risk
Factors – Risks Related to Our Business – We do not carry business interruption
insurance so we could incur unrecoverable losses if our business is
interrupted.”
- 15
-
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this report, before making an investment decision. If
any of the following risks actually occurs, our business, financial condition or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You
should read the section entitled “Special Notes Regarding Forward-Looking
Statements” above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
We
have a short operating history.
We were
founded in 2008 and our predecessor business has been in the steel business
since 2003. We may not succeed in implementing our business plan
successfully because of competition from domestic and foreign market entrants,
failure of the market to accept our products, or other reasons. Therefore, you
should not place undue reliance on our past performance as they may not be
indicative of our future results.
We face risks
related to general domestic and global economic conditions and to the current
credit crisis.
Our
current operating cash flows provide us with stable funding capacity. However,
the current uncertainty arising out of domestic and global economic conditions,
including the recent disruption in credit markets, poses a risk to the PRC
economy, and may impact our ability to manage normal relationships with our
customers, suppliers and creditors. If the current situation deteriorates
significantly, our business could be materially negatively impacted, as demand
for our products and services may decrease from a slow-down in the general
economy, or supplier or customer disruptions may result from tighter credit
markets.
Our
business is subject to the health of the PRC economy and our growth may be
inhibited by the inability of potential customers to fund purchases of our
products and services.
Our
products are dependent on the continued growth of infrastructure and
construction projects in the PRC. There is no guarantee that the PRC
will continue to invest in infrastructure and construction.
In order to grow
at the pace expected by management, we will require additional capital to
support our long-term growth strategies. If we are unable to obtain additional
capital in future years, we may be unable to proceed with our plans and we may
be forced to curtail our operations.
We will
require additional working capital to support our long-term growth strategies,
which includes identifying suitable points of market entry for expansion growing
the number of points of sale for our products, so as to enhance our product
offerings and benefit from economies of scale. Our working capital requirements
and the cash flow provided by future operating activities, if any, may vary
greatly from quarter to quarter, depending on the volume of business during the
period. We may not be able to obtain adequate levels of additional financing,
whether through equity financing, debt financing or other sources. Additional
financings could result in significant dilution to our earnings per share or the
issuance of securities with rights superior to our current outstanding
securities. In addition, we may grant registration rights to investors
purchasing our equity or debt securities in the future. If we are unable to
raise additional financing, we may be unable to implement our long-term growth
strategies, develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures on a timely
basis.
- 16
-
We have
concentration risk in our supply chain as we have historically sourced 100% of
our raw materials from one supplier. Should we encounter problems
with the quality of products or their availability we may be forced to source
billet from another supplier or suppliers, which could adversely affect our
profit margins.
If
we are unable to attract and retain senior management and qualified technical
and sales personnel, our operations, financial condition and prospects will be
materially adversely affected.
Our
future success depends in part on the contributions of our management team and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the continuing
employment of our Chief Executive Officer, Mr. Chaojun Wang, our Chief
Technology Officer, Ms. Dongmei Pan, and our Chief Financial Officer, Mr. Heyin
Lv. There is significant competition in our industry for qualified managerial,
technical and sales personnel and we cannot assure you that we will be able to
retain our key senior managerial, technical and sales personnel or that we will
be able to attract, integrate and retain other such personnel that we may
require in the future. If we are unable to attract and retain key personnel in
the future, our business, operations, financial condition, results of operations
and prospects could be materially adversely affected.
We are
subject to risk inherent to our business, including equipment failure, theft,
natural disasters, industrial accidents, labor disturbances, business
interruptions, property damage, product liability, personal injury and death. We
do not carry any business interruption insurance or third-party liability
insurance or other insurance to cover risks associated with our business. As a
result, if we suffer losses, damages or liabilities, including those caused by
natural disasters or other events beyond our control and we are unable to make a
claim again a third party, we will be required to bear all such losses from our
own funds, which could have a material adverse effect on our business, financial
condition and results of operations.
Our
quarterly operating results are likely to fluctuate, which may affect our stock
price.
Our
quarterly revenues, expenses, operating results and gross profit margins vary
from quarter to quarter. As a result, our operating results may fall below the
expectations of securities analysts and investors in some quarters, which could
result in a decrease in the market price of our common stock. The reasons our
quarterly results may fluctuate include:
|
|
·
|
variations
in the price of steel and steel
wire;
|
|
|
·
|
changes
in the general competitive and economic conditions;
and
|
|
|
·
|
delays
in, or uneven timing in the delivery of, customer
orders.
|
Period to
period comparisons of our results should not be relied on as indications of
future performance.
Our
limited ability to protect our intellectual property, and the possibility that
our technology could inadvertently infringe technology owned by others, may
adversely affect our ability to compete.
We rely
on a combination of trade secret laws and confidentiality procedures to protect
the technological know-how that comprises our intellectual property. We protect
our technological know-how pursuant to non-disclosure and non-competition
provisions contained in our employment agreements, and agreements with them to
keep confidential all information relating to our customers, methods, business
and trade secrets during and after their employment with us. Our employees are
also required to acknowledge and recognize that all inventions, trade secrets,
works of authorship, developments and other processes made by them during their
employment are our property.
- 17
-
A
successful challenge to the ownership of our intellectual property could
materially damage our business prospects. Our competitors may assert that our
technologies or products infringe on their patents or proprietary rights. We may
be required to obtain from others licenses that may not be available on
commercially reasonable terms, if at all. Problems with intellectual property
rights could increase the cost of our products or delay or preclude our new
product development and commercialization. If infringement claims against us are
deemed valid, we may not be able to obtain appropriate licenses on acceptable
terms or at all. Litigation could be costly and time-consuming but may be
necessary to protect our technology license positions or to defend against
infringement claims.
Our
business may be subject to seasonal and cyclical fluctuations in
sales.
We may
experience seasonal fluctuations in our revenue in the PRC. Moreover,
our revenues are usually higher in the fourth and first quarters due to seasonal
purchases.
RISKS
RELATING TO THE VIE AGREEMENTS
The
PRC government may determine that the VIE Agreements are not in compliance with
applicable PRC laws, rules and regulations
Kalington
Consulting manages and operates our steel wire production business through
Longhai pursuant to the rights its holds under the VIE Agreements. Almost
all economic benefits and risks arising from Longhai’s operations are
transferred to Kalington Consulting under these agreements. Details of the
VIE Agreements are set out in “DESCRIPTION OF BUSINESS - Acquisition of
Kalington Limited” above.
There are
risks involved with the operation of our business in reliance on the VIE
Agreements, including the risk that the VIE Agreements may be determined by PRC
regulators or courts to be unenforceable. Our PRC counsel has provided a legal
opinion that the VIE Agreements are binding and enforceable under PRC law, but
has further advised that if the VIE Agreements were for any reason determined to
be in breach of any existing or future PRC laws or regulations, the relevant
regulatory authorities would have broad discretion in dealing with such breach,
including:
|
·
|
imposing economic
penalties;
|
|
·
|
discontinuing or restricting the operations of
Longhai or Kalington
Consulting;
|
|
|
·
|
imposing
conditions or requirements in respect of the VIE Agreements with which
Longhai or Kalington Consulting may not be able to
comply;
|
|
|
·
|
requiring
our company to restructure the relevant ownership structure or
operations;
|
|
|
·
|
taking
other regulatory or enforcement actions that could adversely affect our
company’s business; and
|
|
|
·
|
revoking
the business licenses and/or the licenses or certificates of Kalington
Consulting, and/or voiding the VIE
Agreements.
|
Any of
these actions could adversely affect our ability to manage, operate and gain the
financial benefits of Longhai, which would have a material adverse impact on our
business, financial condition and results of operations.
Our
ability to manage and operate Longhai under the VIE Agreements may not be as
effective as direct ownership
We
conduct our steel wire production business in the PRC and generate virtually all
of our revenues through the VIE Agreements. Our plans for future growth are
based substantially on growing the operations of Longhai. However, the VIE
Agreements may not be as effective in providing us with control over Longhai as
direct ownership. Under the current VIE arrangements, as a legal matter, if
Longhai fails to perform its obligations under these contractual arrangements,
we may have to (i) incur substantial costs and resources to enforce such
arrangements, and (ii) reply on legal remedies under PRC law, which we cannot be
sure would be effective. Therefore, if we are unable to effectively control
Longhai, it may have an adverse effect on our ability to achieve our business
objectives and grow our revenues.
- 18
-
As
the VIE Agreements are governed by PRC law, we would be required to rely on PRC
law to enforce our rights and remedies under them; PRC law may not provide us
with the same rights and remedies as are available in contractual disputes
governed by the law of other jurisdictions.
The VIE
Agreements are governed by the PRC law and provide for the resolution of
disputes through arbitral proceedings pursuant to PRC law. If Longhai or its
shareholders fail to perform the obligations under the VIE Agreements, we would
be required to resort to legal remedies available under PRC law, including
seeking specific performance or injunctive relief, or claiming damages. We
cannot be sure that such remedies would provide us with effective means of
causing Longhai to meet its obligations, or recovering any losses or damages as
a result of non-performance. Further, the legal environment in China is not as
developed as in other jurisdictions. Uncertainties in the application of various
laws, rules, regulations or policies in PRC legal system could limit our
liability to enforce the VIE Agreements and protect our interests.
The
payment arrangement under the VIE Agreements may be challenged by the PRC tax
authorities
We
generate our revenues through the payments we receive pursuant to the VIE
Agreements. We could face adverse tax consequences if the PRC tax authorities
determine that the VIE Agreements were not entered into based on arm’s length
negotiations. For example, PRC tax authorities may adjust our income and
expenses for PRC tax purposes which could result in our being subject to higher
tax liability, or cause other adverse financial consequences.
Our
Shareholders have potential conflicts of interest with our company which may
adversely affect our business
Chaojun
Wang is our chief executive officer, and is also the largest shareholder of
Longhai. There could be conflicts that arise from time to time between our
interests and the interests of Mr. Wang. There could also be conflicts that
arise between us and Longhai that would require our shareholders and Longhai’s
shareholders to vote on corporate actions necessary to resolve the conflict.
There can be no assurance in any such circumstances that Mr. Wang will vote his
shares in our best interest or otherwise act in the best interests of our
company. If Mr. Wang fails to act in our best interests, our operating
performance and future growth could be adversely affected
We
rely on the approval certificates and business license held by Kalington
Consulting and any deterioration of the relationship between Kalington
Consulting and Longhai could materially and adversely affect our business
operations
We
operate our steel wire production business in China on the basis of the approval
certificates, business license and other requisite licenses held by Kalington
Consulting and Longhai. There is no assurance that Kalington Consulting and
Longhai will be able to renew their licenses or certificates when their terms
expire with substantially similar terms as the ones they currently
hold.
Further,
our relationship with Longhai is governed by the VIE Agreements that are
intended to provide us with effective control over the business operations of
Longhai. However, the VIE Agreements may not be effective in providing control
over the application for and maintenance of the licenses required for our
business operations. Longhai could violate the VIE Agreements, go bankrupt,
suffer from difficulties in its business or otherwise become unable to perform
its obligations under the VIE Agreements and, as a result, our operations,
reputations and business could be severely harmed.
If
Kalington Consulting exercises the purchase option it holds over Longhai’s share
capital pursuant to the VIE Agreements, the payment of the purchase price could
materially and adversely affect our financial position
Under the
VIE Agreements, Longhai’s shareholders have granted Kalington Consulting
an option for the maximum period of time allowed by law to purchase all of
the equity interest in Longhai at a price equal to the capital paid in
by the transferors, adjusted pro rata for purchase of less than all of the
equity interest, unless applicable PRC laws and regulations require an appraisal
of the equity interest or stipulate other restrictions regarding the purchase
price of the equity interest. As Longhai is already our contractually
controlled affiliate, Kalington Consulting’s exercising of the option would not
bring immediate benefits to our company, and payment of the purchase prices
could adversely affect our financial position.
- 19
-
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes in
China's political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
|
·
|
Level
of government involvement in the
economy;
|
|
|
·
|
Control
of foreign exchange;
|
|
|
·
|
Methods
of allocating resources;
|
|
|
·
|
Balance
of payments position;
|
|
|
·
|
International
trade restrictions; and
|
|
|
·
|
International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy and weak corporate governance and a lack of flexible currency
exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the
Chinese economy was similar to those of the OECD member countries.
We
conduct substantially all of our business through our operating subsidiary and
affiliate in the PRC. Our principal operating subsidiary and controlled
affiliate, Kalington Consulting and Longhai, respectively, are subject to laws
and regulations applicable to foreign investments in China and, in particular,
laws applicable to foreign-invested enterprises. The PRC legal system is based
on written statutes, and prior court decisions may be cited for reference but
have limited precedential value. Since 1979, a series of new PRC laws and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, since the PRC legal system
continues to evolve rapidly, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to you
and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. In
addition, all of our executive officers and all of our directors are residents
of China and not of the United States, and substantially all the assets of these
persons are located outside the United States. As a result, it could be
difficult for investors to affect service of process in the United States or to
enforce a judgment obtained in the United States against our Chinese operations
and subsidiary and/or controlled affiliate.
- 20
-
You may have
difficulty enforcing judgments against us.
We are a
Nevada holding company, but Kalington is a Hong Kong company, and our principal
operating subsidiary and affiliate, Kalington Consulting and Longhai,
respectively, are located in the PRC. Most of our assets are located
outside the United States and most of our current operations are conducted in
the PRC. In addition, most of our directors and officers are nationals and
residents of countries other than the United States. A substantial portion of
the assets of these persons is located outside the United States. As a result,
it may be difficult for you to effect service of process within the United
States upon these persons. It may also be difficult for you to enforce in U.S.
courts judgments predicated on the civil liability provisions of the U.S.
federal securities laws against us and our officers and directors, most of whom
are not residents in the United States and the substantial majority of whose
assets are located outside the United States. In addition, there is uncertainty
as to whether the courts of the PRC would recognize or enforce judgments of U.S.
courts. The recognition and enforcement of foreign judgments are provided for
under the PRC Civil Procedures Law. Courts in China may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil
Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that
the judgment violates basic principles of PRC law or national sovereignty,
security or the public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the United States.
The PRC
government exerts substantial influence over the manner in which we must conduct
our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future inflation
in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and our company.
Restrictions on currency exchange may limit our ability to receive
and use our revenues effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China 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 China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
- 21
-
Fluctuations in
exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiary’s ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by Kalington Consulting, our PRC subsidiary. PRC
regulations restrict the ability of our PRC subsidiary to make dividends and
other payments to its offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiary only out of its accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiary is also required under PRC laws and regulations
to allocate at least 10% of our annual after-tax profits determined in
accordance with PRC GAAP to a statutory general reserve fund until the amounts
in said fund reaches 50% of our registered capital. Allocations to these
statutory reserve funds can only be used for specific purposes and are not
transferable to us in the form of loans, advances or cash dividends. Any
limitations on the ability of our PRC subsidiary to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
In
October 2005, SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity;
covering the use of existing offshore entities for offshore financings; (3)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (4) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV’s affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
- 22
-
We have
advised our shareholders who are PRC residents, as defined in Circular 75, to
register with the relevant branch of SAFE, as currently required, in connection
with their equity interests in us and our acquisitions of equity interests in
our PRC subsidiary and affiliate. However, we cannot provide any assurances that
their existing registrations have fully complied with, and they have made all
necessary amendments to their registration to fully comply with, all applicable
registrations or approvals required by Circular 75. Moreover, because of
uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiary’s and affiliate’s ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident
beneficial holders. In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
shareholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident shareholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiary’s and affiliate’s
ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and prospects.
Our
business and financial performance may be materially adversely affected if the
PRC regulatory authorities determine that our acquisition of Longhai constitutes
a Round-trip Investment without MOFCOM approval.
On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A
Rule, which became effective on September 8, 2006. According to the 2006 M&A
Rule, when a PRC business that is owned by PRC individual(s) is sold to a
non-PRC entity that is established or controlled, directly or indirectly, by
those same PRC individual(s) it must be approved by the Ministry of Commerce, or
MOFCOM, and any indirect arrangement or series of arrangements which achieves
the same end result without the approval of MOFCOM is a violation of PRC
law.
On March
18, 2010, Mr. Chaojun Wang, our Chief Executive Officer, who is a PRC citizen,
entered into a call option agreement with Mr. Jinhai Guo, a US passport holder
and the sole shareholder of Merry Success Limited, our principal shareholder
after the reverse acquisition. Under the call option agreement, Mr.
Wang shall have right and option to acquire up to 100% shares of Merry Success
Limited for fixed consideration within the next 3 years. The call
option agreement also provides that Mr. Guo shall not dispose any of the shares
of Merry Success Limited without Mr. Wang’s consent.
- 23
-
If the
PRC regulatory authorities take the view that the Acquisition constitutes a
Round-trip Investment without MOFCOM approval, they could invalidate our
acquisition and ownership of our Chinese subsidiary. Additionally, the PRC
regulatory authorities may take the view that the Acquisition constitutes a
transaction which requires the prior approval of the China Securities Regulatory
Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this
takes place, we may be able to find a way to re-establish control of our Chinese
subsidiary’s business operations through a series of contractual arrangements
rather than an outright purchase of our Chinese subsidiary. But we cannot assure
you that such contractual arrangements will be protected by PRC law or that the
registrant can receive as complete or effective economic benefit and overall
control of our Chinese subsidiary’s business than if the Company had direct
ownership of our Chinese subsidiary. In addition, we cannot assure you that such
contractual arrangements can be successfully effected under PRC law. If we
cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory
authorities to do so, and if we cannot put in place or enforce relevant
contractual arrangements as an alternative and equivalent means of control of
our Chinese subsidiary, our business and financial performance will be
materially adversely affected.
Under the New EIT Law, we may be
classified as a “resident enterprise” of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
shareholders.
Under the
New EIT Law effective on January 1, 2008, an enterprise established outside
China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New
EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
- 24
-
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We may be exposed
to liabilities under the Foreign Corrupt Practices Act and Chinese
anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make most of our sales in
China. PRC also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents or distributors of our
Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be
less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may have difficulty hiring new employees
in the PRC with such training. In addition, we may need to rely on a new and
developing communication infrastructure to efficiently transfer our information
from retail outlets to our headquarters. 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. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
material weaknesses in our internal controls, which could impact the reliability
of our financial statements and prevent us from complying with Commission rules
and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such
deficiencies, weaknesses or lack of compliance could have a materially adverse
effect on our business.
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our common stock
is quoted on the OTC Bulletin Board, which may have an unfavorable impact on our
stock price and liquidity.
Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a
significantly more limited market than established trading markets such as the
New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC
Bulletin Board may result in a less liquid market available for existing and
potential shareholders to trade shares of our common stock, could depress the
trading price of our common stock and could have a long-term adverse impact on
our ability to raise capital in the future. We plan to list our common stock as
soon as practicable. However, we cannot assure you that we will be able to meet
the initial listing standards of any stock exchange, or that we will be able to
maintain any such listing.
- 25
-
We may be subject
to penny stock regulations and restrictions and you may have difficulty selling
shares of our common stock.
The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. Our common
stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or
the Penny Stock Rule. This rule imposes additional sales practice requirements
on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market, thus possibly making it more difficult for
us to raise additional capital.
For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in penny stock, of a disclosure schedule required by
the SEC relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stock.
There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of penny stock, if the SEC finds that such a restriction would be
in the public interest.
Provisions
in our Articles of Incorporation and Bylaws or Nevada law might discourage,
delay or prevent a change of control of us or changes in our management and,
therefore depress the trading price of the common stock.
Our
Articles of Incorporation authorize our board of directors to issue up to
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by stockholders. These terms may
include preferences as to dividends and liquidation, voting rights, conversion
rights, redemption rights and sinking fund provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
In
addition, Nevada corporate law and our Articles of Incorporation and Bylaws also
contain other provisions that could discourage, delay or prevent a change in
control of our Company or changes in its management that our stockholders may
deem advantageous. These provisions:
|
|
·
|
deny
holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our
directors;
|
|
|
·
|
require
any stockholder wishing to properly bring a matter before a meeting of
stockholders to comply with specified procedural and advance notice
requirements; and
|
|
|
·
|
allow
any vacancy on the board of directors, however the vacancy occurs, to be
filled by the directors.
|
- 26
-
We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Our
controlling stockholder holds a significant percentage of our outstanding voting
securities, which could hinder our ability to engage in significant corporate
transactions without his approval.
Mr.
Chaojun Wang, through his option to purchase Merry Success Limited, is the
beneficial owner of approximately 51% of our outstanding voting securities. As a
result, he possesses significant influence, giving him the ability, among other
things, to elect a majority of our board of directors and to authorize or
prevent proposed significant corporate transactions. His ownership and control
may also have the effect of delaying or preventing a future change in control,
impeding a merger, consolidation, takeover or other business combination or
discourage a potential acquirer from making a tender offer.
- 27
-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Longhai
was established in 2008 and we began production of steel wire through our
predecessor entity the Longhai Steel Group in 2008. We are a leading
producer of steel wire products in northeastern China. Demand for our
steel wire is driven primarily by spending in the construction and
infrastructure industries. We have benefited from strong fixed asset
investment and construction growth as the PRC has rapidly grown increasingly
urbanized and invested in modernizing its infrastructure.
Our
principal business is the production of steel wire ranging from 6mm to 10mm in
diameter. We operate two wire production lines which have a combined
annual capacity of approximately nine hundred thousand tons per
year. Our products are sold to a number of distributors who transport
the wire to nearby wire processing facilities. Our wire is then
further processed by third party wire refiners into a variety of products such
as nails, screws, and wire mesh for use in reinforced concrete and
fencing. Our facilities and head offices are located in the town of
Xingtai in southern Hebei.
Recent
Developments
Acquisition
of Kalington
On March
26, 2010, we completed a reverse acquisition transaction through a share
exchange with Kalington and its shareholders (the Shareholders), whereby we
acquired 100% of the issued and outstanding capital stock of Kalington in
exchange for 10,000 shares of our Series A Preferred Stock, which constituted
98.5% of our issued and outstanding capital stock on an -as-converted basis as
of and immediately after the consummation of the reverse acquisition. As a
result of the reverse acquisition, Kalington became our wholly-owned subsidiary
and the former shareholders of Longhai became our controlling stockholders. The
share exchange transaction with Kalington and the Shareholders was treated as a
reverse acquisition, with Kalington as the acquirer and Action Industries, Inc.
as the acquired party. Unless the context suggests otherwise, when we refer in
this report to business and financial information for periods prior to the
consummation of the reverse acquisition, we are referring to the business and
financial information of Kalington and its consolidated
subsidiaries.
Immediately
prior to the Share Exchange, the common stock of Kalington was owned by the
following persons in the indicated percentages: William Hugh Luckman (3.51%);
Wealth Index Capital Group LLC (a US company) (7.3%); K International Consulting
Ltd. (a BVI company) (2.08%); Merrill King International Investment Consulting
Ltd. (a BVI company) (0.31%); Shanchun Huang (3.12%); Xiucheng Yang (1.53%);
Jianxin Wang (0.92%); Xingfang Zhang (29.45%); and Merry Success Limited (a BVI
company) (51.78%). Jinhai Guo, a U.S. citizen, owns 100% of the
capital stock of Merry Success Limited. Jinhai Guo and Chaojun Wang,
our Chief Executive Officer, are the directors of Merry Success
Limited. On March 18, 2010, Chaojun Wang, our Chief Executive
Officer, entered into a call option agreement (the “Merry Success Option
Agreement”) with Jinhai Guo, the sole shareholder of Merry Success Limited, our
principal shareholder after the reverse acquisition. Under the Merry
Success Option Agreement, Mr. Wang has the right to acquire up to 100% or the
shares of Merry Success Limited for fixed consideration within the next three
years. The Merry Success Option Agreement also provides that Mr. Guo
shall not dispose any of the shares of Merry Success Limited without Mr. Wang’s
consent. As a result of the Merry Success Option Agreement, Chaojun
Wang, our Chief Executive Officer, beneficially owns a majority of the capital
stock and voting power of Action Industries, Inc., as well as Longhai and the
Longhai Steel Group.
Immediately
following closing of the reverse acquisition of Kalington, certain Shareholder
transferred 625 of the shares issued to them under the Share Exchange to certain
persons who provided services to Kalington’s subsidiary and/or controlled
affiliate.
- 28
-
Upon the
closing of the reverse acquisition, Inna Sheveleva, our sole director and
officer, submitted a resignation letter pursuant to which she resigned from all
offices that she held effective immediately and from her position as our
director that will become effective on the tenth day following the mailing by us
of an information statement, or the Information Statement, to our stockholders
that complies with the requirements of Section 14f-1 of the Exchange
Act. In addition, our board of directors on March 25, 2010 increased
the size of our board of directors to three directors and appointed Chaojun
Wang, Jing Shen and Chaoshui Wang to fill the vacancies created by such
increase, which appointments will become effective upon the effectiveness of the
resignation of Inna Sheveleva on the tenth day following the mailing by us of
the Information Statement to our stockholders. In addition, our
executive officers were replaced by Longhai’s executive officers upon the
closing of the reverse acquisition as indicated in more detail
below.
As a
result of our acquisition of Kalington, we now own all of the issued and
outstanding capital stock of Kalington, which in turn owns all of the issued and
outstanding capital stock of Kalington Consulting. In addition,
we effectively and substantially control Longhai through a series of captive
agreements with Kalington Consulting.
Kalington
was established in Hong Kong on November 5, 2009 to serve as an intermediate
holding company. Chaojun Wang and William Hugh Luckman currently serve as the
directors of Kalington. Kalington Consulting was established in the
PRC on March 18, 2010. Kalington currently owns 100% of Kalington
Consulting. On March 5, 2010, the local government of the PRC issued
a certificate of approval regarding the foreign ownership of Kalington
Consulting by Kalington, a Hong Kong entity. Chaojun Wang serves as
the executive director of Kalington Consulting.
Longhai,
our operating affiliate, was established in the PRC on August 26, 2008 as a
result of the division of the Longhai Steel Group for the purpose of engaging in
the production of steel wire. Chaojun Wang serves as the Chairman of
the Board of Directors and General Manager of Longhai and owns 80% of the
capital stock in Longhai. Longhai’s additional shareholders are
Wealth Index International (Beijing) Investment Co., Ltd. (15% owner) and Wenyi
Chen (5% owner). Chaojun Wang also owns 80% of the capital stock of
and is the chief executive officer of the Longhai Steel Group.
Longhai
leases a five-story office space and the building which houses our production
facilities from the Longhai Steel Group. Until 2008, Longhai
purchased 100% of its steel billet from the Longhai Steel
Group. Since 2009, Longhai has purchased steel billet from third
party vendors. Steel Billet is the principal raw material used in our production
of steel wire. Longhai also purchases production utilities from the
Longhai Steel Group.
On March
19, 2010, prior to the reverse acquisition transaction, Kalington Consulting and
Longhai entered into a series of agreements known as variable interest
agreements (the “VIE Agreements”) pursuant to which Longhai became Kalington
Consulting’s contractually controlled affiliate. The use of VIE
agreements is a common structure used to acquire PRC corporations, particularly
in certain industries in which foreign investment is restricted or forbidden by
the PRC government. The VIE Agreements included:
|
|
(1)
|
A
Consulting Services Agreement through which Kalington Consulting has the
right to advise, consult, manage and operate Longhai and collect and own
all of the net profits of Longhai;
|
|
|
(2)
|
an
Operating Agreement through which Kalington Consulting has the right to
recommend director candidates and appoint the senior executives of
Longhai, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Longhai, and guarantee the
contractual performance by Longhai of any agreements with third parties,
in exchange for a pledge by Longhai of its accounts receivable and
assets;
|
|
|
(3)
|
a
Proxy Agreement under which the three owners of Longhai have vested their
collective voting control over Longhai to Kalington Consulting and will
only transfer their respective equity interests in Longhai to Kalington
Consulting or its designee(s);
|
- 29
-
|
|
(4)
|
an
Option Agreement under which the owners of Longhai have granted to
Kalington Consulting the irrevocable right and option to acquire all of
their equity interests in Longhai;
and
|
|
|
(5)
|
an
Equity Pledge Agreement under which the owners of Longhai have pledged all
of their rights, titles and interests in Longhai to Kalington Consulting
to guarantee Longhai’s performance of its obligations under the Consulting
Services Agreement.
|
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
Because
of the common control between Kalington, Kalington Consulting and Longhai, for
accounting purposes, the acquisitions of these entities has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Principal
Factors Affecting Our Financial Performance
Our
operating results are primarily affected by the following factors:
|
|
·
|
Growth in
the Chinese Economy - We operate our facilities in China and derive
almost all of our revenues from sales to customers in China. Economic
conditions in China, therefore, affect virtually all aspects of our
operations, including the demand for our products, the availability and
prices of our raw materials and our other expenses. China has experienced
significant economic growth, achieving a compound annual growth rate of
over 10% in gross domestic product from 1996 through 2008. China is
expected to experience continued growth in all areas of investment and
consumption, even in the face of a global economic recession. However,
China has not been entirely immune to the global economic slowdown and is
experiencing a slowing of its growth
rate.
|
|
|
·
|
Supply and
Demand in the Steel Market – We are subject to macroeconomic
factors dictating the supply and demand of steel and wire in the
PRC. Steel commodity prices have been volatile in the past, and
while they have stabilized since the first quarter of 2009, our revenues
and earnings could be dramatically affected by increases and decreases in
raw material and wire costs.
|
|
|
·
|
Infrastructure
and Construction Growth – We have in the past benefited from strong
growth in fixed asset investment in roads, residential and commercial
construction, bridges and other fundamental infrastructure and
construction projects in the PRC. As the Chinese economy
matures and develops, while we expect this growth to slow and fixed asset
investment to fall as a percentage of GDP, we still believe demand for our
products will remain strong.
|
Taxation
United
States and Hong Kong
We are
subject to United States tax at a tax rate of 34%. No provision for income taxes
in the United States has been made as we have no income taxable in the United
States.
Kalington
is incorporated in Hong Kong and is subject to Hong Kong profits
tax.
- 30
-
People’s
Republic of China
Income
Taxes:
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. ASC 740 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. There was no deferred tax
asset or liability for the years ended December 31, 2009 and
2008. The Company is governed by the Income Tax Law of the PRC
concerning the private-run enterprises, which are generally subject to tax at a
statutory rate of 25% and 33% on income reported in the statutory financial
statements after appropriated tax adjustments in 2009 and 2008,
respectively.
Value
Added Taxes:
The
Company is subject to value added tax (“VAT”) for selling merchandise. The
applicable VAT rate is 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Under the commercial practice of the
PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be
issued subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date on which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty, which can range from zero
to five times the amount of the taxes which are determined to be late or
deficient. According to PRC tax laws, any potential tax penalty
payable on late or deficient payments of this tax could be between zero and five
times the amount of the late or deficient tax payable,, and will be expensed as
a period expense if and when a determination has been made by the taxing
authorities that a penalty is due. As of December 31, 2008 and 2009,
the Company accrued zero and $1,328,830, respectively, of unpaid value-added
taxes.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will punctually adjust our effective income tax rate when
necessary.
Results
of Operations
Comparison of Twelve Months
Ended December 31, 2009 and December 31, 2008
The
following table sets forth key components of our results of operations during
the twelve month periods ended December 31, 2009 and 2008, both in dollars and
as a percentage of our net sales. As the reverse acquisition of Kalington was
entered into after December 31, 2009 and during the periods indicated Longhai
was the only entity in our combined business that had operations, the results of
operations below refer only to that of Longhai.
|
Twelve
Months Ended
|
Twelve
Months Ended
|
|||||||||||||||
|
31-Dec-09
|
31-Dec-08
|
|||||||||||||||
|
%
Net
|
%
Net
|
|||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
|
Net
Sales
|
$ | 373,660,461 | 100.0 | % | $ | 511,487,983 | 100.0 | % | ||||||||
|
Cost
of sales
|
356,833,041 | 95.5 | % | 492,792,919 | 96.3 | % | ||||||||||
|
Gross
profit
|
16,827,420 | 4.5 | % | 18,695,064 | 3.7 | % | ||||||||||
|
SG&A
Expenses
|
1,114,016 | 0.3 | % | 798,083 | 0.2 | % | ||||||||||
|
Operating
Income
|
15,713,404 | 4.2 | % | 17,896,981 | 3.5 | % | ||||||||||
|
Other
income & interest expense
|
(116,591 | ) | 0.0 | % | (111,161 | ) | 0.0 | % | ||||||||
|
Income
Before Income Taxes
|
15,596,813 | 4.2 | % | 17,785,820 | 3.5 | % | ||||||||||
|
Income
taxes
|
3,899,203 | 1.0 | % | 4,446,455 | 0.9 | % | ||||||||||
|
Net
income
|
$ | 11,697,610 | 3.1 | % | $ | 13,339,365 | 2.6 | % | ||||||||
- 31
-
Net Sales.
Our net sales decreased to $373,660,461 in the twelve months ended December
31, 2009 from $511,487,983 in the same period in 2008, representing a 26.9%
decrease year-on-year. This decrease was mainly due to a sharp decline in
commodity prices, namely steel and steel wire. We had no change in
operating capacity year over year, and we operated at nearly full capacity for
both 2008 and 2009, producing 859MMT of wire in 2008 and 848MMT in
2009. The graph below shows the (unaudited) average sales price steel
wire versus the purchase price we experienced in the marketplace for the past
two years:
Steel
wire sales prices fell 45% from a high of 5,133 RMB/MT in June of 2008 to a low
of 2,802 RMB/MT in March of 2009. Our average purchase price for
steel billet reached a peak in May 2008 at 4,766 RMB/MT and bottomed in March of
2009 2,540 RMB/MT, a decline of 46.7%. Throughout this period of
intense volatility we were able maintain positive margins throughout every
fiscal quarter due to our inventory systems and controls and sales
model.
Cost of
Sales. Our cost of sales decreased to $356,833,041 in the twelve months
ended December 31, 2009 from $492,792,919 in the same period
in 2008. The cost of goods sold per sales ratio changed from 96.3% to 95.5%,
mainly due to greater efficiencies in our cost control.
Gross Profit and
Gross Margin.
Our gross profit decreased from $18,695,064 in 2008 to $16,827,420 in the twelve months
ended December 31, 2009. Gross profit margins as a percentage of net revenue
were up 1.2% to 4.7% in 2009 from 3.5% for the twelve months ended December 31,
2008. The increase in the gross margin was primarily due to greater efficiencies
in our production and lower volatility in the steel and steel wire
market.
Selling, General
and Administrative Expenses. Our selling, general and administration
increased to $1,114,016 in
the twelve months ended December 31, 2009 from $798,083 in the same period in
2008. This increase was, as a percentage of sales, an increase of
0.1%.
Other
Income. Other income remained at roughly the same level over the two year
period, at $(116,591) for 2009 and $(111,161) in 2008.
- 32
-
Income Before
Income Taxes. Our income before income taxes decreased to $15,596,813 in the twelve months
ended December 31, 2009 from $17,785,820 in the same period in
2008. This decrease was mainly due to the change in commodity prices discussed
above.
Income
Taxes. Income tax fell to $3,899,203 in the twelve months
ended December 31, 2009 from $4,446,455 in the same period in
2008. The decrease was due to a decrease in income, as our income tax rate
remained constant at 25%.
Net
Income. In the twelve months ended December 31, 2009, we generated a net
income of $11,697,610, a
decrease of 12% from $13,339,365 in the same period in
2008.
Liquidity
and Capital Resources
As of
December 31, 2009, we had cash and cash equivalents of $115,510, primarily
consisting of cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our
shareholders.
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
Twelve months
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by operating activities
|
$ | 30,776,570 | $ | 2,607,070 | ||||
|
Net
cash used in investing activities
|
(29,565,474 | ) | - | |||||
|
Net
cash used in financing activities
|
(1,468,253 | ) | (2,449,545 | ) | ||||
|
Effects
of Exchange Rate Change in Cash
|
8,764 | 206,378 | ||||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(248,393 | ) | 363,903 | |||||
|
Cash
and Cash Equivalent at Beginning of the Year
|
363,903 | - | ||||||
|
Cash
and Cash Equivalent at End of the Year
|
115,510 | 363,903 | ||||||
Operating
activities
Net cash
used in operating activities was $30,776,570 for the twelve months ended
December 31, 2009, as compared to $2,607,070 for the same period in 2008. The
increase in net cash, apart from our profit, was provided by prepayments from
our customers.
Investing
activities
Net cash
used in investing activities for the twelve months ended December 31, 2009 was
$(29,565,474), as compared to $0 net cash used in investing activities during
the same period of 2008. This amount was mainly due to the advances made to
affiliates.
- 33
-
Financing
activities
Net
cash used in financing activities for the twelve months ended December
31, 2009 was $(1,468,253), as compared to $(2,449,545) net cash used in
financing activities during the same period of 2008. These amounts are mainly
due to repayments made on loans to the related parties.
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in travel industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may
experience seasonal fluctuations in our revenue in some regions in the PRC, but
our main exposure is to the business cycle for steel in the PRC. Any
seasonality may cause significant pressure on us to monitor the development of
materials accurately and to anticipate and satisfy these
requirements.
Significant Accounting
Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude value added tax (“VAT”). Wholesales to its
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point
basis.
- 34
-
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) 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 dates of the financial statements and the amount of revenues 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.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Impairment
of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value. There was no impairment of long-lived assets for the years ended December
31, 2008 and 2007.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis and includes all expenditures incurred in
bringing the goods to the point of sale and putting them in a salable
condition. In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels. Our reserve requirements generally
increase as our projected demand requirements; or decrease due to market
conditions and product life cycle changes. The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market
conditions.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
- 35
-
Foreign
Currency Translation
The Company’s
functional currency is Chinese currency Renminbi (“RMB”) and its reporting
currency is the U.S. dollar. Transactions denominated in foreign currencies are
translated into U.S. dollar at exchange rate in effect on the date of the
transactions. Exchange gains or losses on transaction are included in
earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and 2008, the
cumulative translation adjustment of $806,818 and $752,334 were classified as an
item of accumulated other comprehensive income in the shareholders’ equity
section of the balance sheet respectively. For the years ended December 31,
2009, 2008 and 2007, other comprehensive income was $54,484, $521,483 and
$230,851, respectively.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (Now included in ASC 805),
“Business Combinations” which establishes principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and for
disclosure to enable evaluation of the nature and financial effects of the
business combination. The Company adopted this standard as of January 1, 2009
and does not expect it to have an impact on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 160 (Now ASC 810-10), "Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51. ASC
810-10 introduces significant changes in the accounting and reporting for
business acquisitions and noncontrolling interest in a subsidiary. ASC 810-10
also changes the accounting and reporting for the deconsolidation of a
subsidiary. Companies are required to adopt the new standard for fiscal years
beginning after January 1, 2009. The Company adopted this standard effectively
January 1, 2009 and does not expect it to have an impact on the Company’s
financial statements.
Effective
July 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (Now ASC
820), which provides guidance on how to measure assets and liabilities that use
fair value. ASC 820 applies whenever another U.S. GAAP standard requires (or
permits) measurement of assets or liabilities at fair value, but does not expand
the use of fair value to any new circumstances. The Company also adopted FASB
Staff Position ("FSP") No.FAS 157-2, which allows the Company to partially defer
the adoption of ASC820. This FSP defers the effective date of ASC 820 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or financial liability as defined in
paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. The adoption of ASC 820 had no impact on our financial
statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (Now ASC 855), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. This
disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. ASC 855 is effective for interim and annual periods ending
after June 15, 2009. The adoption of ASC 855 did not have a material impact on
the Company’s financial position, results of operations or cash
flows.
- 36
-
In June
2009, the FASB issued Update No. 2009-01, Generally Accepted Accounting
Principles (ASU 2009-01). ASU 2009-01 establishes “The FASB Accounting Standards
Codification,” or Codification, which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. On the
effective date, the Codification superseded all then-existing non-SEC accounting
and reporting standards. All other non grandfathered non-SEC accounting
literature not included in the Codification will become non authoritative. ASU
2009-01 is effective for interim and annual periods ending after September 15,
2009. The Company will adopt the provisions of ASU 2009-01 for the period ended
September 30, 2009. There will be no impact on the Company’s operating results,
financial position or cash flows.
The
Company does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on the Company’s results of
operations, financial position or cash flows.
- 37
-
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of our
common stock as of March 26, 2010 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our officers
and directors; and (iii) by all of our officers and directors as a group. Unless
otherwise specified, the address of each of the persons set forth below is in
care of the Company, No. 1 Jingguang Road, Neiqiu County, Xingtai City, Hebei
Province, China. Except as indicated in the footnotes to this table
and subject to applicable community property laws, the persons named in the
table to our knowledge have sole voting and investment power with respect to all
shares of securities shown as beneficially owned by them. The information in
this table is as of March 26, 2010 based upon (i) 18,750,000 shares of common
stock outstanding and (ii) 10,000 shares of Series A convertible Preferred Stock
outstanding.
- 38
-
|
Na
me and Address of Beneficial
Owner
|
Of
fice, If
An
y
|
Ti
tle of
Class
|
Amount and
Nature
of
Beneficial
Ownership
|
Percent
Series
A
Preferred
Stock
|
Percent
Common
Stock
|
Percent
of
Combined
Voting Power
of Common
Stock and
Series
A
Preferred
Stock
(1)
|
||||||||||||||
|
Officers
and Directors
|
||||||||||||||||||||
|
Chaojun
Wang
|
Chief
Executive Officer
|
Series
A Convertible Preferred Stock
|
5,178 | (2) | 51.8 | % | - | 51.0 | % | |||||||||||
|
Joseph
Meuse
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Former
President
|
Series
A Convertible Preferred Stock
|
369 | (3) | 3.7 | % | - | 3.6 | % | |||||||||||
|
Inna
Sheveleva
4055
Wetzel Road
Liverpool,
NY 13088
|
Director
|
Common
Stock
|
450,000 | - | 2.4 | % | * | |||||||||||||
|
All
officers and directors as a group (2 persons named above)
|
Series
A Convertible Preferred Stock
|
5,178 | 51.8 | % | 2.4 | % | 51.0 | % | ||||||||||||
|
Common
Stock
|
450,000 | |||||||||||||||||||
|
5%
Security Holders
|
||||||||||||||||||||
|
Merry
Success Limited (4)
P.O
Box 957
Offshore
Incorporation Centre,
Road
Town, Tortola
British
Virgin Islands
|
Series
A Convertible Preferred Stock
|
5,178 | 51.8 | % | - | 51.0 | % | |||||||||||||
|
Xingfang
Zhang (5)
Zheng
No.15, No.33 North Xinhua Road,
Qiaodong
District, Xingtai,
Hebei
Province, China
|
Series
A Convertible Preferred Stock
|
2,945 | 29.5 | % | - | 29.0 | % | |||||||||||||
- 39
-
* Less
than 1%
-
N/A
(1)
Common Stock shares have one vote per share. Shares of Series A
Convertible Preferred Stock will automatically convert into shares of common
stock on the basis of one share of Series A Preferred Stock for 985 shares of
common stock upon the effectiveness of a planned 1-for-125 reverse split of our
outstanding common stock. Holders of Series A Preferred Stock vote
with the holders of common stock on all matters on an as-converted to common
stock based on an assumed post 1-for-125 reverse split basis.
(2) Based
on an option to purchase all of the shares of Merry Success Limited, a British
Virgin Islands limited company, which owns 5,178 shares of Series A Convertible
Preferred. Chaojun Wang also serves as Chief Executive Officer and
Director of Merry Success Limited.
(3) Such
shares are owned by Belmont Partners, LLC, of which Mr. Meuse is a managing
director.
(4)
Jinhai Guo is the sole owner of Merry Success Limited, and has granted Chaojun
Wang an option to purchase the entire ownership interest.
(5)
Xingfang Zhang is the nephew of Chaojun Wang, our Chief Executive Officer and
beneficially controlling shareholder.
- 40
-
Changes
in Control
The
Company does not have any change of control or retirement arrangements with its
executive officers.
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The
following sets forth information about our directors and executive officers as
of the date of this report:
|
NAME
|
AGE
|
POSITION
|
||
|
Chaojun
Wang
|
55
|
CEO
|
||
|
Heyin
Lv
|
37
|
CFO
|
||
|
Chaohong
Wang
|
44
|
Sales
Manager
|
||
|
Dongmei
Pan
|
48
|
CTO
|
||
|
Inna
Sheveleva
|
62
|
Director
|
Chaojun Wang, Mr. Wang has served as
Longhai’s Chief Executive Officer since it was established in 2008 and our Chief
Executive Officer since March 26, 2010. Mr. Wang graduated from the
Shijiazhuang Railway College with a bachelor’s degree in enterprise management.
Previous work experience includes: deputy manager and manager of the supply
department of the Xingtai Jian’an Company from 1976-1984; Vice-manager of
Xingtai Jian’an Metallurgy Group from 1985-1999, and Chairman of the Longhai
Steel Group since 1999.
Dongmei
Pan, Ms. Pan has served as Longhai’s Chief Technology
Officer since its inception in October 2008 and our Chief Technology Officer
since March 26, 2010. Ms. Pan graduated from Hebei Polytechnic
University with a bachelor’s degree in metal processing. Previous work
experience includes: CTO of Xingtai Steel Co Ltd from 1983 to 1995, CTO of Henan
Luoherenhe Steel Wire Co Ltd from 1995-1998 and vice-manager and CTO of the
Steel Group from 2003 to 2008. She published articles about the steel market and
is a certified steel rolling and wire production engineer.
Heyin Lv, Mr. Lv has served as
Longhai’s Chief Financial Officer since its inception in October 2008 and our
Chief Financial Officer since March 26, 2010. Mr. Lv graduated with a
bachelor’s degree majoring in Finance. Previous work experience includes,
Finance Manager of Xingtai Century Automobile Trade Co. Ltd from 2001 to 2005,
Finance Manager of Hebei Xingda Group in 2006, Audit Project Manager of Xingtai
Zhengda Accounting Firm from 2007 to 2008, Liaison Officer of listing department
of the Longhai Steel Group in 2008. Mr. Lv has over 16 years of
financial experience in trade and accounting industry and he is Chinese
certified public accountant.
Chaohong Wang, Mr. Wang has
served as Longhai’s Sales Manager since October 2008 and our Sales Manager since
March 26, 2010. Prior to becoming Sales Manager at Longhai, Mr. Wang
worked as Supply Manager at the Longhai Steel Group since 2003.
Inna Sheveleva, Ms.
Sheveleva has been a Director of Action Industries since 2003 and was the
Secretary and Principal Financial Officer of Action Industries from 2003 until
the reverse acquisition in March 2010. Ms. Sheveleva attended The College of
Arts located in Moscow, Russia where she received a Bachelor of Arts Degree in
Drama. She also earned a Masters Degree in Drama in 1982. She co-produced and
performed in a children's program that was televised throughout the Soviet
Union. Ms. Sheveleva immigrated to the United States and since 1998 she has
owned and operated Sheveleva Upholstery and Seamstery, a sole
proprietorship.
Family
Relationships
Chaojun
Wang and Chaohong Wang are brothers. Other than this, there is no family
relationship among any of our officers or directors.
- 41
-
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws. Except as set forth in our discussion below in
“Certain Relationships and Related Transactions, and Director Independence –
Transactions with Related Persons,” none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
- 42
-
EXECUTIVE
COMPENSATION
Summary
Compensation Table — Fiscal Years Ended December 31, 2009 and 2008
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.
|
Name and Principal
Position
|
Year
|
Salary
($)
|
All Other
Compensation
|
Total
($)
|
||||||||||
|
Chaojun
Wang, CEO
|
2008
|
29,411 | 17,647 | (2) | 47,058 | |||||||||
|
2009
|
29,411 | 17,647 | (2) | 47,058 | ||||||||||
|
Joseph
Meuse, former President
|
2008
|
0 | 0 | 0 | ||||||||||
|
2009
|
0 | 0 | 0 | |||||||||||
(1) On
March 26, 2010, we acquired Kalington in a reverse acquisition transaction that
was structured as a share exchange and in connection with that transaction, Mr.
Chaojun Wang became our Chief Executive Officer. Prior to the effective date of
the reverse acquisition, Mr. Joseph Meuse served as President of Action
Industries. The annual, long term and other compensation shown in this table
include the amount Mr. Chaojun Wang received from Kalington’s controlled
affiliate prior to the consummation of the reverse acquisition.
(2)
Chaojun Wang receives approximately $1,471 per month to reimburse Mr. Wang for
tax liabilities.
Summary of Employment Agreements and
Material Terms
Prior to
our reverse acquisition of Kalington, our operating subsidiary was a private
limited company organized under the laws of the PRC, and in accordance with PRC
regulations, the salary of our executives was determined by our shareholders. In
addition, each employee is required to enter into an employment agreement.
Accordingly, all our employees, including management, have executed our
employment agreement. Our employment agreements with our executives provide the
amount of each executive officer’s salary and establish their eligibility to
receive a bonus. Mr. Chaojun Wang’s employment agreement provides for an annual
salary of RMB 200,000 (approximately $29,411). Other than the salary and
necessary social benefits required by the government, which are defined in the
employment agreement, we currently do not provide other benefits to the officers
at this time. Our executive officers are not entitled to severance payments upon
the termination of their employment agreements or following a change in
control.
We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officers.
Outstanding Equity Awards at Fiscal
Year End
For the
year ended December 31, 2009, no director or executive officer has received
compensation from us pursuant to any compensatory or benefit plan. There is no
plan or understanding, express or implied, to pay any compensation to any
director or executive officer pursuant to any compensatory or benefit plan,
although we anticipate that we will compensate our officers and directors for
services to us with stock or options to purchase stock, in lieu of
cash.
Compensation of
Directors
No member
of our board of directors received any compensation for his services as a
director during the year ended December 31, 2009 and currently no compensation
arrangements are in place for the compensation of directors.
- 43
-
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions
With Related Persons
The
following includes a summary of transactions since the beginning of the 2008
year, or any currently proposed transaction, in which we were or are to be a
participant and the amount involved exceeded or exceeds the lesser of $120,000
or one percent of the average of our total assets at year end for the last two
completed fiscal years, and in which any related person had or will have a
direct or indirect material interest (other than compensation described under
“Executive Compensation”). We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions
described below were comparable to terms available or the amounts that would be
paid or received, as applicable, in arm’s-length transactions.
Longhai
was established in August 2008 as a result of the separation of Longhai from the
Longhai Steel Group at that time. Prior to its establishment as a
stand-alone company, Longhai was a division within the Longhai Steel
Group. The Longhai Steel Group was founded in
2003. Chaojun Wang, Chief Executive Officer and controlling
stockholder of Action Industries, Inc., serves as the Chairman of the Board of
Directors and General Manager of Longhai and beneficially owns 80% of the
capital stock in Longhai. Chaojun Wang also owns 80% of the capital
stock of and is the chief executive officer of the Longhai Steel
Group.
Longhai
leases a five-story office space and the building which houses our production
facilities from the Longhai Steel Group. The rent expense for such
facilities for the years ended December 31, 2009, 2008 and 2007 was $28,334,
$128,604 and $25,447, respectively.
Until
2008, Longhai purchased 100% of its steel billet from the Longhai Steel
Group. Since 2009, Longhai has purchased steel billet from third
party vendors. Steel Billet is the principal raw material used in our production
of steel wire. In 2009, steel billet accounted for more than 95% of
our production costs. We purchase billet from the Longhai Steel Group
at an average market price less a small per ton volume discount. In
2009, 2008 and 2007 we purchased billet from the Longhai Steel Group in the
amounts of $0, $488,908,517 and $222,561,569, respectively. Longhai’s
cost of steel billet, its gross margin and net income might have been different
if it had purchased raw materials from an independent third party.
In 2009,
2008 and 2007, Longhai purchased production utilities from the Longhai Steel
Group in the amounts of $11,661,547, $9,111,397 and $5,409,213,
respectively.
In
addition, during 2009, 2008 and 2007, Longhai sold to the Longhai Steel Group
steel scrape in the amounts of $3,688,573, $5,159,081 and $3,091,358, and steel
wire in the amounts of $71,595, $1,604,785 and $0, respectively.
The
Company provided financing service to the Longhai Steel Group in the amount of
$8,360,120 in 2009. Longhai offered third party customers sales discounts in
return for large customer deposits. Longhai would then loan the cash deposit to
its related party, the Longhai Steel Group.
Prior
to the Acquisition of Kalington by the Company,
Longhai loaned the Longhai Steel Group the amounts
of $42,047,673 and $0 at December 31, 2009 and 2008, respectively. As
of the date of this filing, all balances have been repaid and no loans
to the Longhai Steel Group are
outstanding.
On March
19, 2010, prior to the reverse acquisition transaction, Kalington Consulting and
Longhai entered into a series of agreements known as variable interest
agreements (the “VIE Agreements”) pursuant to which Longhai became Kalington
Consulting’s contractually controlled affiliate. The use of VIE
agreements is a common structure used to acquire PRC corporations, particularly
in certain industries in which foreign investment is restricted or forbidden by
the PRC government. The VIE Agreements included:
|
|
(1)
|
A
Consulting Services Agreement through which Kalington Consulting has the
right to advise, consult, manage and operate Longhai and collect and own
all of the net profits of
Longhai;
|
- 44
-
|
|
(2)
|
an
Operating Agreement through which Kalington Consulting has the right to
recommend director candidates and appoint the senior executives of
Longhai, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Longhai, and guarantee the
contractual performance by Longhai of any agreements with third parties,
in exchange for a pledge by Longhai of its accounts receivable and
assets;
|
|
|
(3)
|
a
Proxy Agreement under which the three owners of Longhai have vested their
collective voting control over Longhai to Kalington Consulting and will
only transfer their respective equity interests in Longhai to Kalington
Consulting or its designee(s);
|
|
|
(4)
|
an
Option Agreement under which the owners of Longhai have granted to
Kalington Consulting the irrevocable right and option to acquire all of
their equity interests in Longhai;
and
|
|
|
(5)
|
an
Equity Pledge Agreement under which the owners of Longhai have pledged all
of their rights, titles and interests in Longhai to Kalington Consulting
to guarantee Longhai’s performance of its obligations under the Consulting
Services Agreement.
|
The
foregoing description of the terms of the Consulting Services Agreement, the
Operating Agreement, the Proxy Agreement, the Option Agreement and the Equity
Pledge Agreement is qualified in its entirety by reference to the provisions of
the agreements filed as Exhibit 10.4, 10.5, 10.6, 10.7 and 10.8 to this report,
respectively, which are incorporated by reference herein.
Mr.
Chaojun Wang, Chief Executive Officer and controlling stockholder of Action
Industries, is a director of Kalington, Kalington Consulting and Longhai and a
controlling shareholder of Longhai.
Insider
Transactions Policies and Procedures
The
Company does not currently have an insider transaction policy.
Director
Independence
We
currently do not have any independent directors as the term “independent” is
defined by the rules of the Nasdaq Stock Market.
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.
MARKET
PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
common shares are quoted for trading on the OTC Bulletin Board under the symbol
"ACTN". The closing price of our common stock, as reported by the OTC Bulletin
Board on December 31, 2009, was $0.02.
National
Association of Securities Dealers OTC Bulletin Board*
|
Quarter End
|
High
|
Low
|
||
|
December
31, 2008
|
.05
|
.05
|
||
|
March
31, 2009
|
.01
|
.01
|
||
|
June
30, 2009
|
.03
|
.03
|
||
|
September
30, 2009
|
.08
|
.08
|
||
|
December
31, 2009
|
.02
|
.02
|
*Over-the-counter
market quotations reflects high and low bid quotations and inter-dealer prices
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
- 45
-
Holders
As of
March 19, 2010 there were approximately 464 stockholders of record of our common
stock. This number does not include shares held by brokerage clearing houses,
depositories or others in unregistered form.
Dividends
In the
past, we have not distributed earnings to shareholders. Any future
decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to
pay dividends. Even if our board of directors decides to pay dividends, the
form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
Substantially
all of our revenues are earned by Longhai or Kalington Consulting, our PRC
controlled affiliate and subsidiary, respectively. PRC regulations restrict the
ability of our PRC affiliate and subsidiary to make dividends and other payments
to their offshore parent company. PRC legal restrictions permit payments of
dividend by our PRC subsidiary and affiliate only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Our PRC subsidiary and affiliate are also required
under PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. Any limitations on the ability of our PRC subsidiary and affiliate to
transfer funds to us could materially and adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do not
have in effect any compensation plans under which our equity securities are
authorized for issuance and we do not have any outstanding stock
options.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to the disclosure set forth under Item 3.02 of this report, which
disclosure is incorporated by reference into this section.
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, par value $0.001
per share. Each outstanding share of common stock entitles the holder thereof to
one vote per share on all matters. Our bylaws provide that any vacancy occurring
in the board of directors may be filled by the affirmative vote of a majority of
the remaining directors though less than a quorum of the board of directors.
Shareholders do not have preemptive rights to purchase shares in any future
issuance of our common stock.
- 46
-
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our board of
directors has never declared a dividend and does not anticipate declaring a
dividend in the foreseeable future. Should we decide in the future to pay
dividends, as a holding company, our ability to do so and meet other obligations
depends upon the receipt of dividends or other payments from our operating
subsidiary and other holdings and investments. In addition, our operating
subsidiary in the PRC, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions. In
the event of our liquidation, dissolution or winding up, holders of our common
stock are entitled to receive, ratably, the net assets available to shareholders
after payment of all creditors.
All of
the issued and outstanding shares of our common stock are duly authorized,
validly issued, fully paid and non-assessable. To the extent that additional
shares of our common stock are issued, the relative interests of existing
shareholders will be diluted.
As of
March 26, 2010, we had a total of 18,750,000 shares of common stock
outstanding.
Preferred
Stock
We are
authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001
per share, in one or more series as may be determined by our board of directors,
who may establish, from time to time, the number of shares to be included in
each series, may fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof. Any preferred stock so issued by the board of directors may rank senior
to the common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up of us, or both. Moreover, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, under certain circumstances, the issuance of preferred stock
or the existence of the unissued preferred stock might tend to discourage or
render more difficult a merger or other change of control.
In
accordance with our Articles of Incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Preferred Stock.
The Certificate of Designation was filed on March 25, 2010.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 985 shares of common
stock upon the effectiveness of a planned 1-for-125 reverse split (the “Reverse
Split”) of our outstanding common stock. Upon the reverse split the 10,000
outstanding shares of Series A Preferred Stock will automatically convert into
9,850,000 shares of common stock, which will constitute 98.5% of the outstanding
common stock of Action Industries subsequent to the Reverse Split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-125
reverse split (to retroactively take into account the Reverse Split). For
example, assuming 100 shares of Series A Preferred Stock are issued and
outstanding on the record date for any stockholder vote, such shares, voting in
aggregate, would vote a total of 12,312,500 voting shares.
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A Preferred Stock
have protective class voting veto rights on certain matters, such as increasing
the authorized shares of Series A Preferred Stock and modifying the rights of
Series A Preferred Stock.
Following
the reverse acquisition as of March 26, 2010, we had 10,000 shares of Series A
Preferred Stock outstanding. Following the effectiveness of the Reverse Split
and conversion of the Series A Preferred Stock into common stock, there will be
approximately 10,000,000 shares of our common stock issued and
outstanding.
- 47
-
Anti-takeover Effects of Our Articles
of Incorporation and By-laws
Our
Articles of Incorporation and Bylaws contain certain provisions that may have
anti-takeover effects, making it more difficult for or preventing a third party
from acquiring control of the Company or changing its board of directors and
management. According to our Bylaws and Articles of Incorporation, neither the
holders of the Company’s common stock nor the holders of the Company’s preferred
stock have cumulative voting rights in the election of our directors. The
combination of the present ownership by a few stockholders of a significant
portion of the Company’s issued and outstanding common stock and lack of
cumulative voting makes it more difficult for other stockholders to replace the
Company’s board of directors or for a third party to obtain control of the
Company by replacing its board of directors.
Anti-takeover
Effects of Nevada Law
Business
Combinations
The
“business combination” provisions of Sections 78.411 to 78.444, inclusive, of
the Nevada Revised Statutes, or NRS, prohibit a Nevada corporation with at least
200 stockholders from engaging in various “combination” transactions with any
interested stockholder:
|
|
•
|
for
a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the transaction is
approved by the board of directors prior to the date the interested
stockholder obtained such status;
or
|
|
|
•
|
after
the expiration of the three-year period,
unless:
|
|
|
•
|
the
transaction is approved by the board of directors or a majority of the
voting power held by disinterested stockholders,
or
|
|
|
•
|
if
the consideration to be paid by the interested stockholder is at least
equal to the highest of: (a) the highest price per share paid by the
interested stockholder within the three years immediately preceding the
date of the announcement of the combination or in the transaction in which
it became an interested stockholder, whichever is higher, (b) the market
value per share of common stock on the date of announcement of the
combination and the date the interested stockholder acquired the shares,
whichever is higher, or (c) for holders of preferred stock, the highest
liquidation value of the preferred stock, if it is
higher.
|
A
“combination” is defined to include mergers or consolidations or any sale, lease
exchange, mortgage, pledge, transfer or other disposition, in one transaction or
a series of transactions, with an “interested stockholder” having: (a) an
aggregate market value equal to 5% or more of the aggregate market value of the
assets of the corporation, (b) an aggregate market value equal to 5% or more of
the aggregate market value of all outstanding shares of the corporation, or (c)
10% or more of the earning power or net income of the corporation.
In
general, an “interested stockholder” is a person who, together with affiliates
and associates, owns (or within three years, did own) 10% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts and, accordingly, may discourage
attempts to acquire our company even though such a transaction may offer our
stockholders the opportunity to sell their stock at a price above the prevailing
market price.
The
“control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS,
which apply only to Nevada corporations with at least 200 stockholders,
including at least 100 stockholders of record who are Nevada residents, and
which conduct business directly or indirectly in Nevada, prohibit an acquiror,
under certain circumstances, from voting its shares of a target corporation's
stock after crossing certain ownership threshold percentages, unless the
acquiror obtains approval of the target corporation's disinterested
stockholders. The statute specifies three thresholds: one-fifth or more
but less than one-third, one-third but less than a majority, and a majority or
more, of the outstanding voting power. Once an acquiror crosses one of the
above thresholds, those shares in an offer or acquisition and acquired within 90
days thereof become “control shares” and such control shares are deprived of the
right to vote until disinterested stockholders restore the right. These
provisions also provide that if control shares are accorded full voting rights
and the acquiring person has acquired a majority or more of all voting power,
all other stockholders who do not vote in favor of authorizing voting rights to
the control shares are entitled to demand payment for the fair value of their
shares in accordance with statutory procedures established for dissenters'
rights.
- 48
-
Although
we are not currently subject to these “control share” provisions since we do not
conduct business directly or indirectly in Nevada and have less than 100
stockholders of record who are Nevada residents, there can be no assurance that
in the future such provisions will not apply to us.
Transfer
Agent And Registrar
Our
independent stock transfer agent is PacWest Transfer, LLC. Their mailing address
is 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119, and their phone
number is (702) 270-9646.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
current Bylaws of the Company provide that the Company shall indemnify a current
or former director, officer, employee or agent of the Company, or a current or
former director, officer, employee or agent of another enterprise serving in
such capacity at the request of the Company, to the full extent permitted under
Nevada law.
The
Company is permitted by the Bylaws to purchase and maintain insurance for any of
the parties described in the preceding paragraph against any liability, cost,
payment or expense, whether or not the Company would have the power to indemnify
such person against such liability.
The
Company is incorporated under the laws of the State of Nevada. Section 78.7502
of the Nevada Revised Statutes provides that a Nevada corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and that, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
Section
78.7502 further provides a Nevada corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such
a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Section
78.751 of the Nevada Revised Statutes provides that discretionary
indemnification under Section 78.7502 unless ordered by a court or advanced
pursuant to subsection 2 of section 78.751, may be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances. The
determination must be made by:
- 49
-
|
|
·
|
By
the stockholders;
|
|
|
·
|
By
the board of directors by majority vote of a quorum consisting of
directors - who were not parties to the action, suit or
proceeding;
|
|
|
·
|
If
a majority vote of a quorum consisting of directors who were not parties
to the action, suit or proceeding so orders, by independent legal counsel
in a written opinion; or
|
|
|
·
|
If
a quorum consisting of directors who were not parties to the action, suit
or proceeding cannot be obtained, by independent legal counsel in a
written opinion.
|
The
Articles of Incorporation, the Bylaws or an agreement made by the corporation
may provide that the expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
The
indemnification and advancement of expenses authorized in or ordered by a court
pursuant to NRS Section 78.751:
|
|
·
|
does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the articles of
incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to section
78.7502 or for the advancement of expenses made pursuant to subsection 2
of section 78.751, may not be made to or on behalf of any director or
officer if a final adjudication establishes that his acts or omissions
involved intentional misconduct, fraud or a knowing violation of the law
and was material to the cause of action;
and
|
|
|
·
|
continues
for a person who has ceased to be a director, officer, employee or agent
and inures to the benefit of the heirs, executors and administrators of
such a person.
|
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding, which may result in a claim for such
indemnification.
- 50
-
ITEM
3.02
UNREGISTERED
SALES OF EQUITY SECURITIES
On March
26, 2010, we issued 10,000 shares of our Series A Preferred Stock to the
shareholders of Kalington. The total consideration for the 10,000 shares of our
Series A Preferred Stock was 10,000 ordinary shares of Kalington, which is all
the issued and outstanding capital stock of Kalington. The number of our shares
issued to the shareholders of Kalington was determined based on an arms-length
negotiation. The issuance of our shares to the shareholders of Kalington was
made in reliance on the exemption provided by Section 4(2) of the Securities Act
for the offer and sale of securities not involving a public offering and
Regulation D promulgated thereunder.
On March
26, 2010, we issued 7,450,000 shares of our Common Stock to Goodwin Ventures,
Inc. in consideration for Goodwin Ventures, Inc. paying off approximately
$90,000 in liabilities of Action Industries, Inc. immediately prior to the Share
Exchange. The issuance of our shares to Goodwin Ventures, Inc. was
made in reliance on the exemption provided by Section 4(2) of the Securities Act
for the offer and sale of securities not involving a public offering and
Regulation D promulgated thereunder.
We issued
securities in reliance upon Rule 506 of Regulation D of the Securities Act.
These shareholders who received the securities in such instances made
representations that (a) the shareholder is acquiring the securities for his,
her or its own account for investment and not for the account of any other
person and not with a view to or for distribution, assignment or resale in
connection with any distribution within the meaning of the Securities Act, (b)
the shareholder agrees not to sell or otherwise transfer the purchased shares
unless they are registered under the Securities Act and any applicable state
securities laws, or an exemption or exemptions from such registration are
available, (c) the shareholder has knowledge and experience in financial and
business matters such that he, she or it is capable of evaluating the merits and
risks of an investment in us, (d) the shareholder had access to all of our
documents, records, and books pertaining to the investment and was provided the
opportunity ask questions and receive answers regarding the terms and conditions
of the offering and to obtain any additional information which we possessed or
were able to acquire without unreasonable effort and expense, and (e) the
shareholder has no need for the liquidity in its investment in us and could
afford the complete loss of such investment. Management made the determination
that the investors in instances where we relied on Regulation D are accredited
investors (as defined in Regulation D) based upon management’s inquiry into
their sophistication and net worth. In addition, there was no general
solicitation or advertising for securities issued in reliance upon Regulation
D.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 985 shares of common
stock upon the effectiveness of a planned 1-for-125 reverse split of our
outstanding common stock. Upon the Reverse Split, the 10,000
outstanding shares of Series A Preferred Stock will automatically convert into
9,850,000 shares of common stock, which will constitute 98.5% of the outstanding
common stock of subsequent to the Reverse Split.
ITEM
5.01
CHANGES
IN CONTROL OF REGISTRANT
Reference
is made to the disclosure set forth under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
As a
result of the closing of the reverse acquisition with Kalington, immediately
after the Share Exchange the former shareholders of Kalington owned 0% of the
total outstanding shares of our common stock, 100% of the total outstanding
shares of our Series A Preferred Stock, and 98.5% of the total voting power of
all our outstanding voting securities.
- 51
-
ITEM
5.02.
DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN
OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
Upon the
closing of the reverse acquisition, Inna Sheveleva, our sole director and
officer, submitted a resignation letter pursuant to which she resigned from all
offices that she held effective immediately and from her position as our
director that will become effective on the tenth day following the mailing by us
of an information statement, or the Information Statement, to our stockholders
that complies with the requirements of Section 14f-1 of the Exchange
Act. In addition, our board of directors on March 25, 2010 increased
the size of our board of directors to three directors and appointed Chaojun Wang
(Chairman), Jing Shen and Chaoshui Wang to fill the vacancies created by such
resignation and increase, which appointments will become effective upon the
effectiveness of the resignation of Inna Sheveleva on the tenth day following
the mailing by us of the Information Statement to our
stockholders. In addition, our executive officers were replaced by
the executive officers of Longhai upon the closing of the reverse acquisition as
indicated in more detail above.
ITEM
5.03.
AMENDMENTS
TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR
Series A Convertible
Preferred Stock
In
accordance with our Articles of Incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Convertible
Preferred Stock (“Series A Preferred Stock”). The Certificate of
Designation was filed on March 25, 2010.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 985 shares of common
stock upon the effectiveness of a planned 1-for-125 reverse split of our
outstanding common stock. Upon the reverse split the 10,000
outstanding shares of Series A Preferred Stock will automatically convert into
9,850,000 shares of common stock, which will constitute 98.5% of the outstanding
common stock of subsequent to the Reverse Split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-125
reverse split (to retroactively take into account the Reverse
Split). For example, assuming 100 shares of Series A Preferred Stock
are issued and outstanding on the record date for any stockholder vote, such
shares, voting in aggregate, would vote a total of 12,312,500 voting
shares.
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A
Preferred Stock have protective class voting veto rights on certain matters,
such as increasing the authorized shares of Series A Preferred Stock and
modifying the rights of Series A Preferred Stock.
The
Certificate of Designation is filed as Exhibit 3.3 to this Current Report on
Form 8-k and is incorporated herein by reference.
- 52
-
ITEM
5.06.
CHANGE
IN SHELL COMPANY STATUS
Prior to
the closing of the reverse acquisition, Action Industries was a “shell company”
as defined in Rule 12b-2 of the Exchange Act. As described in Item
2.01 above, which is incorporated by reference into this Item 5.06, Action
Industries ceased being a shell company upon completion of the reverse
acquisition on March 26, 2010.
ITEM
9.01
FINANCIAL
STATEMENTS AND EXHIBITS
Financial
Statements of Business Acquired
Filed
herewith are the following:
(a)
1. Audited
consolidated financial statements of Kalington Limited and subsidiaries for the
fiscal years ended December 31, 2009 and 2008.
(b)
Pro Forma
Financial Information
2. Unaudited
pro forma condensed consolidated financial information of Kalington Limited and
its subsidiaries for the requisite periods.
(d)
Exhibits
|
Exhibit
No.
|
Description
|
|
|
2.1
|
Share
Exchange Agreement, dated as of March 26, 2010, among Action Industries,
Inc., Kalington Limited, the shareholders of Kalington Limited, Goodwin
Ventures, Inc. and Xingtai Longhai Wire Co., Ltd.
|
|
|
*3.1
|
Articles
of Incorporation.
|
|
|
**3.2
|
Bylaws
|
|
|
3.3
|
Certificate
of Designation of Series A Convertible Preferred Stock, as filed with the
Nevada Secretary of State on March 25, 2010.
|
|
|
10.1
|
Purchase
Agreement for Steel Billet by and between Xingtai Longhai Steel Wire Ltd.
and Xingtai Longhai Steel Group Ltd., dated October 1,
2008
|
|
|
10.2
|
Lease
Agreement, as amended, between Xingtai Longhai Steel Wire Co. Ltd and
Xingtai Longhai Steel Group Co. Ltd., dated October 1, 2008, amended on
October 2, 2008 and October 4, 2008.
|
|
|
10.3
|
Form
of Wire Purchase and Sales Contract
|
|
|
10.4
|
Consulting
Services Agreement dated March 19, 2010 between Xingtai Kalington
Consulting Service Co., Ltd. and Xingtai Longhai Wire Co.,
Ltd.
|
|
|
10.5
|
Operating
Agreement dated March 19, 2010 between Xingtai Kalington Consulting
Service Co., Ltd. and Xingtai Longhai Wire Co., Ltd.
|
|
|
10.6
|
Proxy
Agreement dated March 19, 2010 between Xingtai Kalington Consulting
Service Co., Ltd. and Xingtai Longhai Wire Co.,
Ltd.
|
- 53
-
|
10.7
|
Option
Agreement dated March 19, 2010 between Xingtai Kalington Consulting
Service Co., Ltd. and Xingtai Longhai Wire Co., Ltd.
|
|
|
10.8
|
Equity
Pledge Agreement dated March 19, 2010 between Xingtai Kalington Consulting
Service Co., Ltd. and Xingtai Longhai Wire Co., Ltd.
|
|
|
21
|
Subsidiaries
of the Company
|
|
|
*
|
Filed
as an exhibit to the Company's definitive proxy statement on Schedule 14C,
as filed with the Securities and Exchange Commission on January 29, 2008,
and incorporated herein by this reference
|
|
|
14**
|
Filed
as an exhibit to (i) the Company's definitive proxy statement on Schedule
14C, as filed with the Securities and Exchange Commission on January 29,
2008, and (ii) the Company Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on March 25, 2010, and incorporated
herein by this
reference
|
- 54
-
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:
|
March
26, 2010
|
||
|
Action Industries, Inc.
|
|||
|
(Registrant)
|
|||
|
/s/ Chaojun Wang
|
|||
|
*Signature
|
|||
|
Chief Executive Officer
|
|||
|
Title
|
- 55
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Kalington
Limited Hong Kong, PRC
We have
audited the accompanying balance sheets of Kalington Limited (the “Company”) as
of December 31, 2009 and 2008, and the related statements of operations and
comprehensive income, changes in shareholders’ equity and cash flows for the
years ended December 31, 2009, 2008 and 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material 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 financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements of the Company referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2009 and 2008 and the results of its operations and its cash flows
for the years ended December 31, 2009, 2008 and 2007 in conformity with
accounting principles generally accepted in the United States of
America.
/s/
MALONEBAILEY, LLP
www.malone-bailey.com
Houston,
Texas
March 26,
2010
- 1
-
KALINGTON
LIMITED
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 & 2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 115,510 | $ | 363,903 | ||||
|
Accounts
receivable, net
|
19,009 | - | ||||||
|
Inventory,
net
|
2,393,159 | 2,107,701 | ||||||
|
Advance
to suppliers
|
15,663,763 | 23,873,721 | ||||||
|
Tax
receivable
|
1,579,933 | - | ||||||
|
Other
current assets
|
2,799 | 64,194 | ||||||
|
Due
from related parties
|
42,290,438 | - | ||||||
|
Total
current assets
|
62,064,611 | 26,409,519 | ||||||
|
Property,
plant and equipment, net
|
26,680,244 | 29,355,329 | ||||||
|
Other
assets
|
- | 30,343 | ||||||
|
TOTAL
ASSETS
|
$ | 88,744,855 | $ | 55,795,191 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 15,536,226 | $ | 6,128,116 | ||||
|
Unearned
revenue
|
33,245,360 | 17,913,926 | ||||||
|
Income
tax payable
|
2,325,984 | 656,972 | ||||||
|
Accrued
liabilities
|
5,169,708 | 7,245,557 | ||||||
|
Current
deferred tax liabilities
|
1,172,181 | 169,639 | ||||||
|
Short-term
debt - related party
|
- | 4,214,758 | ||||||
|
Total
current liabilities
|
57,449,459 | 36,328,968 | ||||||
|
Non-current
deferred tax liabilities
|
190,351 | 113,272 | ||||||
|
TOTAL
LIABILITIES
|
57,639,810 | 36,442,240 | ||||||
|
Commitments
and contingencies
|
$ | - | $ | - | ||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
Stock (par value $0.13 per share 10,000 shares authorized, 1,000 shares
issued and outstanding at December 31, 2009 and 2008)
|
129 | 129 | ||||||
|
Additional
paid-in capital
|
2,664,762 | 2,664,762 | ||||||
|
Accumulated
other comprehensive income
|
806,818 | 752,334 | ||||||
|
Retained
earnings
|
27,633,336 | 15,935,726 | ||||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
31,105,045 | 19,352,951 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 88,744,855 | $ | 55,795,191 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 2
-
KALINGTON
LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 & 2007
|
The
Year Ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 373,660,461 | $ | 511,487,983 | $ | 238,644,939 | ||||||
|
Cost
of revenue
|
(356,833,041 | ) | (492,792,919 | ) | (234,180,486 | ) | ||||||
|
Gross
profit
|
16,827,420 | 18,695,064 | 4,464,453 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
General
and administrative expenses
|
(1,114,016 | ) | (798,083 | ) | (476,507 | ) | ||||||
|
Impairment
loss on assets
|
- | (20,632 | ) | |||||||||
|
Income
from operations
|
15,713,404 | 17,896,981 | 3,967,314 | |||||||||
|
Interest
income
|
3,301 | 806 | - | |||||||||
|
Interest
expense
|
(85,422 | ) | (84,199 | ) | (121,417 | ) | ||||||
|
Other
expenses
|
(34,470 | ) | (27,768 | ) | (22,456 | ) | ||||||
|
Total
other income and expenses
|
(116,591 | ) | (111,161 | ) | (143,873 | ) | ||||||
|
Income
before income taxes
|
15,596,813 | 17,785,820 | 3,823,441 | |||||||||
|
Income
tax expense
|
(3,899,203 | ) | (4,446,455 | ) | (1,227,080 | ) | ||||||
|
Net
income
|
$ | 11,697,610 | $ | 13,339,365 | $ | 2,596,361 | ||||||
|
Net
Income per share – basic and diluted
|
$ | 11,698 | $ | 13,339 | $ | 2,596 | ||||||
|
Weighted
average shares outstanding –
basic and diluted
|
1,000 | 1,000 | 1,000 | |||||||||
|
Comprehensive
Income
|
||||||||||||
|
Net
income
|
$ | 11,697,610 | $ | 13,339,365 | $ | 2,596,361 | ||||||
|
Other
comprehensive income
|
54,484 | 521,483 | 230,851 | |||||||||
|
Comprehensive
income
|
$ | 11,752,094 | $ | 13,860,848 | $ | 2,827,212 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 3
-
KALINGTON
LIMITED
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 & 2007
|
Shares
|
Common
Stock
|
Additional
Paid-in
Capital
|
Other
comprehensive
income
|
Retained
earnings
|
Total
|
|||||||||||||||||||
|
Balance
January 1, 2007
|
100 | $ | 129 | 1,790,725 | $ | - | $ | - | $ | 1,790,854 | ||||||||||||||
|
Foreign
Currency Translation
|
- | 230,851 | - | 230,851 | ||||||||||||||||||||
|
Net
income
|
- | - | 2,596,361 | 2,596,361 | ||||||||||||||||||||
|
Balance
December 31, 2007
|
100 | $ | 129 | $ | 1,790,725 | $ | 230,851 | $ | 2,596,361 | $ | 4,618,066 | |||||||||||||
|
Contributed
capital
|
874,037 | 874,037 | ||||||||||||||||||||||
|
Foreign
Currency Translation
|
- | 521,483 | - | 521,483 | ||||||||||||||||||||
|
Net
income
|
- | - | 13,339,365 | 13,339,365 | ||||||||||||||||||||
|
Balance
December 31, 2008
|
100 | $ | 129 | $ | 2,664,762 | $ | 752,334 | $ | 15,935,726 | $ | 19,352,951 | |||||||||||||
|
Foreign
Currency Translation
|
54,484 | 54,484 | ||||||||||||||||||||||
|
Net
income
|
11,697,610 | 11,697,610 | ||||||||||||||||||||||
|
Balance
December 31, 2009
|
100 | $ | 129 | $ | 2,664,762 | $ | 806,818 | $ | 27,633,336 | $ | 31,105,045 | |||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 4
-
KALINGTON
LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 & 2007
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 11,697,610 | $ | 13,339,365 | $ | 2,596,361 | ||||||
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
2,990,846 | 2,884,014 | 2,280,177 | |||||||||
|
Provision
for inventory obsolescence
|
- | - | 20,632 | |||||||||
|
Deferred
tax assets / liabilities
|
1,078,918 | 162,556 | 112,787 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(19,009 | ) | 6,083,087 | (5,700,591 | ) | |||||||
|
Inventory
|
(280,217 | ) | 1,620,193 | (3,493,489 | ) | |||||||
|
Advance
to suppliers
|
8,280,771 | (23,873,721 | ) | - | ||||||||
|
Prepaid
expenses and other assets
|
50,102 | (64,194 | ) | - | ||||||||
|
Due
to / from related parties
|
(17,194,469 | ) | (12,811,436 | ) | 948,571 | |||||||
|
Accounts
payable
|
9,392,873 | 4,229,366 | 1,779,359 | |||||||||
|
Accrued
expenses and other current liabilities
|
(2,175,127 | ) | 2,184,788 | 1,359,937 | ||||||||
|
Advance
from customers
|
15,286,893 | 9,439,401 | 7,941,659 | |||||||||
|
Income
tax payable
|
1,667,379 | (586,349 | ) | 1,165,143 | ||||||||
|
CASH
PROVIDED BY OPERATING ACTIVITIES
|
30,776,570 | 2,607,070 | 9,010,546 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Advances
to affiliates
|
(29,321,207 | ) | - | - | ||||||||
|
Purchase
of property and equipment and other long-term assets
|
(244,267 | ) | - | - | ||||||||
|
CASH
USED IN INVESTING ACTIVITIES
|
(29,565,474 | ) | - | - | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Contributed
capital
|
- | 874,037 | - | |||||||||
|
Repayments
on borrowings from related parties
|
(1,498,671 | ) | (2,535,072 | ) | (8,210,997 | ) | ||||||
|
Financing
cost on fixed assets purchase
|
30,418 | 85,527 | 126,449 | |||||||||
|
Principal
payments on long-term loan
|
- | (874,037 | ) | (1,107,452 | ) | |||||||
|
CASH
USED IN FINANCING ACTIVITIES
|
(1,468,253 | ) | (2,449,545 | ) | (9,192,000 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
8,764 | 206,378 | 181,454 | |||||||||
|
Net
decrease in cash and cash equivalents
|
(248,393 | ) | 363,903 | - | ||||||||
|
Cash
and cash equivalents, beginning balance
|
363,903 | - | - | |||||||||
|
Cash
and cash equivalents, ending balance
|
$ | 115,510 | $ | 363,903 | $ | - | ||||||
|
NON-CASH
TRANSACTIONS
|
||||||||||||
|
Fixed
assets purchased on credit
|
$ | - | $ | 1,550,886 | $ | 7,566,360 | ||||||
|
Raw
materials purchased on credit
|
4,214,758 | 15,955,612 | ||||||||||
|
Financing
service and sales of products to related parties
|
12,969,231 | - | - | |||||||||
|
SUPPLEMENTARY DISCLOSURE:
|
||||||||||||
|
Interest
paid
|
$ | 85,422 | $ | - | $ | - | ||||||
|
Income
tax paid
|
$ | 1,154,400 | $ | - | $ | 1,227,080 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 5
-
KALINGTON
LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND
BUSINESS OPERATIONS
Xingtai
Longhai Steel Wire Co., Ltd. (”Longhai”) was incorporated on August 26, 2008 in
Neiqiu County, Xingtai City, Hebei Province, People’s Republic of China (the
“PRC”) with registered capital of $2,664,891. Mr. Chaojun Wang owned 80% of
Longhai and the remaining 20% was owned by Wealth Index Capital Group
LLC. Longhai is principally engaged in the manufacturing and sales of
steel wire. Our major customers are in construction industry and our major
market is in north China.
Prior to
the incorporation on August 26, 2008, Longhai was a division of the Xingtai
Longhai Steel Group Co., Ltd. (the “Division”). On July 6, 2008, the
shareholders of Longhai Steel Group Co., Ltd. (the “Group”) consented to
separate the division
from the Group., and incorporate into a new company. The Group transferred 40%
of its net assets to Longhai. The asset
transfer was recorded at historical cost as it was a transfer between entities
under common control. After the asset transfer,
Mr. Wang Chaojun owns 80% of the equity of Longhai. The other two shareholders
each own 10% of equity of
Longhai. Longhai did not issue any common stock.
On July
26, 2008, the shareholders appointed five directors to the board, including Mr.
Wang Chaojun. On July 28, 2008, the Board of
Directors elected Mr. Wang Chaojun as CEO of Longhai.
On
September 12, 2008, two shareholders transferred all their equity of Longhai to
Wealth Index Capital Group LLC. After the
transfer, Wealth Index Capital Group LLC owned 20% of the equity of
Longhai.
On
November 30, 2009, Wealth Index Capital Group LLC transferred 5% of the equity
of Longhai to Ms. Chen Wenyi. After the transfer, Wealth Index
Capital Group LLC owned 15% of the equity of Longhai.
Kalington
Limited (the “Company”) was established in Hong Kong on November 5, 2009 to
serve as an intermediate holding company. Mr. Chaojun Wang, the
controlling interest holder of Longhai also controls the
Company. On March 19, 2010, also pursuant to the
restructuring plan the Company acquired 100% of the equity interests in
Longhai.
Since the
Company and Longhai are under common control for accounting purposes, the
acquisition of Longhai has been treated as a recapitalization with no adjustment
to the historical basis of their assets and liabilities. The
restructuring has been accounted for using the “as if” pooling method of
accounting and the operations were consolidated as if the restructuring had
occurred as of the beginning of the earliest period presented in our
consolidated financial statements and the current corporate structure had been
in existence throughout the periods covered by our consolidated financial
statements.
NOTE 2 - BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements reflect the financial position, results of operations and
cash flows of the Company and all of its wholly owned and majority owned
subsidiaries as of December 31, 2009 and 2008 and for the years ended December
31, 2009 and the period from August 26, 2008 to December 31, 2008, and of
carve-out financial statements of the Division as of December 31, 2007 and for
the period from January 1, 2008 to August 25, 2008 and for the year ended
December 31, 2007. All intercompany items are eliminated during
consolidation.
- 6
-
The
carve-out financial statements include the assets, liabilities and results of
operations of the Division that were "carved-out" from Xingtai
Longhai Steel Group Co., Ltd. (the “Group”). The operating expenses included in
the “carve-out”) financial statements include proportional allocations of
various common costs of the Group because specific identification of the
expenses was not practicable. The common costs include expenses from the Group
related to various common costs, including executive, finance and accounting,
human resources, legal, marketing, and information technology.
The
Company believes that the assumptions underlying the carve-out financial
statements are reasonable. The cost allocation methods applied to certain common
costs include the following:
|
|
•
|
Specific
identification. Where the amounts were specifically identified
to the Division, they were classified
accordingly.
|
|
|
•
|
Reasonable
allocation. Where the amounts were not clearly or specifically
identified, management determined if a reasonable allocation method could
be applied. For example, proportionally allocated general and
administrative expenses based on production
costs.
|
The
Consolidated Financial Statements are prepared in accordance with generally
accepted accounting principles in the United States of America (“US
GAAP”). The Company’s functional currency is the Chinese Renminbi
(“RMB”); however the accompanying financial statements have been translated and
presented in United States Dollars (“$”).
Use of
Estimates
The
preparation of consolidated financial statements in conformity with US GAAP
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 dates of the consolidated financial statements and the amount
of revenues 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 results.
Risks and
Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Concentration of
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade and
bills receivables. As of December 31, 2009 and 2008, substantially all of the
Company’s cash and cash equivalents were held by major financial institutions
located in the PRC, which management believes are of high credit quality. With
respect to trade receivables, the Company extends credit based on an evaluation
of the customer’s financial condition. The Company generally does not require
collateral for trade receivables and maintains an allowance for doubtful
accounts of trade receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
Comprehensive
income consists of two components, net income and other comprehensive
income/(loss). Other comprehensive income refers to revenue, expenses, gains and
losses that under generally accepted accounting principles are recorded as an
element of stockholders’ equity but are excluded from net income. During the
periods presented, other comprehensive income (loss) includes cumulative
translation adjustment from foreign currency translation.
- 7
-
Foreign Currency
Transactions
The
reporting currency of the Company is the US dollar. The functional currency of
PRC subsidiaries is RMB. The financial statements of PRC subsidiaries are
translated to United States Dollars using year-end exchange rates as to assets
and liabilities and average exchange rates as to revenues, expenses and cash
flows. Capital accounts are translated at their historical exchange
rates when the capital transaction occurred. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
The
balance sheet amounts with the exception of equity at December 31, 2009 were
translated 6.8376 RMB to $1.00 as compared to 6.8542 RMB at December 31,
2008. The equity accounts were stated at their historical exchange
rate. The average translation rates applied to the income and cash
flow statement amounts for the years ended December 31, 2009, 2008 and 2007 was
6.84092 RMB, 6.96225 RMB and 7.6172 RMB to $1.00, respectively..
Translations
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of stockholders’ equity and
were $806,818 and $752,334 as of December 31, 2009 and 2008,
respectively.
Cash and Cash
Equivalents
For
Statement of Cash Flows purposes, the Company considers all cash on hand and in
banks, including accounts in book overdraft positions, certificates of deposit
and other highly-liquid investments with original maturity of three months or
less, when purchased, to be cash and cash equivalents. The Company
maintains cash with various banks and trust companies located in
China. Cash accounts are not insured or otherwise
protected. Should any bank or trust company holding cash deposits
become insolvent, or if the Company is otherwise unable to withdraw funds, the
Company would lose the cash on deposit with that particular bank or trust
company.
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Accounts are written off
against the allowance when it becomes evident collection will not
occur. As of December 31, 2009 and 2008, the accounts receivable was
$19,009 and Nil, respectively.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable
condition. In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels. The Company estimates the demand
requirements based on market conditions, forecasts prepared by its customers,
sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market
conditions.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the year of disposal. All
ordinary repair and maintenance costs are expensed as
incurred. Expenditures for maintenance and repairs are expensed as
incurred. Major renewals and betterments are charged to the property
accounts while replacements, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are expensed in the current
period.
- 8
-
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below.
|
Estimated Useful Life
|
|
|
Plant
and building
|
20 years
|
|
Machinery
and equipment
|
10 years
|
|
Office
furniture and equipment
|
5 years
|
|
Transportation
equipment
|
5 years
|
Impairment of Long-Lived
Assets
In
accordance with ASC 360, “Property, Plant and Equipment”, the Company reviews
the carrying values of long-lived assets, including property, plant and
equipment, land use right and other intangible assets, whenever facts and
circumstances indicate the assets may be impaired. Recoverability of assets to
be held and used is measured by comparing the carrying amount of an asset to
future net undiscounted cash flows expected to be generated by the asset. If an
asset is considered impaired, the impairment is measured by the amount by which
the carrying amount the asset exceeds the fair value. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less costs of
disposal.
The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and
future estimated results in its evaluation of potential impairment and then
compares the carrying amount of the asset to the future estimated cash flows
expected to result from the use of the asset. If the carrying amount
of the asset exceeds estimated expected undiscounted future cash flows, the
Company measures the amount of impairment by comparing the carrying amount of
the asset to its fair value. The estimation of fair value is
generally measured by discounting expected future cash flows as the rate the
Company utilizes to evaluate potential investments. The Company
estimates fair value based on the information available in making whatever
estimates, judgments and projections are considered necessary. There
was no impairment of long-lived assets for the years ended December 31, 2009,
2008 and 2007.
Revenue
Recognition
The
Company recognizes sales in accordance with United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements” and SAB No. 104, “Revenue Recognition.” The
Company recognizes revenue when the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services were
rendered, (iii) the price to the customer is fixed or determinable and (iv)
collection of the resulting receivable is reasonably assured. After the
customers of the Company taking the goods and signing on the shipping order, the
Company considers the signed shipping order as customer acceptance and the risk
of goods is transferred, as the price in invoice or sales contract with
customers is fixed, the Company recognize revenue accordingly. Revenue is not
recognized until title and risk of loss is transferred to the customer, which
occurs upon delivery of goods, and objective evidence exists that customer
acceptance provisions have were met. Provisions for discounts and returns are
provided for at the time the sale is recorded, and are recorded as a reduction
of sales. The Company bases its estimates on historical experience taking into
consideration the type of products sold, the type of customer, and the type of
specific transaction in each arrangement. Revenues represent the invoiced value
of goods, net of value added tax (“VAT”).
- 9
-
The
Company provides a product warranty to customers; meanwhile, as an assembling
company, all parts are purchased from related suppliers, suppliers provide a
same terms warranty to the Company as that the Company provides to customers. In
case customers claim problem products to the Company, the Company will claim the
related parts to suppliers accordingly. Further more, the labor costs and
overheads related to the problem products are not material compared to the parts
cost, so the company do not accrue any warranty liabilities in financial
statements.
The
Company does not offer promotional payments, customer coupons, rebates or other
cash redemption offers to its customers. Deposits or advance payments from
customers prior to delivery of goods and passage of title of goods are recorded
as unearned revenue.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. Under this method, deferred income taxes are recognized for
the estimated tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts and each
year-end based on enacted tax laws and statutory rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances are established to reduce deferred tax assets to the amount expected
to be realized when, in management’s opinion; it is more likely than not that
some portion of the deferred tax assets will not be realized. The
provision for income taxes represents current taxes payable net of the change
during the period in deferred tax assets and liabilities.
Earnings (loss) Per
Share
The
Company reports earnings per share in accordance with the provisions of ASC 260
“Earnings Per Share”. ASC 260 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock using the treasury
method.
Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company’s net income (loss) position at the calculation
dates. As of December 31, 2009, 2008 and 2007, the Company does not
have any dilutive securities. The Company does not have shares
outstanding. As a result, earnings per share are not presented.
Fair Value of Financial
Instruments
ASC 820
“Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosure requirements for fair value measures.
The carrying amounts reported in the balance sheets for current receivables and
payables qualify as financial instruments. Management concluded the carrying
values are a reasonable estimate of fair value because of the short period of
time between the origination of such instruments and their expected realization
and if applicable, their stated interest rate approximates current rates
available. The three levels are defined as follows:
|
·
|
Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 - inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 - inputs to the valuation methodology are unobservable and significant
to the fair value.
|
- 10
-
It is
management’s opinion that as of December 31, 2009, 2008 and 2007, the estimated
fair values of the financial instruments were not materially different from
their carrying values as presented on the balance sheet. This is
attributed to the short maturities of the instruments and that interest rates on
the borrowings approximate those that would have been available for loans of
similar remaining maturity and risk profile at respective balance sheet
dates. The carrying amounts of short-term and long-term loans
approximate their fair values because the applicable interest rates approximate
current market rates.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (Now included in ASC 805),
"Business Combinations" which establishes principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and for
disclosure to enable evaluation of the nature and financial effects of the
business combination. The Company adopted this standard as of January 1, 2009
and does not expect it to have an impact on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 160 (Now ASC 810-10), "Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51. ASC
810-10 introduces significant changes in the accounting and reporting for
business acquisitions and noncontrolling interest in a subsidiary. ASC 810-10
also changes the accounting and reporting for the deconsolidation of a
subsidiary. Companies are required to adopt the new standard for fiscal years
beginning after January 1, 2009. The Company adopted this standard effectively
January 1, 2009 and does not expect it to have an impact on the Company’s
financial statements.
Effective
July 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (Now ASC
820), which provides guidance on how to measure assets and liabilities that use
fair value. ASC 820 applies whenever another U.S. GAAP standard requires (or
permits) measurement of assets or liabilities at fair value, but does not expand
the use of fair value to any new circumstances. The Company also adopted FASB
Staff Position ("FSP") No.FAS 157-2, which allows the Company to partially defer
the adoption of ASC820. This FSP defers the effective date of ASC 820 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or financial liability as defined in
paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. The adoption of ASC 820 had no impact on our financial
statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (Now ASC 855), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. This
disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. ASC 855 is effective for interim and annual periods ending
after June 15, 2009. The adoption of ASC 855 did not have a material impact on
the Company’s financial position, results of operations or cash
flows.
In June
2009, the FASB issued Update No. 2009-01, Generally Accepted Accounting
Principles (ASU 2009-01). ASU 2009-01 establishes “The FASB Accounting Standards
Codification,” or Codification, which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. On the
effective date, the Codification superseded all then-existing non-SEC accounting
and reporting standards. All other non grandfathered non-SEC accounting
literature not included in the Codification will become non authoritative. ASU
2009-01 is effective for interim and annual periods ending after September 15,
2009. The Company will adopt the provisions of ASU 2009-01 for the period ended
September 30, 2009. There will be no impact on the Company’s operating results,
financial position or cash flows.
The
Company does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on the Company’s results of
operations, financial position or cash flows.
- 11
-
NOTE
3 - INVENTORY
Inventory
as of December 31, 2009 and 2008 were as follows:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Raw
material
|
$ | 27,292 | $ | 875,282 | ||||
|
Finished
goods
|
849,000 | 314,847 | ||||||
|
Auxiliary
inventory (spare parts)
|
1,516,867 | 917,572 | ||||||
|
Total
inventory
|
$ | 2,393,159 | $ | 2,107,701 | ||||
NOTE
4 - ADVANCE TO SUPPLIERS
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Advance
to suppliers
|
$ | 15,663,763 | $ | 23,873,721 | ||||
Advance
to suppliers represents amounts prepaid for raw materials. The advances are
applied against amounts due to the supplier as the materials are
received
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
As of
December 31, 2009 and 2008, property, plant and equipment consisted of the
following:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Plant
and building
|
$ | 7,467,107 | $ | 7,448,587 | ||||
|
Machinery
and equipment
|
19,209,690 | 18,936,343 | ||||||
|
Office
furniture and equipment
|
8,398,072 | 8,359,152 | ||||||
|
Transportation
equipment
|
74,914 | 74,728 | ||||||
|
Total
property, plant and equipment
|
35,149,783 | 34,818,810 | ||||||
|
Less:
accumulated depreciation
|
(8,469,539 | ) | (5,463,481 | ) | ||||
|
Total
property, plant and equipment, net
|
$ | 26,680,244 | $ | 29,355,329 | ||||
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was
$2,990,846, $2,884,014 and $2,280,177, respectively.
NOTE
6 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES
As of
December 31, 2009 and December 31, 2008, the accounts payable, unearned revenue
and accrued liabilities of the Company were summarized as follows:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Accounts
payable
|
$ | 15,536,226 | $ | 6,128,116 | ||||
|
Unearned
revenue
|
33,245,660 | 17,913,926 | ||||||
|
Accrued liabilities
and other payables:
|
||||||||
|
– payroll
payable
|
97,894 | 104,793 | ||||||
|
– taxes
payable
|
- | 1,328,830 | ||||||
|
–
customer deposits
|
2,923,634 | 2,190,881 | ||||||
|
–
payable for equipment purchased
|
2,119,889 | 3,609,584 | ||||||
|
–
others
|
28,291 | 11,469 | ||||||
|
Total
accrued expenses and other payables
|
$ | 5,169,708 | $ | 7,245,557 | ||||
- 12
-
NOTE
7 - RELATED PARTY BALANCE AND TRANSCATIONS
Due to related
party
As of
December 31, 2009 and December 31, 2008, due to related party was summarized as
follows:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Xingtai
Longhai Steel Group Co., Ltd. (“ Longhai Group”)
|
$ | - | $ | 4,214,758 | ||||
The
Company purchased the raw material and utilities for production from Longhai
Group, which is controlled by Mr. Wang, the majority owner of the Company. As of
December 31, 2009 and 2008, the outstanding balance of this purchase
was Nil and $4,214,758, respectively.
Due from related
parties
As of
December 31, 2009 and December 31, 2008, due from related parties was summarized
as follows:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Xingtai
Longhai Steel Group Co., Ltd.
|
$ | 42,047,673 | $ | - | ||||
|
Xingtai
Longhai Steel Group Metal Product Co., Ltd.
|
242,765 | |||||||
|
Total
|
$ | 42,290,438 | ||||||
The
Company provided cash advances to Longhai Group. As of December 31, 2009 and
2008, the outstanding balance of this service was $42,047,673 and Nil
respectively. The Company sells steel wire to Xingtai Longhai Steel
Group Metal Product Co., Ltd. (“Longhai Metal”) As of December 31, 2009 and
2008, the balance of due from Longhai Metal related to such sales was $242,765
and Nil, respectively. As of the date of this filing, in anticipation of
being a U.S. public company, all balances have been repaid and no loans to the
Longhai Steel Group are outstanding. See Note 12 for subsequent event
related to the settlement of related party receivable.
REFER TO
SUBSEQUENT EVENT RELATED TO THE SETTLEMENT OF RELATED PARTY
RECEIVABLE
Related party
transactions
In 2009,
the Company purchased production utilities from Longhai Group amounted to
$11,661,547. In addition, the amount of $3,688,573 steel scrape and
$71,595 steel wire were sold to Longhai Group during 2009. The Company provided
cash advances to Longhai Group and earned finance income amounted to
$8,360,120 in 2009, which is included in the Company’s
revenue.
In 2008,
the Company purchased billet and production utilities from the Group amounted to
$488,908,517 and $9,111,397, respectively. In addition, the amount of
$5,159,081 steel scrape and $1,604,785 steel wire were sold to the Group during
2008.
In 2007,
the Company purchased billet and production utilities from the Group amounted to
$222,561,569 and $5,409,213, respectively. In addition, the amount of
$3,091,358 steel scrape was sold to the Group during 2007.
Since the
Company purchased almost all of its raw materials from the Group during 2008 and
2007, which is an entity under common control with the Company, the cost of
purchases, the gross margin and net income of the Company might be different
from a similar company that purchases raw materials from an independent third
party.
- 13
-
In
addition, Longhai Group rents office building and workshop to the Company.
The lease term is month by month. The rent expense for the years ended December
31, 2009, 2008 and 2007 was $28,334, $128,604 and $25,447,
respectively.
The
amount of steel wire sold to Longhai Steel Group Metal Products was $3,955,563
for the year of 2009 and Nil for the years of 2008 and 2007.
NOTE
8 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after appropriate tax
adjustments in 2009 and 2008.
The
following table summarizes the temporary differences which result in deferred
tax assets and liabilities as of December 31, 2009 and December 31,
2008:
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Current
deferred tax assets:
|
||||||||
|
Cost
of uninvoiced goods delivery
|
161,673 | 2,107,242 | ||||||
|
Expenses
deductible in next year
|
31,547 | 26,198 | ||||||
|
Total
current deferred tax assets
|
193,220 | 2,133,440 | ||||||
|
Non-current
deferred tax assets
|
||||||||
|
Amortization
of long-term prepaid expenses
|
- | 109,422 | ||||||
|
Total
deferred tax assets
|
$ | 193,220 | $ | 2,242,862 | ||||
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Current
deferred tax liabilities:
|
||||||||
|
Sales
of uninvoiced goods delivery (net of output VAT)
|
1,365,401 | 2,303,079 | ||||||
|
Non-current
deferred tax liabilities:
|
||||||||
|
Depreciation
of fixed assets
|
$ | 190,351 | $ | 222,694 | ||||
|
Total
deferred tax liabilities
|
$ | 1,555,752 | $ | 2,525,773 | ||||
|
Net
current deferred tax liabilities
|
1,172,181 | 169,639 | ||||||
|
Net
non-current deferred tax liabilities
|
190,351 | 113,272 | ||||||
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
US
statutory rates
|
34.0 | % | 34.0 | % | ||||
|
Tax
rate difference
|
(9.0 | )% | (9.0 | )% | ||||
|
Tax
per financial statements
|
25.0 | % | 25.0 | % | ||||
NOTE
9 - EQUITY
The
Company's equity is comprised of the common stock, additional paid-in capital
plus retained earnings of the Company and the carved-out Division. As of
December 31, 2009 and 2008, the initial capital contribution of fixed assets
totaled to $1,790,725(at shareholders’ cost basis) was recorded in additional
paid-in capital. On August 21, 2008, the Company received cash
contribution totaling $874,037 from the major shareholders as additional paid-in
capital.
- 14
-
NOTE 10 –
COMMITMENTS AND CONTINGECIES
Social insurance for
employees
According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs. Management believes that due to the transient nature of its employees,
the Company does not need to provide all employees with such social
insurances, and has paid the social insurances for the Company’s employees who
have completed three months’ continuous employment with the
Company.
In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurances as
well as administrative fines. As the Company believes that these fines would not
be material, no provision has been made in this regard.
Tax
issues
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax authority may
take different views about the Company’s tax filings which may lead to
additional tax liabilities.
Value
Added Tax
The
Company is subject to value added tax ("VAT") for manufacturing products. The
applicable VAT tax rate is 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Under the commercial practice of the
PRC, the Company paid value added taxes ("VAT") based on tax invoices issued.
The tax invoices may be issued subsequent to the date on which revenue is
recognized, and there may be a considerable delay between the date on which the
revenue is recognized and the date on which the tax invoice is issued. In the
event that the PRC tax authorities dispute the date of which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes
which are determined to be late or deficient. According to the PRC tax laws, any
potential tax penalty payable on late or deficient payments of this tax could be
between zero and five times the amount of the late or deficient tax payable, and
will be expensed as a period expense if and when a determination has been made
by the taxing authorities that a penalty is due. At December 31, 2009 and 2008,
the Company accrued Nil and $1,328,829, respectively, of unpaid value-added
taxes.
NOTE
11 - OPERATING RISKS
(a) Country
risk
Currently,
the Company’s revenues are primarily derived from the sale of agriculture
tractors to customers in the People’s Republic of China (“PRC”). The Company
hopes to expand its operations to other countries, however, such expansion has
not commenced and there is no assurance that the Company will be able to achieve
such expansion. Therefore, a downturn or stagnation in the economic environment
of the PRC could have a material adverse effect on the Company’s financial
condition.
(b) Products
risk
In
addition to competing with other manufacturers of steel wires, the Company
competes with larger PRC companies which have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. These PRC companies may be able to offer products at a
lower price. There can be no assurance the Company will remain competitive
should this occur.
- 15
-
(c) Exchange
risk
The
Company can not guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on changes in the
political and economic environments without notice.
(d) Political
risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
(e) Interest
risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company does not have
any derivative financial instruments as of December 31, 2009 and 2008 and
believes its exposure to interest rate risk is not material.
NOTE
12 - MAJOR CUSTOMERS AND MAJOR VENDORS
The
Company generated 39.0 percent, 51.0 percent and 49.0 percent of its revenues
from five customers during the years ended December 31, 2009, 2008 and 2007,
respectively.
The
Company incurred 91.0 percent of its cost of revenues to three vendors during
the year ended December 31, 2009. The Company incurred 99.0 percent of its cost
of revenues to one vendor during the year ended December 31, 2008. The Company
incurred 100 percent of its cost of revenues to one vendor during the year ended
December 31, 2007.
NOTE
13 - SUBSEQUENT EVENTS
On March
26, 2010, the Company entered into and closed an Agreement and Plan of
Reorganization with Action Industries, Inc. (“Action”), a Delaware public shell.
Upon closing, the equity owners of the Company delivered all of their equity
interests in the Company to Action in exchange for 10,000 shares of Action’s
Series A Preferred Stock which constituted 98.5% of Action’s issued and
outstanding capital stock on a as-converted basis as of and immediately after
the consummation of the reverse acquisition. As a result of the reverse
acquisition, the Company became Action’s wholly-owned subsidiary and the former
shareholders of the Company became Action’s controlling
stockholders. The share exchange transaction with the Company and the
shareholders of Action, or Share Exchange, was treated as a reverse acquisition,
with the Company as the acquirer and Action as the acquired party.
On March
25, 2010 the Company settled and received payments for all outstanding balances
due from Xingtai Longhai Steel Group, in accordance with the anticipated related
party policies and procedures associated with being a public reporting
company.
- 16
-
KALINGTON
LIMITED
PRO FORMA CONSOLIDATED
BALANCE SHEETAS
OF DECEMBER 31, 2009
(UNAUDITED)
|
KALINGTON
LIMITED
|
ACTION
INDUSTRIES
|
PRO-FORMA
ADJUSTMENTS
|
PRO-FORMA
CONSOLIDATED
BALANCE SHEET
|
|||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
assets
|
||||||||||||||||
|
Cash
|
$ | 115,510 | $ | 126 | $ | 115,636 | ||||||||||
|
Accounts
receivable
|
19,009 | 19,009 | ||||||||||||||
|
Inventories,
net
|
2,393,159 | 1,635 | 2,394,794 | |||||||||||||
|
Advance
to suppliers
|
15,663,763 | - | 15,663,763 | |||||||||||||
|
Tax
receivable
|
1,579,933 | 1,579,933 | ||||||||||||||
|
Other
current assets
|
2,799 | 2,799 | ||||||||||||||
|
Due
from related party
|
42,290,438 | - | 42290438 | |||||||||||||
|
Total
current assets
|
62,064,611 | 1,761 | 62,066,372 | |||||||||||||
|
Property,
plant and equipment, net
|
26,680,244 | 2,170 | 26,682,414 | |||||||||||||
|
Total
Assets
|
$ | 88,744,855 | $ | 3,931 | $ | 88,748,786 | ||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||
|
Current
liabilities
|
||||||||||||||||
|
Accounts
payable
|
15,536,226 | 20,880 | 15,557,106 | |||||||||||||
|
Unearned
revenue
|
33,245,360 | - | 33,245,360 | |||||||||||||
|
Income
tax payable
|
2,325,984 | - | 2,325,984 | |||||||||||||
|
Accrued
liabilities
|
5,169,708 | - | 5,169,708 | |||||||||||||
|
Current
deferred tax liabilities
|
1,172,181 | - | 1,172,181 | |||||||||||||
|
Related
Party Payable
|
- | 4,735 | (4,735 | ) (b) | - | |||||||||||
|
Commission
Payable
|
- | 132 | 132 | |||||||||||||
|
Convertible
Shareholder Note Payable
|
- | 49,229 | (49,229 | ) (b) | - | |||||||||||
|
Interest
Payable
|
- | 992 | 992 | |||||||||||||
|
Shareholder
Note Payable
|
- | 75 | 75 | |||||||||||||
|
Total
current liabilities
|
57,449,459 | 76,043 | (53,964 | ) | 57,471,538 | |||||||||||
|
Non-current
Deferred Tax Liabilities
|
190,351 | - | 190,351 | |||||||||||||
|
Total
Liabilities
|
57,639,810 | 76,043 | (53,964 | ) | 57,661,889 | |||||||||||
|
Shareholders'
Equity
|
||||||||||||||||
|
Common
Stock ($.001 par value; Authorized 100,000,000 shares, Issued 11,300,000
shares at December 31, 2009)
|
129 | 11,300 | (129 | ) (a) | 11,300 | |||||||||||
|
Additional
paid-in capital
|
2,664,762 | 20,700 | (20,700 | ) (a) | 2,635,443 | |||||||||||
| (83,283 | ) (a) | |||||||||||||||
| 53,964 | (b) | |||||||||||||||
|
Accumulated
other comprehensive income
|
806,818 | 806,818 | ||||||||||||||
|
Retained
earnings
|
27,633,336 | (104,112 | ) | 104,112 | 27,633,336 | |||||||||||
|
Total
Shareholders' Equity
|
31,105,045 | (72,112 | ) | 53,964 | 31,086,897 | |||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 88,744,855 | $ | 3,931 | $ | 88,748,786 | ||||||||||
The
accompanying notes are an integral part of these pro forma financial
statements.
- 1
-
KALINGTON
LIMITED
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEAR ENDED DECEMBER 31, 2009
(UNAUDITED)
|
KALINGTON
LIMITED
|
ACTION
INDUSTRIES
|
PRO-FORMA
ADJUSTMENTS
|
PRO-FORMA
CONSOLIDATED
INCOME STATEMENT
|
|||||||||||||
|
Revenue
|
$ | 373,660,461 | $ | 2,645 | $ | 373,663,106 | ||||||||||
|
Cost
of revenue
|
(356,833,041 | ) | (3,097 | ) | (356,836,138 | ) | ||||||||||
|
Gross
profit
|
16,827,420 | (452 | ) | 16,826,968 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
General
and administrative expenses
|
(1,114,016 | ) | (667 | ) | (1,114,683 | ) | ||||||||||
|
Accounting
fees
|
- | (23,104 | ) | (23,104 | ) | |||||||||||
|
Related
party accounting fees
|
- | (2,962 | ) | (2,962 | ) | |||||||||||
|
Outside
services
|
- | (486 | ) | (486 | ) | |||||||||||
|
Income
from operations
|
15,713,404 | (27,671 | ) | 15,685,733 | ||||||||||||
|
Interest
income
|
3,301 | - | 3,301 | |||||||||||||
|
Interest
expense
|
(85,422 | ) | (3,698 | ) | (89,120 | ) | ||||||||||
|
Other
expenses
|
(34,470 | ) | - | (34,470 | ) | |||||||||||
|
Total
other income and expenses
|
(116,591 | ) | (3,698 | ) | (120,289 | ) | ||||||||||
|
Income
before income taxes
|
15,596,813 | (31,369 | ) | 15,565,444 | ||||||||||||
|
Income
tax benefit / (expense)
|
(3,899,203 | ) | (278 | ) | (3,899,481 | ) | ||||||||||
|
Net
income
|
11,697,610 | (31,647 | ) | 11,665,963 | ||||||||||||
|
Other
comprehensive income
|
54,484 | - | 54,484 | |||||||||||||
|
Comprehensive
income
|
$ | 11,752,094 | $ | (31,647 | ) | $ | - | $ | 11,720,447 | |||||||
The
accompanying notes are an integral part of these pro forma financial
statements.
- 2
-
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1 –
BASIS OF PRESENTATION
In March,
2010, Kalington Limited (the “Company”) completed a reverse acquisition
transaction through a share exchange with Action Industries, Inc. (“Action”),
whereby Action acquired 100% of the issued and outstanding capital stock of the
Company in exchange for 10,000 shares of the preferred stock of Action. As a
result of the reverse acquisition, the Company became Action’s wholly-owned
subsidiary and the former shareholders of the Company became controlling
stockholders of Action. The share exchange transaction with Action
was treated as a reverse acquisition, with the Company as the accounting
acquirer and Action as the acquired party.
Consequently,
the assets and liabilities and the historical operations that will be reflected
in the consolidated financial statements for periods prior to the Share Exchange
Agreement will be those of the Company and will be recorded at the historical
cost basis. After the completion of the Share Exchange Agreement, the
Company’s consolidated financial statements will include the assets and
liabilities of the Company and Action, the historical operations of the Company
and the operations of Action from the closing date of the Share Exchange
Agreement.
These pro
forma consolidated financial statements are prepared assuming the above
transaction occurred on December 31, 2009 (as to the balance sheet) and on
January 1, 2009 (as to the income statements).
Audited
financial statements of the Company and Action have been used in the preparation
of these pro forma consolidated financial statements. These pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of Action and the Company.
Note 2 –
PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
|
(a)
|
To
eliminate the equity of the accounting acquiree, Action Industries Inc.,
and to reflect the recapitalization of the common stock and additional
paid in capital of the Company as a result of the reverse
merger.
|
|
(b)
|
To
convert related party payable to common
stock.
|
- 3
-