Attached files
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EX-23.1 - LianDi Clean Technology Inc. | v178912_ex23-1.htm |
As
filed with the Securities and Exchange Commission on March 29, 2010
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
REMEDIATION
SERVICES, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
75-2834498
|
3822
|
||
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer Identification No.)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
4th
Floor Tower B. Wanliuxingui Building, No. 28 Wanquanzhuang Road
Haidian
District, Beijing, 100089
China
86-10-5872-0171
(Address,
including zip code, and Telephone Number, including area code,
of
Registrant’s Principal Executive Offices)
_________
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
(212)
407-4000
(Name,
Address, including zip code, and Telephone Number, including area code, of Agent
for Service)
__________
With
a copy to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
(212)
407-4159
Approximate date of commencement of
proposed sale to the public: From time to time after this
registration statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated
filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if smaller
reporting company)
|
Smaller reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to be
registered
|
Amount of
shares to be
registered (1)
|
Proposed
Maximum
offering price
per share (2)
|
Proposed
maximum
aggregate
offering price
|
Amount of
registration fee
|
||||||||||||
Common
stock, par value $0.001 per share
|
993,742 | $ | 3.33 | $ | 3,309,160.86 | $ | 235.95 | |||||||||
Common
stock, par value $0.001 per share (3)
|
7,086,078 | 3.33 | 23,596,639.74 | 1,682.45 | ||||||||||||
Common
stock, par value $0.001 per share, underlying series A warrants (4)(6)
|
1,968,363 | 4.50 | 8,857,633.50 | 631.55 | ||||||||||||
Common
stock, par value $0.001 per share, underlying series B warrants (4)(6)
|
1,968,363 | 5.75 | 11,318,087.25 | 806.98 | ||||||||||||
Common
stock, par value $0.001 per share, underlying placement agent warrants
(5)(6)
|
787,342 | 3.50 | 2,755,697.00 | 196.49 | ||||||||||||
Common
stock, par value $0.001 per share, underlying placement agent series A
warrants (5)(6)
|
196,836 | 4.50 | 885,762.00 | 63.16 | ||||||||||||
Common
stock, par value $0.001 per share, underlying placement agent series B
warrants (5)(6)
|
196,836 | 5.75 | 1,131,807.00 | 80.70 | ||||||||||||
Total
|
13,197,560 | $ | $ | 51,854,787.35 | $ | 3,697.28 |
(1)
|
Pursuant
to Rule 416 under the Securities Act of 1933, as amended, this
registration statement includes an indeterminate number of shares as may
become necessary to adjust the number of shares issued by the Registrant
to the selling stockholders resulting from stock splits, stock dividends
or similar transactions involving the common
stock.
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended, based on
the average of the bid and ask prices on March 24, 2010, as reported by
the OTC Bulletin Board.
|
(3)
|
The
shares of common stock registered hereunder are being registered for
resale by selling stockholders named in the prospectus upon conversion of
7,086,078 shares of series A convertible preferred
stock.
|
(4)
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The
shares of common stock registered hereunder are being registered for
resale by selling stockholders named in the prospectus upon exercise of
outstanding series A and series B warrants to purchase common
stock.
|
(5)
|
The
shares of common stock registered hereunder are being registered for
resale by selling stockholders named in the prospectus upon exercise of
outstanding placement agent warrants to purchase our common
stock.
|
(6)
|
The
registration fee has been calculated in accordance with Rule 457(g) under
the Securities Act of 1933, as
amended.
|
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Prospectus
|
Subject
to Completion, Dated March 29,
2010
|
REMEDIATION
SERVICES, INC.
13,197,560
SHARES OF COMMON STOCK
This
prospectus relates to the resale of 993,742 shares (the “Issued Shares”) of our
common stock, par value $.001 per share (the “Common Stock”), 7,086,078 shares
of Common Stock (the “Conversion Shares”) issuable upon the conversion of shares
of our Series A Convertible Preferred Stock, par value $.001 per share (the
“Series A Preferred Stock”), and 5,117,740 shares of Common Stock (the “Warrant
Shares”) issuable upon the exercise of warrants to purchase shares of our Common
Stock (the “Warrants”). The Issued Shares, the Conversion Shares and
the Warrant Shares (collectively, the “Shares”) are being offered by the selling
stockholders (the “Selling Stockholders”) identified in this
prospectus.
We will
not receive any of the proceeds from the sale of the Issued Shares or the
Conversion Shares by the Selling Stockholders. However, we will receive the
proceeds from any cash exercise of Warrants to purchase the Warrant Shares to be
sold hereunder. See “Use of Proceeds.” The Selling Stockholders may sell their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed prices, at prevailing market prices at the time of sale, at
prices related to the prevailing market price, at varying prices determined at
the time of sale, or at negotiated prices. See “Plan of
Distribution.”
We have
agreed to pay certain expenses in connection with the registration of the
Shares.
Our
Common Stock is quoted on the OTC Bulletin Board under the trading symbol
“RMSI.” The closing price for our Common Stock on the OTC Bulletin Board on
March 24, 2010 was $4.50 per share. You are urged to obtain
current market quotations of our Common Stock before purchasing any of the
Shares being offered for sale pursuant to this prospectus.
The
Selling Stockholders, and any broker-dealer executing sell orders on behalf of
the Selling Stockholders, may be deemed to be “underwriters” within the meaning
of the Securities Act of 1933, as amended. Commissions received by
any broker-dealer may be deemed underwriting commissions under the Securities
Act of 1933, as amended.
Investing
in our Common Stock involves risk. You should carefully consider the risk
factors beginning on page 6 of this prospectus before purchasing shares of our
Common Stock.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus is ____________, 2010
5
Table
of Contents
Page
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SUMMARY
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1
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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4
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THE
OFFERING
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5
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RISK
FACTORS
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6
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USE
OF PROCEEDS
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17
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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18
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DESCRIPTION
OF THE BUSINESS
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33
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DIRECTORS
AND EXECUTIVE OFFICERS
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50
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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54
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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56
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SELLING
STOCKHOLDERS
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58
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PLAN
OF DISTRIBUTION
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77
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DESCRIPTION
OF SECURITIES
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80
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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83
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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85
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LEGAL
MATTERS
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86
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EXPERTS
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86
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WHERE
YOU CAN FIND MORE INFORMATION
|
86
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FINANCIAL
STATEMENTS
|
F-1
|
i
SUMMARY
This
summary highlights material information about us that is described more fully
elsewhere in this prospectus. It may not contain all of the information that you
find important. You should carefully read this entire document, including the
“Risk Factors” section beginning on page 6 of this prospectus and the financial
statements and related notes to those statements appearing elsewhere in this
prospectus before making a decision to invest in our Common Stock.
Unless
otherwise indicated in this prospectus or the context otherwise requires, all
references to “we,” “us,” “our” and “the Company” or “China LianDi” refers
collectively to Remediation Services, Inc. and its wholly-owned
subsidiaries.
OUR
COMPANY
We
provide downstream flow equipment and engineering services to China’s leading
petroleum and petrochemical companies. Through our four operating subsidiaries
located in the in the People’s Republic of China (the “PRC”) and the Hong Kong
Special Administration Region of the PRC, we: (i) distribute a wide range of
petroleum and petrochemical valves and equipment, including unheading units for
the delayed coking process, as well as provide associated value-added technical
services; (ii) provide systems integration services; and (iii) develop and
market proprietary optimization software for the polymerization process. Our
products and services are provided both bundled or individually, depending on
the needs of the customer.
We are a
pioneer in modernizing China’s delayed coking industry, and, as such, are
strategically positioned to capitalize opportunistically on growth opportunities
as new technologies enter our market. For example, as part of our
many potential expansion alternatives, we plan to install in the fall of 2010,
and are now exploring future opportunities to assemble, clean and safe enclosed
unheading units for the delayed coking process at a Chinese facility (unheading
units are used in delayed coking to “unhead” or open the coke drum for the
removal of the residual coke). Any facility like this would be the first of its
kind in the PRC. As of December
31, 2009, we were involved in approximately 20 total projects in approximately
eight provinces, cities, autonomous regions and municipalities located in
China. Since our inception we have
completed more than 200 projects in approximately 24 provinces, cities,
autonomous regions and municipalities located in China.
Our objectives are to enhance
the reputation of our brand, continue to achieve rapid growth and to strengthen
our position as the leading innovator in clean technology for the petroleum and
petrochemical industry in China. In the next three years we intend to strengthen
our optimization software for the polymerization reaction of ethylene
production, enhancing its function and reliability. We intend to leverage our
current relationships in the petroleum and petrochemical industry to become a
leading player in clean technology by bringing totally enclosed unheading units
to China. We also intend to expand and further develop our long-term
relationships with our customers, helping them to reduce their production costs
and increase the efficiency and safety of their
facilities.
1
Remediation
Services Organizational Structure
Share
Exchange Agreement
On
February 26, 2010 (the “Closing Date”), we entered into a Share Exchange
Agreement (the “Exchange Agreement”), by and among (i) China LianDi Clean
Technology Engineering Ltd. (“China LianDi”) and China LianDi’s shareholders, SJ
Asia Pacific Ltd., a company organized under the laws of the British Virgin
Islands, which is a wholly-owned subsidiary of SJI Inc., a Jasdaq listed company
organized under the law of Japan, China Liandi Energy Resources Engineering
Technology Limited, a company organized under the laws of the British Virgin
Islands, Hua Shen Trading (International) Limited, a company organized under the
laws of the British Virgin Islands, Rapid Capital Holdings Limited, a company
organized under the laws of the British Virgin Islands, Dragon Excel Holdings
Limited, a company organized under the laws of the British Virgin Islands, and
TriPoint Capital Advisors, LLC, a limited liability company organized under the
laws of Maryland (collectively, the “China LianDi Shareholders”), who together
owned shares constituting 100% of the issued and outstanding ordinary shares of
China LianDi (the “China LianDi Shares”) and (ii) Reed Buley, our former
principal stockholder (“Buley”). Pursuant to the terms of the Exchange
Agreement, the China LianDi Shareholders transferred to us all of the China
LianDi Shares in exchange for 27,354,480 shares of our Common Stock (such
transaction, the “Share Exchange”). As a result of the Share Exchange, we are
now a holding company, which through our operating companies in the PRC,
provides downstream flow equipment and engineering services to the leading
petroleum and petrochemical companies in the PRC.
Immediately
prior to the Share Exchange, 4,690,000 shares of our Common Stock then
outstanding were cancelled and retired, so that immediately prior to the private
placement described below, we had 28,571,430 shares issued and outstanding.
China LianDi also deposited $275,000 into an escrow account which amount was
paid to Buley, owner of the cancelled shares, as a result of the Share Exchange
having been consummated.
2
Private
Placement
On
February 26, 2010 and immediately following the Share Exchange, we entered into
a securities purchase agreement (the “Purchase Agreement”) with certain
investors (collectively, the “Investors”) for the issuance and sale in a private
placement of 787,342 units (the “Units”) at a purchase price of $35 per Unit,
consisting of, in the aggregate, (a) 7,086,078 shares of Series A convertible
preferred stock, par value $0.001 per share (the “Series A Preferred Stock”)
convertible into the same number of shares of Common Stock (the “Conversion
Shares”), (b) 787,342 shares of Common Stock (the “Issued Shares”), (c)
three-year Series A Warrants (the “Series A Warrants”) to purchase up to
1,968,363 shares of Common Stock, at an exercise price of $4.50 per share (the
“Series A Warrant Shares”), and (d) three-year Series B Warrants (the “Series B
Warrants” and, together with the Series A Warrants, the “Warrants”) to purchase
up to 1,968,363 shares of Common Stock, at an exercise price of $5.75 per share
(the “Series B Warrant Shares” and, together with the Series A Warrant Shares,
the “Warrant Shares”), for aggregate gross proceeds of approximately $27.56
million (the “Private Placement”). The issuance of the Units was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”), and Regulation D or Regulation S promulgated
thereunder.
In
connection with the Private Placement, we also entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investors, in
which we agreed to file this registration statement with the Securities and
Exchange Commission (the “SEC”) to register for resale the Issued Shares, the
Conversion Shares and the Warrant Shares within 30 calendar days of the Closing
Date, and to have this registration statement declared effective within 150
calendar days of the Closing Date or within 180 calendar days of the Closing
Date in the event the SEC conducts a full review of this registration
statement. We agreed to keep this registration statement continuously
effective under the Securities Act until such date as is the earlier of the date
when all of the securities covered by this registration statement have been sold
or the date on which such securities may be sold without any restriction
pursuant to Rule144. If we do not comply with the foregoing
obligations under the Registration Rights Agreement, we will be required to pay
cash liquidated damages to each investor, at the rate of 2% of the applicable
subscription amount for each 30 day period in which we are not in compliance;
provided, that such
liquidated damages will be capped at 10% of the subscription amount of each
investor and will not apply to any shares that may be sold pursuant to Rule 144
under the Securities Act, or are subject to an SEC comment with respect to Rule
415 promulgated under the Securities Act.
We also
entered into a make good escrow agreement with the Investors (the “Securities
Escrow Agreement”), pursuant to which China LianDi Energy Resources Engineering
Technology Ltd. (the “Principal Stockholder”), an affiliate of Jianzhong Zuo,
our Chief Executive Officer, President and Chairman, delivered into an escrow
account 1,722,311 shares of Common Stock (the “Escrow Shares”) to be used as a
share escrow for the achievement of a fiscal year 2011 net income performance
threshold of $20.5 million. With respect to the 2011 performance year, if we
achieve less than 95% of the 2011 performance threshold, then the Escrow Shares
for such year will be delivered to the Investors in the amount of 86,115.55
shares (rounded up to the nearest whole share and pro rata based on the number
of shares of Series A Preferred Stock owned by such Investor at such date) for
each full percentage point by which such threshold was not achieved up to a
maximum of 1,722,311 shares. Any Escrow Shares not delivered to any Investor
because such Investor no longer holds shares of Series A Preferred Stock or
Conversion Shares, or because the 2011 performance threshold was met, shall be
returned to the Principal Stockholder.
For the
purposes of the Securities Escrow Agreement, net income is defined in accordance
with US GAAP and reported by us in our audited financial statements for fiscal
year ended 2011; provided, however, that net income for fiscal year ended 2011
shall be increased by any non-cash charges incurred (i) as a result of the
Private Placement, including without limitation, as a result of the issuance
and/or conversion of the Series A Preferred Stock, and the issuance and/or
exercise of the Warrants, (ii) as a result of the release of the Escrow Shares
to the Principal Stockholder and/or the Investors, as applicable, pursuant to
the terms of the Securities Escrow Agreement, (iii) as a result of the issuance
of ordinary shares of the Principal Stockholder to its PRC shareholders, upon
the exercise of options granted to such PRC shareholders by the Principal
Stockholder, as of the date of the Securities Escrow Agreement, (iv) as a result
of the issuance of Warrants to any placement agent and its designees in
connection with the Private Placement, (v) the exercise of any Warrants to
purchase Common Stock outstanding and (vi) the issuance under any
performance based equity incentive plan that we adopt. Net income will also be
increased to adjust for any cash or non-cash charges resulting from the payment
of dividends on the Series A Preferred Stock in connection with the Private
Placement.
3
On the
Closing Date, we and China LianDi Energy Resources Engineering Technology Ltd.,
an affiliate of Jianzhong Zuo, our Chief Executive Officer, President and
Chairman, entered into a lock-up agreement whereby such entity is prohibited
from selling our securities until six (6) months after the effective date of the
registration statement required to be filed under the Registration Rights
Agreement. For one (1) year thereafter, it will be permitted to sell up to
one-twelfth (1/12) of its initial holdings every month.
Executive
Offices
Our
principal executive offices are located at Unit 401-405.4/F, Tower B,
Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China
100089, Tel: (86) (0)10-5872 0171, Fax: (86) (0)10-5872 0181.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form S-1 that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These
include statements about the Company’s expectations, beliefs, intentions or
strategies for the future, which are indicated by words or phrases such as
“anticipate,” “expect,” “intend,” “plan,” “will,” “the Company believes,”
“management believes” and similar words or phrases. The forward-looking
statements are based on the Company’s current expectations and are subject to
certain risks, uncertainties and assumptions. The Company’s actual results could
differ materially from results anticipated in these forward-looking statements.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements.
4
THE
OFFERING
Common
Stock being offered by Selling Stockholders
|
Up
to 13,197,560 shares(1)
|
Common
Stock outstanding
|
29,358,772
shares as of the date of this Prospectus
|
Common
Stock outstanding after the Offering
|
41,562,590(2)
|
Use
of Proceeds
|
We
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
|
OTC
Bulletin Board Symbol
|
RMSI
|
Risk
Factors
|
The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on page 6.
|
(1)
|
This
prospectus relates to the resale by the Selling Stockholders of up
to 13,197,560 shares of our Common Stock, including 993,742 shares of
our Common Stock that are currently issued and outstanding, 7,086,078
shares of our Common Stock (the “Conversion Shares”) issuable upon the
conversion of our Series A Preferred Stock, and 5,117,740 shares of our
Common Stock issuable upon exercise of Warrants. The Warrant Shares are
comprised of (i) 1,968,363 shares of Common Stock issuable upon exercise
of Series A Warrants to purchase our Common Stock, (ii) 1,968,363 shares
of Common Stock issuable upon exercise of Series B Warrants to purchase
our Common Stock and (iii) 1,181,014 shares of Common Stock issuable upon
exercise of placement agent Warrants to purchase our Common Stock issued
to TriPoint Global Equities, LLC, as placement agent in connection with
the Private Placement, and certain of its designees as set forth in this
prospectus.
|
(2)
|
Assumes
issuance of all Conversion Shares and Warrant
Shares.
|
5
RISK
FACTORS
An
investment in our Common Stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto, before deciding to invest
in our Common Stock. Additional risks not presently known to us or that we
presently consider immaterial may also adversely affect our Company. If any of
the following risks occur, our business, financial condition and results of
operations and the value of our Common Stock could be materially and adversely
affected.
Risks
Related to Our Business
Key
employees are essential to growing our business.
Jianzhong
Zuo, Jintai Zhao, Zipeng Zhang and Junheng Su are essential to our ability to
continue to grow our business. They have established relationships within the
industries in which we operate. If they were to leave us, our growth strategy
might be hindered, which could limit our ability to increase
revenue.
In
addition, we face competition for attracting skilled personnel. If we fail to
attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease in
market share.
We
may need additional capital and we may not be able to obtain it at acceptable
terms, or at all, which could adversely affect our liquidity and financial
position.
We may
need additional cash resources due to changed business conditions or other
future developments. If these sources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain
a credit facility. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations and liquidity.
Our
ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including, but not limited to the following, and therefore may
never occur:
|
·
|
investors’
perception of, and demand for, securities of similar oil and gas equipment
and services/clean technology companies in
China;
|
|
·
|
conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
|
|
·
|
our
future results of operations, financial condition and cash
flow;
|
|
·
|
PRC
governmental regulation of foreign investment in oil and gas equipment and
services/clean technology companies in
China;
|
|
·
|
economic,
political and other conditions in China;
and
|
|
·
|
PRC
governmental policies relating to foreign currency
borrowings.
|
Our
failure to protect our intellectual property rights could have a negative impact
on our business.
We
believe our brand, trade name, copyrights and other intellectual property are
critical to our success. The success of our business depends in part upon our
continued ability to use our brand, trade names and copyrights to further
develop and increase brand awareness. The infringement of our trade names and
copyrights could diminish the value of our brand and its market acceptance,
competitive advantages or goodwill. In addition, our information and operational
systems, which have not been patented or otherwise registered as our property,
are a key component of our competitive advantage and our growth
strategy.
6
Monitoring
and preventing the unauthorized use of our intellectual property is difficult.
The measures we take to protect our brand, trade names, copyrights and other
intellectual property rights may not be adequate to prevent their unauthorized
use by third parties. Furthermore, application of laws governing intellectual
property rights in China and abroad is uncertain and evolving, and could involve
substantial risks to us. If we are unable to adequately protect our brand, trade
names, copyrights and other intellectual property rights, we may lose these
rights and our business, results of operations, financial condition and
prospects could be materially and adversely affected.
We
rely on computer software and hardware systems in managing our operations, the
failure of which could adversely affect our business, financial condition and
results of operations.
We are
dependent upon our computer software and hardware systems in supporting our
network and managing and monitoring programs on the network. In addition, we
rely on our computer hardware for the storage, delivery and transmission of the
data on our network. Any system failure which interrupts the input, retrieval
and transmission of data or increases the service time could disrupt our normal
operation. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with our customers, which in
turn could have a material adverse effect on our business, financial condition
and results of operations.
Our
dependence on a limited number of suppliers could adversely impact our
distribution capabilities or increase our costs, which could harm our reputation
or materially and adversely affect our business, results of operations and
financial condition.
We import
high-quality petroleum and petrochemical valves and similar equipment from a
limited number of third-party suppliers, including Cameron, DeltaValve and Poyam
Valves, and distribute them to our domestic clients who are large petroleum and
petrochemical companies located and operating in China. The failure of a
supplier to supply valves and other equipment satisfying our quality, quantity
and cost requirements in a timely and efficient manner could impair our ability
to distribute these products, increase our costs, and have an adverse effect on
our ability to maintain our client network of domestic buyers of this machinery.
The third-party suppliers from whom we import petroleum and petrochemical valves
and similar equipment have not committed, contractually or otherwise, to
distribute their products through us on an exclusive or a non-exclusive basis.
If we fail to maintain our relationships with these suppliers or fail to develop
new relationships with other suppliers, we may only be able to distribute these
products at a higher cost or after lengthy delays, or may not be able to
distribute these products at all. If our suppliers identify alternative sales
channels, they may choose to sell to other buyers or raise their prices. As a
result, we may be compelled to pay higher prices to secure our product supply,
which could adversely affect our business, results of operations and financial
condition.
Although
our continuing relationships with DeltaValve and other manufacturers are
important components of our future growth plan, there can be no assurance that
we will continue to be a distributor for such manufacturers, on an exclusive or
non-exclusive basis, or that we will in the future successfully consummate the
expansion and investment opportunities that we seek.
In the
past, we have had a strong working relationship with DeltaValve and other
manufacturers and have acted as the sole distributor of DeltaValve products in
China. Although we believe that our relationship with DeltaValve and other
manufacturers will continue, there is no assurance that we will retain our
position as sole distributor of certain DeltaValve products, or as a distributor
of other manufacturers’ products. DeltaValve and other manufacturers may
determine to provide licenses to distribute their products to our competitors
and/or may not renew our licenses with them on terms favorable to us or at all.
Furthermore, although we continually explore many potential expansion and
investment opportunities in our industry with third parties such as DeltaValve,
there can be no assurance that the opportunities that we pursue will ultimately
be consummated, or appropriately licensed and approved. In such circumstances,
we may be required to pursue other opportunities at lower margins, which could
adversely affect our business, results of operations and financial
condition.
We
do not have a majority of independent directors serving on our Board of
Directors, which could present the potential for conflicts of
interest.
We do not
have a majority of independent directors serving on our Board of Directors. In
the absence of a majority of independent directors, our executive officers could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between us and our stockholders, generally, and the controlling officers,
stockholders or directors.
7
We
have limited insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited insurance products. We have determined that the
risks of disruption or liability from our business, the loss or damage to our
property, including our facilities, equipment and office furniture, the cost of
insuring for these risks, 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 do not have any business liability, disruption,
litigation or property insurance coverage for our operations in China except for
insurance on some company owned vehicles. Any uninsured occurrence of loss or
damage to property, or litigation or business disruption may result in the
incurrence of substantial costs and the diversion of resources, which could have
an adverse effect on our operating results.
If
we are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. We maintain a system of internal control over
financial reporting, which is defined as a process designed by, or under the
supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
As a
public company, we will have significant additional requirements for enhanced
financial reporting and internal controls. We will be required to document and
test our internal control procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent registered public accounting firm
addressing these assessments. The process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company.
We cannot
assure you that we will not, in the future, identify areas requiring improvement
in our internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be
successful or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our growth. If we
are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.
Lack
of experience as officers of publicly-traded companies of our management team
may hinder our ability to comply with Sarbanes-Oxley Act.
It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act.
We may need to hire additional financial reporting, internal controls and other
finance staff or consultants in order to develop and implement appropriate
internal controls and reporting procedures. If we are unable to comply with the
Sarbanes-Oxley Act’s internal controls requirements, we may not be able to
obtain the independent auditor certifications that Sarbanes-Oxley Act requires
publicly-traded companies to obtain.
8
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act,
as well as new rules subsequently implemented by the SEC, has required changes
in corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
Risks
Relating to Regulation of Our Business
Uncertainties
with respect to the governing regulations could have a material and adverse
effect on us.
There are
substantial uncertainties regarding the interpretation and application of the
PRC laws and regulations, including, but not limited to, the laws and
regulations governing our business and our ownership of equity interest in
Beijing JianXin. These laws and regulations are relatively new and may be
subject to change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to Beijing JianXin by relevant governmental bodies may be
revoked at a later time by higher regulatory bodies. We cannot predict the
effect of the interpretation of existing or new PRC laws or regulations on our
businesses. We cannot assure you that our current ownership and operating
structure would not be found in violation of any current or future PRC laws or
regulations. As a result, we may be subject to sanctions, including fines, and
could be required to restructure our operations or cease to provide certain
services. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. Any of
these or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Our
PRC operating subsidiary will be subject to restrictions on dividend
payments.
We may
rely on dividends and other distributions from the Beijing JianXin, our PRC
subsidiary, to provide us with cash flow and to meet our other obligations.
Current regulations in the PRC would permit Beijing JianXin to pay dividends to
us only out of its accumulated distributable profits, if any, determined in
accordance with Chinese accounting standards and regulations. In addition,
Beijing JianXin will be required to set aside at least 10% (up to an aggregate
amount equal to half of its registered capital) of its accumulated profits each
year. Such cash reserve may not be distributed as cash dividends. In addition,
if the Beijing JianXin incurs debt on its own behalf in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other payments to us.
PRC
regulations on loans and direct investments by overseas holding companies in PRC
entities may delay or prevent us to make overseas loans or additional capital
contributions to Beijing JianXin.
Under the
PRC laws, foreign investors may make loans to their PRC subsidiaries or foreign
investors may make additional capital contributions to their PRC subsidiaries.
Any loans to such PRC subsidiaries are subject to the PRC regulations and
foreign exchange loan registrations, i.e. loans by foreign investors to their
PRC subsidiaries to finance their activities cannot exceed statutory limits and
must be registered with the State Administration of Foreign Exchange, or SAFE,
or its local branch. Foreign investors may also decide to finance their PRC
subsidiaries by means of additional capital contributions. These capital
contributions must be examined and approved by the Ministry of Commerce, or
MOFCOM, or its local branch in advance.
9
Under
the PRC Enterprise Income Tax
Law, we may be classified as a “resident enterprise” of China, and such
classification would likely result in unfavorable tax consequences to us and our
non-PRC stockholders.
On March
16, 2007, the National People’s Congress or the NPC, approved and promulgated
the PRC Enterprise Income Tax
Law, which we refer to as the New EIT Law. The New EIT Law took effect on
January 1, 2008. Under the New EIT Law, Foreign Investment Enterprises (FIEs)
and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law
provides a five-year transition period starting from its effective date for
those enterprises which were established before the promulgation date of the New
EIT Law and which were entitled to a preferential lower tax rate under the
then-effective tax laws or regulations.
On
December 26, 2007, the State Council issued a Notice on Implementing Transitional
Measures for Enterprise Income Tax, or the Notice, providing that the
enterprises that have been approved to enjoy a low tax rate prior to the
promulgation of the New EIT Law will be eligible for a five-year transition
period since January 1, 2008, during which time the tax rate will be increased
step by step to the 25% unified tax rate set out in the New EIT Law. From
January 1, 2008, for the enterprises whose applicable tax rate was 15% before
the promulgation of the New EIT Law , the tax rate will be increased to 18% for
year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year
2012. For the enterprises whose applicable tax rate was 24%, the tax rate will
be changed to 25% from January 1, 2008.
Under the
New EIT Law, an enterprise established outside of 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. Because the New EIT Law and its implementing rules are new, no
official interpretation or application of this new “resident enterprise”
classification is available. Therefore, it is unclear how tax authorities will
determine tax residency based on the facts of each case.
If the
PRC tax authorities determine that we are “resident enterprises” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on offering proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC stockholders and with respect to gains derived by our non-PRC
stockholders from transferring our shares.
Dividends
we received from Beijing JianXin may be subject to PRC withholding
tax.
The New
EIT Law provides that an income tax rate of 20% may be applicable to dividends
payable to non-PRC investors that are “non-resident enterprises” and that do not
have an establishment or place of business in the PRC, or which have such
establishment or place of business in the PRC but the relevant income is not
effectively connected with the establishment or place of business, to the extent
such dividends are derived from sources within the PRC. The income tax for
non-resident enterprises shall be subject to withholding at the income source,
with the payer acting as the obligatory withholder under the New EIT Law, and
therefore such income taxes are generally called withholding tax in practice.
The State Council of the PRC has reduced the withholding tax rate from 20% to
10% through the Implementation
Rules of the New EIT Law. It is currently unclear in what circumstances a
source will be considered as located within the PRC. We are an offshore holding
company. Thus, if we are considered as a “non-resident enterprise” under the New
EIT Law and the dividends paid to us by our subsidiary in the PRC are considered
income sourced within the PRC, such dividends may be subject to a 10%
withholding tax.
The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in our combined company’s tax rate in the future could have a material
adverse effect on our financial conditions and results of
operations.
10
Beijing
JianXin is obligated to withhold and pay PRC individual income tax on behalf of
our employees who are subject to PRC individual income tax. If we fail to
withhold or pay such individual income tax in accordance with applicable PRC
regulations, we may be subject to certain sanctions and other penalties and may
become subject to liability under PRC laws.
Under PRC
laws, Beijing JianXin, our PRC subsidiary, is obligated to withhold and pay
individual income tax on behalf of our employees who are subject to PRC
individual income tax. If the PRC Subsidiary fails to withhold and/or pay such
individual income tax in accordance with PRC laws, it may be subject to certain
sanctions and other penalties and may become subject to liability under PRC
laws.
In
addition, the State Administration of Taxation has issued several circulars
concerning employee stock options. Under these circulars, our employees working
in the PRC (which could include both PRC employees and expatriate employees
subject to PRC individual income tax) who exercise stock options will be subject
to PRC individual income tax. Our PRC subsidiary has obligations to file
documents related to employee stock options with relevant tax authorities and
withhold and pay individual income taxes for those employees who exercise their
stock options. While tax authorities may advise us that our policy is compliant,
they may change their policy, and we could be subject to sanctions.
Regulation
of foreign currency’s conversion into RMB and investment by FIEs may adversely
affect our PRC Subsidiary’s direct investment in China
On August
29, 2008, the SAFE issued a Notice of the General Affairs Department of the
State Administration of Foreign Exchange on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to
further regulate the foreign exchange of FIEs. According to Notice 142, FIEs
shall obtain verification report from a local accounting firm before converting
its registered capital of foreign currency into Renminbi, and the converted
Renminbi shall be used for the business within its permitted business scope.
Notice 142 explicitly prohibits FIEs from using RMB converted from foreign
capital to make equity investments in the PRC, unless the domestic equity
investment is within the approved business scope of the FIE and has been
approved by SAFE in advance.
Regulations
of Overseas Investments and Listings may increase the administrative burden we
face and create regulatory uncertainties.
On August
8, 2006, six PRC regulatory agencies, including MOFCOM, the CSRC, the SASAC, the
SAT, the SAIC and SAFE, jointly amended and released the New M&A Rule, which
took effect as of September 8, 2006. This regulation, among other things,
includes provisions that purport to require that an offshore special purpose
vehicle (SPV) formed for purposes of overseas listing of equity interest in PRC
companies and controlled directly or indirectly by PRC companies or individuals
obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange.
On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by SPVs. The CSRC approval
procedures require the filing of a number of documents with the CSRC and it
would take several months to complete the approval process.
The
application of the New M&A Rule with respect to overseas listings of SPVs
remains unclear with no consensus currently existing among the leading PRC law
firms regarding the scope of the applicability of the CSRC approval
requirement.
11
It is not
clear whether the provisions in the new regulation regarding the offshore
listing and trading of the securities of a SPV applies to an offshore company
such as us which owns equity interest in the PRC Operating Entity. We believe
that the New M&A Rule and the CSRC approval are not required in the context
of the Share Exchange under our transaction because (i) such Share Exchange is a
purely foreign related transaction governed by foreign laws, not subject to the
jurisdiction of PRC laws and regulations; (ii) we are not a SPV formed or
controlled by PRC companies or PRC individuals; (iii) the PRC Operating Entity
is a PRC wholly foreign owned enterprise, which is not owned or controlled by
PRC individuals or entities; (iv) we are owned or substantively controlled by
foreigners; and (v) there is no clear requirement in the New M&A Rule that
would require an application to be submitted to the MOFCOM or the CSRC for the
approval of the listing and trading of our company on the U.S. securities
market. However, we cannot be certain that the relevant PRC government agencies,
including the CSRC, would reach the same conclusion, and we still cannot rule
out the possibility that CSRC may deem that the transactions effected by the
Share Exchange circumvented the New M&A Rule, the PRC Securities Law and
other rules and notices.
If the
CSRC or another PRC regulatory agency subsequently determines that the CSRC’s
approval is required for the transaction, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
this Offering into the PRC, restrict or prohibit payment or remittance of
dividends to us or take other actions that could have a material adverse effect
on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our shares. The CSRC or other PRC
regulatory agencies may also take actions requiring us, or making it advisable
for us, to delay or cancel the transaction.
The New
M&A Rule, along with foreign exchange regulations discussed in the above
subsection, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions,
and we cannot predict how they will affect our acquisition
strategy.
Risks
Associated With Doing Business In China
There are
substantial risks associated with doing business in China, as set forth in the
following risk factors.
Our
operations and assets in China are subject to significant political and economic
uncertainties.
Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
We
derive a substantial portion of ours sales from the PRC.
Substantially
all of our sales are generated from the PRC. We anticipate that sales of our
products in the PRC will continue to represent a substantial proportion of our
total sales in the near future. Any significant decline in the condition of the
PRC economy could adversely affect consumer demand of our products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of exchange
rate fluctuations with respect to any of these currencies. For example, the
value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as
well as supply and demand in the local market. Since 1994, the official exchange
rate for the conversion of Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on
July 21, 2005, the Chinese government changed its policy of pegging the value of
Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. As a result of this policy change, Chinese Renminbi appreciated
approximately 0.09% against the U.S. dollar in 2009 and 3.35% in 2008. It is
possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be
stable against the U.S. dollar or any other foreign currency.
12
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a
translation gain or loss which is recorded as a component of other comprehensive
income. In addition, we have certain assets and liabilities that are denominated
in currencies other than the relevant entity’s functional currency. Changes in
the functional currency value of these assets and liabilities create
fluctuations that will lead to a transaction gain or loss. We have not entered
into agreements or purchased instruments to hedge our exchange rate risks,
although we may do so in the future. The availability and effectiveness of any
hedging transaction may be limited and we may not be able to successfully hedge
our exchange rate risks.
Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of Chinese Renminbi into foreign currency for current account
items, conversion of Chinese Renminbi into foreign exchange for capital items,
such as foreign direct investment, loans or securities, requires the approval of
the State Administration of Foreign Exchange, or SAFE, which is under the
authority of the People’s Bank of China. These approvals, however, do not
guarantee the availability of foreign currency conversion. We cannot be sure
that we will be able to obtain all required conversion approvals for our
operations or that Chinese regulatory authorities will not impose greater
restrictions on the convertibility of Chinese Renminbi in the future. Because a
significant amount of our future revenue may be in the form of Chinese Renminbi,
our inability to obtain the requisite approvals or any future restrictions on
currency exchanges could limit our ability to utilize revenue generated in
Chinese Renminbi to fund our business activities outside of China, or to repay
foreign currency obligations, including our debt obligations, which would have a
material adverse effect on our financial condition and results of
operations
We
may have limited legal recourse under PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted laws and regulations dealing with matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, precedent and experience in implementing, interpreting and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. If our new
business ventures are unsuccessful, or other adverse circumstances arise from
these transactions, we face the risk that the parties to these ventures may seek
ways to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations.
13
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we can not assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
Renminbi is not a freely convertible currency currently, and the restrictions on
currency exchanges may limit our ability to use revenues generated in Renminbi
to fund our business activities outside the PRC or to make dividends or other
payments in United States dollars. The PRC government strictly regulates
conversion of Renminbi into foreign currencies. Over the years, foreign exchange
regulations in the PRC have significantly reduced the government’s control over
routine foreign exchange transactions under current accounts. In the PRC, the
State Administration for Foreign Exchange, or the SAFE, regulates the conversion
of the Renminbi into foreign currencies. Pursuant to applicable PRC laws and
regulations, foreign invested enterprises incorporated in the PRC are required
to apply for “Foreign Exchange Registration Certificates.” Currently, conversion
within the scope of the “current account” (e.g. remittance of foreign currencies
for payment of dividends, etc.) can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities, and, as a result, we are dependent on our relationship with
the local government in the province in which we operate our business. Chinese
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, 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 these
jurisdictions 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.
Future
inflation in China may inhibit our activity to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. These factors have led to the adoption by 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 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.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
We may
have difficulty in hiring and retaining a sufficient number of qualified
employees to work in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards. We may have difficulty establishing adequate management, legal and
financial controls in the PRC.
14
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.
We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, some of our directors and
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon some of our directors and senior executive officers, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws. It would also be difficult for investors to bring an original
lawsuit against us or our directors or executive officers before a Chinese court
based on U.S. federal securities laws or otherwise. Moreover, China does not
have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.
Because
Chinese laws will govern almost all of our business’ material agreements, we may
not be able to enforce our rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities or
capital.
The
Chinese legal system is similar to a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal cases have
little precedential value. Although legislation in the PRC over the past 25
years has significantly improved the protection afforded to various forms of
foreign investment and contractual arrangements in the PRC, these laws,
regulations and legal requirements are relatively new. Due to the limited volume
of published judicial decisions, their non-binding nature, the short history
since their enactments, the discrete understanding of the judges or government
agencies of the same legal provision, inconsistent professional abilities of the
judicators, and the inclination to protect local interest in the court rooms,
interpretation and enforcement of PRC laws and regulations involve
uncertainties, which could limit the legal protection available to us, and
foreign investors. The inability to enforce or obtain a remedy under any of our
future agreements could result in a significant loss of business, business
opportunities or capital and could have a material adverse impact on our
business, prospects, financial condition, and results of operations. In
addition, the PRC legal system is based in part on government policies and
internal rules (some of which are not published on a timely basis or at all)
that may have a retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until some time after the violation. In
addition, any litigation in the PRC, regardless of outcome, may be protracted
and result in substantial costs and diversion of resources and management
attention.
Risks
Related to our Securities
Insiders
have substantial control over us, and they could delay or prevent a change in
our corporate control even if our other stockholders wanted it to
occur.
Our
executive officers, directors, and principal stockholders hold approximately
81.06% of our outstanding Common Stock. Accordingly, these stockholders are able
to control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This could delay
or prevent an outside party from acquiring or merging with us even if our other
stockholders wanted it to occur.
We
cannot assure you that the Common Stock will become liquid or that it will be
listed on a securities exchange.
Currently,
we are quoted on the OTC Bulletin Board, where an investor may find it difficult
to obtain accurate quotations as to the market value of the Common Stock. In
addition, if we fail to meet the criteria set forth in SEC regulations, by law,
various requirements would be imposed on broker-dealers who sell its securities
to persons other than established customers and accredited investors.
Consequently, such regulations may deter broker-dealers from recommending or
selling the Common Stock, which may further affect its
liquidity.
15
There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.
There is
currently only a limited public market for our Common Stock and there can be no
assurance that a trading market will develop further or be maintained in the
future.
The
market price of our Common Stock may be volatile.
The
market price of our Common Stock has been and will likely continue to be highly
volatile, as is the stock market in general, and the market for OTC Bulletin
Board quoted stocks in particular. Some of the factors that may materially
affect the market price of our Common Stock are beyond our control, such as
changes in financial estimates by industry and securities analysts, conditions
or trends in the industry in which we operate or sales of our Common Stock.
These factors may materially and adversely affect the market price of our Common
Stock, regardless of our performance. In addition, the public stock markets have
experienced extreme price and trading volume volatility. This volatility has
significantly affected the market prices of securities of many companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of our Common Stock.
Because
we became a public company by means of a reverse merger, it may not be able to
attract the attention of major brokerage firms.
Additional
risks may exist since we became public through a “reverse merger.” Securities
analysts of major brokerage firms may not provide coverage of our securities
since there is little incentive to brokerage firms to recommend the purchase of
our Common Stock. No assurance can be given that brokerage firms will want to
conduct any secondary offerings on our behalf in the future.
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results. As a
result, current and potential investors could lose confidence in our financial
reporting, which could harm our business and have an adverse effect on our stock
price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to
annually furnish a report by our management on our internal control over
financial reporting. Such report must contain, among other matters, an
assessment by our principal executive officer and our principal financial
officer on the effectiveness of our internal control over financial reporting,
including a statement as to whether or not our internal control over financial
reporting is effective as of the end of our fiscal year. This assessment must
include disclosure of any material weakness in our internal control over
financial reporting identified by management. In addition, under current SEC
rules, we will be required to obtain an attestation from our independent
registered public accounting firm as to our internal control over financial
reporting for our annual report on Form 10-K covering out next fiscal year.
Performing the system and process documentation and evaluation needed to comply
with Section 404 is both costly and challenging. During the course of our
testing we may identify deficiencies which we may not be able to remediate in
time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for
compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of
2002. Failure to achieve and maintain an effective internal control environment
could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the price of our
Common Stock.
16
When
the registration statement required to be filed under the Registration Rights
Agreement becomes effective, there will be a significant number of shares of
Common Stock eligible for sale, which could depress the market price of such
Common Stock.
Following
the effective date of the registration statement required to be filed under the
Registration Rights Agreement, a large number of shares of Common Stock would
become available for sale in the public market, which could harm the market
price of the stock. Further, shares may be offered from time to time in the open
market pursuant to Rule 144, and these sales may have a depressive effect as
well. Although the current holding period under Rule 144 for our Common Stock
ends on March 4, 2011 (which represents one year from the date that we filed
“Form 10 information” with the SEC), in general, and after March 4, 2011, a
person who has held restricted shares for a period of six months may, upon
filing a notification with the SEC on Form 144, sell Common Stock into the
market in an amount equal to the greater of one percent of the outstanding
shares or the average weekly trading volume during the last four weeks prior to
such sale.
Our
Common Stock is considered “penny stock.”
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The market price of the Common Stock is currently less than
$5.00 per share and therefore may be a “penny stock.” Brokers and dealers
effecting transactions in “penny stock” must disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the securities.
These rules may restrict the ability of brokers or dealers to sell the Common
Stock and may affect your ability to sell shares.
The
market for penny stocks has experienced numerous frauds and abuses which could
adversely impact investors in our stock.
OTC
Bulletin Board securities are frequent targets of fraud or market manipulation,
both because of their generally low prices and because OTC Bulletin Board
reporting requirements are less stringent than those of the stock exchanges or
NASDAQ.
Patterns
of fraud and abuse include:
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Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
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Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
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“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
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Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
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Wholesale
dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the inevitable
collapse of those prices with consequent investor
losses.
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Our
management is aware of the abuses that have occurred historically in the penny
stock market.
We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.
We have
never paid any cash dividends on our Common Stock and do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future and any return
on investment may be limited to the value of our Common Stock. We plan to retain
any future earning to finance growth.
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of the Shares being offered by the
Selling Stockholders, although we may receive additional proceeds of up to
$24,948,986.75 if all of the Warrants are exercised for cash. We will not
receive any additional proceeds to the extent that the Warrants are
exercised by cashless exercise. We expect to use the proceeds received from the
exercise of the Warrants, if any, for general working capital
purposes.
17
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following is a discussion and analysis of our financial condition and results of
operations in conjunction with our consolidated financial statements and the
related notes included in the financial statements. Our consolidated financial
statements have been prepared in accordance with the Generally Accepted
Accounting Principles of the United States of America (“US GAAP”). The following
discussion and analysis contain forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements. For additional information regarding these
risks and uncertainties, please see “Risk Factors.”
We
conducted minimal operations during periods up through the date of the Share
Exchange. However, we have included elsewhere in this Report the historical
consolidated financial statements of China LianDi, our recently acquired
subsidiary.
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
financial statements of China LianDi for the fiscal years ended March 31, 2009
and 2008 and for the nine months ended December 31, 2009 and 2008 and should be
read in conjunction with such financial statements and related notes included in
this report.
Reorganization
On
February 26, 2010, we entered into a share exchange agreement, pursuant to which
we acquired all of the outstanding capital shares of China LianDi in exchange
for a controlling interest in our shares of Common Stock.
Basis
of preparation and consolidation and use of estimates
Our
audited consolidated financial statements for the years ended March 31, 2009 and
2008 are prepared in accordance with US GAAP.
The
consolidated financial statements include the financial statements of our
company and our subsidiaries. All significant inter-company transactions and
balances between our company and our subsidiaries are eliminated upon
consolidation.
The
interim consolidated financial statements for the nine months ended December 31,
2009 and 2008 are unaudited. In the opinion of our management, all adjustments
and disclosures necessary for a fair presentation of these interim consolidated
financial statements have been included. The results reported in the
consolidated financial statements for any interim periods are not necessarily
indicative of the results that may be reported for the entire year. These
interim consolidated financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (“SEC”) and
do not include all information and footnotes necessary for a complete
presentation of financial statements in conformity with US GAAP. These unaudited
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes for the years ended
March 31, 2009 and 2008.
The
preparation of these consolidated financial statements in conformity with US
GAAP requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the related disclosure of contingent
assets and liabilities at the date of these consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Our management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Accordingly, actual results may differ from these estimates under different
assumptions or conditions.
18
Recent
Accounting Pronouncements
In June
2009, the FASB established the FASB Accounting Standards Codification™ (“ASC”) as the single
source of authoritative nongovernmental US GAAP. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The ASC supersedes all previously
existing non-SEC accounting and reporting standards. Any prior sources of US
GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (“ASU”). The ASC did not change the
current US GAAP but changed the approach by referencing authoritative literature
by topic (each a “Topic”) rather than by type of standard. The ASC is effective
for interim and annual periods ending after September 15, 2009. Adoption of the
ASC did not have a material impact on our consolidated financial statements, but
references in our notes to consolidated financial statements to former FASB
positions, statements, interpretations, opinions, bulletins or other
pronouncements are now presented as references to the corresponding Topic in the
ASC.
Effective
April 1, 2009, the first day of fiscal 2010, we adopted FASB ASC 350-30 and ASC
275-10-50 (formerly FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142 (“SFAS 142”) Goodwill and Other Intangible
Assets. The adoption of these revised provisions did not have a material
impact on our consolidated financial statements.
Effective
April 1, 2009, the first day of fiscal 2010, we adopted FASB ASC 815-10-65
(formerly SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities), which amends and expands previously
existing guidance on derivative instruments to require tabular disclosure of the
fair value of derivative instruments and their gains and losses. This provision
of the ASC also requires disclosure regarding the credit-risk related contingent
features in derivative agreements, counterparty credit risk, and strategies and
objectives for using derivative instruments. The adoption of this ASC did not
have a material impact on our consolidated financial statements.
Upon
initial adoption of SFAS 157 on April 1, 2008, we adopted FASB ASC 820-10
(formerly FSP FAS 157-2, Effective Date of FASB Statement
157), which deferred the provisions of previously issued fair value
guidance for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. Deferred nonfinancial assets and liabilities
include items such as goodwill and other nonamortizable intangibles. Effective
April 1, 2009, we adopted the fair value guidance for nonfinancial assets and
liabilities. The adoption of FASB ASC 820-10 did not have a material impact on
our consolidated financial statements.
Effective
April 1, 2009, we adopted FASB ASC 810-10-65 (formerly SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51), which
amends previously issued guidance to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this statement requires that the consolidated net
income attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the consolidated income statement. The
adoption of the provisions in this ASC did not have a material impact on our
consolidated financial statements.
Effective
April 1, 2009, we adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. In addition, the provisions in this ASC require that any
additional reversal of deferred tax asset valuation allowance established in
connection with fresh start reporting on January 7, 1998 be recorded as a
component of income tax expense rather than as a reduction to the goodwill
established in connection with the fresh start reporting. We will apply ASC
805-10 to any business combination subsequent to adoption.
Effective
April 1, 2009, we adopted FASB ASC 805-20 (formerly FSP FAS 141R-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies), which amends ASC 805-10 to require that an acquirer
recognize at fair value, at the acquisition date, an asset acquired or a
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value of such an
asset acquired or liability assumed cannot be determined, the acquirer should
apply the provisions of ASC Topic 450, Contingences, to determine
whether the contingency should be recognized at the acquisition date or after
such date. The adoption of ASC 805-20 did not have a material impact on our
consolidated financial statements.
19
Effective
July 1, 2009, we adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair Value
of Financial Instruments), which amends previous guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
The adoption of FASB ASC 825-10-65 did not have a material impact on our
consolidated financial statements.
Effective
July 1, 2009, we adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and FAS
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). Under ASC 320-10-65,
an other-than-temporary impairment must be recognized if the company has the
intent to sell a debt security or the company is more likely than not to be
required to sell the debt security before its anticipated recovery. In addition,
ASC 320-10-65 requires impairments related to credit loss, which is the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis for each security, to be recognized in earnings
while impairments related to all other factors are recognized in other
comprehensive income. The adoption of ASC 320-10-65 did not have a material
impact on our consolidated financial statements.
Effective
July 1, 2009, we adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly),
which provides guidance on how to determine the fair value of assets and
liabilities when the volume and level of activity for the asset or liability has
significantly decreased when compared with normal market activity for the asset
or liability as well as guidance on identifying circumstances that indicate a
transaction is not orderly. The adoption of ASC 820-10-65 did not have a
material impact on our consolidated financial statements.
Effective
July 1, 2009, we adopted FASB ASC 855-10 (formerly SFAS 165, Subsequent Events), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. Adoption of ASC 855-10 did not have a material
impact on our consolidated financial statements.
In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement
Benefit Plan Assets), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. We have
adopted these disclosure requirements in the quarter ended December 31, 2009.
The adoption of these disclosure requirements did not have any material effect
on our Consolidated Financial Statements.
In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157,
Fair Value Measurements). We have adopted Update 2009-05 in the quarter
ended December 31, 2009. The adoption of this Update did not have any material
effect on our Consolidated Financial Statements.
New
accounting pronouncement to be adopted
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140, (codified
by ASU No. 2009-16 issued in December 2009). SFAS No. 166 limits the
circumstances in which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of
Variable Interest Entities. The standard is effective for the first
annual reporting period that begins after November 15, 2009 (i.e. our
fiscal year ending March 31, 2011). Earlier application is prohibited. It is
expected the adoption of this statement will have no material effect on our
consolidated financial statements.
20
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009).
The standard amends FIN No. 46(R) to require a company to analyze whether
its interest in a variable interest entity (“VIE”) gives it a controlling
financial interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. our fiscal year ending
March 31, 2011). Earlier application is prohibited. Comparative disclosures will
be required for periods after the effective date. It is expected that the
adoption of this statement will have no material effect on our consolidated
financial statements.
In
October 2009, the FASB concurrently issued the following ASUs:
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ASU
No. 2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable
Revenue Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13
modifies the revenue recognition guidance for arrangements that involve
the delivery of multiple elements, such as product, software, services or
support, to a customer at different times as part of a single revenue
generating transaction. This standard provides principles and
application guidance to determine whether multiple deliverables exist, how
the individual deliverables should be separated and how to allocate the
revenue in the arrangement among those separate deliverables. The standard
also expands the disclosure requirements for multiple deliverable revenue
arrangements.
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ASU
No. 2009-14—Software (ASC Topic 985): Certain Revenue Arrangements That
Include Software Elements (formerly EITF Issue No. 09-3). ASU No. 2009-14
removes tangible products from the scope of software revenue recognition
guidance and also provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product, such as
embedded software, are within the scope of the software revenue
guidance.
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ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. We expect to apply these ASUs on a prospective basis for revenue
arrangements entered into or materially modified beginning April 1, 2011. We are
currently evaluating the potential impact these ASUs may have on our financial
position and results of operations.
In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other
Options, to provide accounting and reporting guidance for own-share lending
arrangements issued in contemplation of convertible debt issuance. ASU 2009-15
is effective for fiscal year beginning on or after December 15, 2009 with
retrospective application required.
In
January 2010, the FASB issued the following ASU:
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ASU
No. 2010-01—Equity (Topic 505):
Accounting for
Distributions to Shareholders with Components of Stock and Cash.
This update clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a
potential limitation on the total amount of cash that all shareholders can
elect to receive in the aggregate is considered a share issuance that is
reflected in EPS prospectively and is not a stock dividend for purposes of
applying Topics 505 and 260 (Equity and Earnings Per Share). The
amendments in this update are effective for interim and annual periods
ending on or after December 15, 2009 with retrospective
application.
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ASU
No. 2010-02—Consolidation (Topic
810): Accounting and
Reporting for Decreases in Ownership of a Subsidiary. This update
amends Subtopic 810-10 and related guidance to clarify that the scope of
the decrease in ownership provisions of the Subtopic and related guidance
applies to (i) a subsidiary or group of assets that is a business or
nonprofit activity; (ii) a subsidiary that is a business or nonprofit
activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a
business or nonprofit activity for a noncontrolling interest in an entity,
but does not apply to: (i) sales of substantial real estate; and (ii)
conveyances of oil and gas mineral rights. The amendments in this update
are effective beginning the period that an entity adopts FAS 160 (now
included in Subtopic 810-10).
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ASU
No. 2010-05—Compensation—Stock
Compensation (Topic 718): Escrowed Share Arrangements
and the Presumption of Compensation. This update simply codifies
EITF Topic D-110, Escrowed Share Arrangements and the Presumption of
Compensation issued on June 18, 2009. In EITF Topic No. D-110, SEC
staff clarified that entities should consider the substance of the
transaction in evaluating whether the presumption of compensation may be
overcome, including whether the transaction was entered into for a reason
unrelated to employment, such as to facilitate a financing transaction. In
that situation, the staff generally believes that the escrowed shares
should be reflected as a discount in the allocation of
proceeds.
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ASU
No. 2010-06—Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements. This update amends Subtopic 820-10 that
requires new disclosures about transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. This update also amends
Subtopic 820-10 to clarify certain existing disclosures. The new
disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal year beginning after December
15, 2010.
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We expect
that the adoption of the above updates issued in January 2010 will not have any
significant impact on our financial position and results of
operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.
Critical
Accounting Policies and Estimates
The
following discussion and analysis is based upon our consolidated financial
statements, which have been prepared in conformity with US GAAP. Our significant
accounting policies are more fully described in the notes to the consolidated
financial statements attached hereto. However, certain accounting policies and
estimates are particularly important to the understanding of our financial
position and results of operations and require the application of significant
judgment by our management or can be materially affected by changes from period
to period in economic factors or conditions that are outside of the control of
management. As a result they are subject to an inherent degree of uncertainty.
In applying these policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical operations, our future business
plans and projected financial results, the terms of existing contracts, our
observance of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. The following
discusses significant accounting policies and estimates.
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Revenue
recognition
|
Revenue
is recognized when the following four criteria are met as prescribed by US
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 104 (“SAB 104”): (i) persuasive evidence of an arrangement exists,
(ii) product delivery has occurred or the services have been rendered,
(iii) the fees are fixed or determinable, and (iv) collectability is
reasonably assured.
22
Multiple-deliverable
arrangements
We derive
revenue from fixed-price sale contracts with customers that may require us to
deliver equipment with varied performance specifications customized to each
customer and technical services for installation, integration and testing of the
equipment. The contract price is inclusive of the technical services. These sale
contracts include multiple deliverables. Because installation and integration
are essential to the functionality of the equipment and due to the lack of
objective and reliable evidence of fair value for each deliverable included in
the arrangement, a combined unit of accounting is used pursuant to ASC Topic
605, “Revenue Recognition” (formerly EITF 00-21, Revenue Arrangements with Multiple
Elements). In addition, the arrangement generally includes customer
acceptance criteria that cannot be tested before installation and integration at
the customer’s site, therefore revenue recognition is deferred until customer
acceptance, as indicated by an acceptance certificate signed by the
customer.
We may
also provide our customers with a warranty for, in general, one year following
the customer’s acceptance of the installed equipment. Some contracts require
that 5% to 15% of the contract price be held as a retainer for the warranty and
only due for payment by the customer upon expiration of the warranty period. For
those contracts with retainer clauses, we defer the recognition of the amounts
retained as revenue until expiration of the warranty period when collectability
can reasonably be assured. We have not provided for warranty costs for contracts
without retainer clauses, as the relevant costs were insignificant based on
historical experience.
Product
only
Revenue
derived from sale contracts that provide for delivery of products is only
recognized when the titles to the products pass to customers.
Software
sale
We
recognize revenue from the delivery of our optimization software when the
software is delivered and accepted by the customer, pursuant to ASC Topic 985,
Software (formerly
Statement of Position, or SOP 97-2, Software Revenue Recognition,
as amended) and in accordance with SAB 104. Cost of software revenue includes
amortization of software copyright.
Service
We
recognize revenue from provision of services when the service has been
performed, in accordance with SAB 104.
We are
subject to business tax at 5% and value added tax at 17% on the revenues earned
for services provided and products sold in the PRC, respectively. We present our
revenue net of business tax, related surcharges and value added tax, as well as
discounts and returns. There were no product returns for the two years ended
March 31, 2009 and the nine months ended December 31, 2009.
|
·
|
Deferred revenue and
costs
|
Deferred
revenue represents payments received from customers on equipment delivery and
installation contracts prior to customer acceptance. As revenues are deferred,
the related costs of equipment paid to suppliers are also deferred. The deferred
revenue and costs are recognized in the consolidated statements of income in the
period in which the criteria for revenue recognition are satisfied as discussed
above.
|
·
|
Income
taxes
|
We
account for income taxes in accordance with FASB ASC Topic 740. ASC Topic 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 we are able to
realize their benefits, or that future deductibility is
uncertain.
23
In July
2006, the FASB issued ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109), which became
effective for fiscal year beginning after December 15, 2006. The interpretation
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. Our
adoption of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 did not result
in any adjustments to the opening balance of our retained earnings as of April
1, 2007.
British Virgin
Islands
Our
holding company, being incorporated in the British Virgin Islands (“BVI”), is
not subject to any income tax in the BVI.
Hong
Kong
Hua Shen,
PEL HK and Bright Flow are subject to Hong Kong income tax on their taxable
income derived from trade or businesses carried out in Hong Kong at 16.5% for
the year ended March 31, 2009 and the nine months ended December 31, 2009, and
17.5% for the year ended March 31, 2008.
PRC
In March
2007, the PRC government enacted the PRC Enterprise Income Tax Law (“New EIT
Law”), and promulgated related regulation, implementing regulations for the
PRC Enterprise Income Tax Law. The law and regulation became effective
January 1, 2008. The PRC Enterprise Income Tax Law, among other things,
imposes a unified income tax rate of 25% for both domestic and foreign invested
enterprises registered in the PRC.
Beijing
JianXin being established in the PRC is generally subject to PRC income tax.
Beijing JianXin has been recognized by the relevant PRC tax authority as a
software enterprise with its own software product and is entitled to tax
preferential treatment – a two years tax holiday through EIT exemption from its
first profitable year and a 50% reduction on its EIT rate for the three ensuing
years.
|
·
|
Comprehensive
income
|
FASB ASC
Topic 220 Comprehensive
Income establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income and loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Accumulated other comprehensive income arose from
foreign currency translation adjustments.
|
·
|
Foreign
currency
|
We use
United States dollars (“US$”) for financial reporting purposes. Our subsidiaries
maintain their books and records in their respective functional currency,
Chinese Renminbi (“RMB”) and Hong Kong dollars (“HK$”), being the lawful
currency in the PRC and Hong Kong, respectively. Assets and liabilities of the
subsidiaries are translated from RMB or HK$ into US$ using the applicable
exchange rates prevailing at the balance sheet date. Items on the statements of
income and comprehensive income and cash flows are translated at average
exchange rates during the reporting period. Equity accounts are translated at
historical rates. Adjustments resulting from the translation of our financial
statements are recorded as accumulated other comprehensive income.
The
exchange rates used to translate amounts in RMB and HK$ into US$ for the
purposes of preparing our consolidated financial statements are as
follows:
24
December 31, 2009
|
March 31, 2009
|
March 31, 2008
|
|||
Balance
sheet items, except for equity accounts
|
US$1=RMB6.8282
|
US$1=RMB6.8359
|
US$1=RMB7.0190
|
||
US$1=HK$7.7551
|
US$1=HK$7.7502
|
US$1=HK$7.7821
|
|||
Items
in statements of income and cash flows
|
US$1=RMB6.8296
|
US$1=RMB6.8670
|
US$1=RMB7.4606
|
||
US$1=
HK$7.7512
|
US$1=
HK$7.7769
|
US$1=HK$7.7991
|
No
representation is made that the RMB and HK$ amounts could have been, or could
be, converted into US$ at the above rates.
While RMB
is not a freely convertible currency, its value against US$ and other currencies
may fluctuate and is affected by, among other things, changes in China’s
political and economic conditions. Any significant revaluation of RMB may
materially affect our financial condition in terms of US$ reporting. The
exchange rates used to translate amounts in RMB into US$ are based on the rates
quoted by the People’s Bank of China.
A.
|
Results
of Operations for the years ended March 31, 2009 and 2008 and for the nine
months ended December 31, 2009 and
2008
|
The
following table sets forth a summary, for the periods indicated, of our
consolidated results of operations. Our historical results presented below are
not necessarily indicative of the results that may be expected for any future
period. All amounts are presented in US$.
Nine months ended
December 31,
|
Year ended
March 31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
NET
REVENUE
|
$ | 45,604,199 | $ | 8,221,549 | $ | 31,265,285 | $ | 6,849,284 | ||||||||
Cost
of revenue
|
(31,986,380 | ) | (5,868,198 | ) | (21,404,779 | ) | (3,216,227 | ) | ||||||||
Gross
profit
|
13,617,819 | 2,353,351 | 9,860,506 | 3,633,057 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
|
(816,281 | ) | (865,090 | ) | (1,228,481 | ) | (313,251 | ) | ||||||||
General
and administrative
|
(863,061 | ) | (752,782 | ) | (1,177,820 | ) | (263,757 | ) | ||||||||
Research
and development
|
(40,432 | ) | (31,223 | ) | (42,158 | ) | – | |||||||||
Total
operating expenses
|
(1,719,774 | ) | (1,649,095 | ) | (2,448,459 | ) | (577,008 | ) | ||||||||
Income
from operations
|
11,898,045 | 704,256 | 7,412,047 | 3,056,049 | ||||||||||||
Other
income (expenses), net
|
||||||||||||||||
Interest
income
|
48,121 | 31,278 | 48,390 | 21,820 | ||||||||||||
Interest
and bank charges
|
(402,674 | ) | (236,051 | ) | (366,232 | ) | (46,313 | ) | ||||||||
Exchange
gains (losses), net
|
(479,188 | ) | 317,851 | 37,695 | 14,705 | |||||||||||
Value
added tax refund
|
220,758 | – | – | – | ||||||||||||
Other
|
19,072 | (18,162 | ) | (3,196 | ) | (11,433 | ) | |||||||||
(593,911 | ) | 94,916 | (283,343 | ) | (21,221 | ) | ||||||||||
IncIncome
before income tax
|
11,304,134 | 799,172 | 7,128,704 | 3,034,828 | ||||||||||||
Income
tax expense
|
(817 | ) | (3,985 | ) | (41,720 | ) | (23,594 | ) | ||||||||
NET
INCOME
|
11,303,317 | 795,187 | 7,086,984 | 3,011,234 | ||||||||||||
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||||||||||
Foreign
currency translation adjustment
|
17,427 | (14,942 | ) | 43,119 | 12,574 | |||||||||||
|
||||||||||||||||
TOTAL
COMPREHENSIVE INCOME
|
$ | 11,320,744 | $ | 780,245 | $ | 7,130,103 | $ | 3,023,808 |
25
Net
Revenue:
Net
revenue represented our gross revenue net of business tax and related surcharges
as well as discounts and returns.
Nine
months ended
December
31,
|
Year
ended
March
31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
US$
M
|
US$
M
|
US$
M
|
US$
M
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Gross
Revenue
|
45.88 | 8.23 | 31.69 | 6.85 | ||||||||||||
Net
of sales tax
|
(0.28 | ) | (0.01 | ) | (0.43 | ) | – | |||||||||
Net
Revenue
|
45.60 | 8.22 | 31.26 | 6.85 |
The
following tables set out the analysis of our net revenue:
Nine months ended
December 31,
|
Year ended
March 31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
US$ M
|
US$ M
|
US$ M
|
US$ M
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Sales
of industrial valves and other equipment with related technical
services
|
39.15 | 8.22 | 25.95 | 3.90 | ||||||||||||
Sales
of data processing software
|
6.43 | – | 4.79 | 2.95 | ||||||||||||
Technical
consultancy services
|
0.02 | – | 0.52 | – | ||||||||||||
45.60 | 8.22 | 31.26 | 6.85 |
We
generated our revenue from delivery of equipment with the related technical
engineering services (including but not limited to installation, integration and
system testing), and sales of our optimization software. Generally, sales of
equipment, the related technical services as well as the optimization software
are included in one agreement as a total solution package. However, in some
cases, customers sign agreements with us to purchase equipment, software
products or consultancy services individually. Under the total solution
agreements, we do not have objectives or reliable evidence for us to separate
our total revenue amount into separate categories. Therefore, the revenue amount
indicated as sales of software and technical consultancy services in the above
tables was calculated based on total revenue amount of individual
agreements.
26
Our total
gross revenue increased significantly to US$31.7 million for the year ended
March 31, 2009 from US$6.9 million for the year ended March 31, 2008. For the
nine months ended December 31, 2009, our total gross revenue also increased
significantly to US$45.9 million from US$8.2 million for the same period in
2008. This was mainly due to the significant increase of the distribution and
service contracts we signed with our customers and the successful and timely
implementation of our contracts. These achievements were mainly a result of our
successful establishment of an experienced sales and implementation team. As a
result, we have earned a good reputation among our customers.
We have
served the Chinese petroleum and petrochemical industries since 2004 through our
four operating subsidiaries. We spent one year working to establish
relationships with well-known international industrial equipment manufacturers,
such as Cameron, DeltaValve and PoyamValves, which has allowed us to become a
leading distributor in China. We also exerted tremendous efforts in analyzing
the domestic market and the local customers’ needs. As a result, we are one of
the few domestic companies able to provide localized services for international
companies lacking local offices in China. This process also allowed us to meet
the high standards and requirements set by our customers, the major petroleum
and petrochemical companies in China, and to become an approved and respected
vendor. Along with the rapid growth of the petroleum and petrochemical
industries and the rapid growth of the fixed assets investments within these
industries, we successfully increased the size and scope of projects performed
for our customers in the second half of 2008 and all of 2009. With the
successful implementation of our contracts, we were able to recognize revenue
once the products were delivered and the related engineering services were
accepted by our customers.
The
revenue amount we received from our customers for the successful delivery of the
equipment prior to the completion of related technical services and the delivery
of acceptance certificate was recorded as deferred revenue. As of December 31,
2009, approximately US$2.6 million was recorded as deferred revenue. As of the
years ended March 31, 2009 and 2008, approximately US$18.9 million and US$5.7
million were recorded as deferred revenue, respectively.
Cost
of sales:
Cost of
sales consist of the equipment purchase cost recognized in-line with the
contract revenue which is recognized in each reporting period and the
amortization amount of our software copyright. Our total cost of sales increased
significantly to US$21.4 million for the year ended March 31, 2009 from US$3.2
million for the year ended March 31, 2008. For the nine months ended December
31, 2009, our total cost of sales also increased significantly to US$32.0
million from US$5.9 million for the same period in 2008. These increases are
in-line with the increases in our total revenue recognized in each reporting
period.
Gross
margin:
Nine months ended
December 31,
|
Year ended
March 31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
US$ M
|
US$ M
|
US$ M
|
US$ M
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Net
Revenue
|
45.60 | 8.22 | 31.26 | 6.85 | ||||||||||||
Cost
of sales
|
31.98 | 5.87 | 21.40 | 3.22 | ||||||||||||
Gross
margin
|
13.62 | 2.35 | 9.86 | 3.63 | ||||||||||||
Overall
gross margin (%)
|
30 | % | 29 | % | 32 | % | 53 | % |
The level
of our overall gross margin was affected by the relative percentage of our
separate software sales volume for each reporting period. As of the years ended
March 31, 2009 and 2008, and the nine months ended December 31, 2009 and 2008,
there were no software sales being included in the total solution agreement with
our customers. The cost of our software sales consisted of the amortization of
our purchased software copyright. Other direct installation and testing cost
related to the software sales was insignificant based on our historical
experience, and we did not separate these software related expenses from our
total expenses in the normal course of business.
27
The
relatively higher overall gross margin of approximately 53% achieved for the
year ended March 31, 2008 was mainly due to 43% of our revenue coming from
software sales, which we believe have a general gross margin of about 85%-95%.
Gross margin of 32% in fiscal year 2009 dropped from 53% in fiscal year 2008 due
to a greater percentage of equipment sales and related technical services in the
overall revenue mix. We believe that our overall gross margin of the equipment
sales and related technical services is approximately 25%-35%. Our overall gross
margin for the nine months ended December 31, 2009 was relatively lower at
approximately 30%, due to lower margin contracts we signed with a few key
customers in order to further develop these important relationships. Going
forward, we expect modestly higher gross margins due to our improving client
relationships and enhanced reputation as an established innovator in this
industry.
Operating
expense
Our
operating expenses include: selling expenses, general and administrative
expenses and research and development expenses.
The
following tables set forth the analysis of our operating expenses:
Nine months ended
December 31,
|
Year ended
March 31
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
US$ M
|
US$ M
|
US$ M
|
US$ M
|
|||||||||||||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||||||||||
% of
|
% of
|
% of
|
% of
|
|||||||||||||||||||||||||||||
Revenue
|
Revenue
|
Revenue
|
Revenue
|
|||||||||||||||||||||||||||||
Net
revenue
|
45.60 | 100 | % | 8.22 | 100 | % | 31.26 | 100 | % | 6.85 | 100 | % | ||||||||||||||||||||
–
selling expenses
|
0.82 | 2 | % | 0.87 | 11 | % | 1.23 | 4 | % | 0.31 | 5 | % | ||||||||||||||||||||
–
G&A expenses
|
0.86 | 2 | % | 0.75 | 9 | % | 1.18 | 4 | % | 0.26 | 4 | % | ||||||||||||||||||||
–
R&D expenses
|
0.04 | 0.09 | % | 0.03 | 0.4 | % | 0.04 | 0.1 | % | – | – | |||||||||||||||||||||
Total
Operating expenses
|
1.72 | 4 | % | 1.65 | 20 | % | 2.45 | 8 | % | 0.58 | 9 | % |
Selling
expenses:
Our
selling expenses increased significantly to US$1.2 million for the year ended
March 31, 2009 from US$0.3 million for the year ended March 31, 2008. For the
nine months ended December 31, 2009 and 2008, our selling expenses slightly
decreased to US$0.82 million from US$0.87 million for the same period in 2008.
Our selling expenses mainly include freight, marketing research expenses, salary
expenses and traveling expenses.
For the
years ended March 31, 2009 and 2008, the increase in selling expenses was
in-line with the increase in our revenue, which resulted from an increase in
freight charges and traveling expenses as well as salary and bonus expenses. For
the nine months ended December 31, 2009 and 2008, the percentage of total
selling expenses over the relative total net revenue of the corresponding period
decreased to 2% from 11% for the previous reporting period. This is mainly due
to the following reasons: (1) our average total solution business cycle is
normally from nine months to twelve months, and a significant portion of our
services (including but not limited to attending bidding invitation meetings,
providing customers survey and analysis, presenting proposals to customers, and
finalizing total solution packages with customers) were performed before the
contracts were signed, in accordance with the prudence principles set by US GAAP
(our expenses for the “pre-contract” stage were expensed and recorded in
earnings when they occurred); therefore, the amount of “pre-contract” expenses
directly relate to the number of contracts we participated in during each
reporting period but not to the corresponding contract revenue being recognized;
(2) in the early development stage of our company, we had relatively higher
marketing expenses, such as attending forums for industrial technical updates
and participating in industrial training programs; therefore, our expenses
decreased accordingly in the nine months ended December 31, 2009; and (3) our
annual performance based bonuses are normally paid in January or February of
each year, which is typically before the Chinese Spring Festival; therefore, for
accounting periods that did not cover these months, the percentage of salary
expenses was relatively lower than that in a complete fiscal
year.
28
General and administrative
expenses:
Our
general and administrative expenses increased significantly to US$1.2 million
for the year ended March 31, 2009 from US$0.3 million for the year ended March
31, 2008. For the nine months ended December 31, 2009 and 2008, our general and
administrative expenses increased to US$0.9 million for the nine months ended
December 31, 2009 from US$0.8million for the same period in 2008. Our general
and administrative expenses mainly include: (1) salary and benefits for
management and administrative departments (finance, importation, human
resources, administration etc); (2) office rental and other administrative
suppliers; (3) management’s traveling expenses; (4) general communication and
entertainment expenses; and (5) professional service charges (valuation, audit
etc). We expect that our general and administrative expenses will increase in
future periods as we hire additional personnel and incur additional costs in
connection with the expansion of our business. We also expect to incur increased
professional services costs in connection with disclosure requirements under
applicable securities laws as a result of us becoming a public company, and our
efforts to continue to improve our internal control systems in-line with the
expansion of our business.
For the
years ended March 31, 2009 and 2008, our general and administrative expenses
increased due to the following: (1) increase in salary and staff benefits
expenses due to an increase in staff to support the rapid growth of our
business. Our salary expenses increased approximately three times as compared to
the last fiscal year 2008; (2) increase in rental expense associated with the
addition of a new office in May 2008; and (3) increase in other administrative
expenses, such as communication expenses and office supplies, due to rapid
expansion of our business. For the nine months ended December 31, 2009, the
percentage of our total general and administrative expenses relative to total
net revenue of the corresponding period decreased to 2% from 9% for the previous
reporting period.
Research and development
expenses:
Research
and development expenses represent the salary expenses and other related
expenses of our Research and Development department. We expect our research and
development expenses to increase in the future as we plan to hire additional
R&D personnel to strengthen the functionality of our current software
products and develop additional competitive industrial software
products.
Operating
profits
As a
result of the foregoing, our operating profit increased significantly to US$7.4
million for the year ended March 31, 2009 from US$3.1 million for the year ended
March 31, 2008. For the nine months ended December 31, 2009 and 2008, our
operating profit also increased significantly to US$11.9 million from US$0.7
million for the same period in 2008.
Other
income and expenses
Our other
income and expenses mainly include interest income, interest expenses, bank
charges, exchange gains or losses, value added tax refund and other income and
expenses.
Interest income, interest
expenses and bank charges:
Interest
income represents the interest income we earned from cash deposits. The increase
in our interest income was due to the increase in our cash deposits. Interest
expenses relate to the working capital loans we borrowed from our Japanese
shareholder (annual interest rate of 3% to 5%) which were mostly short-term
loans with an effective credit period from three to six months. Bank charges
represent the handling charges for issuance of letters of credit and other bank
transactions.
29
Exchange gains or
losses:
Exchange
gains or losses were considered relatively significant for the nine months ended
December 31, 2009 compared with other reporting periods due to the following
transactions: (1) our Hong Kong subsidiary Hua Shen HK (which keeps its bank
deposits in US dollars during its normal course of business) borrowed pursuant
to a shareholder loan which was approximately JPY500 million from our Japanese
shareholder in June 2009. We recognized approximately US$0.5 million exchange
loss due to the devaluation of US dollar against the Japanese Yuan for the nine
months ended December 31, 2009; (2) we had important contracts signed by our
subsidiary Beijing JianXin (using functional currency RMB) with our
international suppliers in Euro. We recognized approximately US$0.2 million
exchange gain due to the devaluation of the RMB against the Euro. Management
believes that further fluctuation of these currencies will have an impact on
both our operating results and financial positions.
Value added tax
refund
Our PRC
subsidiary Beijing Jianxin has been recognized by the PRC government as a
software enterprise with its own software copyright. Under the PRC government’s
preferential policies for software enterprises, Beijing Jianxin is entitled to a
refund of 14% value added tax in respect to sales of self-developed software
products. We recognize the value added tax refund only when it has been
received. There is no condition to the use of the refund received.
As a
result of the foregoing, our income before income tax increased significantly to
US$7.1 million for the year ended March 31, 2009 from US$3.0 million for the
year ended March 31, 2008. For the nine months ended December 31, 2009 and 2008,
our income before income tax also increased significantly to US$11.3 million
from US$0.8 million for the same period in 2008.
Income
tax expenses
As a
holding company incorporated in the British Virgin Islands (“BVI”), we are not
subject to any income tax in the BVI. Under the Inland Revenue Ordinance of Hong
Kong, only profits arising in or derived from Hong Kong are chargeable to Hong
Kong profits tax, whereas the residence of a taxpayer is not relevant.
Therefore, our Hong Kong subsidiaries Hua Shen HK, PEL HK and Bright Flow
are generally subject to Hong Kong income tax on its taxable income derived
from the trade or businesses carried out by them in Hong Kong at 16.5% for the
year ended March 31, 2009 and the nine months ended December 31, 2009, and 17.5%
for the year ended March 31, 2008.
Our PRC
subsidiary Beijing JianXin is generally subject to PRC enterprise income tax
(“EIT”). However, it has been recognized by the relevant PRC tax authority as a
software enterprise with its own software copyright and is entitled to
preferential tax treatment – a tax holiday for two-years, EIT exemption from its
first profitable year (calendar year 2009) and a 50% reduction on its EIT rate
for the three ensuing years.
Net
income
As a
result of the foregoing, our net income increased significantly to US$7.1
million for the year ended March 31, 2009 from US$3.0 million for the year ended
March 31, 2008. For the nine months ended December 31, 2009 and 2008, our net
income increased significantly to US$11.3 million from US$0.8 million for the
same period in 2008.
B.
|
Liquidity
and capital resources
|
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Restricted cash is excluded from
cash and cash equivalents. As of the years ended March 31, 2009 and 2008 we had
cash and cash equivalents of US$5.0 million and US$6.6 million, respectively. As
of the nine months ended December 31, 2009, we had cash and cash equivalents of
US$18.2 million.
30
Our
liquidity needs include: (i) net cash used in operating activities which
consists of: (a) cash required to import the equipment to be distributed to our
customers, and (b) related freight expenses needed to be borne by our
company; and (ii) our general working capital needs, which include payment
for staff salary and benefits, payment for office rental and other
administrative suppliers, and net cash used in investing activities that consist
of the investments in computers and other office equipment. Before the year
ended March 31 2009, we financed our liquidity needs primarily through working
capital loans obtained from our shareholders. During the nine months ended
December 31, 2009, we generated a positive net cash flow from our operating
activities and repaid a significant portion of the shareholder loans, which
amounted to approximately US$8.5 million.
The
following tables provide detailed information about our net cash flow for the
periods indicated:
Year ended March 31,
|
||||||||
2009
|
2008
|
|||||||
(Amount in thousands of US dollars)
|
||||||||
Net
cash provided by (used in) operating activities
|
(4,353 | ) | (2,155 | ) | ||||
Net
cash provided by (used in) investing activities
|
(13,546 | ) | (1,350 | ) | ||||
Net
cash provided by (used in) financing actives
|
16,371 | 9,901 | ||||||
Effect
of foreign currency exchange rate changes on cash
|
(3 | ) | 13 | |||||
Net
increase/(decrease) in cash and cash equivalents
|
(1,531 | ) | 6,409 |
Nine months ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Amount in thousands of US dollars)
|
||||||||
Net
cash provided by/(used in) operating activities
|
7,841 | (4,041 | ) | |||||
Net
cash provided by/(used in) investing activities
|
13,786 | 6,073 | ||||||
Net
cash provided by financing actives
|
(8,519 | ) | (5,355 | ) | ||||
Effect
of foreign currency exchange rate changes on cash
|
27 | (19 | ) | |||||
Net
increase/(decrease) in cash and cash equivalents
|
13,135 | (3,342 | ) |
Net
cash provided by (used in) operating activates:
Before
March 31, 2009, a very significant portion of our cash was used to import
equipment from our suppliers. Before the equipment was shipped to our customers,
the prepayment was recorded as prepayment to suppliers which was included in
prepaid expenses and other current assets. After the equipment was shipped to
our customer but before it was accepted by our customers, the payments were
recorded as deferred cost. We spent approximately US$14 million and US$5 million
to import equipment for the years ended March 31, 2009 and 2008, respectively,
and approximately US$15 million and US$4 million was recorded as deferred cost
for the year ended March 31, 2009 and 2008 respectively, which resulted in a net
negative operating cash flow for these periods. In the first half of the fiscal
year 2010, the successful completion of our projects and receipt of the final
acceptance from our customers allowed deferred costs to be recognized as cost of
sales along with the related revenue to be recognized in the same period. We
generated a positive operating cash flow of approximately US$7.8 million for the
nine months ended December 31, 2009.
Net
cash provided by (used in) investing activities:
Our net
cash used in investing activities included the following transactions: (1) cash
used in purchasing short-term investments; (2) cash received for selling
short-term investments; (3) cash used in purchasing office equipment, and (4)
cash provided by (used in) resulted from increase or decrease of restricted cash
balance which represents our bank deposits held as collateral for our credit
facilities. Historically, cash provided by investing activities and used in
investing activities except increase or decrease of restricted cash balance were
not considered significant. In February 2009, we loaned approximately US$15
million to a third party, which was paid off as of December 31,
2009.
31
Net
cash provided by (used in) financing activities:
Our
financing activities relate to the loans we borrowed from our shareholders. We
borrowed approximately US$26.0 million and US$10.0 million from our shareholders
to finance equipment purchases from our suppliers as of years ended March 31,
2009 and 2008, respectively. We repaid approximately US$8.5 million to our
shareholders in the nine months ended December 31, 2009. Our shareholders also
forgave approximately US$9.3 million of debt and contributed as capital in the
nine months ended December 31, 2009. As of December 31, 2009, we still owe our
shareholders approximately US$8.4 million, which we believe will be paid off in
a short period with the growth of our business and improvement in our financial
position.
C.
|
Off-Balance
Sheet Arrangements
|
Our
company did not have any significant off-balance sheet arrangement as of
December 31, 2009.
D.
|
Tabular
Disclosure of Contractual
Obligations
|
The
following table sets forth our company’s contractual obligations as of December
31, 2009:
Office Rental
|
||||
(Unaudited)
|
||||
Payable
within:
|
||||
-
Remainder of fiscal year ending March 31, 2010
|
$ | 109,409 | ||
-
fiscal year ending March 31, 2011
|
379,204 | |||
-
fiscal year ending March 31, 2012
|
267,857 | |||
-
fiscal year ending March 31, 2013
|
219,385 | |||
-
fiscal year ending March 31, 2014
|
14,016 | |||
Thereafter
|
- | |||
Total
minimum lease payments
|
$ | 989,871 |
32
DESCRIPTION
OF THE BUSINESS
Company
Background
China
LianDi was
established in July 2004 to serve the largest Chinese petroleum and
petrochemical companies. Through our four operating subsidiaries, which are Hua
Shen Trading (International) Ltd., Petrochemical Engineering Ltd., Bright Flow
Control Ltd. and Beijing JianXin Petrochemical Engineering Ltd., we: (i)
distribute a wide range of petroleum and petrochemical valves and equipment,
including unheading units for the delayed coking process, as well as provide
associated value-added technical services; (ii) provide systems integration
services; and (iii) develop and market proprietary optimization software for the
polymerization process. Our products and services are provided both bundled or
individually, depending on the needs of the customer.
We are a
pioneer in modernizing China’s delayed coking industry, and, as such, are
strategically positioned to capitalize opportunistically on growth opportunities
as new technologies enter our market. For example, as part of our
many potential expansion alternatives, we plan to install in the fall of 2010,
and are now exploring future opportunities to assemble, clean and safe enclosed
unheading units for the delayed coking process at a Chinese facility (unheading
units are used in delayed coking to “unhead” or open the coke drum for the
removal of the residual coke). Any facility like this would be the first of its
kind in the PRC.
Hua Shen
Trading (International) Ltd. (“Hua Shen HK”) is a company organized under the
laws of Hong Kong Special Administration Region of the PRC and was incorporated
in 1999. Beginning in 2005, Hua Shen HK started to distribute industrial
equipment for the petroleum and petrochemical industry, and became a pioneer
company for the imported petroleum and petrochemical equipment industry.
Currently, Hua Shen HK has become a qualified supplier for China Petroleum &
Chemical Corporation, China National Petroleum Corporation, China National
Offshore Oil Corporation, SinoChem Corporation and ChemChina Group
Corporation.
Petrochemical
Engineering Ltd. (“PEL HK”) was established in Hong Kong PRC under the laws of
Hong Kong Special Administration Region of the PRC in 2007. This company
primarily distributes petroleum and petrochemical equipment and provides related
technical services. Currently, PEL HK has become a qualified supplier for China
National Petroleum Corporation, China National Offshore Oil Corporation,
SinoChem Corporation, ChemChina Group Corporation and China Shenhua Energy
Company Limited.
Bright
Flow Control Ltd. was established in Hong Kong PRC in 2007. This company is
mainly engaged in the distribution of petrochemical equipment.
Beijing
JianXin Petrochemical Technology Development Ltd. (“Beijing JianXin”) was incorporated in
Beijing, PRC in 2008, and is a wholly-owned subsidiary of Petrochemical
Engineering Ltd. Beijing JianXin is mainly engaged in distributing industrial
oil and gas equipment and providing related technical and engineering services,
developing and marketing optimization software for the polymerization process
and providing clean technology solutions for the delayed coking industry. Our
customers are large domestic Chinese petroleum and petrochemical companies and
other energy companies. Currently, Beijing JianXin has five software copyrights
and is qualified as a “software enterprise” that can benefit from an income tax
exemption for two years beginning with its first profitable year and a 50% tax
reduction to a rate of 12.5% for the subsequent three years. We believe this
helps strengthen our position as an industry leader in the clean technology area
and contribute to our rapid growth.
33
Share
Exchange Agreement with China LianDi and Private Placement
Share
Exchange Agreement
On
February 26, 2010 (the “Closing Date”), we entered into a Share Exchange
Agreement (the “Exchange Agreement”), by and among (i) China LianDi Clean
Technology Engineering Ltd. (“China LianDi”) and China LianDi’s shareholders, SJ
Asia Pacific Ltd., a company organized under the laws of the British Virgin
Islands, which is a wholly-owned subsidiary of SJI Inc., a Jasdaq listed company
organized under the law of Japan, China Liandi Energy Resources Engineering
Technology Limited, a company organized under the laws of the British Virgin
Islands, Hua Shen Trading (International) Limited, a company organized under the
laws of the British Virgin Islands, Rapid Capital Holdings Limited, a company
organized under the laws of the British Virgin Islands, Dragon Excel Holdings
Limited, a company organized under the laws of the British Virgin Islands, and
TriPoint Capital Advisors, LLC, a limited liability company organized under the
laws of Maryland (collectively, the “China LianDi Shareholders”), who together
owned shares constituting 100% of the issued and outstanding ordinary shares of
China LianDi (the “China LianDi Shares”) and (ii) Reed Buley, our former
principal stockholder (“Buley”). Pursuant to the terms of the Exchange
Agreement, the China LianDi Shareholders transferred to us all of the China
LianDi Shares in exchange for 27,354,480 shares of our Common Stock (such
transaction, the “Share Exchange”). As a result of the Share Exchange, we are
now a holding company, which through our operating companies in the PRC,
provides downstream flow equipment and engineering services to the leading
petroleum and petrochemical companies in the PRC.
Immediately
prior to the Share Exchange, 4,690,000 shares of our Common Stock then
outstanding were cancelled and retired, so that immediately prior to the private
placement described below, we had 28,571,430 shares issued and outstanding.
China LianDi also deposited $275,000 into an escrow account which amount was
paid to Buley, owner of the cancelled shares, as a result of the Share Exchange
having been consummated.
Private
Placement
On
February 26, 2010 and immediately following the Share Exchange, we entered into
a securities purchase agreement (the “Purchase Agreement”) with certain
investors (collectively, the “Investors”) for the issuance and sale in a private
placement of 787,342 units (the “Units”) at a purchase price of $35 per Unit,
consisting of, in the aggregate, (a) 7,086,078 shares of Series A convertible
preferred stock, par value $0.001 per share (the “Series A Preferred Stock”)
convertible into the same number of shares of Common Stock (the “Conversion
Shares”), (b) 787,342 shares of Common Stock (the “Issued Shares”), (c)
three-year Series A Warrants (the “Series A Warrants”) to purchase up to
1,968,363 shares of Common Stock, at an exercise price of $4.50 per share (the
“Series A Warrant Shares”), and (d) three-year Series B Warrants (the “Series B
Warrants” and, together with the Series A Warrants, the “Warrants”) to purchase
up to 1,968,363 shares of Common Stock, at an exercise price of $5.75 per share
(the “Series B Warrant Shares” and, together with the Series A Warrant Shares,
the “Warrant Shares”), for aggregate gross proceeds of approximately $27.56
million (the “Private Placement”). The issuance of the Units was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”), and Regulation D or Regulation S promulgated
thereunder.
In
connection with the Private Placement, we also entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investors, in
which we agreed to file this registration statement with the Securities and
Exchange Commission (the “SEC”) to register for resale the Issued Shares, the
Conversion Shares and the Warrant Shares within 30 calendar days of the Closing
Date, and to have this registration statement declared effective within 150
calendar days of the Closing Date or within 180 calendar days of the Closing
Date in the event the SEC conducts a full review of this registration
statement. We agreed to keep this registration statement continuously
effective under the Securities Act until such date as is the earlier of the date
when all of the securities covered by this registration statement have been sold
or the date on which such securities may be sold without any restriction
pursuant to Rule144. If we do not comply with the foregoing
obligations under the Registration Rights Agreement, we will be required to pay
cash liquidated damages to each investor, at the rate of 2% of the applicable
subscription amount for each 30 day period in which we are not in compliance;
provided, that such
liquidated damages will be capped at 10% of the subscription amount of each
investor and will not apply to any shares that may be sold pursuant to Rule 144
under the Securities Act, or are subject to an SEC comment with respect to Rule
415 promulgated under the Securities Act.
We also
entered into a make good escrow agreement with the Investors (the “Securities
Escrow Agreement”), pursuant to which China LianDi Energy Resources Engineering
Technology Ltd. (the “Principal Stockholder”), an affiliate of Jianzhong Zuo,
our Chief Executive Officer, President and Chairman, delivered into an escrow
account 1,722,311 shares of Common Stock (the “Escrow Shares”) to be used as a
share escrow for the achievement of a fiscal year 2011 net income performance
threshold of $20.5 million. With respect to the 2011 performance year, if we
achieve less than 95% of the 2011 performance threshold, then the Escrow Shares
for such year will be delivered to the Investors in the amount of 86,115.55
shares (rounded up to the nearest whole share and pro rata based on the number
of shares of Series A Preferred Stock owned by such Investor at such date) for
each full percentage point by which such threshold was not achieved up to a
maximum of 1,722,311 shares. Any Escrow Shares not delivered to any Investor
because such Investor no longer holds shares of Series A Preferred Stock or
Conversion Shares, or because the 2011 performance threshold was met, shall be
returned to the Principal Stockholder.
34
For the
purposes of the Securities Escrow Agreement, net income is defined in accordance
with US GAAP and reported by us in our audited financial statements for fiscal
year ended 2011; provided, however, that net income for fiscal year ended 2011
shall be increased by any non-cash charges incurred (i) as a result of the
Private Placement, including without limitation, as a result of the issuance
and/or conversion of the Series A Preferred Stock, and the issuance and/or
exercise of the Warrants, (ii) as a result of the release of the Escrow Shares
to the Principal Stockholder and/or the Investors, as applicable, pursuant to
the terms of the Securities Escrow Agreement, (iii) as a result of the issuance
of ordinary shares of the Principal Stockholder to its PRC shareholders, upon
the exercise of options granted to such PRC shareholders by the Principal
Stockholder, as of the date of the Securities Escrow Agreement, (iv) as a result
of the issuance of Warrants to any placement agent and its designees in
connection with the Private Placement, (v) the exercise of any Warrants to
purchase Common Stock outstanding and (vi) the issuance under any
performance based equity incentive plan that we adopt. Net income will also be
increased to adjust for any cash or non-cash charges resulting from the payment
of dividends on the Series A Preferred Stock in connection with the Private
Placement.
On the Closing Date, we and China
LianDi Energy Resources Engineering Technology Ltd., an affiliate of Jianzhong
Zuo, our Chief Executive Officer, President and Chairman, entered into a lock-up
agreement whereby such entity is prohibited from selling our securities until
six (6) months after the effective date of the registration statement required
to be filed under the Registration Rights Agreement. For one (1) year
thereafter, it will be permitted to sell up to one-twelfth (1/12) of its initial
holdings every month.
Industry
and Market Overview
China
Petroleum and Petrochemical Industries
China
consumed an estimated 7.8 million barrels per day (bbl/d) of oil in 2008, making
it the second-largest oil consumer in the world behind the United States. During
that same year, China produced an estimated 4.0 million bbl/d of total oil
liquids, of which 96 percent was crude oil. China’s net oil imports were
approximately 4.1 million bbl/d in 2009, again making it the second-largest net
oil importer in the world behind the United States. Energy Information
Administration (EIA) forecasts that China’s oil consumption will continue to
grow during 2010, with oil demand reaching 8.2 million bbl/d in 2010. This
anticipated growth of over 390,000 bbl/d between 2008 and 2010 represents 31
percent of the projected world oil demand growth in non-OECD countries according
to the July 2009 Short-Term Energy Outlook. According to Oil & Gas Journal
(OGJ), China had 16 billion barrels of proven oil reserves as of January
2009.
China’s
national oil companies (NOCs) wield a significant amount of influence in China’s
oil sector. Between 1994 and 1998, the Chinese government reorganized most
state-owned oil and gas assets into two vertically integrated firms: the China
National Petroleum Corporation (CNPC) and the China Petroleum and Chemical
Corporation (Sinopec). These two conglomerates operate a range of local
subsidiaries, and together dominate China’s upstream and downstream oil markets.
CNPC remains the much larger NOC and is the leading upstream participant in
China. CNPC, along with its publicly-listed arm PetroChina, accounts for roughly
60 percent and 80 percent of China’s total oil and gas output, respectively.
Sinopec, on the other hand, has traditionally focused on downstream activities
such as refining and distribution with these sectors making up 76 percent of the
company’s revenues in 2007.
Additional
state-owned oil firms have emerged in the competitive landscape in China over
the last several years. The China National Offshore Oil Corporation (CNOOC),
which is responsible for offshore oil exploration and production (“E&P”),
has seen its role expand as a result of growing attention to offshore zones.
Also, the Company has proven to be a growing competitor to CNPC and Sinopec by
not only increasing its E&P expenditures in the South China Sea but also
extending its reach into the downstream sector particularly in the southern
Guangdong Province through its recent 300 billion yuan investment plan. The
Sinochem Corporation and CITIC Group have also expanded their presence in
China’s oil sector, although their involvement in the oil sector remains dwarfed
by CNPC, Sinopec, and CNOOC. The government intends to use the stimulus plan to
enhance energy security and strengthen Chinese NOCs’ global position by offering
various incentives to invest in both upstream and downstream oil
markets.
35
China
Oil Refineries
China had
6.4 million bbl/d of crude oil refining capacity at 53 facilities as of January
2009, according to OGJ. Other sources report higher refinery capacity at the end
of 2008. China’s National Energy Administration’s (NEA) goal is to raise
refining capacity to 8.8 million bbl/d by 2011. According to the BP Statistical
Review of World Energy, refinery utilization in China increased from 67 percent
in 1998 to 89 percent in 2008.
Sinopec
and CNPC are historically the two dominant providers in China’s oil refining
sector, accounting for 50 percent and 35 percent of the capacity, respectively.
However, CNOOC entered the downstream arena and commissioned the company’s first
refinery, the 240,000 bbl/d Huizhou plant, in March 2009 in order to process the
high-sulfur crudes from its Bohai Bay fields. Sinochem has also proposed a
number of new refineries, and national oil companies from Kuwait, Saudi Arabia,
Russia, and Venezuela have entered into joint-ventures with Chinese companies to
build new refining facilities. Sinopec and PetroChina plan to commission about
450,000 bbl/d and 400,000 bbl/d, respectively, of expansion and greenfield
capacity by 2011 according to industry sources. In light of the recent economic
downturn, some firms have postponed launching refinery projects until product
demand picks up again. Also, the National Development and Reform Commission
(NDRC) outlined in May 2009 that it plans to eliminate refineries of 20,000
bbl/d with inefficient equipment and ban any new projects in efforts to
encourage economies of scale and energy efficiency measures. In addition,
PetroChina (CNPC) is branching out to acquire refinery stakes in other countries
in efforts to move downstream and secure more global trading and arbitrage
opportunities. The Company recently purchased a 45.5 percent stake in Singapore
Petroleum for $1 billion, and received approval to purchase 49 percent of Nippon
Oil’s Osaka refinery in Japan in June 2009.
The
expansive refining sector has undergone modernization and consolidation in
recent years, with dozens of small refineries, accounting for about 20 percent
of total fuel output, shut down and larger refineries expanding and upgrading
their existing systems.
China
Oil Prices
The
Chinese government decided to launch a fuel tax and reform of the country’s
product pricing mechanism in December 2008 to tie retail oil product prices more
closely to international crude oil market, attract downstream investment, ensure
profit margins for refiners, and reduce energy intensity caused by distortions
in the market pricing. When international crude oil prices skyrocketed in
mid-2008, the capped fuel prices downstream caused some refiners, especially the
smaller refiners, to cease production causing supply shortfalls and the major
NOCs, particularly Sinopec, to incur substantial profit losses. In order to stem
state-refiners’ losses during the first half of last year, the government issued
value added tax rebates on fuel imports and some direct subsidies.
China is
currently taking advantage of the economic recession to liberalize its pricing
system and encourage more market responsiveness. When fuel prices fluctuate more
than 4 percent of the average crude oil price of three grades for over 22
consecutive working days, the NDRC can alter the ex-refinery price. The
government also sets transportation charges, processing costs, and refining
margins (5 percent when crude prices are below $80/bbl). Additionally, a
consumption tax and value-added tax is added for gasoline and diesel fuels.
These taxes are set to replace six transportation fees established by local
authorities.
36
Imports
of Heavy Crude Oil
China has
swelled into the world’s second-largest consumer of oil. According to government
statistics, China’s imports have grown from about 6 percent of its oil needs a
decade ago, to roughly one-third in 2004 and are forecast to rise to 60 percent
by 2020. China has emerged from being a net oil exporter in the early 1990s to
become the world’s second-largest net importer of oil in 2009. Despite the
economic slowdown in exports and domestic demand in the past year, China’s
demand for energy remains high. China has turned to the Middle East, South
America, Russia, Central Asia and Africa for sources of crude oil. The Middle
East remains the largest source of China’s oil imports, although African
countries also contribute a significant amount. According to FACTS Global
Energy, China imported 3.6 million bbl/d of crude oil in 2008, of which
approximately 1.8 million bbl/d (50%) came from the Middle East, 1.1 million
bbl/d (30%) from Africa, 101,000 bbl/d (3%) from the Asia-Pacific region, and
603,000 bbl/d (17%) came from other countries. In 2008, Saudi Arabia and Angola
were China’s two largest sources of oil imports, together accounting for over
one-third of China’s total crude oil imports. Recently, China has taken bold
steps to significantly increase its oil imports from Venezuela. The Chinese
government has signed contracts with Venezuela for purchase contracts and
production projects, as part of an effort to diversify and increase oil imports
from Venezuela to 1 million bbl/d from the existing 400,000 bbl/d. In addition,
China’s largest oil producer, China National Petroleum Corp (CNPC) and China
National Offshore Oil Corp (CNOOC) have signed agreements to develop oil and gas
resources in Venezuela. The sound relationship between the Chinese and
Venezuelan governments will contribute to a greater number of partnerships
between Chinese oil production companies and the Venezuelan oil and gas
resources, increasing oil imports from Venezuela.
As China
diversifies its crude oil import sources and expands oil production
domestically, state-owned refiners will have to adjust to the changing crude
slate. Traditionally, many of China’s refineries were built to handle relatively
light and sweet crude oils, such as Daqing and other domestic sources. However,
the viscosity and specific gravity of crude oil from South America and Africa
are both higher than the other countries from which China traditionally acquired
imports, especially the heavy crude oil with high resin from Venezuela. Because
delayed coking unit technology is necessary for processing this crude oil, the
increase in heavy crude oil imports will increase demand for unheading units.
Furthermore, China’s growing dependence on heavy crude oil imports from
Venezuela will make it necessary for refineries across China to acquire advanced
technology for the delayed coking process.
China
Environmental Regulations
In recent
years, the Chinese government has made protection of the environment a priority,
strengthening its environmental legislation. In 2005, the Chinese government’s
State Environmental Protection Administration enacted a new, far-reaching
regulatory and environmental initiative including reduced total emissions by 15%
and increasing China’s energy efficiency by 30%. Furthermore, each province in
China has followed the central government’s directive and established their own
target to pollution issues that affect their province. Most of the provinces
pollution reduction targets have focused on air pollution caused largely by
sulfur dioxide emissions and water pollution. Also, since China entered the
World Trade Organization in 2001 and has begun to play an increasingly larger
role in international politics, the government has been held more accountable
for its climate footprint. At the Copenhagen Climate Conference, the central
Chinese government pledged to cut emissions by 40 percent and is expected to
agree to new targets to reduce pollution at the next U.N. Climate Summit in
Mexico City December 2010.
Our
Principal Products and Services
Our
principal products and services include:
|
·
|
distributing
a wide range of petroleum and petrochemical valves and equipment,
including unheading units for the delayed coking process, as well as
providing associated value-added technical
services;
|
|
·
|
providing
systems integration services; and
|
|
·
|
developing
and marketing proprietary optimization software for the polymerization
process.
|
Enclosed
Unheading Units
We have
had close relationships with manufacturers of industrial valves and delayed
coking unheading systems. We plan to install the first totally enclosed
unheading units in China in the fall of 2010 for Sinochem Quanzhou. In addition,
as part of one of our many potential growth strategies, we are in discussions to
invest in the first facility in China to manufacture select supporting
components and assemble DeltaValve’s unheading units. Investing in a facility
like the potential venture with DeltaValve would allow us to significantly
increase our gross margin on the sale of unheading units.
37
The
DeltaValve unheading unit has significant safety advantages over all other
currently available unheading equipment because it eliminates exposure risks to
personnel and the atmosphere. With a fully automated system, workers are safely
able to conduct unheading delayed coking remotely and mitigate potential
dangers. In addition, these unheading units significantly increase refinery
throughput and lower operation costs.
An
unheading unit with one-million ton annual capacity can generate a total
economic benefit of $7.4 million for our customers for the following
reasons:
|
·
|
cost
per unit installation is $3 million, and total cost for an upgraded
delayed coking system is recouped typically within one
year;
|
|
·
|
30%-40%
less expensive to buy than the competing product from Z&J Technologies
GmbH;
|
|
·
|
shorter
cycle times and reduced maintenance
expenses;
|
|
·
|
lower
costs for water usage and wastewater
treatment;
|
|
·
|
increased
ability to process inferior grades of crude oil;
and
|
|
·
|
25%
tax deduction for energy saving and environment-friendly
products.
|
Delayed
coking, a thermal cracking process achieved through heating crude oil to
extremely high temperatures and pumping it into large pressurized drums, is the
most efficient and cost-effective solution for refining a range of
inferior-grade domestic and imported crude oil.
Currently
there are 120 existing coking units in China that could potentially benefit from
a totally enclosed unheading unit. The number of coking units is expected to
grow at a rate of 10% annually and is projected to have a market size of almost
$1 billion over the next 10 years, of which we expect significant
penetration.
Distribution
& Technical Services
We
distribute hundreds of different types of valves and related equipment from
manufacturers/suppliers such as Cameron (NYSE: CAM) and Poyam Valves. We also
provide related value-added technical services to manufacturers and petroleum
and petrochemical companies. We provide invaluable locally customized technical
services for international companies who sell products in China but who do not
have local offices. For these companies, we offer our services by enlisting our
engineers on the ground to provide localized services for their products. Our
technical services include, but are not limited to: communicating with the
R&D arms of the large Chinese oil companies; verifying and confirming the
specification of products; and product inspecting, maintenance and debugging
assistance.
Currently
we are negotiating with a large manufacturer to set up its valve technology
service center in China. We will provide their technical services and conduct
marketing campaigns in the Chinese market. We have also provided technical
services to principle European manufacturers and assisted one to become the
vender of block valves for the second line in the West-East Gas Pipeline
Project.
Systems
Integration
We
provide systems integration services for self-control of the chemical production
process. This process includes integration of storage operations and
transportation of valve instruments from tank farms, as well as providing
upgrading services of programmable logic controllers with instrument systems.
Currently, we are undertaking systematic integrations of operations in several
chemical plant tank farm projects.
Software
Polymerization
reaction is very important in the petrochemical process. It converts ethylene,
propylene and other major gas-phase products into solid products which in turn
can be further processed. Polymerization provides raw materials for
downstream industries. The conditions important to the polymerization reaction
process are mainly temperature, pressure, flow, liquid level and the catalyst.
Prior to using a new process or before a catalyst is put into mass production,
as well as before products are officially used, the process needs to be tested.
Our software helps test the processes by producing data collection, performance
analysis and process optimization indications. Polymerization reaction data
collection and analysis software provides production process automation control.
Our software can also be applied to other industries including the coal and
steel industries.
38
Depending
on customers’ needs, our products and services may be bundled together or
provided individually.
Our
Competitive Strengths
As an
industry innovator, our competitive strengths include:
Product advantages
We import
high-quality petroleum and petrochemical valves and distribute them to our
domestic clients who are large petroleum and petrochemical companies located and
operating in China. Our suppliers are global and reputable industrial equipment
manufacturers with leading technology among their competitors. Our international
suppliers include Cameron, DeltaValve and Poyam Valves. We also work with the
R&D subsidiaries of CNPC and Sinopec, as well as other independent research
institutes, to determine standards in the petroleum and petrochemical
industries. Our software is used by petrochemical companies during the
polymerization reaction of ethylene production for data collection, performance
analysis and process optimization. We believe it has several advantages over
similar products, including lower costs, better quality control, improved
process optimization and customization to individual customers.
Client
relationship advantages
Most of
the petroleum and petrochemical companies are very large state-owned enterprises
in China which set high standards and thresholds for products and services
providers. We have agreements with the three largest industry leaders, China
National Offshore Oil Corporation, Sinochem Group and China National Petroleum
Corporation, to provide equipment and technical services to them. Our key
management personnel have at least 10-20 years of experience in the industry and
have established broad channels and networks within the industry.
Research
and development advantage
We have
partnered with the leading industrial research and development institutions
throughout China to develop standards for the petroleum and petrochemical
industries, which has led to the development of our integrated products and
services and their achievement of a higher level of technological sophistication
as compared with our competitors. We currently have approximately 120 employees,
many from China’s largest petroleum and petrochemical companies and research and
development subsidiaries and possessing extensive technology and R&D
capabilities.
Comprehensive
localized system integration advantage
We have
accumulated more than five years of comprehensive system integration services
experience with a relatively stable base of clients and products and an
effective operational team. This experience has allowed us to emerge as a
high-end integrator of industrial products and related engineering services. We
have the ability to understand our customers’ current systems and needs, and
then design the total solution to integrate international products and
technologies with their local systems.
Clean
technology advantage
We are a
pioneer in modernizing China’s delayed coking industry by being the first
company to bring DeltaValve’s affordable, environment-friendly, safe and
maintenance-free coke-drum enclosed unheading system to the Chinese marketplace.
The delayed coking process produces more pollution than any other refining step.
The totally enclosed unheading units we distribute and install significantly
reduce emissions. Given the Chinese government’s aggressive industry targets to
reduce air pollution, traditional delayed coking units will have to be updated.
In addition, our product is superior in price, performance and
reliability.
39
Benefit
from income tax policy
Our PRC
Subsidiary, Beijing JianXin, has been qualified as a software enterprise by the
related government authorities. Accordingly, Beijing JianXin can benefit from an
income tax exemption for two years beginning with its first profitable year of
2009 and a 50% tax reduction to a rate of 12.5% for the subsequent three years.
This tax benefit will reduce the capital demands in our operating activities and
allow us to invest more funding into long-term projects and to better serve our
clients.
Elite
workforce
Currently,
many of our senior managers and engineers have significant prior experience in
the petroleum and petrochemical industry. Many of our employees have graduated
from petrochemical based institutions and colleges. Our executive team has over
100 years of management experience in the aggregate and provides excellent
operating and technical administration for our company.
Healthy
financial growth
We are
projecting 100% year-to-year net income growth for fiscal year 2010 ending March
31, 2010, compared with that of 2009, and 67.7% year-to-year projected organic
net income growth to $25 million for fiscal year 2011.
Supplier
Relationships
We
distribute high quality, world-renowned products of international suppliers,
which affords us a distinctive reputation and significant profit. We have close
relationships with world-famous brand name manufacturers, and remain the largest
distributor of many of their products in China.
Growth
Strategy
We plan
to strengthen our leading position as the industry innovator and achieve rapid
growth through the following strategies:
|
·
|
Product
localization: we plan to localize our products by establishing a
manufacturing and assembly facility in China, which will significantly
decrease our costs and increase our competitive
strength;
|
|
·
|
Strengthen
our research and development effort to increase the functions and the
stability of our optimization software to increase the sales volume of our
software products which have a relatively high gross margin;
and
|
|
·
|
Expand
our distribution channels and network by increasing the sales force to
collect more industrial information and enhance the communication with
existing potential clients.
|
Corporate
Structure
Our
current corporate structure is set forth below:
40
Competition
China
LianDi competes against other companies which seek to provide the Chinese
petroleum refinery industry with a wide range of petroleum and petrochemical
valves and equipment and associated technical and engineering services. Much
like China LianDi, these companies compete on the basis of cost, the size of
their distribution product portfolio, and level of technical and engineering
expertise. In addition, similar products to those distributed by China LianDi
are available from domestic Chinese and foreign manufacturers and compete with
the products in our distribution portfolio.
Z&J
Technologies GmbH is a German industrial valve company and a direct competitor
to China LianDi/DeltaValve’s enclosed unheading units. Honeywell is also a
competitor of China LianDi’s optimization software.
Methods
of Distribution
We
maintain aggressive sales channels and distribution networks in China with an
approximately 21 member sales team. We have spent significant amount of time
developing relationships with international equipment suppliers, and with the
PRC’s largest petroleum and petrochemical companies.
Our
Suppliers
We
maintain close relationships with, and distribute products for large, industry
leading valve and equipment manufacturers, including Cameron, Poyam Valves,
Rotork, Perar S.p.A, Kanon Loading Equipment BV, and DeltaValve. Most of our
suppliers renew annually, though some suppliers have signed multi-year
agreements. We expect all existing supplier relationships will continue on an
ongoing basis, and that going forward we will add new partners to diversify our
supplier base.
Significant
Customers
For nine
months ended December 31, 2009, China LianDi’s major customer breakdown as a
percentage of revenues was as follows: Sinopec: 54%; CNPC: 17%; and other: 29%.
We are dependent on China’s largest petroleum and petrochemical companies in our
distribution business. As we grow our business, we intend to diversify our
customer relationships that can benefit from our technology and software
business.
41
Research
& Development
We have
partnered with the leading industrial research and development institutions
throughout the PRC to develop standards for the petroleum and petrochemical
industries, which has led to the development of our integrated products and
services and their achievement of a higher level of technological sophistication
as compared with our competitors.
We
currently have approximately 40 employees dedicated to research and development
activities. During the fiscal year ended March 31, 2009, we spent approximately
$42,158 on such activities.
Government
Regulation
Our
business operations do not require any special government licenses or
permits.
Compliance
with Environmental Laws
We
believe that we are in compliance with the current material environmental
protection requirements. Our costs attributed to compliance with
environmental laws is negligible.
Intellectual
Property
The PRC
has adopted legislation governing intellectual property rights, including
patents, copyrights and trademarks. The PRC is a signatory to the main
international conventions on intellectual property rights and became a member of
the Agreement on Trade Related
Aspects of Intellectual Property Rights upon its accession to the WTO in
December 2001.
We have
five software copyright certificates issued by the State Copyright Office of the
PRC as listed below:
Names of Software
|
Registration Number
|
|
化工生产系统数据处理平台软件V1.0
|
2008SRBJ6676
|
|
Software
V1.0 of Data Processing Platform for Chemical Production
System.
|
||
油气管线调度管理平台软件
V1.0
|
2009SRBJ5672
|
|
Software
V1.0 of Dispatch Management Platform for Oil and Gas
Pipeline
|
||
油气管线计量站自动标定软件
V1.0
|
2009SR036455
|
|
Software
V1.0 of Automatic Calibration for Oil and Gas Pipeline Measuring
Station
|
||
数据采集的后处理平台软件
V1.0
|
2009SR036454
|
|
Software
V1.0 of Data Collection Post-Processing Platform
|
||
油库信息管理软件V1.0
|
2009SRBJ5783
|
|
Software
V1.0 of Oil Depot Information Management
|
|
With this
intellectual property, we believe we can facilitate the services that are in
demand by our customers.
Legal
Proceedings
We are
currently not a party to any material legal or administrative proceedings and
are not aware of any pending or threatened legal or administrative proceedings
against us in all material aspects. We may from time to time become a party to
various legal or administrative proceedings arising in the ordinary course of
our business.
42
Property
The
following table summarizes the location of real property we lease. As all
property in China is state owned, neither we, nor any company, owns any real
property.
Item
|
Address
|
Leased/Owned
|
||
1
|
Unit
1805.18/F, Tower Two, Lippo Centre, 89 Queensway, Admiralty, Hong
Kong
|
Leased
|
||
2
|
Unit
401-405.4/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road,
Haidian District, Beijing, China
|
Leased
|
||
3
|
Unit
702.7/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian
District, Beijing, China
|
Leased
|
Employees
As of
March 26, 2010, we had 124 full-time employees, including 40 in technology and
R&D; 39 engineers; 21 in sales; 6 members of management and 18 others,
including accounting, administration and human resources.
We are
compliant with local prevailing wage, contractor licensing and insurance
regulations, and have good relations with our employees.
As
required by PRC regulations, we participate in various employee benefit plans
that are organized by municipal and provincial governments, including pension,
work-related injury benefits, maternity insurance, medical and unemployment
benefit plans. We are required under PRC laws to make contributions to the
employee benefit plans at specified percentages of the salaries, bonuses and
certain allowances of our employees, up to a maximum amount specified by the
local government from time to time. Members of the retirement plan are entitled
to a pension equal to a fixed proportion of the salary prevailing at the
member’s retirement date.
Generally
we enter into a standard employment contract with our officers and managers for
a set period of years and a standard employment contract with other employees
for a set period of years. According to these contracts, all of our employees
are prohibited from engaging in any activities that compete with our business
during the period of their employment with us. Furthermore, the employment
contracts with officers or managers include a covenant that prohibits officers
or managers from engaging in any activities that compete with our business for
two years after the period of employment.
Corporation
Information
Our
principal executive offices are located at Unit 401-405.4/F, Tower B,
Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China
100089, Tel: (86) (0)10-5872 0171, Fax: (86) (0)10-5872 0181.
PRC
Government Regulations
Our
operations are subject to numerous laws, regulations, rules and
specifications of the PRC relating to various aspects. We are in compliance in
all material respects with such laws, regulations, rules, specifications
and have obtained all material permits, approvals and registrations relating to
human health and safety, the environment, taxation, foreign exchange
administration, financial and auditing, and labor and employments. We make capital
expenditures from time to time to stay in compliance with applicable laws and
regulations. Below we set forth a summary of the most significant PRC
regulations or requirements that may affect our business activities operated in
the PRC or our shareholders’ right to receive dividends and other distributions
of profits from Beijing JianXin, a wholly foreign owned enterprise under the PRC
laws.
43
Business
license
Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. The business license of Beijing Jianxin covers
its present business of distributing industrial oil and gas equipment and
providing related technical and engineering services, developing and marketing
optimization software for the polymerization process and providing clean
technology solutions for the delayed coking industry. Prior to expanding Beijing
Jianxin’s business beyond that of its business license, we are required to apply
and receive approval from the PRC government.
Annual
Inspection
In
accordance with relevant PRC laws, all types of enterprises incorporated under
the PRC laws are required to conduct annual inspections with the State
Administration for Industry and Commerce of PRC or its local branches. In
addition, foreign-invested enterprises are also subject to annual inspections
conducted by PRC government authorities. In order to reduce enterprises’ burden
of submitting inspection documentation to different government authorities, the
Measures on Implementing Joint
Annual Inspection issued by the PRC Ministry of Commerce together with
other six ministries in 1998 stipulated that foreign-invested enterprises shall
participate in a joint annual inspection jointly conducted by all relevant PRC
government authorities. Beijing Jianxin, as a foreign-invested enterprise, has
participated and passed all such annual inspections since its establishment on
May 6, 2008.
Employment
laws
We are
subject to laws and regulations governing our relationship with our employees,
including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These
include local labor laws and regulations, which may require substantial
resources for compliance.
China’s National Labor Law,
which became effective on January 1, 1995, and China’s National Labor Contract
Law, which became effective on January 1, 2008, permit workers in both
state and private enterprises in China to bargain collectively. The National Labor Law and the
National Labor Contract
Law provide for collective contracts to be developed through
collaboration between the labor union (or worker representatives in the absence
of a union) and management that specify such matters as working conditions, wage
scales, and hours of work. The laws also permit workers and employers in all
types of enterprises to sign individual contracts, which are to be drawn up in
accordance with the collective contract.
Foreign
Investment in PRC Operating Companies
The Foreign Investment Industrial
Catalogue jointly issued by the Ministry of Commerce, or the MOFCOM, and
the National Development and Reform Commission, or the NDRC, in 2007 classified
various industries/businesses into three different categories: (i) encouraged
for foreign investment; (ii) restricted to foreign investment; and (iii)
prohibited from foreign investment. For any industry/business not covered by any
of these three categories, they will be deemed industries/businesses permitted
to have foreign investment. Except for those expressly provided restrictions,
encouraged and permitted industries/businesses are usually 100% open to foreign
investment and ownership. With regard to those industries/businesses restricted
to or prohibited from foreign investment, there is always a limitation on
foreign investment and ownership. Beijing JianXin’s business does not fall under
the industry categories that are restricted to, or prohibited from foreign
investment and is not subject to limitation on foreign investment and
ownership.
44
Regulation
of Foreign Currency Exchange
Foreign
currency exchange in the PRC is governed by a series of regulations, including
the Foreign Currency
Administrative Rules (1996), as amended, and the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), as amended.
Under these regulations, the Renminbi is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment,
loans or investments in securities outside the PRC without the prior approval of
the State Administration of Foreign Exchange, or SAFE. Pursuant to the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), Foreign Invested
Enterprises, or FIEs, may purchase foreign exchange without the approval of the
SAFE for trade and service-related foreign exchange transactions by providing
commercial documents evidencing these transactions. They may also retain foreign
exchange, subject to a cap approved by SAFE, to satisfy foreign exchange
liabilities or to pay dividends. However, the relevant Chinese government
authorities may limit or eliminate the ability of FIEs to purchase and retain
foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside the PRC are still
subject to limitations and require approvals from the SAFE.
Regulation
of FIEs’ Dividend Distribution
The
principal laws and regulations in the PRC governing distribution of dividends by
FIEs include:
|
(i)
|
The
Sino-foreign Equity Joint Venture Law (1979), as amended, and the
Regulations for the Implementation of the Sino-foreign Equity Joint
Venture Law (1983), as amended;
|
|
(ii)
|
The
Sino-foreign Cooperative Enterprise Law (1988), as amended, and the
Detailed Rules for the Implementation of the Sino-foreign Cooperative
Enterprise Law (1995), as amended;
|
|
(iii)
|
The
Foreign Investment Enterprise Law (1986), as amended, and the Regulations
of Implementation of the Foreign Investment Enterprise Law (1990), as
amended.
|
Under
these regulations, FIEs in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with Chinese accounting
standards and regulations. In addition, foreign-invested enterprises in the PRC
are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds unless such reserve funds have
reached 50% of their respective 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.
Regulation
of a Foreign Currency’s Conversion into RMB and Investment by FIEs
On August
29, 2008, the SAFE issued a Notice of the General Affairs Department of the
State Administration of Foreign Exchange on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to
further regulate the foreign exchange of FIEs. According to the Notice 142, FIEs
shall obtain verification report from a local accounting firm before converting
its registered capital of foreign currency into Renminbi, and the converted
Renminbi shall be used for the business within its permitted business scope. The
Notice 142 explicitly prohibits FIEs from using RMB converted from foreign
capital to make equity investments in the PRC, unless the domestic equity
investment is within the approved business scope of the FIE and has been
approved by SAFE in advance.
Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions
In
October 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Return Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and
was further supplemented by two implementation notices issued by the SAFE on
November 24, 2005 and May 29, 2007, respectively. SAFE Notice 75 states that PRC
residents, whether natural or legal persons, must register with the relevant
local SAFE branch prior to establishing or taking control of an offshore entity
established for the purpose of overseas equity financing involving onshore
assets or equity interests held by them. The term “PRC legal person residents”
as used in SAFE Notice 75 refers to those entities with legal person status or
other economic organizations established within the territory of the PRC. The
term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC
citizens and all other natural persons, including foreigners, who habitually
reside in the PRC for economic benefit. The SAFE implementation notice of
November 24, 2005 further clarifies that the term “PRC natural person residents”
as used under SAFE Notice 75 refers to those “PRC natural person residents”
defined under the relevant PRC tax laws and those natural persons who hold any
interests in domestic entities that are classified as “domestic-funding”
interests.
45
PRC
residents are required to complete amended registrations with the local SAFE
branch upon: (i) injection of equity interests or assets of an onshore
enterprise to the offshore entity, or (ii) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any
material change in the shareholding or capital of the offshore entity, such as
changes in share capital, share transfers and long-term equity or debt
investments or, providing security, and these changes do not relate to return
investment activities. PRC residents who have already organized or gained
control of offshore entities that have made onshore investments in the PRC
before SAFE Notice 75 was promulgated must register their shareholdings in the
offshore entities with the local SAFE branch on or before March 31,
2006.
Under
SAFE Notice 75, PRC residents are further required to repatriate into the PRC
all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore entity within 180 days of their receipt of such
dividends, profits or capital gains. The registration and filing procedures
under SAFE Notice 75 are prerequisites for other approval and registration
procedures necessary for capital inflow from the offshore entity, such as
inbound investments or shareholders loans, or capital outflow to the offshore
entity, such as the payment of profits or dividends, liquidating distributions,
equity sale proceeds, or the return of funds upon a capital
reduction.
Government
Regulations Relating to Taxation
On March
16, 2007, the National Peoples Congress or the NPC, approved and promulgated the
PRC Enterprise Income Tax
Law, which we refer to as the New EIT Law. The New EIT Law took effect on
January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject
to a uniform tax rate of 25%. The New EIT Law provides a five-year transition
period starting from its effective date for those enterprises which were
established before the promulgation date of the New EIT Law and which were
entitled to a preferential lower tax rate under the then-effective tax laws or
regulations.
On
December 26, 2007, the State Council issued a Notice on Implementing Transitional
Measures for Enterprise Income Tax, or the Notice, providing that the
enterprises that have been approved to enjoy a low tax rate prior to the
promulgation of the New EIT Law will be eligible for a five-year transition
period since January 1, 2008, during which time the tax rate will be increased
step by step to the 25% unified tax rate set out in the New EIT Law. From
January 1, 2008, for the enterprises whose applicable tax rate was 15% before
the promulgation of the New EIT Law, the tax rate will be increased to 18% for
year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year
2012. For the enterprises whose applicable tax rate was 24%, the tax rate will
be changed to 25% from January 1, 2008.
The New
EIT Law provides that an income tax rate of 20% may be applicable to dividends
payable to non-PRC investors that are “non-resident enterprises”. Non-resident
enterprises refer to enterprises which do not have an establishment or place of
business in the PRC, or which have such establishment or place of business in
the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends are derived
from sources within the PRC. The income tax for non-resident enterprises shall
be subject to withholding at the income source, with the payor acting as the
obligatory withholder under the New EIT Law, and therefore such income taxes
generally called withholding tax in practice. The State Council of the PRC has
reduced the withholding tax rate from 20% to 10% through the Implementation
Rules of the New EIT Law. It is currently unclear in what circumstances a source
will be considered as located within the PRC. We are a U.S. holding company and
substantially all of our income is derived from dividends we receive from our
subsidiaries located in the PRC. Thus, if we are considered as a “non-resident
enterprise” under the New EIT Law and the dividends paid to us by our subsidiary
in the PRC are considered income sourced within the PRC, such dividends may be
subject to a 10% withholding tax.
46
Such
income tax may be exempted or reduced by the State Council of the PRC or
pursuant to a tax treaty between the PRC and the jurisdictions in which our
non-PRC shareholders reside. For example, the 10% withholding tax is reduced to
5% pursuant to the Double Tax
Avoidance Agreement Between Hong Kong and Mainland China if the
beneficial owner in Hong Kong owns more than 25% of the registered capital in a
company in the PRC.
The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in the combined company’s tax rate in the future could have a material
adverse effect on its financial conditions and results of
operations.
Regulations
of Overseas Investments and Listings
On August
8, 2006, six PRC regulatory agencies, including the MOFCOM, the China Securities
Regulatory Commission or the CSRC, the State Asset Supervision and
Administration Commission or the SASAC, the State Administration of Taxation, or
the SAT, the State Administration for Industry and Commerce or the SAIC and
SAFE, amended and released the New M&A Rule, which took effect as of
September 8, 2006. This regulation, among other things, includes provisions that
purport to require that an offshore special purpose vehicle (SPV) formed for
purposes of overseas listing of equity interest in PRC companies and controlled
directly or indirectly by PRC companies or individuals obtain the approval of
the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange.
On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by SPVs. The CSRC approval
procedures require the filing of a number of documents with the CSRC. The
application of the New M&A Rule with respect to overseas listings of SPVs
remains unclear with no consensus currently existing among the leading PRC law
firms regarding the scope of the applicability of the CSRC approval
requirement.
Regulation
of the Software Industry
Software
Copyright
The China
State Council promulgated the Regulations on the Protection of
Computer Software, or the Software Protection Regulations, on December
20, 2001, which became effective on January 1, 2002. The Software Protection
Regulations were promulgated, among other things, to protect the copyright of
computer software in China. According to the Software Protection Regulations,
computer software that is independently developed and exists in a physical form
or is attached to physical goods will be protected. However, such protection
does not apply to any ideas, mathematical concepts, processing and operation
methods used in the development of software solutions.
Under the
Software Protection Regulations, PRC citizens, legal persons and organizations
shall enjoy copyright protection over computer software that they have
developed, regardless of whether the software has been published. Foreigners or
any person without a nationality shall enjoy copyright protection over computer
software that they have developed, as long as such computer software was first
distributed in China. Software of foreigners or any person without a nationality
shall enjoy copyright protection in China under these regulations in accordance
with a bilateral agreement signed between China and the country to which the
developer is a citizen of or in which the developer habitually resides, or in
accordance with an international treaty to which China is a party.
Under the
Software Protection Regulations, owners of software copyright protection shall
enjoy the rights of publication, authorship, modification, duplication,
issuance, lease, transmission on the information network, translation, licensing
and transfer. Software copyright protection takes effect on the day of
completion of the software’s development.
47
The
protection period for software developed by legal persons and other
organizations is 50 years and ends on the thirty-first day of December of the
fiftieth year from the date the software solution was first published. However,
the Software Protection Regulations will not protect the software if it is
published within 50 years of the completion of its development. A contract of
licensing shall be made to license others to exploit the software copyright, and
if the licensing of exploitation of software copyright is exclusive, a written
contract shall be made. A written contract also shall be made for the transfer
of any software copyright.
Civil
remedies available under the Software Protection Regulations against
infringements of copyright include cessation of the infringement, elimination of
the effects, apology and compensation for losses. The administrative department
of copyright shall order the infringer of software copyright to stop all
infringing acts, confiscate illegal gains, confiscate and destroy infringing
copies, and may impose a fine on the offender under certain circumstances.
Disputes regarding infringements of software copyright may be settled through
mediation. In addition, the parties involved in the disputes may apply for
arbitration in accordance with any arbitration provisions set forth in the
copyright contract or arbitration agreement otherwise entered into between or
among the parties. If the parties neither have an arbitration provision in the
copyright contract, nor an arbitration agreement, they may resolve their dispute
through the PRC courts directly.
Software
Copyright Registration
On
February 20, 2002, the State Copyright Administration of the PRC promulgated and
enforced the Measures
Concerning Registration of Computer Software Copyright Procedures, or the
Registration Procedures, to implement the Software Protection Regulations and to
promote the development of China’s software industry. The Registration
Procedures apply to the registration of software copyrights and software
copyright exclusive licensing contracts and assignment contracts. The registrant
of a software copyright will either be the copyright owner, or another person
(whether a natural person, legal person or an organization) in whom the software
copyright becomes vested through succession, assignment or
inheritance.
Pursuant
to the Registration Procedures, the software to be registered must (i) have been
independently developed or (ii) significantly improve in its function or
performance after modification from the original software with the permission of
the original copyright owner. If the software being registered is developed by
more than one person, the copyright owners may nominate one person to handle the
copyright registration process on behalf of the other copyright owners. If the
copyright owners fail to reach an agreement with respect to the registration,
any of the copyright owners may apply for registration but the names of the
other copyright owners must be recorded on the application.
The
registrant of a software copyright and the parties to a software copyright
assignment contract or exclusive licensing contract may apply to the Copyright
Protection Center of the PRC for registration of such software copyright and
contracts. To register a software copyright, the following documents shall be
submitted: (i) a completed software copyright registration application form in
accordance with relevant requirements; (ii) identification materials of
software; and (iii) relevant documentation demonstrating ownership. To register
a software copyright assignment contract or exclusive licensing contract, the
following materials shall be submitted: (i) a completed contract registration
form in accordance with relevant requirements; (ii) a copy of the contract; and
(iii) the applicant’s identification documents. The Copyright Protection Center
of the PRC will complete its examination of an accepted application within 60
days of the date of acceptance. If an application complies with the requirements
of the Software Protection Regulations and the Registration Procedures, a
registration will be granted, a corresponding registration certificate will be
issued and the registration will be publicly announced.
Software
Products Administration
On
October 27, 2000, the MIIT issued and enforced the Measures Concerning Software
Products Administration, to regulate and administer software products and
promote the development of the software industry in China. Pursuant to the Measures Concerning Software
Products Administration, all software products operated or sold in China
had to be duly registered and recorded with the relevant authorities, and no
entity or individual is allowed to sell or distribute any unregistered and
unrecorded software products.
48
To
produce software products in China, a software producer was required to meet the
following requirements: (i) it possessed the status of an enterprise legal
person, and its scope of operations included the computer software business
(including technology development of software or production of software
products); (ii) it had a fixed production site; (iii) it possessed necessary
conditions and technologies for producing software products; and (iv) it
possessed quality control measures and capabilities for the production of
software products. Software developers or producers were allowed to sell their
registered and recorded software products independently or through agents, or by
way of licensing. Software products developed in China had to be registered with
the local provincial governmental authorities in charge of information industry
and then filed with the taxation authority at the same level and MIIT. Imported
software products, i.e., software developed overseas and sold or distributed
into China, had to be registered with the MIIT. Upon registration, the software
products had to be granted registration certificates. Each registration
certificate was valid for five years from the issuance date and could be renewed
upon expiry. The MIIT and other relevant departments carried out supervision and
inspection over the development, production, operation and import/export
activities of software products in China.
On March
1, 2009, the MIIT promulgated the amended and restated Measures Concerning Software
Products Administration, or the New Measures, which became effective on
April 10, 2009. Under the New Measures, software products operated or sold in
China are not required to be registered or recorded by relevant authorities, and
software products developed in China (including those developed in China on the
basis of imported software) can enjoy certain favorable policies when they have
been registered and recorded. The New Measures also eliminated the October 2000
requirements set forth above.
Policies
to Encourage the Development of Software and Integrated Circuit
Industries
On June
24, 2000, the State Council issued Certain Policies to Encourage the
Development of Software and Integrated Circuit Industries, or the
Policies, to encourage the development of the software and integrated circuit
industries in China and to enhance the competitiveness of the PRC information
technology industry in the international market. The Policies encourage the
development of the software and integrated circuit industries in China through
various methods, including:
|
(i)
|
Encouraging
venture capital investment in the software industry and providing or
assisting software enterprises to raise capital
overseas;
|
|
(ii)
|
Providing
tax incentives, including an immediate tax rebate for taxpayers who sell
self-developed software products, before 2010, of the amount of the
statutory value-added tax that exceeds 3% and a number of exemptions and
reduced enterprise income tax
rates;
|
|
(iii)
|
Providing
government support, such as government funding in the development of
software technology;
|
|
(iv)
|
Providing
preferential treatment, such as credit facilities with low interest rates
to enterprises that export software
products;
|
|
(v)
|
Taking
various strategies to ensure that the software industry has sufficient
expertise; and
|
|
(vi)
|
Implementing
measures to enhance intellectual property protection in
China.
|
To
qualify for preferential treatment, an enterprise must be recognized as a
software enterprise by governmental authorities. A software enterprise is
subject to annual inspection, failure of which in a given year shall cause the
enterprise not to be able to enjoy the relevant benefits.
49
DIRECTORS
AND EXECUTIVE OFFICERS
Executive
Officers and Directors
The
following discussion sets forth information regarding the executive officers and
directors of the Company as of the date of this prospectus. Our Board of
Directors is comprised of only one class. All of the directors will serve until
the next annual meeting of shareholders and until their successors are elected
and qualified, or until their earlier death, retirement, resignation or removal.
To date we have not had an annual meeting. Provided below is a brief description
of our executive officers’ and directors’ business experience during the past
five years.
Name
|
Age
|
Position
|
||
Jianzhong
Zuo
|
42
|
Chief
Executive Officer, President and Chairman of the Board
|
||
Yong
Zhao
|
38
|
Chief
Financial Officer
|
||
Hirofumi
Kotoi
|
|
47
|
|
Director
|
Jianzhong
Zuo, Chief Executive Officer, President and Chairman
Mr. Zuo
has been our Chief Executive Officer, President and Chairman of the Board since
February 26, 2010. Mr. Zuo founded our wholly-owned subsidiary, Hua Shen Trading
(International) Ltd., and served as its President since 1999. From 1993 to 1996,
Mr. Zuo worked at Shenzhen Huashen Shiye International and Beijing Huashen
Automation Engineering, and from 1992 to 1993 he was at Beijing Nonferrous Metal
Research Institute. He earned his M.S. degree from the University of Science and
Technology, Beijing in 1992 and an Executive MBA from the Central European
Business School in 2007.
Yong
Zhao, Chief Financial Officer
Mr. Zhao
was appointed as our Chief Financial Officer on February 26, 2010. Mr. Zhao
joined our wholly owned subsidiary, Beijing JianXin Petrochemical Engineering
Ltd., as the Chief Financial Officer in 2008. From 1998 to 2008, he served as a
financial manager for Beijing Feite Tianyuan Environmental Protection, Ltd.,
Co., Beijing Huashen Huizheng System Engineering Technology, Ltd., Co. and
Beijing Huashen Guotong Technology Development Ltd. Mr. Zhao earned his
Certificate in Project Financial Analysis at Beijing Technology and Business
University in 2004 and earned his Bachelors Degree in Finance from Capital
University of Economics and Business in 1992.
Hirofumi
Kotoi, Director
Mr. Kotoi
has been a member of our Board of Directors since March 27, 2010. Mr. Kotoi is a
Vice-President and Representative Director at SJI Inc. where he has worked since
June 1990. He earned his master degree from Kyoto University and completed a
Ph.D. course major in Computer science. He also studied at the University of
Science and Technology of China. A Chinese native, he came to Japan as a
government funded overseas student in 1981.
Family
Relationships
There are
no family relationships between any of our directors or executive
officers.
Code
of Ethics
The OTC
Bulletin Board, which is the exchange on which our shares of Common Stock are
listed, does not maintain any listing requirements, and we did not have a code
of ethics prior to the Share Exchange. However, our Board of
Directors plans to adopt in the near future a formal Code of Conduct and Ethics
(the “Code”) that would apply to all of our employees, officers and
directors. The Code will cover compliance with law; fair and honest
dealings with the company, with competitors and with others; fair and honest
disclosure to the public; and procedures for compliance with the
Code.
50
Board
Composition
The Board
of Directors is currently composed of two members. All actions of the Board of
Directors require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present. A quorum is a majority of the Board of
Directors.
Audit
Committee and Financial Expert
Due to
our lack of operations and size prior or the Share Exchange, we did not
designate an Audit Committee. Furthermore, our Common Stock is quoted on the OTC
Bulletin Board, which does not maintain any listing requirements mandating the
establishment of any particular committees. Our Board of Directors acts as
our audit committee and performs equivalent functions, such as: recommending a
firm of independent certified public accountants to audit the annual financial
statements; reviewing the independent auditor’s independence, the financial
statements and their audit report; and reviewing management’s administration of
the system of internal accounting controls. At the present time, we believe that
the members of the Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting.
For these
same reasons, we did not have any other separate committees prior to the Share
Exchange. All functions of a nominating committee, audit committee
and compensation committee were, and continue to be performed by our Board of
Directors.
We
currently do not have a member of the Board of Directors who qualifies as an
“audit committee financial expert” as defined in Item 401(h) of Regulation S-K
and is “independent” as the term is used in Item 7(d)(3) (iv) of Schedule 14A
under the Exchange Act. However, our Board of Directors is in the process of
searching for a suitable candidate for this position.
Policy
Regarding Board Attendance
Our
directors are expected to attend meetings of the Board of Directors as
frequently as necessary to properly discharge their responsibilities and to
spend the time needed to prepare for each such meeting. Our directors are
expected to attend annual meetings of stockholders, but we do not have a formal
policy requiring them to do so.
Shareholder
Communications
The
Company has a process for shareholders who wish to communicate with the Board of
Directors. Shareholders who wish to communicate with the Board may write to it
at the Company’s address given above. These communications will be reviewed by
one or more employees of the Company designated by the Board, who will determine
whether they should be presented to the Board. The purpose of this screening is
to allow the Board to avoid having to consider irrelevant or inappropriate
communications.
Background
and Compensation Philosophy
Our Board
of Directors has not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive officers. No
pre-established, objective performance goals or metrics have been used by the
Board of Directors in determining the compensation of our executive
officers.
51
Elements
of Compensation
Some of
our executive officers receive a base salary to compensate them for services
rendered during the year. Our policy of compensating our certain executives with
a cash salary has served the Company well. Because of our history of attracting
and retaining executive talent, we do not believe it is necessary at this time
to provide our executives equity incentives, or other benefits for the Company
to continue to be successful.
Base Salary and Bonus. The
value of base salary and bonus for each our executive reflects his skill set and
the market value of that skill set in the sole discretion of the Board of
Directors.
Equity Incentives. The Company
and its subsidiaries have not established an equity based incentive program and
have not granted stock based awards as a component of compensation. In the
future, we may make awards under an equity incentive plan pursuant to which
awards may be granted if our Compensation Committee determines that it is in the
best interest of the Company and its stockholders to do so.
Retirement Benefits. Our
executive officers are not presently entitled to company-sponsored retirement
benefits.
Perquisites. We have not
provided our executive officers with any material perquisites and other personal
benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.
Deferred Compensation. We do
not provide our executives the opportunity to defer receipt of annual
compensation.
Summary
Compensation Table
The
following table sets forth all cash compensation paid by the Company, as well as
certain other compensation paid or accrued, for each of the last two fiscal
years of the Company to each named executive officers.
Summary
Compensation of Named Executive Officers
Name and Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards
|
All Other
Compensation ($)
|
Total
($)
|
||||||||||||||||
Reed
Buley, Former CEO, CFO, President and Secretary
|
2009
|
– | – | – | – | – | ||||||||||||||||
2008
|
30,863 | – | – | – | 30,863 | |||||||||||||||||
Jianzhong
Zuo, President and Chief Executive Officer
|
2009
|
– | – | – | – | – | ||||||||||||||||
2008
|
– | – | – | – | – | |||||||||||||||||
Yong
Zhao, Chief Financial Officer
|
2009
|
7,028 | 3,514 | – | – | 10,542 | ||||||||||||||||
2008
|
7,028 | 3,514 | – | – | 10,542 |
During
each of the last two fiscal years, none of our other officers had salary and
bonus greater than $31,000. In addition, our executive officers
and/or their respective affiliates will be reimbursed by us for any
out-of-pocket expenses incurred in connection with activities conducted on our
behalf. There is no limit on the amount of these out-of-pocket expenses and
there will be no review of the reasonableness of such expenses by anyone other
than our Board of Directors, which includes persons who may seek reimbursement,
or a court of competent jurisdiction if such reimbursement is
challenged.
Employment
Agreements
We have
entered into employment agreements with Jianzhong Zuo and Yong
Zhao.
52
Jianzhong
Zuo
Mr. Zuo’s
employment agreement, effective June 15, 2008, provides that Mr. Zuo will be
employed as President of Beijing JianXin for a two year term. During the term of
the agreement, Mr. Zuo will devote substantially all of his time to the service
of the Company and may not compete directly or indirectly with us. We
may terminate Mr. Zuo for cause at any time, and without cause upon 30 days
notice. Mr. Zuo may resign without good reason upon 30 days notice.
Mr. Zuo
receives no annual salary under the agreement or otherwise.
Yong
Zhao
Mr.
Zhao’s employment agreement, effective June 15, 2008, provides that Mr. Zuo will
be employed as Chief Financial Officer of Beijing JianXin for a two year term.
During the term of the agreement, Mr. Zhao will devote substantially all of his
time to the service of the Company and may not compete directly or indirectly
with us. We may terminate Mr. Zhao for cause at any time, and without cause upon
30 days notice. Mr. Zhao may resign without good reason upon 30 days
notice.
Mr. Zhao
has a verbal agreement with management setting his compensation at $7,028
annually and a bonus of $3,514 annually.
Director
Compensation
Our
directors are reimbursed for reasonable expenses incurred by them in connection
with attending Board of Directors’ meetings, but they do not receive any other
compensation for serving on the Board of Directors.
Bonuses
and Deferred Compensation
We do not
have any bonus, deferred compensation or retirement plan. All decisions regarding
compensation are determined by our Board of Directors.
Options
and Stock Appreciation Rights
We do not
currently have a stock option or other equity incentive plan. We may adopt one
or more such programs in the future.
Payment
of Post-Termination Compensation
The
Company does not have change-in-control agreements with any of its directors or
executive officers, and the Company is not obligated to pay severance or other
enhanced benefits to executive officers upon termination of their
employment.
53
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of March 24, 2010 by (i) each person (or group of affiliated
persons) who is known by us to own more than five percent of the outstanding
shares of our Common Stock, (ii) each director and executive officer, and (iii)
all of our directors and executive officers and director nominees as a group. As
of March 24, 2010, we had 29,358,772 shares of Common Stock issued and
outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise noted,
the principal address of each of the stockholders, directors and officers listed
below is c/o China LianDi Clean Technology Engineering Ltd., Unit 401-405.4/F,
Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District,
Beijing, China 100089.
All share
ownership figures include shares of our Common Stock issuable upon securities
convertible or exchangeable into shares of our Common Stock within sixty (60)
days of March 24, 2010, which are deemed outstanding and beneficially owned by
such person for purposes of computing his or her percentage ownership, but not
for purposes of computing the percentage ownership of any other
person.
Name & Address of Beneficial Owner and Office, if any
|
Amount & Nature
of Beneficial
Ownership (1)
|
Percent of
Class (1)
|
||||||
SJ
Asia Pacific Ltd.(2)
|
6,275,118 | 21.37 | % | |||||
China
LianDi Energy Resources Engineering Technology Ltd.(3)
|
10,684,660 | 36.39 | ||||||
Hua
Shen Trading (International) Ltd.(4)
|
6,838,620 | 23.29 | ||||||
Jianzhong
Zuo, Chairman, Chief Executive Officer & President (5)
|
17,523,280 | 59.69 | ||||||
Yong
Zhao, Chief Financial Officer
|
0 | 0.00 | ||||||
Hirofumi
Kotoi, Director (6)
|
6,275,118 | 21.37 | ||||||
TriPoint
Global Equities, LLC (7)
|
2,159,462 | 7.09 | ||||||
All
officers and directors as a group (3 persons)
|
23,798,398 | 81.06 | % |
|
(1)
|
Pursuant
to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of
any securities as to which such person, directly or indirectly, through
any contract, arrangement, undertaking, relationship or otherwise has or
shares voting power and/or investment power or as to which such person has
the right to acquire such voting and/or or investment power within 60
days. Unless otherwise stated, each beneficial owner has sole power
to vote and dispose of the shares.
|
|
(2)
|
SJ
Asia Pacific Ltd. is a wholly-owned subsidiary of SJI Inc., a Jasdaq
listed company organized under the laws of Japan. Hirofumi Kotoi, one of
our directors, and Jian Li are directors of SJ Asia Pacific Ltd. Its
business address is Shinagawa Seaside, East Tower 4-12-8,
Higashi-Shinagawa, Shinagawa-Ku, Tokyo,
Japan.
|
|
(3)
|
Mr.
Jianzhong Zuo, our Chairman, Chief Executive Officer and President, is a
director of China LianDi Energy Resources Engineering Technology Ltd. and
holds voting and dispositive power over the shares held by
it.
|
|
(4)
|
Mr.
Jianzhong Zuo, our Chairman, Chief Executive Officer and President, is a
director of Hua Shen Trading (International) Ltd. and holds voting and
dispositive power over the shares held by
it.
|
54
|
(5)
|
Includes
shares held of record by China LianDi Energy Resources Engineering
Technology Ltd. and Hua Shen Trading (International) Ltd., each over which
Mr. Zuo maintains voting and dispositive power. Mr. Zuo has no
pecuniary interest in the shares held by Hua Shen Trading (International)
Ltd.
|
|
(6)
|
Mr.
Kotoi is a director of SJ Asia Pacific Ltd., a wholly-owned subsidiary of
SJI Inc., a Jasdaq listed company organized under the laws of Japan, and
shares voting and dispositive power over the shares held by SJ Asia
Pacific Ltd. as a result of his position as a director of SJ Asia Pacific
Ltd.
|
|
(7)
|
This
number includes (a) the following securities held by TriPoint Global
Equities, LLC, our placement agent in the Private Placement: (i) 725,882
shares of Common Stock underlying placement agent Warrants, (ii) 181,473
shares underlying placement agent Series A Warrants and (iii) 181,473
shares underlying placement agent Series B Warrants; and (b) the following
securities held by TriPoint Capital Advisors, LLC, our financial
consultant: (i) 1,070,634 shares of Common Stock. Mark Elenowitz and
Michael Boswell share voting and dispositive power over the securities
held by TriPoint Global Equities, LLC. Mark Elenowitz and Michael Boswell,
along with Louis Taubman, share voting and dispositive power over the
securities held by TriPoint Capital Advisors, LLC. The principal address
of TriPoint Global Equities, LLC is 17 State Street, 20th
Floor, New York, New York 10004.
|
Changes
in Control
Pursuant
to the Share Exchange, we had 28,571,430 shares of Common Stock issued and
outstanding, of which China LianDi’s former shareholders own approximately 81%
with the balance held by the Investors in the Private Placement and those who
held our shares of Common Stock prior to the Share Exchange. Accordingly, the
closing of the Share Exchange caused a change in control.
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in any other
change in control of the Company.
55
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As of
December 31, 2009, we rented warehouse space and a truck from the wife of Reed
Buley, our former executive officer who was also our former majority
shareholder, at a percentage of revenues, which is intended to approximate fair
market value. As of February 26, 2010, this agreement has been terminated and
any liability settled.
We owed
Mr. Buley $23,847 as of December 31, 2009 for operating expenses paid on our
behalf. As of February 26, 2010, pursuant to the Exchange Agreement, such
liability was assumed by Mr. Buley.
We owed
$27,560 as of December 31, 2009 to a consultant, who is also a shareholder, for
professional fees paid on our behalf. As of February 26, 2010, pursuant to the
Exchange Agreement, such liability was assumed by Mr. Buley.
As of
December 31, 2009, we had two notes payable totaling $41,000 due to the father
of Mr. Buley, our former CEO. As of February 26, 2010, pursuant to the Exchange
Agreement, such liabilities were assumed by Mr. Buley.
TriPoint Capital Advisors,
LLC
On
February 26, 2010, we issued TriPoint Capital Advisors, LLC, an affiliate of
TriPoint Global Equities, LLC, 820,634 shares of Common Stock pursuant to
the Exchange Agreement in exchange for 1,500 shares of China LianDi that it
owned.
Lock Up
Agreement
On the
February 26, 2010, we entered into a lock-up agreement with China LianDi Energy
Resources Engineering Technology Ltd., an affiliate of Jianzhong Zuo, our Chief
Executive Officer, President and Chairman, whereby such entity is prohibited
from selling the Company’s securities until six (6) months after the effective
date of the registration statement required to be filed under the Registration
Rights Agreement. For one (1) year thereafter, it will be permitted to sell up
to 1/12 of its initial holdings every month.
Securities Escrow
Agreement
On
February 26, 2010, we entered into a make good escrow agreement with the
Investors (the “Securities Escrow Agreement”), pursuant to which China LianDi
Energy Resources Engineering Technology Ltd. (the “Principal Stockholder”), an
affiliate of Jianzhong Zuo, our Chief Executive Officer, President and Chairman,
delivered into an escrow account 1,722,311 shares of Common Stock (the “Escrow
Shares”) to be used as a share escrow for the achievement of a fiscal year 2011
net income performance threshold of $20.5 million. With respect to the 2011
performance year, if we achieve less than 95% of the 2011 performance threshold,
then the Escrow Shares for such year will be delivered to the Investors in the
amount of 86,115.55 shares (rounded up to the nearest whole share and pro rata
based on the number of shares of Series A Preferred Stock owned by such Investor
at such date) for each full percentage point by which such threshold was not
achieved up to a maximum of 1,722,311 shares. Any Escrow Shares not delivered to
any Investor because such Investor no longer holds shares of Series A Preferred
Stock or Conversion Shares, or because the 2011 performance threshold was met,
shall be returned to the Principal Stockholder.
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
It is our
policy that we will not enter into transactions required to be disclosed under
item 404 of the SEC’s Regulation S-K unless our Board of Directors first reviews
and approves the transactions.
56
Promoters
and Certain Control Persons
We
have not had a
promoter at any time during the past five years. Other than our shares received
as part of the Share Exchange or compensation or reimbursement of expenses in
connection with job responsibilities at our company, as the case may be, none of
the persons or entities that may be deemed to have acquired control of us as a
result of the Share Exchange have received anything of value from us during the
past five years. Other than the shares of China LianDi received in
the Share Exchange, we have not received any assets from such persons during the
past five years.
57
SELLING
STOCKHOLDERS
We are
registering for resale shares of our Common Stock that are issued and
outstanding, and shares of Common Stock underlying our Series A Preferred Stock
and Warrants held by the Selling Stockholders identified below. We are
registering the shares to permit the Selling Stockholders and their pledgees,
donees, transferees and other successors-in-interest that receive their shares
from a Selling Stockholder as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus to resell the shares when and
as they deem appropriate in the manner described in the “Plan of
Distribution.” As of the date of this prospectus there are 29,358,772
shares of Common Stock issued and outstanding.
The
following table sets forth:
|
·
|
the
name of the Selling Stockholders,
|
|
·
|
the
number of shares of our Common Stock that the Selling Stockholders
beneficially owned prior to the offering for resale of the shares under
this prospectus,
|
|
·
|
the
maximum number of shares of our Common Stock that may be offered for
resale for the account of the Selling Stockholders under this prospectus,
and
|
|
·
|
the
number and percentage of shares of our Common Stock beneficially owned by
the Selling Stockholders prior to the offering and after the offering of
the shares (assuming all of the offered shares are sold by the Selling
Stockholders).
|
Except
for Reed Buley, none of the Selling Stockholders has been our officer or
director or an officer or director of any of our predecessors or affiliates
within the last three years.
Except
for Hayden Communications International Inc. and Chesapeake Group, each of which
has been engaged by us as our investor relations firm, and TriPoint Global
Equities, LLC (“TriPoint Global”), our financial advisor and placement agent in
the Private Placement, none of our Selling Stockholders had a material
relationship with the Company within the last three years.
We
entered into a placement agent agreement with TriPoint Global on October 27,
2009 whereby we paid a cash fee to TriPoint Global equal to 7% of the gross
proceeds received by us in connection with the Private Placement and we issued
to TriPoint Global and its designees (i) Warrants to purchase 787,342 shares of
Common Stock, (ii) Series A Warrants to purchase 196,836 shares of Common Stock
and (iii) Series B Warrants to purchase 196,836 shares of Common
Stock.
Except
for TriPoint Global, Syndicated Capital, Inc., Brill Securities, Meyer
Associates LP and SHP Securities, LLC, none of the Selling Stockholders is a
broker dealer.
Except
for Ancora Greater China Fund LP, Shira Capital LLC, Burt Stangarone, Anthony G.
Polak, John Riccardi, Jr., NTC & Co. F/B/O Paul Masters IRA, IRA FBO Ronald
Lazar, Pershing LLC as Custodian, RL Capital Partners and Heather U Baines and
Lloyd McAdams AB Living Trust 8/01/2001, none of the Selling Stockholders is an
affiliate of a broker dealer. Each of Ancora Greater China Fund LP, Shira
Capital LLC, Burt Stangarone, Anthony G. Polak, John Riccardi, Jr., NTC &
Co. F/B/O Paul Masters IRA, IRA FBO Ronald Lazar, Pershing LLC as Custodian, RL
Capital Partners and the Heather U Baines and Lloyd McAdams AB Living Trust
8/01/2001 certified to us that it or he bought the securities in the ordinary
course of business and at the time of purchase, it or he had no agreements or
understandings, directly or indirectly, with any person to distribute the
securities. None of the Selling Stockholders has any agreement or understanding
to distribute any of the Shares being registered.
Each
Selling Stockholder may offer for sale all or part of the Shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
Shares offered for sale. A Selling Stockholder is under no obligation, however,
to sell any Shares pursuant to this prospectus.
58
Name of Selling Stockholder
|
Shares of
Common
Stock
Beneficially
Owned Prior
to Offering
(1)
|
Percentage
Ownership
Before
Offering
|
Maximum
Number of
Shares of
Common
Stock to be
Sold (2)
|
Number of
Shares of
Common
Stock
Owned After
Offering
|
Percentage
Ownership
After
Offering (3)
|
|||||||||||||||
Hermes
Partners, LP (4)
|
60,000 | * | 60,000 | -0- | -0- | |||||||||||||||
Alder
Capital Partners I, L.P. (5)
|
285,000 | * | 285,000 | -0- | -0- | |||||||||||||||
Burt
Stangarone (6)
|
51,420 | * | 51,420 | -0- | -0- | |||||||||||||||
Snow
Hill Developments Limited (7)
|
345,000 | 1.18 | % | 345,000 | -0- | -0- | ||||||||||||||
The
Knapp Family Trust, Geoffrey D. Knapp, Trustee (8)
|
75,000 | * | 75,000 | -0- | -0- | |||||||||||||||
IRA
FBO Ronald Lazar, Pershing LLC as Custodian (9)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
RL
Capital Partners (10)
|
60,000 | * | 60,000 | -0- | -0- | |||||||||||||||
Anthony
Polak (11)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Domaco
Venture Capital Fund (12)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Frederick
Polak (13)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Steve
Strasser (14)
|
60,000 | * | 60,000 | -0- | -0- | |||||||||||||||
Ephraim
Field (15)
|
321,420 | 1.10 | % | 321,420 | -0- | -0- | ||||||||||||||
Trading
Systems, LLC (16)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Oppenheimer
& Co., Inc. Custodian FBO Lawrence Kaplan RLURIRA (17)
|
60,000 | * | 60,000 | -0- | -0- | |||||||||||||||
Douglas
N. Woodrum (18)
|
43,500 | * | 43,500 | -0- | -0- | |||||||||||||||
Michael
Miller (19)
|
60,000 | * | 60,000 | -0- | -0- | |||||||||||||||
Martha
A. Rogers (20)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Sandor
Capital Master Fund (21)
|
171,000 | * | 171,000 | -0- | -0- | |||||||||||||||
Shira
Capital LLC (22)
|
107,130 | * | 107,130 | -0- | -0- | |||||||||||||||
Li
Jun (23)
|
85,710 | * | 85,710 | -0- | -0- | |||||||||||||||
Markets
Edge Limited (24)
|
22,500 | * | 22,500 | -0- | -0- | |||||||||||||||
Stanley
Kaplan (25)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Futurtec,
L.P. (26)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Peter
Fahey (27)
|
64,276 | * | 64,276 | -0- | -0- | |||||||||||||||
Venturetek,
LP (28)
|
214,276 | * | 214,276 | -0- | -0- | |||||||||||||||
Allan
C. Lichtenberg (29)
|
22,500 | * | 22,500 | -0- | -0- | |||||||||||||||
NTC
& Co. F/B/O Paul Masters IRA (30)
|
32,100 | * | 32,100 | -0- | -0- | |||||||||||||||
Stephanie
Ognar (31)
|
300,000 | 1.01 | % | 300,000 | -0- | -0- | ||||||||||||||
JW
Partners, L.P. (32)
|
85,710 | * | 85,710 | -0- | -0- | |||||||||||||||
Taylor
International Fund LTD (33)
|
1,285,710 | 4.21 | % | 1,285,710 | -0- | -0- | ||||||||||||||
Ancora
Greater China Fund LP (34)
|
135,000 | * | 135,000 | -0- | -0- | |||||||||||||||
Allen
Lupyrypa (35)
|
43,500 | * | 43,500 | -0- | -0- | |||||||||||||||
Michael
Cohen (36)
|
106,500 | * | 106,500 | -0- | -0- | |||||||||||||||
Blue
Earth Fund, L.P. (37)
|
857,130 | 2.84 | % | 857,130 | -0- | -0- | ||||||||||||||
Dennis
Jason Wong, Sole Trustee of the Dennis and Sharon Wong Family Trust
(38)
|
128,566 | * | 128,566 | -0- | -0- | |||||||||||||||
Daybreak
Special Situations Master Fund, Ltd. (39)
|
107,146 | * | 107,146 | -0- | -0- | |||||||||||||||
William
P. Haus (40)
|
22,500 | * | 22,500 | -0- | -0- |
59
Name of Selling Stockholder
|
Shares of
Common
Stock
Beneficially
Owned Prior
to Offering
(1)
|
Percentage
Ownership
Before
Offering
|
Maximum
Number of
Shares of
Common
Stock to be
Sold (2)
|
Number of
Shares of
Common
Stock
Owned After
Offering
|
Percentage
Ownership
After
Offering (3)
|
|||||||||||||||
Silver
Rock II, Ltd. (41)
|
128,566 | * | 128,566 | -0- | -0- | |||||||||||||||
James
H. Stebbins (42)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
John
C. Kleinert (43)
|
21,750 | * | 21,750 | -0- | -0- | |||||||||||||||
Martin
Feinberg (44)
|
22,500 | * | 22,500 | -0- | -0- | |||||||||||||||
Brightstar
Investment Fund LP (45)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
MKM
Opportunity Master Fund, Ltd. (46)
|
105,000 | * | 105,000 | -0- | -0- | |||||||||||||||
Lennox
Capital Partners, LP (47)
|
278,566 | * | 278,566 | -0- | -0- | |||||||||||||||
Squires
Family LP (48)
|
150,000 | * | 150,000 | -0- | -0- | |||||||||||||||
Eric
E. Shear (49)
|
10,726 | * | 10,726 | -0- | -0- | |||||||||||||||
Greg
Freihofner (50)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Paul
Hickey (51)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Maple
Day Limited (52)
|
100,726 | * | 100,726 | -0- | -0- | |||||||||||||||
Dynacap
Global Capital Fund II, LP (53)
|
128,550 | * | 128,550 | -0- | -0- | |||||||||||||||
BBS
Capital Fund, LP (54)
|
214,276 | * | 214,276 | -0- | -0- | |||||||||||||||
Trillion
Growth China LP (55)
|
90,000 | * | 90,000 | -0- | -0- | |||||||||||||||
Pope
Investments II LLC (56)
|
1,500,000 | 4.88 | % | 1,500,000 | -0- | -0- | ||||||||||||||
Jayhawk
Private Equity Fund II, L.P. (57)
|
1,714,276 | 5.54 | % | 1,714,276 | -0- | -0- | ||||||||||||||
Hua
Mei 21st
Century Partners, LP (58)
|
321,436 | 1.08 | % | 321,436 | -0- | -0- | ||||||||||||||
Guerilla
Partners, LP (59)
|
107,146 | * | 107,146 | -0- | -0- | |||||||||||||||
Joseph
Myers (60)
|
75,000 | * | 75,000 | -0- | -0- | |||||||||||||||
Nicholas
Primpas (61)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
Ashar
Qureshi (62)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
David
Forti (63)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Lutz
Engineering PSP (64)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
AEJ
Doyer (65)
|
6,000 | * | 6,000 | -0- | -0- | |||||||||||||||
David
Morin (66)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Hugh
Hadden (67)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Michael
Leone (68)
|
2,250 | * | 2,250 | -0- | -0- | |||||||||||||||
Gary
Andreasen (69)
|
4,500 | * | 4,500 | -0- | -0- | |||||||||||||||
Steven
Gianniotis (70)
|
7,500 | * | 7,500 | -0- | -0- | |||||||||||||||
Jeffrey
A. Grossman (71)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Jon
L. Grossman (72)
|
4,500 | * | 4,500 | -0- | -0- | |||||||||||||||
John
O. Senior (73)
|
6,000 | * | 6,000 | -0- | -0- | |||||||||||||||
Kira
L. Grossman (74)
|
3,000 | * | 3,000 | -0- | -0- | |||||||||||||||
Mark
Napier (75)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Charles
Barovian (76)
|
4,500 | * | 4,500 | -0- | -0- | |||||||||||||||
Robert
Lutz / Jo Lutz (77)
|
9,000 | * | 9,000 | -0- | -0- | |||||||||||||||
Angela
LaRosa / Joseph Maida (78)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
David
F. Davis (79)
|
5,250 | * | 5,250 | -0- | -0- | |||||||||||||||
Kenneth
Noggle (80)
|
3,000 | * | 3,000 | -0- | -0- | |||||||||||||||
John
Dow (81)
|
7,500 | * | 7,500 | -0- | -0- | |||||||||||||||
John
Riccardi, Jr. (82)
|
5,250 | * | 5,250 | -0- | -0- |
60
Name of Selling Stockholder
|
Shares of
Common
Stock
Beneficially
Owned Prior
to Offering
(1)
|
Percentage
Ownership
Before
Offering
|
Maximum
Number of
Shares of
Common
Stock to be
Sold (2)
|
Number of
Shares of
Common
Stock
Owned After
Offering
|
Percentage
Ownership
After
Offering (3)
|
|||||||||||||||
William
Seifer (83)
|
1,500 | * | 1,500 | -0- | -0- | |||||||||||||||
Todd
Taricco (84)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Robert
Leng (85)
|
6,000 | * | 6,000 | -0- | -0- | |||||||||||||||
John
R. Duffy / Lorrain Duffy (86)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Albert
Shehabar (87)
|
6,000 | * | 6,000 | -0- | -0- | |||||||||||||||
Paul
E. Triulzi (88)
|
1,500 | * | 1,500 | -0- | -0- | |||||||||||||||
Paul
E. Triulzi, IRA (89)
|
4,500 | * | 4,500 | -0- | -0- | |||||||||||||||
Barbara
Mishan (90)
|
21,420 | * | 21,420 | -0- | -0- | |||||||||||||||
Meir
Duke (91)
|
64,276 | * | 64,276 | -0- | -0- | |||||||||||||||
Robert
Baron (92)
|
4,276 | * | 4,276 | -0- | -0- | |||||||||||||||
Martin
Feinberg (93)
|
22,500 | * | 22,500 | -0- | -0- | |||||||||||||||
Cubs
Capital c/o Morris Resner (94)
|
6,750 | * | 6,750 | -0- | -0- | |||||||||||||||
Heller
Capital Investments (95)
|
75,000 | * | 75,000 | -0- | -0- | |||||||||||||||
Octagon
Capital Partners (96)
|
37,500 | * | 37,500 | -0- | -0- | |||||||||||||||
Alpha
Capital Anstalt (97)
|
85,710 | * | 85,710 | -0- | -0- | |||||||||||||||
Tommy
Dilling (98)
|
19,200 | * | 19,200 | -0- | -0- | |||||||||||||||
Robin
Whaite (99)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
Compact
Poolen Modehuset AB (100)
|
23,550 | * | 23,550 | -0- | -0- | |||||||||||||||
Kristian
Stensjo / Pernilla Stensjo (101)
|
10,650 | * | 10,650 | -0- | -0- | |||||||||||||||
Ulf
Sorvik (102)
|
21,376 | * | 21,376 | -0- | -0- | |||||||||||||||
David
Sandgren (103)
|
108,000 | * | 108,000 | -0- | -0- | |||||||||||||||
Hans
Waren (104)
|
15,000 | * | 15,000 | -0- | -0- | |||||||||||||||
Ferghal
O’regan (105)
|
45,000 | * | 45,000 | -0- | -0- | |||||||||||||||
Olive
or Twist Limited (106)
|
18,000 | * | 18,000 | -0- | -0- | |||||||||||||||
Enebybergs
Revisionsbyra AB (107)
|
42,750 | * | 42,750 | -0- | -0- | |||||||||||||||
Henrik
Gumaelius (108)
|
18,000 | * | 18,000 | -0- | -0- | |||||||||||||||
Kari
Ekholm (109)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
Peter
Gustafsson (110)
|
53,550 | * | 53,550 | -0- | -0- | |||||||||||||||
Garolf
AB (111)
|
64,500 | * | 64,500 | -0- | -0- | |||||||||||||||
Heather
U Baines and Lloyd McAdams AB Living Trust 8/01/2001 (112)
|
64,276 | * | 64,276 | -0- | -0- | |||||||||||||||
Ulf
Ivarsson (113)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
Joachim
Jaginder (114)
|
30,000 | * | 30,000 | -0- | -0- | |||||||||||||||
Charles
Smith (115)
|
5,000 | * | 5,000 | -0- | -0- | |||||||||||||||
Reed
Buley (116)
|
51,000 | * | 50,000 | 1,000 | * | |||||||||||||||
Hayden
Communications International Inc. (117)
|
89,000 | * | 89,000 | -0- | -0- | |||||||||||||||
Chesapeake
Group Inc. (118)
|
62,400 | * | 62,400 | -0- | -0- | |||||||||||||||
TriPoint
Global Equities, LLC (119)
|
2,159,462 | 7.09 | % | 1,088,828 | 1,070,634 | 3.52 | % | |||||||||||||
Syndicated
Capital, Inc. (120)
|
31,192 | * | 31,192 | -0- | -0- | |||||||||||||||
Brill
Securities (121)
|
3,855 | * | 3,855 | -0- | -0- | |||||||||||||||
Meyers
Associates LP (122)
|
32,216 | * | 32,216 | -0- | -0- | |||||||||||||||
SHP
Securities, LLC (123)
|
24,924 | * | 24,924 | -0- | -0- |
61
* less
than one percent
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations of
the SEC. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, securities that are currently
convertible or exercisable into shares of our Common Stock, or convertible
or exercisable into shares of our Common Stock within 60 days of the date
hereof are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person. Except as indicated in the footnotes to the following table,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder’s name. The
percentage of beneficial ownership is based on 29,358,772 shares of Common
Stock outstanding as of March 24,
2010.
|
|
(2)
|
Includes
the total number of shares of Common Stock that each Selling Stockholder
intends to sell, regardless of the 9.99% beneficial ownership limitation,
more fully explained in footnote 3.
|
(3)
|
Pursuant
to the terms of the Warrants and the Certificate of Designation for the
Series A Preferred Stock, at no time may a purchaser of Series A Preferred
Stock convert such purchaser’s shares into shares of our Common Stock if
the conversion would result in such purchaser beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) more than 9.99% of our then issued and outstanding
shares of Common Stock; provided, however, that upon a purchaser providing
us with sixty-one days’ notice that such purchaser wishes to waive the
cap, then the cap will be of no force or effect with regard to all or a
portion of the Series A Preferred Stock referenced in the waiver notice.
Similarly under the terms of the Warrants, at no time may a holder
exercise such holder’s Warrant if the exercise would result in such holder
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules thereunder) more than 9.99% of our then issued
and outstanding shares of Common Stock; provided, however, that upon a
purchaser providing us with sixty-one days’ notice that such purchaser
wishes to waive the cap, then the cap will be of no force or effect with
regard to all or a portion of the shares referenced in the waiver notice.
The 9.99% beneficial ownership limitation does not prevent a stockholder
from selling some of its holdings and then receiving additional shares.
Accordingly, each stockholder could exercise and sell more than 9.99% of
our Common Stock without ever at any one time holding more than this
limit.
|
(4)
|
Consists
of 4,000 shares of Common Stock, 36,000 shares underlying Series A
Preferred Stock, 10,000 shares underlying Series A Warrants and 10,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Paul Flather has voting and dispositive power over the shares
held by Hermes Partners, LP. Mr. Flather may be deemed to beneficially own
the shares of Common Stock held by Hermes Partners, LP. Mr. Flather
disclaims beneficial ownership of such shares. The address for Hermes
Partners, LP is 1223 Camino Del Mar, Del Mar, CA
92014.
|
(5)
|
Consists
of 19,000 shares of Common Stock, 171,000 shares underlying Series A
Preferred Stock, 47,500 shares underlying Series A Warrants and 47,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Michael Licosati, Managing Partner, has voting and dispositive
power over the shares held by Alder Capital Partners I, L.P. Mr. Licosati
may be deemed to beneficially own the shares of Common Stock held by Alder
Capital Partners I, L.P. Mr. Licosati disclaims beneficial ownership of
such shares. The address for Alder Capital Partners I, L.P. is 1223 Camino
Del Mar, Del Mar, CA 92014.
|
(6)
|
Consists
of 3,428 shares of Common Stock, 30,852 shares underlying Series A
Preferred Stock, 8,570 shares underlying Series A Warrants and 8,570
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
62
|
(7)
|
Consists
of 23,000 shares of Common Stock, 207,000 shares underlying Series A
Preferred Stock, 57,500 shares underlying Series A Warrants and 57,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Qianbai Yang has voting and dispositive power over the shares held
by Snow Hill Developments Limited. Qianbai Yang may be deemed to
beneficially own the shares of Common Stock held by Snow Hill Developments
Limited. Qianbai Yang disclaims beneficial ownership of such shares. The
address for Snow Hill Developments Limited is 5/F, B&H Plaza, 1077
Nanhai Ave., Shekou Shenzhen 518067
China.
|
|
(8)
|
Consists
of 5,000 shares of Common Stock, 45,000 shares underlying Series A
Preferred Stock, 12,500 shares underlying Series A Warrants and 12,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Geoffrey D. Knapp has voting and dispositive power over the
shares held by The Knapp Family Trust, Geoffrey D. Knapp,
Trustee. Mr. Knapp may be deemed to beneficially own the shares
of Common Stock held by The Knapp Family Trust, Geoffrey D. Knapp,
Trustee. Mr. Knapp disclaims beneficial ownership of such shares. The
address for The Knapp Family Trust, Geoffrey D. Knapp, Trustee, is 1031
Keys Drive, Boulder City, NV 89005.
|
|
(9)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Ronald Lazar has voting and dispositive power over
the shares held by IRA FBO Ronald Lazar, Pershing LLC as
Custodian. Mr. Lazar may be deemed to
beneficially own the shares of Common Stock held by the trust. Mr. Lazar
disclaims beneficial ownership of such shares. The address for IRA FBO
Ronald Lazar, Pershing LLC as Custodian is 200 Winston Drive, #3109,
Cliffside Park, NJ 07010.
|
|
(10)
|
Consists
of 4,000 shares of Common Stock, 36,000 shares underlying Series A
Preferred Stock, 10,000 shares underlying Series A Warrants and 10,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Messrs. Ronald Lazar and Anthony G. Polak share voting
and dispositive power over the shares held by RL Capital
Partners. Messrs. Lazar and Polak may be deemed to beneficially
own the shares of Common Stock held by RL Capital Partners. Messrs. Lazar
and Polak disclaim beneficial ownership of such shares. The address for RL
Capital Partners is 405 Lexington Avenue, 2nd
Floor, New York, NY 10174.
|
|
(11)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
(12)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Jack Polak, General Partner, has voting and dispositive power over
the shares held by Domaco Venture Capital Fund. Mr. Polak may be deemed to
beneficially own the shares of Common Stock held by Domaco Venture Capital
Fund. Mr. Polak disclaims beneficial ownership of such shares. The address
for Domaco Venture Capital Fund is 195 Beech Street, Eastchester, NY
10709.
|
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(13)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
63
|
(14)
|
Consists
of 4,000 shares of Common Stock, 36,000 shares underlying Series A
Preferred Stock, 10,000 shares underlying Series A Warrants and 10,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
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(15)
|
Consists
of 21,428 shares of Common Stock, 192,852 shares underlying Series A
Preferred Stock, 53,570 shares underlying Series A Warrants and 53,570
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
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(16)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Gary J. McAdam, Manager, has voting and dispositive
power over the shares held by Trading Systems, LLC. Mr. McAdam
may be deemed to beneficially own the shares of Common Stock held by
Trading Systems, LLC. Mr. McAdam disclaims beneficial ownership of such
shares. The address for Trading Systems, LLC is 14 Red Tail Drive,
Highlands Ranch, CO 80126.
|
|
(17)
|
Consists
of 4,000 shares of Common Stock, 36,000 shares underlying Series A
Preferred Stock, 10,000 shares underlying Series A Warrants and 10,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Lawrence Kaplan has voting and dispositive power
over the shares held by Oppenheimer & Co., Inc. Custodian FBO Lawrence
Kaplan RLURIRA. Mr. Kaplan may be deemed to beneficially own
the shares of Common Stock held by Oppenheimer & Co., Inc. Custodian
FBO Lawrence Kaplan RLURIRA. Mr. Kaplan disclaims beneficial ownership of
such shares. The address for Oppenheimer & Co., Inc. Custodian FBO
Lawrence Kaplan RLURIRA is c/o Oppenheimer & Co., 3310 W. Big Beaver
Road, Troy, MI 48084.
|
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(18)
|
Consists
of 2,900 shares of Common Stock, 26,100 shares underlying Series A
Preferred Stock, 7,250 shares underlying Series A Warrants and 7,250
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(19)
|
Consists
of 4,000 shares of Common Stock, 36,000 shares underlying Series A
Preferred Stock, 10,000 shares underlying Series A Warrants and 10,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(20)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(21)
|
Consists
of 11,400 shares of Common Stock, 102,600 shares underlying Series A
Preferred Stock, 28,500 shares underlying Series A Warrants and 28,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. John S. Lemack has voting and dispositive power over
the shares held by Sandor Capital Master Fund. Mr. Lemack may
be deemed to beneficially own the shares of Common Stock held by Sandor
Capital Master Fund. Mr. Lemack disclaims beneficial ownership of such
shares. The address for Sandor Capital Master Fund is 2828
Routh Street, Suite 500, Dallas, TX
75201.
|
64
|
(22)
|
Consists
of 7,142 shares of Common Stock, 64,278 shares underlying Series A
Preferred Stock, 17,855 shares underlying Series A Warrants and 17,855
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Montgomery Cornell has voting and dispositive power
over the shares held by Shira Capital LLC. Mr. Cornell may be
deemed to beneficially own the shares of Common Stock held by Shira
Capital LLC. Mr. Cornell disclaims beneficial ownership of such shares.
The address for Shira Capital LLC is 71 S. Wacker, Suite 1900, Chicago, IL
60606.
|
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(23)
|
Consists
of 5,714 shares of Common Stock, 51,426 shares underlying Series A
Preferred Stock, 14,285 shares underlying Series A Warrants and 14,285
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(24)
|
Consists
of 1,500 shares of Common Stock, 13,500 shares underlying Series A
Preferred Stock, 3,750 shares underlying Series A Warrants and 3,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Majed Soueidan has voting and dispositive power over
the shares held by Markets Edge Limited. Mr. Soueidan may be
deemed to beneficially own the shares of Common Stock held by Markets Edge
Limited. Mr. Soueidan disclaims beneficial ownership of such shares. The
address for Markets Edge Limited is 116 Pheasant Lane, Collegeville, PA
19426.
|
|
(25)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(26)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Ido Clear has voting and dispositive power over the
shares held by Futurtec, L.P. Mr. Clear may be deemed to
beneficially own the shares of Common Stock held by Futurtec, L.P. Mr.
Clear disclaims beneficial ownership of such shares. The address for
Futurtec, L.P. is 111 Great Neck Rd., Suite 301, Great Neck, NY
11021.
|
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(27)
|
Consists
of 4,285 shares of Common Stock, 38,565 shares underlying Series A
Preferred Stock, 10,713 shares underlying Series A Warrants and 10,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(28)
|
Consists
of 14,825 shares of Common Stock, 128,565 shares underlying Series A
Preferred Stock, 35,713 shares underlying Series A Warrants and 35,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. David Selengot has voting and dispositive power over
the shares held by Venturetek, LP. Mr. Selengot may be deemed to
beneficially own the shares of Common Stock held by Venturetek, LP. Mr.
Selengot disclaims beneficial ownership of such shares. The address for
Venturetek, LP is P.O. Box 339, Lawrence, NY
11559.
|
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(29)
|
Consists
of 1,500 shares of Common Stock, 13,500 shares underlying Series A
Preferred Stock, 3,750 shares underlying Series A Warrants and 3,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
(30)
|
Consists
of 2,140 shares of Common Stock, 19,260 shares underlying Series A
Preferred Stock, 5,350 shares underlying Series A Warrants and 5,350
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Paul Masters has voting and dispositive power over the shares
held by NTC & Co. F/B/O Paul Masters IRA. Mr. Masters may be deemed to
beneficially own the shares of Common Stock held by NTC & Co. F/B/O
Paul Masters IRA. Mr. Masters disclaims beneficial ownership of such
shares. The address for NTC & Co. F/B/O Paul Masters IRA is 717
17th
Street, Suite 2200, Denver, CO
80202-3331.
|
65
|
(31)
|
Consists
of 20,000 shares of Common Stock, 180,000 shares underlying Series A
Preferred Stock, 50,000 shares underlying Series A Warrants and 50,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
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(32)
|
Consists
of 5,714 shares of Common Stock, 51,426 shares underlying Series A
Preferred Stock, 14,285 shares underlying Series A Warrants and 14,285
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Jason Wild has voting and dispositive power over the
shares held by JW Partners, L.P. Mr. Wild may be deemed to beneficially
own the shares of Common Stock held by JW Partners, L.P. Mr. Wild
disclaims beneficial ownership of such shares. The address for JW
Partners, L.P. is 900 Third Avenue, Suite 1901, New York, NY
10022.
|
|
(33)
|
Consists
of 85,714 shares of Common Stock, 771,426 shares underlying Series A
Preferred Stock, 214,285 shares underlying Series A Warrants and 214,285
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Messrs. Steve Taylor and Robert Kirkland, share voting
and dispositive power over the shares held by Taylor International Fund
LTD. Messrs. Taylor and Kirkland may be deemed to beneficially
own the shares of Common Stock held by Taylor International Fund, LTD.
Messrs. Taylor and Kirkland disclaim beneficial ownership of such shares.
The address for Taylor International Fund LTD. is 714 South
Dearborn Street, 2nd
Floor, Chicago, IL 60605.
|
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(34)
|
Consists
of 9,000 shares of Common Stock, 81,000 shares underlying Series A
Preferred Stock, 22,500 shares underlying Series A Warrants and 22,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. John P. Micklitsch, the Managing Partner, has voting
and dispositive power over the shares held by Ancora Greater China Fund,
LP. Mr. Micklitsch may be deemed to beneficially own the shares
of Common Stock held by Ancora Greater China Fund, LP. Mr. Micklitsch
disclaims beneficial ownership of such shares. The address for Ancora
Greater China Fund, LP is 2000 Auburn Dr. Suite 300, Cleveland, OH
44122.
|
|
(35)
|
Consists
of 2,900 shares of Common Stock, 26,100 shares underlying Series A
Preferred Stock, 7,250 shares underlying Series A Warrants and 7,250
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(36)
|
Consists
of 7,100 shares of Common Stock, 63,900 shares underlying Series A
Preferred Stock, 17,750 shares underlying Series A Warrants and 17,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(37)
|
Consists
of 57,142 shares of Common Stock, 514,278 shares underlying Series A
Preferred Stock, 142,855 shares underlying Series A Warrants and 142,855
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Brett Conrad, Managing Member, General Partner has
voting and dispositive power over the shares held by Blue Earth Fund,
LP. Mr. Conrad may be deemed to beneficially own the shares of
Common Stock held by Blue Earth Fund, LP. Mr. Conrad disclaims beneficial
ownership of such shares. The address for Blue Earth Fund, LP is 1312
Cedar St., Santa Monica, CA
90405.
|
66
|
(38)
|
Consists
of 8,571 shares of Common Stock, 77,139 shares underlying Series A
Preferred Stock, 21,428 shares underlying Series A Warrants and 21,428
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Dennis Jason Wong has voting and dispositive power over the
shares held by Dennis Jason Wong, Sole Trustee of the Dennis and Sharon
Wong Family Trust. Mr. Wong may be deemed to beneficially own
the shares of Common Stock held by Dennis Jason Wong, Sole Trustee of the
Dennis and Sharon Wong Family Trust. Mr. Wong disclaims beneficial
ownership of such shares. The address for Dennis Jason Wong, Sole Trustee
of the Dennis and Sharon Wong Family Trust is 88 Kearny Street, Suite
1818, San Francisco, CA 94108.
|
|
(39)
|
Consists
of 7,143 shares of Common Stock, 64,287 shares underlying Series A
Preferred Stock, 17,858 shares underlying Series A Warrants and 17,858
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Messrs. Lawrence J. Butz and John Prinz share voting and
dispositive power over the shares held by Daybreak Special Situations
Master Fund, Ltd. Messrs. Butz and Prinz may be deemed to
beneficially own the shares of Common Stock held by Daybreak Special
Situations Master Fund, Ltd. Messrs. Butz and Prinz disclaim beneficial
ownership of such shares. The address for Daybreak Special Situations
Master Fund, Ltd. is 100 East Cook Avenue, Suite 100, Libertyville, IL
60048.
|
|
(40)
|
Consists
of 1,500 shares of Common Stock, 13,500 shares underlying Series A
Preferred Stock, 3,750 shares underlying Series A Warrants and 3,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(41)
|
Consists
of 8,571 shares of Common Stock, 77,139 shares underlying Series A
Preferred Stock, 21,428 shares underlying Series A Warrants and 21,428
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Rima Salam, Director, has voting and dispositive power
over the shares held by Silver Rock II, Ltd. Rima Salam may be
deemed to beneficially own the shares of Common Stock held by Silver Rock
II, Ltd. Rima Salam disclaims beneficial ownership of such shares. The
address for Silver Rock II, Ltd. is Villa D 103, Palm Jumeriah Island,
Dubai UAE.
|
|
(42)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(43)
|
Consists
of 1,450 shares of Common Stock, 13,050 shares underlying Series A
Preferred Stock, 3,625 shares underlying Series A Warrants and 3,625
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(44)
|
Consists
of 1,500 shares of Common Stock, 13,500 shares underlying Series A
Preferred Stock, 3,750 shares underlying Series A Warrants and 3,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(45)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Eric Allen, Managing Partner, has voting and
dispositive power over the shares held by Brightstar Investment Fund
LP. Mr. Allen may be deemed to beneficially own the shares of
Common Stock held by Brightstar Investment Fund LP. Mr. Allen
disclaims beneficial ownership of such shares. The address for Brightstar
Investment Fund LP is 12720 Huntsman Way, Potomac, MD
20854.
|
67
|
(46)
|
Consists
of 7,000 shares of Common Stock, 63,000 shares underlying Series A
Preferred Stock, 17,500 shares underlying Series A Warrants and 17,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. David Skriloff, Portfolio Manager, has voting and
dispositive power over the shares held by MKM Opportunity Master Fund,
Ltd. Mr. Skriloff may be deemed to beneficially own the shares of Common
Stock held by MKM Opportunity Master Fund, Ltd. Mr. Skriloff disclaims
beneficial ownership of such shares. The address for MKM Opportunity
Master Fund, Ltd. is c/o MKM Capital Advisors, 1515 Broadway, 11th
Floor, New York, NY 10036.
|
|
(47)
|
Consists
of 18,571 shares of Common Stock, 167,139 shares underlying Series A
Preferred Stock, 46,428 shares underlying Series A Warrants and 46,428
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Richard D. Squires has voting and dispositive power
over the shares held by Lennox Capital Partners, LP. Mr.
Squires may be deemed to beneficially own the shares of Common Stock held
by Lennox Capital Partners, LP. Mr. Squires disclaims
beneficial ownership of such shares. The address for Lennox Capital
Partners, LP is 2101 Cedar Springs Road, Suite 1230, Dallas, TX
75201.
|
|
(48)
|
Consists
of 10,000 shares of Common Stock, 90,000 shares underlying Series A
Preferred Stock, 25,000 shares underlying Series A Warrants and 25,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Richard D. Squires has voting and dispositive power
over the shares held by Squires Family LP. Mr. Squires may be
deemed to beneficially own the shares of Common Stock held by Squires
Family LP. Mr. Squires disclaims beneficial ownership of such shares. The
address for Squires Family LP is 2101 Cedar Springs Rd. Suite 1230,
Dallas, TX 75201.
|
|
(49)
|
Consists
of 715 shares of Common Stock, 6,435 shares underlying Series A Preferred
Stock, 1,788 shares underlying Series A Warrants and 1,788 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(50)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(51)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(52)
|
Consists
of 6,715 shares of Common Stock, 60,435 shares underlying Series A
Preferred Stock, 16,788 shares underlying Series A Warrants and 16,788
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Xue Yuchao, Director, has voting and dispositive
power over the shares held by Maple Day Limited. Mr. Yuchao may
be deemed to beneficially own the shares of Common Stock held by Maple Day
Limited. Mr. Yuchao disclaims beneficial ownership of such
shares. The address for Maple Day Limited is Xin Hao Cheng Hua Yuan, Hao
Jin 9e 8A, Futian District, Shenzhen Guangdong
518053.
|
|
(53)
|
Consists
of 8,570 shares of Common Stock, 77,130 shares underlying Series A
Preferred Stock, 21,425 shares underlying Series A Warrants and 21,425
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Charles Smith, General Partner, has voting and
dispositive power over the shares held by Dynacap Global Capital Fund II
LP . Mr. Smith may be deemed to beneficially own the shares of
Common Stock held by Dynacap Global Capital Fund II LP. Mr. Smith
disclaims beneficial ownership of such shares. The address for Dynacap
Global Capital Fund II LP is 1541 E Interstate 30 #140, Rockwall Texas
75087.
|
68
|
(54)
|
Consists
of 14,285 shares of Common Stock, 128,565 shares underlying Series A
Preferred Stock, 35,713 shares underlying Series A Warrants and 35,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Berke Bakay, the principal and portfolio manager of
BBS Capital Fund, LP, has voting and dispositive power over the shares
held by BBS Capital Fund, LP. Mr. Bakay may be deemed to
beneficially own the shares of Common Stock held by BBS Capital Fund, LP.
Mr. Bakay disclaims beneficial ownership of such shares. The address for
BBS Capital Fund, LP is 4975 Preston Park Blvd. Suite # 775W, Plano, TX
75093.
|
|
(55)
|
Consists
of 6,000 shares of Common Stock, 54,000 shares underlying Series A
Preferred Stock, 15,000 shares underlying Series A Warrants and 15,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Corey Mitchell, the managing partner has voting and
dispositive power over the shares held by Trillion Growth China
LP. Mr. Mitchell may be deemed to beneficially own the shares
of Common Stock held by Trillion Growth China LP. Mr. Mitchell disclaims
beneficial ownership of such shares. The address for Trillion Growth China
LP is 1000, 888-3rd
Street S.W., Calgary, AB T2P 5C5,
Canada.
|
|
(56)
|
Consists
of 100,000 shares of Common Stock, 900,000 shares underlying Series A
Preferred Stock, 250,000 shares underlying Series A Warrants and 250,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. William P. Wells has voting and dispositive power
over the shares held by Pope Investments II LLC. Mr. Wells may
be deemed to beneficially own the shares of Common Stock held by Pope
Investments II LLC. Mr. Wells disclaims beneficial ownership of such
shares. The address for Pope Investments II LLC is 5100 Poplar Avenue,
Suite 805, Memphis, TN 38137.
|
(57)
|
Consists
of 114,285 shares of Common Stock, 1,028,565 shares underlying Series A
Preferred Stock, 285,713 shares underlying Series A Warrants and 285,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Kent C. McCarthy, President of Jayhawk Private Equity, LLC
which is the general partner and has voting and dispositive power over the
shares held by Jayhawk Private Equity Fund II, L.P. Mr. McCarthy may be
deemed to beneficially own the shares of Common Stock held by Jayhawk
Private Equity Fund II, L.P.. Mr. McCarthy disclaims beneficial ownership
of such shares. The address for Jayhawk Private Equity Fund II, L.P. is
5410 West 61st
Place, Suite 100, Mission, KS
66205.
|
|
(58)
|
Consists
of 21,429 shares of Common Stock, 192,861 shares underlying Series A
Preferred Stock, 53,573 shares underlying Series A Warrants and 53,573
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Messrs. Peter Siris and Leigh S. Curry, Managing
Director, share voting and dispositive power over the shares held by
Hua-Mei 21st
Century Partners. Messrs. Siris and Curry may be deemed to
beneficially own the shares of Common Stock held by Hua-Mei 21st
Century Partners. Messrs. Siris and Curry disclaim beneficial
ownership of such shares. Peter Siris is the managing director of Hua-Mei
21st
Century Partners. The address for Hua-Mei 21st
Century Partners is 237 Park Avenue, 9th
Floor, New York, NY 10017.
|
(59)
|
Consists
of 7,143 shares of Common Stock, 64,287 shares underlying Series A
Preferred Stock, 17,858 shares underlying Series A Warrants and 17,858
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Messrs. Peter Siris and Leigh S. Curry share voting and dispositive
power over the shares held by Guerilla Partners. Messrs. Siris and Curry
may be deemed to beneficially own the shares of Common Stock held by
Guerilla Partners. Messrs. Siris and Curry disclaim beneficial ownership
of such shares. The address for Guerilla Partners is 237 Park Avenue,
9th
Floor, New York, NY 10017.
|
69
|
(60)
|
Consists
of 5,000 shares of Common Stock, 45,000 shares underlying Series A
Preferred Stock, 12,500 shares underlying Series A Warrants and 12,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(61)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(62)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(63)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(64)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Robert E. Lutz, Trustee, has voting and dispositive
power over the shares held by Lutz Engineering PSP. Mr. Lutz may be deemed
to beneficially own the shares of Common Stock held by Lutz Engineering
PSP. Mr. Lutz disclaims beneficial ownership of such shares. The address
for Lutz Engineering PSP is 10221 E. Hercules Drive, Sun Lakes, AZ
85248.
|
|
(65)
|
Consists
of 400 shares of Common Stock, 3,600 shares underlying Series A Preferred
Stock, 1,000 shares underlying Series A Warrants and 1,000 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(66)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(67)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(68)
|
Consists
of 150 shares of Common Stock, 1,350 shares underlying Series A Preferred
Stock, 375 shares underlying Series A Warrants and 375 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(69)
|
Consists
of 300 shares of Common Stock, 2,700 shares underlying Series A Preferred
Stock, 750 shares underlying Series A Warrants and 750 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
70
|
(70)
|
Consists
of 500 shares of Common Stock, 4,500 shares underlying Series A Preferred
Stock, 1,250 shares underlying Series A Warrants and 1,250 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(71)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(72)
|
Consists
of 300 shares of Common Stock, 2,700 shares underlying Series A Preferred
Stock, 750 shares underlying Series A Warrants and 750 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(73)
|
Consists
of 400 shares of Common Stock, 3,600 shares underlying Series A Preferred
Stock, 1,000 shares underlying Series A Warrants and 1,000 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(74)
|
Consists
of 200 shares of Common Stock, 1,800 shares underlying Series A Preferred
Stock, 500 shares underlying Series A Warrants and 500 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(75)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(76)
|
Consists
of 300 shares of Common Stock, 2,700 shares underlying Series A Preferred
Stock, 750 shares underlying Series A Warrants and 750 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(77)
|
Consists
of 600 shares of Common Stock, 5,400 shares underlying Series A Preferred
Stock, 1,500 shares underlying Series A Warrants and 1,500 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(78)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(79)
|
Consists
of 350 shares of Common Stock, 3,150 shares underlying Series A Preferred
Stock, 875 shares underlying Series A Warrants and 875 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(80)
|
Consists
of 200 shares of Common Stock, 1,800 shares underlying Series A Preferred
Stock, 500 shares underlying Series A Warrants and 500 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
71
|
(81)
|
Consists
of 500 shares of Common Stock, 4,500 shares underlying Series A Preferred
Stock, 1,250 shares underlying Series A Warrants and 1,250 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(82)
|
Consists
of 350 shares of Common Stock, 3,150 shares underlying Series A Preferred
Stock, 875 shares underlying Series A Warrants and 875 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(83)
|
Consists
of 100 shares of Common Stock, 900 shares underlying Series A Preferred
Stock, 250 shares underlying Series A Warrants and 250 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(84)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(85)
|
Consists
of 400 shares of Common Stock, 3,600 shares underlying Series A Preferred
Stock, 1,000 shares underlying Series A Warrants and 1,000 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(86)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(87)
|
Consists
of 400 shares of Common Stock, 3,600 shares underlying Series A Preferred
Stock, 1,000 shares underlying Series A Warrants and 1,000 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(88)
|
Consists
of 100 shares of Common Stock, 900 shares underlying Series A Preferred
Stock, 250 shares underlying Series A Warrants and 250 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(89)
|
Consists
of 300 shares of Common Stock, 2,700 shares underlying Series A Preferred
Stock, 750 shares underlying Series A Warrants and 750 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above. Paul E. Triulzi has voting and dispositive power over
the shares held by Paul E. Triulzi, IRA. Mr. Triulzi may be
deemed to beneficially own the shares of Common Stock held by Paul E.
Triulzi, IRA. Mr. Triulzi disclaims beneficial ownership of such shares.
The address for Paul E. Triulzi, IRA is 112 Spring Lake Ct., Durham, NC
27713.
|
|
(90)
|
Consists
of 1,428 shares of Common Stock, 12,852 shares underlying Series A
Preferred Stock, 3,570 shares underlying Series A Warrants and 3,570
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
72
|
(91)
|
Consists
of 4,285 shares of Common Stock, 38,565 shares underlying Series A
Preferred Stock, 10,713 shares underlying Series A Warrants and 10,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(92)
|
Consists
of 285 shares of Common Stock, 2,565 shares underlying Series A Preferred
Stock, 713 shares underlying Series A Warrants and 713 shares underlying
Series B Warrants, subject to a 9.99% limitation on beneficial ownership
of our Common Stock as more fully described in note 3
above.
|
|
(93)
|
Consists
of 1,500 shares of Common Stock, 13,500 shares underlying Series A
Preferred Stock, 3,750 shares underlying Series A Warrants and 3,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(94)
|
Consists
of 450 shares of Common Stock, 4,050 shares underlying Series A Preferred
Stock, 1,125 shares underlying Series A Warrants and 1,125 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3 above. Mr.
Morris Resner has voting and dispositive power over the shares held by
Cubs Capital c/o Morris Resner. Mr. Resner may be deemed to
beneficially own the shares of Common Stock held by Cubs Capital c/o
Morris Resner. Mr. Resner disclaims beneficial ownership of such shares.
The address for Cubs Capital c/o Morris Resner is 2 Frost Avenue West,
Edison, NJ 08820.
|
(95)
|
Consists
of 5,000 shares of Common Stock, 45,000 shares underlying Series A
Preferred Stock, 12,500 shares underlying Series A Warrants and 12,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Ronald I. Heller has voting and dispositive power over the
shares held by Heller Capital Investments. Mr. Heller may be deemed to
beneficially own the shares of Common Stock held by Heller Capital
Investments. Mr. Heller disclaims beneficial ownership of such shares. The
address for Heller Capital Investments is 700 E. Palisade Avenue,
Englewood Cliffs, NJ 07632.
|
|
(96)
|
Consists
of 2,500 shares of Common Stock, 22,500 shares underlying Series A
Preferred Stock, 6,250 shares underlying Series A Warrants and 6,250
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Steven Hart has voting and dispositive power over the shares
held by Octagon Capital Partners. Mr. Hart may be deemed to
beneficially own the shares of Common Stock held by Octagon Capital
Partners. Mr. Hart disclaims beneficial ownership of such shares. The
address for Octagon Capital Partners is 155 W. 68th
Street, #27E, New York, NY 10023.
|
|
(97)
|
Consists
of 5,714 shares of Common Stock, 51,426 shares underlying Series A
Preferred Stock, 14,285 shares underlying Series A Warrants and 14,285
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Konrad Ackerman, Director, has voting and
dispositive power over the shares held by Alpha Capital. Mr.
Ackerman may be deemed to beneficially own the shares of Common Stock held
by Alpha Capital. Mr. Ackerman disclaims beneficial ownership of such
shares. The address for Alpha Capital is Pradafont 7 Furstentoms 9490
Vaduz, Liechtenstein.
|
|
(98)
|
Consists
of 1,280 shares of Common Stock, 11,520 shares underlying Series A
Preferred Stock, 3,200 shares underlying Series A Warrants and 3,200
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(99)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
73
|
(100)
|
Consists
of 1,570 shares of Common Stock, 14,130 shares underlying Series A
Preferred Stock, 3,925 shares underlying Series A Warrants and 3,925
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Bjorn Torstenson, Managing Director, has voting and
dispositive power over the shares held by Compact Poolen Modehuset
AB. Mr. Torstenson may be deemed to beneficially own the shares
of Common Stock held by Compact Poolen Modehuset AB. Mr. Torstenson
disclaims beneficial ownership of such shares. The address for Compact
Poolen Modehuset AB is Drottninggaten 73 Gothenburg, 41107
Sweden.
|
|
(101)
|
Consists
of 710 shares of Common Stock, 6,390 shares underlying Series A Preferred
Stock, 1,775 shares underlying Series A Warrants and 1,775 shares
underlying Series B Warrants, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above.
|
|
(102)
|
Consists
of 1,425 shares of Common Stock, 12,825 shares underlying Series A
Preferred Stock, 3,563 shares underlying Series A Warrants and 3,563
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(103)
|
Consists
of 7,200 shares of Common Stock, 64,800 shares underlying Series A
Preferred Stock, 18,000 shares underlying Series A Warrants and 18,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(104)
|
Consists
of 1,000 shares of Common Stock, 9,000 shares underlying Series A
Preferred Stock, 2,500 shares underlying Series A Warrants and 2,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(105)
|
Consists
of 3,000 shares of Common Stock, 27,000 shares underlying Series A
Preferred Stock, 7,500 shares underlying Series A Warrants and 7,500
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
(106)
|
Consists
of 1,200 shares of Common Stock, 10,800 shares underlying Series A
Preferred Stock, 3,000 shares underlying Series A Warrants and 3,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Joel Wahlstrom has voting and dispositive power over the shares
held by Olive or Twist Limited. Mr. Wahlstrom may be deemed to
beneficially own the shares of Common Stock held by Olive or Twist
Limited. Mr. Wahlstrom disclaims beneficial ownership of such shares. The
address for Olive or Twist Limited is 68 Hing Man Street, Room 17/f,
Marina House Shaukerwan, Hong Kong.
|
(107)
|
Consists
of 2,850 shares of Common Stock, 25,650 shares underlying Series A
Preferred Stock, 7,125 shares underlying Series A Warrants and 7,125
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Lars Svantemark, Director, has voting and dispositive power
over the shares held by Enebybergs Revisionsbyra AB. Mr. Svantemark may be
deemed to beneficially own the shares of Common Stock held by Enebybergs
Revisionsbyra AB. Mr. Svantemark disclaims beneficial ownership of such
shares. The address for Enebybergs Revisionsbyra AB is Senapsgrand 19
Enebyberg, Sweden 18245.
|
74
|
(108)
|
Consists
of 1,200 shares of Common Stock, 10,800 shares underlying Series A
Preferred Stock, 3,000 shares underlying Series A Warrants and 3,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(109)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(110)
|
Consists
of 3,570 shares of Common Stock, 32,130 shares underlying Series A
Preferred Stock, 8,925 shares underlying Series A Warrants and 8,925
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(111)
|
Consists
of 4,300 shares of Common Stock, 38,700 shares underlying Series A
Preferred Stock, 10,750 shares underlying Series A Warrants and 10,750
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Tommy Martensson, Director, has voting and
dispositive power over the shares held by Garolf AB. Mr.
Martensson may be deemed to beneficially own the shares of Common Stock
held by Garolf AB. Mr. Martensson disclaims beneficial ownership of such
shares. The address for Garolf AB is Floragatan 12 Stockholm,
Sweden 11431.
|
|
(112)
|
Consists
of 4,285 shares of Common Stock, 38,565 shares underlying Series A
Preferred Stock, 10,713 shares underlying Series A Warrants and 10,713
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above. Mr. Lloyd McAdams, Trustee, has voting and dispositive
power over the shares held by Heather U Baines and Lloyd McAdams AB Living
Trust 8/01/2001. Mr. McAdams may be deemed to beneficially own
the shares of Common Stock held by Heather U Baines and Lloyd McAdams AB
Living Trust 8/01/2001. Mr. McAdams disclaims beneficial ownership of such
shares. The address for Heather U Baines and Lloyd McAdams AB Living Trust
8/01/2001 is 1200 Turquesa Lane, Pacific Palisades, CA
90272.
|
|
(113)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(114)
|
Consists
of 2,000 shares of Common Stock, 18,000 shares underlying Series A
Preferred Stock, 5,000 shares underlying Series A Warrants and 5,000
shares underlying Series B Warrants, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in note 3
above.
|
|
(115)
|
Reflects
5,000 shares of Common Stock beneficially owned by the
stockholder.
|
|
(116)
|
Reflects
50,000 shares of Common Stock beneficially owned by the stockholder. The
number of shares beneficially owned prior to the offering also includes
1,000 shares held by Mr. Buley's spouse. Mr. Reed Buley was our former
chief executive officer, director and principal stockholder prior to the
consummation of the Share Exchange.
|
|
(117)
|
Reflects
89,000 shares of Common Stock beneficially owned by the stockholder.
Hayden Communications International Inc. has been engaged as our investor
relations firm. Mr. Matt Hayden has voting and dispositive
power over the shares held by Hayden Communications International Inc. Mr.
Hayden may be deemed to beneficially own the shares of Common Stock held
by Hayden Communications International Inc. The address for Hayden
Communications International Inc. is 2975 Highway A1A, Melbourne Beach, FL
32951.
|
75
|
(118)
|
Reflects
62,400 shares of Common Stock beneficially owned by the stockholder.
Chesapeake Group has been engaged as our investor relations
firm. Kevin Holmes has voting and dispositive power over the
shares held by Chesapeake Group. Mr. Holmes may be deemed to beneficially
own the shares of Common Stock held by Chesapeake Group. The address for
Chesapeake Group is 17 W. Pennsylvania Avenue, Towson, MD
21024.
|
|
(119)
|
Consists
of 725,882 shares of Common Stock underlying placement agent Warrants,
181,473 shares underlying placement agent Series A Warrants and 181,473
shares underlying placement agent Series B Warrants, subject to a 9.99%
limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. The number of shares beneficially owned prior
to the offering also includes 1,070,634 shares of Common Stock held by
TriPoint Capital Advisors, LLC, our financial consultant and an affiliate
of TriPoint Global Equities, LLC. Messrs. Mark Elenowitz and Michael
Boswell share voting and dispositive power over the securities held by
TriPoint Global Equities, LLC. The address for TriPoint Global Equities,
LLC is 17 State Street, 20th
Floor, New York, NY 10004.
|
(120)
|
Consists
of 20,796 shares of Common Stock underlying placement agent Warrants,
5,198 shares underlying placement agent Series A Warrants and 5,198 shares
underlying placement agent Series B Warrants, subject to a 9.99%
limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. Ms. Faith Lee has voting and dispositive power
over the securities held by Syndicated Capital, Inc. The address for
Syndicated Capital, Inc is 1299 Ocean Avenue, Suite 210, Santa Monica, CA
90401.
|
|
(121)
|
Consists
of 2,571 shares of Common Stock underlying placement agent Warrants, 642
shares underlying placement agent Series A Warrants and 642 shares
underlying placement agent Series B Warrants, subject to a 9.99%
limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. Mr. Robert Brown has voting and dispositive
power over the securities held by Brill Securities. The address for Brill
Securities is 152 W. 57th
Street, New York NY 10017.
|
|
(122)
|
Consists
of 21,478 shares of Common Stock underlying placement agent Warrants,
5,369 shares underlying placement agent Series A Warrants and 5,369 shares
underlying placement agent Series B Warrants, subject to a 9.99%
limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. Mr. Bruce Meyers has voting and
dispositive power over the securities held by Meyers Associates
LP. The address for Meyers Associates LP is 45 Broadway, 2nd
Floor, New York NY 10006.
|
(123)
|
Consists
of 16,616 shares of Common Stock underlying placement agent Warrants,
4,154 shares underlying placement agent Series A Warrants and 4,154 shares
underlying placement agent Series B Warrants, subject to a 9.99%
limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. Mr. Tim Mallot has voting and dispositive power
over the securities held by SHP Securities, LLC. The address for SHP
Securities, LLC is 6310 Greenwich Drive, Suite 120, San Diego, CA
92122.
|
76
PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
Shares on any stock exchange, market or trading facility on which the Shares are
traded or quoted or in private transactions. These sales may be at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling Shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits Investors;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the Shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
to
cover short sales made after the date that this registration statement is
declared effective by the SEC;
|
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
Shares at a stipulated price per
share;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell Shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
In
connection with the sale of the Common Stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of Shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of Selling
Stockholders to include the pledgee, transferee or other successors in interest
as Selling Stockholders under this prospectus.
77
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the Shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of Shares
will be paid by the Selling Stockholder and/or the purchasers. Each Selling
Stockholder has represented and warranted to the Company that it acquired the
securities subject to this registration statement in the ordinary course of such
Selling Stockholder’s business and, at the time of its purchase of such
securities such Selling Stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such
securities.
TriPoint
Global Equities, LLC (“TriPoint Global”) is a registered broker dealer and FINRA
member firm and listed as a Selling Stockholder in this prospectus. TriPoint
Global served as placement agent for our Private Placement, which was completed
on February 26, 2010.
We
entered into a placement agent agreement with TriPoint Global on October 27,
2009 whereby we paid a cash fee to TriPoint Global equal to 7% of the gross
proceeds received by us in connection with the Private Placement and we issued
to TriPoint Global and its designees (i) Warrants to purchase 787,342 shares of
Common Stock, (ii) Series A Warrants to purchase 196,836 shares of Common Stock
and (iii) Series B Warrants to purchase 196,836 shares of Common Stock. The
registration statement of which this prospectus forms a part includes the shares
of Common Stock underlying Warrants granted to TriPoint Global and its
designees. The Warrants granted to TriPoint Global and its designees expire on
February 26, 2013. The shares of Common Stock issuable upon exercise of
placement agent Warrants received by TriPoint Global are transferable within
TriPoint Global or to its assigns or designees, at the discretion of TriPoint
Global, and in accordance with the Securities Act of 1933, as
amended.
TriPoint
Capital Advisors, LLC, an affiliate of TriPoint Global, received 820,634 shares
of our Common Stock in February 2010 pursuant to the Share
Exchange.
TriPoint
Global does not have an underwriting agreement with us and/or the Selling
Stockholders and no Selling Stockholders are required to execute transactions
through TriPoint Global. Further, other than any existing brokerage relationship
as customers with TriPoint Global, no Selling Stockholders has any pre-arranged
agreement, written or otherwise, with TriPoint Global to sell their securities
through TriPoint Global.
FINRA
Rule 5110 requires FINRA member firms (unless an exemption applies) to satisfy
the filing requirements of Rule 5110 in connection with the resale, on behalf of
Selling Stockholders, of the securities on a principal or agency basis. NASD
Notice to Members 88-101 states that in the event a Selling Stockholder intends
to sell any of the shares registered for resale in this prospectus through a
member of FINRA participating in a distribution of our securities, such member
is responsible for insuring that a timely filing, if required, is first made
with the Corporate Finance Department of FINRA and disclosing to FINRA the
following:
|
·
|
it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
|
|
·
|
the
complete details of how the selling shareholders’ shares are and will be
held, including location of the particular
accounts;
|
|
·
|
whether
the member firm or any direct or indirect affiliates thereof have entered
into, will facilitate or otherwise participate in any type of payment
transaction with the selling shareholders, including details regarding any
such transactions; and
|
|
·
|
in
the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of FINRA
or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
FINRA for review.
|
78
No FINRA
member firm may receive compensation in excess of that allowable under FINRA
rules, including Rule 2710, in connection with the resale of the securities by
the selling shareholders, which total compensation may not exceed
8%.
We have
advised each Selling Stockholder that it may not use Shares registered on this
registration statement to cover short sales of Common Stock made prior to the
date on which this registration statement shall have been declared effective by
the Commission. If a Selling Stockholder uses this prospectus for any sale of
the Common Stock, it will be subject to the prospectus delivery requirements of
the Securities Act. The Selling Stockholders will be responsible to comply with
the applicable provisions of the Securities Act and Exchange Act, and the rules
and regulations thereunder promulgated, including, without limitation,
Regulation M, as applicable to such Selling Stockholders in connection with
resales of their respective Shares under this registration
statement.
We are
required to pay all fees and expenses incident to the registration of the
Shares, but the Company will not receive any proceeds from the sale of the
Common Stock. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
79
DESCRIPTION
OF SECURITIES
General
Our
authorized capital stock consists of 75,000,000 shares: 50,000,000 shares of
Common Stock are authorized, par value $0.001 per share, of which 29,358,772
shares are outstanding, and 25,000,000 shares of the Company’s preferred stock
are authorized, par value $0.001 per share, of which 15,000,000 are designated
and authorized as Series A Preferred Stock, of which 7,086,078 shares are
outstanding.
Common
Stock
Holders
of Common Stock are entitled to cast one vote for each share on all matters
submitted to a vote of shareholders, including the election of directors. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefore. See “Dividend Policy.” Such holders do not have any preemptive or
other rights to subscribe for additional shares. All holders of Common Stock are
entitled to share ratably in any assets for distribution to shareholders upon
our liquidation, dissolution or winding up. There are no conversion, redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are fully paid and non-assessable.
Preferred
Stock
We have
25,000,000 authorized shares of preferred stock par value $.001 per share, of
which 15,000,000 shares are designated as Series A Preferred Stock, of which
7,086,078 shares are issued and outstanding as of the date of this
prospectus.
Voting
Rights
The
holders of Series A Preferred Stock have class voting rights with respect to
actions that may materially and adversely affect the rights of the holders,
including (i) authorizing, creating, issuing or increasing the authorized or
issued amount of any class or series of preferred stock, ranking pari passu or
senior to the Series A Preferred Stock, with respect to the distribution of
assets on liquidation, (ii) amending, altering or repealing the provisions of
the Series A Preferred Stock, (iii) issuing any shares of Series A Preferred
Stock, (iv) repurchasing, redeeming or paying dividends on, shares of Common
Stock or shares of equity securities that do not rank pari passu or senior to
the Series A Preferred Stock, or “Junior Stock”, (v) amending the articles of
incorporation or by-laws, (vi) effecting a distribution with respect to the
Junior Stock, (vii) reclassifying outstanding securities, (viii) voluntarily
filing for bankruptcy, liquidating assets or making an assignment for the
benefit of creditors, or (ix) materially changing the nature of our
business. Without the affirmative vote or consent of the holder of a
majority of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting, in
which the holders of the Series A Preferred Stock vote separately as a class,
such actions are prohibited. Except with respect to transactions upon which the
Series A Preferred Stock shall be entitled to vote separately as a class and as
otherwise required by Nevada law, the shares of Series A Preferred Stock have no
voting rights. The shares of Common Stock into which the Series A
Preferred Stock are convertible will, upon issuance, have all of the same voting
rights as other issued and outstanding shares of Common Stock and none of the
rights of the Series A Preferred Stock.
Dividends
Rights
The
holders of the Series A Preferred Stock are entitled to dividends payable
quarterly at the rate of 8% per annum, payable at our option in cash or by
issuing to the holder of Series A Preferred Stock such number of additional
Conversion Shares which, when multiplied by $3.50, would equal the amount of
such quarterly dividend not paid in cash.
80
Conversion
of Series A Preferred Stock
At any
time on or after the issuance date, the holder of any such shares of Series A
Preferred Stock may, at the holder’s option, elect to convert all or any portion
of the shares of Series A Preferred Stock held by such person into a number of
fully paid and nonassessable shares of Common Stock equal to the quotient of (i)
the series A liquidation preference amount ($3.50) of the shares of Series A
Preferred Stock being converted divided by (ii) the conversion price, which
initially is $3.50 per share, subject to certain adjustments, such as in the
event of (i) combination, stock split, or reclassification of the Common Stock;
(ii) distribution of dividends; (iii) reclassification, exchange or
substitution, (iv) reorganization, merger, consolidation or sales of assets or
(iv) the issuance or sale of additional shares of Common Stock or Common Stock
equivalents. Pursuant to the terms of the Certificate of Designation, at no time
may a holder of shares of Series A Preferred Stock convert into shares of Common
Stock if the number of shares of Common Stock to be issued pursuant to such
conversion would cause the number of shares of Common Stock beneficially owned
by such holder and its affiliates at such time, when aggregated with all other
shares of Common Stock owned by such holder and its affiliates at such time,
result in such holder and its affiliates beneficially owning in excess of 9.99%
of the then issued and outstanding shares of Common Stock at such time. However,
a holder of Series A Preferred Stock is entitled to waive this cap upon a 61-day
notice to us.
Failure
to Timely Convert
If within
three business days, with respect to our Common Stock being issued upon
conversion, and within five business days in the event a new preferred stock
certificate is being issued, of our receipt of an executed copy of a conversion
notice the transfer agent fails to issue and deliver to a holder the number of
shares of Common Stock to which such holder is entitled upon such holder’s
conversion of the Series A Preferred Stock or within five trading days fails to
issue a new preferred stock certificate representing the number of Series A
Preferred Stock to which such holder is entitled, we will pay additional damages
to such holder on each trading day after such third or fifth trading day, as the
case may be, that such conversion is not timely effected in an amount equal to
0.5% of the product of (A) the sum of the number of shares of Common Stock not
issued to the holder on a timely basis and to which such holder is entitled and,
in the event we failed to deliver a preferred stock certificate to the holder on
a timely basis, the number of shares of Common Stock issuable upon conversion of
the shares of Series A Preferred Stock represented by such certificate, as of
the last possible date which we could have issued such certificate to such
holder timely and (B) the closing bid price of our Common Stock on the last
possible date which we could have issued such Common Stock and such preferred
stock certificate, as the case may be, to such holder timely. If we fail to pay
those additional damages within five trading days of the date incurred, then
such payment will bear interest at the rate of 2.0% per month (prorated for
partial months) until such payments are made.
For the
purposes of this provision with respect to our Common Stock, the term “closing
bid price” shall mean, for any security as of any date, the last closing bid
price of such security on the NASDAQ or other principal exchange on which such
security is traded as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the “pink sheets” by Pink OTC
Markets, Inc. If the closing bid price cannot be calculated for such security on
such date on any of the foregoing bases, the closing bid price of such security
on such date shall be the fair market value as mutually determined by the
Company and the holders of a majority of the outstanding shares of Series A
Preferred Stock, as applicable.
Liquidation
Rights of Series A Preferred Stock
In the
event of the liquidation, dissolution or winding up of our affairs, whether
voluntary or involuntary, the holders of shares of Series A Preferred Stock then
outstanding are entitled to receive, out of our assets available for
distribution to stockholders, a liquidation preference amount of $3.50 per share
for the Series A Preferred Stock, before any payment is made or any assets are
distributed to the holders of the Common Stock or any other junior
stock. If our assets are not sufficient to pay in full the
liquidation preference amount payable to the holders of outstanding shares of
the Series A Preferred Stock preferred stock or any other class of stock ranking
pari passu, as to rights on liquidation, dissolution or winding up, then all of
said assets will be distributed among the holders of the Series A Preferred
Stock and the other classes of stock ranking pari passu with the Series A
Preferred Stock, if any, ratably in accordance with the respective amounts that
would be payable on such shares if all amounts payable thereon were paid in
full. All payments pursuant thereto are to be in cash, property (valued at its
fair market value as determined by an independent appraiser chosen by us and
reasonably acceptable to the holders of a majority of the Series A Preferred
Stock) or a combination thereof; provided, however, that no cash is to be paid
to holders of junior stock unless each holder of the outstanding shares of
Series A Preferred Stock have been paid in cash the full liquidation preference
amount to which such holder is entitled as provided herein.
81
Series
A Warrants and Series B Warrants
Series
A Warrants
We have
Series A Warrants to purchase up to 1,968,363 Series A Warrant Shares
outstanding. The Series A Warrants:
(a) entitle
the holder to purchase that number of Series A Warrant Shares as is equal to 25%
of the aggregate number of shares of Common Stock included in the Units and
underlying the Series A Preferred Stock purchased by such holder;
(b) are
exercisable at any time after the Closing Date and shall expire three years
therefrom;
(c) are
exercisable, in whole or in part, at the Series A Warrant Exercise Price of
$4.50 per share, subject to adjustment upon the occurrence of certain events,
including recapitalizations or consolidations, combinations of our Common
Stock;
(d) may
be exercised only for cash (except that there will be a cashless exercise option
at any time during which a registration statement covering such shares is not
effective); and
(e) are
callable by us following the date that the Common Stock equals or exceeds $9.00
for 15 consecutive trading days and the average daily trading volume of the
Common Stock exceeds 75,000 shares for 15 consecutive trading days at a price
equal to $0.001 per called Series A Warrant Share.
Series
B Warrants
We have
Series B Warrants to purchase up to 1,968,363 Series B Warrant Shares
outstanding. The Series B Warrants:
(a) entitle
the holder to purchase that number of Series B Warrant Shares as is equal to 25%
of the aggregate number of shares of Common Stock included in the Units and
underlying the Series A Preferred Stock purchased by such holder;
(b) are
exercisable at any time after the Closing Date and shall expire three years
therefrom;
(c) are
exercisable, in whole or in part, at the Series B Warrant Exercise Price of
$5.75 per share, subject to adjustment upon the occurrence of certain events,
including recapitalizations or consolidations, combinations of our Common
Stock;
(d) may
be exercised only for cash (except that there will be a cashless exercise option
at any time during which a registration statement covering such shares is not
effective); and
(e) are
callable by us following the date that the Common Stock equals or exceeds $11.50
for 15 consecutive trading days and the average daily trading volume of the
Common Stock exceeds 75,000 shares for 15 consecutive trading days at a price
equal to $0.001 per called Series B Warrant Share.
As of the
date of this prospectus, none of the Series A Warrants or Series B Warrants have
been exercised.
82
No
fractional shares will be issued upon exercise of the Warrants. If, upon
exercise of a Warrant, a holder would be entitled to receive a fractional
interest in a share, we shall round the number of shares to be issued upon
exercise up to the nearest whole number of shares. Pursuant to the terms of the
Warrants, we will not effect the exercise of any Warrants, and no person who is
a holder of any Warrant has the right to exercise his/her Warrant, if after
giving effect to such exercise, such person would beneficially own in excess of
9.99% of the then outstanding shares of our Common Stock. However, a holder of
Warrants is entitled to waive this restriction upon 61 days prior written notice
to us.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
Common Stock is quoted on the OTC Bulletin Board under the trading symbol
“RMSI.” The last reported price for our Common Stock on the OTC Bulletin Board
on March 24, 2010 was $4.50 per share.
The
following table sets forth the high and low bid information for our Common Stock
for the period from January 1, 2008 through March 24, 2010. The OTC Bulletin
Board quotations reflect inter-dealer prices, are without retail markup,
markdowns or commissions, and may not represent actual
transactions.
Common Stock
|
||||||||
High
|
Low
|
|||||||
First
quarter 2008
|
$ | 0.45 | $ | 0.45 | ||||
Second
quarter 2008
|
$ | 0.45 | $ | 0.45 | ||||
Third
quarter 2008
|
$ | 0.45 | $ | 0.25 | ||||
Fourth
quarter 2008
|
$ | 0.25 | $ | 0.25 | ||||
First
quarter 2009
|
$ | 0.25 | $ | 0.25 | ||||
Second
quarter 2009
|
$ | 0.25 | $ | 0.25 | ||||
Third
quarter 2009
|
$ | 0.25 | $ | 0.25 | ||||
Fourth
quarter 2009
|
$ | 0.25 | $ | 0.25 | ||||
First
quarter 2010 through March 24, 2010*
|
$ | 6.08 | $ | 2.00 |
*No bid
information is available for the period commencing on January 1, 2010 and ending
on February 28, 2010.
Holders
of Common Stock
As of
March 24, 2010, there were of record 153 holders of Common Stock.
Dividend
Policy
We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends on our Common Stock for the foreseeable future.
Future
cash dividends, if any, will be at the discretion of our Board of Directors and
will depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other factors
as our Board of Directors may deem relevant. We can pay dividends only out of
our profits or other distributable reserves and dividends or distribution will
only be paid or made if we are able to pay our debts as they fall due in the
ordinary course of business.
Securities
Authorized for Issuance Under Equity Compensation Plans
As of the
date of this prospectus, we do not have any equity compensation
plans.
83
Equity
Repurchases
In
connection with the Share Exchange, in February 2010, we repurchased and
cancelled 4,690,000 shares of our Common Stock from our then chief executive
officer and principal stockholder, Reed Buley.
Indemnification
of Directors and Officers
Our
officers and directors are indemnified as provided by the Nevada Revised
Statutes (“NRS”) and our bylaws and articles of incorporation.
Under the
NRS, director immunity from liability to a company or its shareholders for
monetary liabilities applies automatically unless it is specifically limited by
a company’s articles of incorporation that is not the case with our articles of
incorporation. Excepted from that immunity are:
|
(1)
|
a
willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
|
|
(2)
|
a
violation of criminal law (unless the director had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to
believe that his or her conduct was
unlawful);
|
|
(3)
|
a
transaction from which the director derived an improper personal profit;
and
|
|
(4)
|
willful
misconduct.
|
Our
bylaws and articles of incorporation provide that we will indemnify our
directors, officers, employees, and agents, to the fullest extent to the extent
required by the Nevada Revised Statutes and shall indemnify such individuals to
the extent permitted by the Nevada Revised Statutes. We may purchase
and maintain liability insurance, or make other arrangements for such
obligations or otherwise, to the extent permitted by the Nevada Revised
Statutes.
84
DISCLOSURE
OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The
following is a summary of the relevant provisions in our articles of
incorporation, bylaws and Nevada law with regard to limitation of liability and
indemnification of our officers, directors and employees. The full provisions
are contained in the Nevada Revised Statutes and such documents.
Indemnification. Our
directors and officers are indemnified as provided by our articles of
incorporation, our bylaws and the Nevada Revised Statutes. Our bylaws and
articles of incorporation provide that we will indemnify our directors,
officers, employees, and agents, to the fullest extent to the extent required by
the Nevada Revised Statutes and shall indemnify such individuals to the extent
permitted by the Nevada Revised Statutes. We may purchase and maintain liability
insurance, or make other arrangements for such obligations or otherwise, to the
extent permitted by the Nevada Revised Statutes. Our bylaws and Nevada laws
permit us to 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 or she 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 or her in connection with
the action, suit or proceeding if he has exercised his powers in good faith and
with a view to the interests of the corporation; or acted in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
We will
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 or
she 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 or her in connection
with the defense or settlement of such action or suit if he or she acted in good
faith and in a manner which he or she 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 person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amount 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.
Limitation of Liability. Our
articles of incorporation limit the liability of our directors and officers
under certain circumstances. Our articles of incorporation provide that the
liability of directors or officers for monetary damages are eliminated to the
fullest extent permitted by Nevada law.
In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will (unless in the opinion of our counsel, the
matter has been settled by controlling precedent) submit to a court of
appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue. The legal process relating to this matter if
it were to occur is likely to be very costly and may result in us receiving
negative publicity, both of which are likely to materially reduce the market and
price for our shares.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been advised that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
85
LEGAL
MATTERS
The
validity of the shares of our Common Stock offered hereby has been passed upon
for us by Lionel Sawyer & Collins, Las Vegas, Nevada.
EXPERTS
The
audited financial statements as of and for the years ended March 31, 2009 and
2008 have been included in this prospectus in reliance upon the report of AGCA
CPA Limited, an independent registered public accounting firm and their
authority as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We are a
public company and file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document we file
at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available, at no charge, to the public at the SEC’s web site at http://www.sec.gov.
86
FINANCIAL
STATEMENTS
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
STOCKHOLDERS AND BOARD OF DIRECTORS OF
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED:
(formerly
LIAN DI PETROCHEMICAL TECHNOLOGY LIMITED)
We have
audited the accompanying consolidated balance sheets of China Liandi Clean
Technology Engineering Limited and its subsidiaries (collectively the “Company”)
as of March 31, 2009 and 2008 and the related consolidated statements of income,
shareholders’ equity and cash flows for each of the two years ended March 31,
2009. These consolidated 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 the 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 audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial positions of the Company as
of March 31, 2009 and 2008, the consolidated results of its operations and its
consolidated cash flows for each of the two years ended March 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ AGCA
CPA Limited
Hong
Kong, March 3, 2010
F-1
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONSOLIDATED
BALANCE SHEETS
(AMOUNTS
EXPRESSED IN US DOLLAR)
As of March 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 5,018,813 | $ | 6,550,092 | ||||
Restricted
cash
|
989,475 | 2,245,561 | ||||||
Accounts
receivable, net of $nil allowance
|
15,054,940 | 2,956,785 | ||||||
Deferred
costs of revenue
|
15,063,883 | 4,231,315 | ||||||
Inventories
|
72,199 | 30,871 | ||||||
Prepaid
expenses and other current assets
|
21,973,197 | 4,235,341 | ||||||
Pledged
trading securities
|
29,380 | 313,508 | ||||||
Total
current assets
|
58,201,887 | 20,563,473 | ||||||
Other
Assets
|
||||||||
Property
and equipment, net
|
145,733 | - | ||||||
Intangible
assets, net
|
5,774,660 | - | ||||||
Total
assets
|
$ | 64,122,280 | $ | 20,563,473 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | - | $ | 360,828 | ||||
Deferred
revenue
|
18,938,681 | 5,702,911 | ||||||
Other
payables and accrued expenses
|
1,275,711 | 72,291 | ||||||
Provision
for income tax
|
59,869 | 23,387 | ||||||
Payable
for intangible
|
5,968,490 | - | ||||||
Due
to shareholders
|
26,242,336 | 9,896,966 | ||||||
Total
current liabilities
|
52,485,087 | 16,056,383 | ||||||
Total
liabilities
|
52,485,087 | 16,056,383 | ||||||
Commitments
and Contingencies (Note 16)
|
||||||||
Shareholders’
Equity
|
||||||||
Common
stock, $1 par value, 50,000 shares authorized, issued and
outstanding
|
50,000 | 50,000 | ||||||
Statutory
reserves
|
1,138,733 | - | ||||||
Retained
earnings
|
10,392,768 | 4,444,517 | ||||||
Accumulated
other comprehensive income
|
55,692 | 12,573 | ||||||
Total
shareholders’ equity
|
11,637,193 | 4,507,090 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 64,122,280 | $ | 20,563,473 |
The
accompanying notes form an integral part of these consolidated financial
statements.
F-2
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS
EXPRESSED IN US DOLLAR)
Year ended March 31,
|
||||||||
2009
|
2008
|
|||||||
NET
REVENUE
|
$ | 31,265,285 | $ | 6,849,284 | ||||
Cost
of revenue
|
(21,404,779 | ) | (3,216,227 | ) | ||||
Gross
profit
|
9,860,506 | 3,633,057 | ||||||
Operating
expenses:
|
||||||||
Selling
|
(1,228,481 | ) | (313,251 | ) | ||||
General
and administrative
|
(1,177,820 | ) | (263,757 | ) | ||||
Research
and development
|
(42,158 | ) | - | |||||
Total
operating expenses
|
(2,448,459 | ) | (577,008 | ) | ||||
Income
from operations
|
7,412,047 | 3,056,049 | ||||||
Other
income (expenses), net
|
||||||||
Interest
income
|
48,390 | 21,820 | ||||||
Interest
and bank charges
|
(366,232 | ) | (46,313 | ) | ||||
Exchange
gains (losses), net
|
37,695 | 14,705 | ||||||
Other
|
(3,196 | ) | (11,433 | ) | ||||
(283,343 | ) | (21,221 | ) | |||||
Income
before income tax
|
7,128,704 | 3,034,828 | ||||||
Income
tax expense
|
(41,720 | ) | (23,594 | ) | ||||
NET
INCOME
|
7,086,984 | 3,011,234 | ||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||
Foreign
currency translation adjustment
|
43,119 | 12,574 | ||||||
COMPREHENSIVE
INCOME
|
$ | 7,130,103 | $ | 3,023,808 |
The
accompanying notes form an integral part of these consolidated financial
statements.
F-3
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(AMOUNTS
EXPRESSED IN US DOLLAR)
Year ended March 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 7,086,984 | $ | 3,011,234 | ||||
Adjustments
for:
|
||||||||
Depreciation
of property and equipment
|
23,474 | - | ||||||
Amortization
of intangible assets
|
198,777 | - | ||||||
Impairment
of inventories
|
30,998 | - | ||||||
Loss
on short-term investments
|
9,799 | 16,232 | ||||||
Decrease
(increase) in assets:
|
||||||||
Accounts
receivable
|
(12,038,588 | ) | (2,915,718 | ) | ||||
Inventories
|
(72,306 | ) | (30,804 | ) | ||||
Deferred
costs, prepaid expenses and other current assets
|
(13,648,574 | ) | (4,930,549 | ) | ||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
(361,069 | ) | 286,946 | |||||
Deferred
revenue and accruals
|
14,381,319 | 2,384,583 | ||||||
Provision
for income tax
|
36,261 | 23,336 | ||||||
Net
cash used in operating activities
|
(4,352,925 | ) | (2,154,740 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from sales of short-term investments
|
274,329 | 49,390 | ||||||
Decrease
(increase) in restricted cash
|
1,260,985 | (2,240,666 | ) | |||||
Purchase
of short-term investments
|
- | (116,109 | ) | |||||
Purchase
of property and equipment
|
(168,857 | ) | - | |||||
Purchase
of intangible assets
|
(5,825 | ) | - | |||||
(Advance
to) repayment from other entities
|
(14,907,083 | ) | 957,473 | |||||
Net
cash used in investing activities
|
(13,546,451 | ) | (1,349,912 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Advance
from shareholders
|
16,371,471 | 9,900,523 | ||||||
Net
cash provided by financing activities
|
16,371,471 | 9,900,523 | ||||||
Effect
of foreign currency translation on cash
|
(3,374 | ) | 13,280 | |||||
Net
(decrease) increase in cash and cash equivalents
|
(1,531,279 | ) | 6,409,151 | |||||
Cash
and cash equivalents, beginning of year
|
6,550,092 | 140,941 | ||||||
CASH
AND CASH EQUIVALENTS, end of year
|
$ | 5,018,813 | $ | 6,550,092 | ||||
SUPPLEMENTAL
DISCLOSURE INFORMATION
|
||||||||
Cash
paid for interests
|
$ | 262,146 | $ | 16,717 | ||||
Cash
paid for income tax
|
$ | 647 | $ | 1,785 | ||||
NONCASH INVESTING AND FINANCING TRANSACTIONS | ||||||||
Payable for intangibles (Note 9) | $ | - | $ | 5,941,459 |
The
accompanying notes form an integral part of these consolidated financial
statements.
F-4
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(AMOUNTS
EXPRESSED IN US DOLLAR)
Accumulated
|
||||||||||||||||||||||||
other
|
||||||||||||||||||||||||
Ordinary Shares
|
Statutory
|
Retained
|
comprehensive
|
|||||||||||||||||||||
Number
|
Amount
|
reserves
|
earnings
|
income
|
Total
|
|||||||||||||||||||
Balance,
April 1, 2007
|
50,000 | $ | 50,000 | $ | - | $ | 1,433,283 | $ | (1 | ) | $ | 1,483,282 | ||||||||||||
Net
income for the year
|
- | - | - | 3,011,234 | - | 3,011,234 | ||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 12,574 | 12,574 | ||||||||||||||||||
Comprehensive
income
|
3,023,808 | |||||||||||||||||||||||
Balance,
March 31, 2008
|
50,000 | 50,000 | - | 4,444,517 | 12,573 | 4,507,090 | ||||||||||||||||||
Net
income for the year
|
- | - | - | 7,086,984 | - | 7,086,984 | ||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 43,119 | 43,119 | ||||||||||||||||||
Comprehensive
income
|
7,130,103 | |||||||||||||||||||||||
Appropriations
to statutory reserves
|
1,138,733 | (1,138,733 | ) | - | - | |||||||||||||||||||
Balance,
March 31, 2009
|
50,000 | $ | 50,000 | $ | 1,138,733 | $ | 10,392,768 | $ | 55,692 | $ | 11,637,193 |
The
accompanying notes form an integral part of these consolidated financial
statements.
F-5
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
NOTES
TO CONSOLIDAED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED MARCH 31, 2009 AND 2008.
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION
|
Nature
of operations
China
Liandi Clean Technology Engineering Limited (formerly known as Lian Di
Petrochemical Technology Limited) (“China Liandi”) is a holding company and,
through its subsidiaries, primarily engages in distributing of clean technology
for refineries (unheading units for the delayed coking process), distributing of
a wide range of petroleum and petrochemical valves and equipments, providing
systems integration, developing and marketing optimization software for the
polymerization process and providing related technical and engineering services
to large domestic Chinese petroleum and petrochemical companies and other energy
companies. China Liandi together with its subsidiaries are
collectively referred to as the “Company”.
Corporate
organization
China
Liandi was incorporated with limited liability on July 28, 2004 in the British
Virgin Islands under the International Business Companies Act, with a registered
and paid up capital of $50,000.
China
Liandi changed its name from State Expert Limited to Lian Di Petrochemical
Technology Limited on February 21, 2009, and further to China Liandi Clean
Technology Engineering Limited on January 7, 2010.
Details
of China Liandi’s subsidiaries as of March 31, 2009 are as follows:
Subsidiaries’ names
|
Place and date of
incorporation
|
Percentage
of
ownership
by the
Company
|
Principal activities
|
|||
Hua
Shen Trading
(International)
Limited
(“Hua
Shen”)
|
Hong
Kong
January
20, 1999
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services
|
|||
Petrochemical
Engineering
Limited
(“Petro
HK”)
|
Hong
Kong
September
13, 2007
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services, and investment holding
|
|||
Bright
Flow Control Ltd.
(“Bright
Flow”)
|
Hong
Kong
December
17, 2007
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services
|
|||
Beijing
Jianxin
Petrochemical
Engineering
Ltd.
(“Beijing
Jianxin”)
|
People’s
Republic of China (“PRC”)
May
6, 2008
|
100%
(through
Petro
HK)
|
Delivering
of industrial valves and other equipment with the related integration and
technical services, developing and marketing optimization software for
polymerization processes, and provision of delayed coking solutions for
petrochemical, petroleum and other energy
companies
|
F-6
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION
(CONTINUED)
|
Corporate
organization (continued)
In July
2004, China Liandi was founded and owned as to 60% by Mr. Jianzhong Zuo (“Mr.
Zuo”) and 40% by another third-party minority shareholder. On October 2, 2007,
Mr. Zuo acquired from that minority shareholder the remaining 40% interest in
China Liandi, and hence became the sole shareholder of China
Liandi. On March 6, 2008, SJ Asia Pacific Limited (a company
incorporated in the British Virgin Island and wholly owned by SJI Inc., which
was incorporated in Japan and whose shares are listed on Jasdaq Securities
Exchange, Inc. in Japan) acquired 51% interest in China Liandi from Mr.
Zuo. As a result, China Liandi is currently owned as to 51% by SJ
Asia Pacific Limited and 49% by Mr. Zuo. Mr. Zuo is also the Chief Executive
Officer and Chairman of the Company.
Hua Shen
was founded by Mr. Zuo in 1999. On January 8, 2008, China Liandi
acquired 100% ownership interest in Hua Shen from Mr. Zuo. As Hua Shen and China
Liandi had been under common control, the acquisition of Hua Shen by China
Liandi has been accounted for using the “as if” pooling method of
accounting.
In 2007,
China Liandi established Petro HK and Bright Flow, as wholly-owned subsidiaries,
in Hong Kong. In 2008, Petro HK established Beijing Jianxi, as a wholly-owned
subsidiary, in the PRC.
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of preparation and consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances between the Company and its subsidiaries are eliminated upon
consolidation.
Use
of estimates
The
preparation of the these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the related disclosure of contingent assets and liabilities at the date of
these consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Accordingly, actual results
may differ from these estimates under different assumptions or
conditions.
Cash
and cash equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Because of the short maturity of
these investments, the carrying amounts approximate their fair
value. Restricted cash is excluded from cash and cash
equivalents.
Accounts
receivable
Accounts
receivable is stated at cost, net of an allowance for doubtful accounts. The Company
sets aside an allowance for doubtful accounts to account for any estimated
losses resulting from the failure of customers to make required payments. The
Company reviews the accounts receivable on a periodic basis and makes allowances
where there is doubt as to the collectibility of individual balances. In
evaluating the collectibility of individual receivable balances, the Company
considers many factors, including the age of the balance, the customer’s payment
history, its current credit-worthiness and current economic
trends.
F-7
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Inventories
are stated at the lower of cost, determined on a specific identification basis,
or market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
will write down the inventories to market value if it is below cost. The
management also regularly evaluates the composition of its inventories to
identify slow-moving and obsolete inventories to determine if valuation
allowance is required.
Property
and equipment
Property
and equipment are stated at cost
less accumulated depreciation and accumulated impairment losses, if any. Gains
or losses on disposals are reflected as gain or loss in the year of disposal.
The cost of improvements that extend the life of property and equipment are capitalized. These capitalized
costs may include structural improvements, equipment and fixtures. All ordinary
repair and maintenance costs are expensed as incurred.
Depreciation for financial reporting
purposes is provided using the straight-line method over the estimated useful
lives of the assets as follows:
Useful
Life
|
|
Leasehold
improvements
|
5 years
|
Office equipment
|
5
years
|
The
carrying value of property and equipment is assessed annually and when factors
indicating impairment is present, the carrying value of the property and
equipment is reduced by the amount of the impairment. The Company determines the
existence of such impairment by measuring the expected future cash flows
(undiscounted and without interest charges) and comparing such amount to the net
asset carrying value. An impairment loss, if exists, is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the
asset.
Intangible
assets
Purchased
software and copyrights are initially recorded at costs and amortized on a
straight-line basis over the shorter of the contractual terms or estimated
useful economic life of 2 to 10 years.
Impairment of long-lived
assets
The Company reviews and evaluates its
long-lived assets for impairment when events or changes in circumstances
indicate that the related
carrying amounts may not be recoverable. An impairment is considered to exist if
the total estimated future cash flows on an undiscounted basis are less than the
carrying amount of the assets, including goodwill, if any. An impairment loss is
measured and recorded based on discounted estimated
future cash flows. In estimating future cash flows, assets are grouped at the
lowest level for which there are identifiable cash flows that are largely
independent of future cash flows from other asset
groups.
F-8
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Revenue recognition
Revenue
is recognized when the following four criteria are met as prescribed by U.S.
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 104 (“SAB 104”): (i) persuasive evidence of an arrangement exists,
(ii) product delivery has occurred
or the services have been rendered, (iii) the fees are fixed or
determinable, and (iv) collectibility is reasonably assured.
Multiple-deliverable
arrangements
The
Company derives revenue from fixed-price sale contracts with customers that may
provide for the Company to deliver equipment with varied performance
specifications specific to each customer and provide the technical services for
installation, integration, testing etc. of the equipment. The contract price is
inclusive of the technical services. These sale contracts include multiple
deliverables. Because it is considered installation and integration are
essential to the functionality of the equipment and due to the lack of objective
and reliable evidence of fair value for each deliverable included in the
arrangement, a combined unit of accounting is used pursuant to ASC Topic 605, Revenue
Recognition (formerly EITF 00-21, Revenue Arrangements with Multiple
Elements). In addition, the arrangement generally includes customer
acceptance criteria that cannot be tested before installation and integration at
the customer’s site, revenue recognition is deferred until customer acceptance,
indicated by an acceptance certificate signed off by customer.
The
Company may also provide its customers with a warranty for, in general, one year
following the customer's acceptance of the installed equipment. Some contracts
require that 5% to 15% of the contract price be held as retainage for quality
warranty and only due for payment by the customer upon expiry of the warranty
period. For those contracts with retainage clauses, the Company defers the
recognition of the amounts retained as revenue until expiry of the warranty
period when collectibility can reasonably be assured. The Company has not
provided for warranty costs for those contracts without retainage clauses, as
the relevant estimated costs were insignificant based on historical
experience.
Product
only
Revenue derived from sale contracts that
provide for delivery of products only is recognized when the titles to the
products pass to customers.
Software
sale
The Company recognizes revenue from the
delivering of data processing platform software when the software is delivered
to and accepted by the customer, pursuant to ASC Topic 985, Software (formerly
Statement of Position, or SOP 97-2, Software
Revenue Recognition, as
amended) and in accordance with SAB 104. Cost of software revenue include
amortization of software copyright.
Service
The Company recognizes revenue from
provision of services when the service has been performed, in accordance with
SAB 104.
The
Company is subject to business tax at 5% and value added tax at 17% on the
revenues earned for services provided and products sold in the PRC,
respectively. The Company presents its revenue net of business tax and related
surcharges and value added tax, as well as discounts and returns. There were no
product returns for the two years ended March 31, 2009.
F-9
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Deferred revenue and
costs
Deferred
revenue represents payments received from customers on equipment delivery and
installation contracts prior to customer acceptance. As revenues are
deferred, the related costs of equipment paid to suppliers are also deferred.
The deferred revenue and costs are recognized in the consolidated statements of
income in the period in which the
criteria for revenue recognition are satisfied as discussed
above.
Research and development
expenses
Research
and development costs are charged to expense when incurred.
Advertising
and promotion costs
Advertising
and promotion costs are charged to expense when incurred. During the
two years ended March 31, 2009, advertising and promotion costs were
insignificant.
Shipping
and handling cost
Shipping
and handling costs are charged to expense when incurred. Shipping and
handling costs were $316,454 and $105,450 for the years ended March 31, 2009 and
2008, respectively.
Income taxes
The Company accounts for income taxes
in accordance with FASB ASC Topic 740. ASC Topic 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.
In July
2006, the FASB issued ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — An interpretation of FASB Statement No. 109) which became
effective for fiscal years beginning after December 15, 2006. The interpretation
prescribes a recognition threshold and a measurement attribute for the financial
statements recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company’s adoption of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 did
not result in any adjustments to the opening balance of the Company’s retained
earnings as of April 1, 2007.
Comprehensive income
FASB ASC Topic 220, Comprehensive
Income, establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. Comprehensive income and loss
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income
arose from foreign currency translation adjustments.
F-10
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Foreign currency
The Company uses the United States
dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The
subsidiaries within the Company maintain their books and records in
their
respective functional
currency, Chinese Renminbi (“RMB”) and Hong Kong dollars
(“HK$”), being the lawful
currency in the PRC and
Hong Kong, respectively.
Assets and liabilities of the subsidiaries are translated from RMB or HK$ into U.S. Dollars using the applicable
exchange rates prevailing at the balance sheet date. Items on the statements of
income and comprehensive
income and cash flows are
translated at average exchange rates during the reporting period. Equity
accounts are translated at historical rates. Adjustments resulting from the
translation of the Company’s financial statements are recorded as accumulated
other comprehensive income.
The exchange rates used to translate
amounts in RMB and HK$ into U.S. Dollars for the purposes of
preparing the consolidated financial statements are as
follows:
March 31, 2009
|
March 31, 2008
|
|||
Balance
sheet items, except for equity
accounts
|
US$1=RMB6.8359
US$1=HK$7.7502
|
US$1=RMB7.0190
US$1=HK$7.7821
|
||
Items
in statements of income and cash
flows
|
US$1=RMB6.8670
US$1=
HK$7.7769
|
US$1=RMB7.4606
US$1=HK$7.7991
|
No representation is made that the
RMB and HK$ amounts could have been, or could be,
converted into U.S. dollars at the above rates.
Whilst RMB is not a freely convertible
currency, its value against U.S. dollars and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions. Any significant revaluation of RMB may materially affect the
Company’s financial condition in terms of U.S. dollar reporting. The
exchange rates used to translate amounts in RMB into U.S. Dollars are based on the rates
quoted by the People’s Bank of
China.
Commitments and
contingencies
The Company follows ASC Subtopic 450-20,
Loss
Contingencies in
determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses
from loss contingencies are accrued by a charge to income when information
available prior to issuance of the financial statements indicates that it is
probable that a liability could be been incurred and the amount of the loss can be reasonably
estimated. Legal expenses associated with the contingency are expensed as
incurred. If a loss contingency is not probable or reasonably estimable,
disclosure of the loss contingency is made in the financial statements when
it is at least reasonably possible that a
material loss could be incurred.
F-11
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Fair value
ASC Topic 820, Fair Value
Measurement and Disclosures, defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. This topic also establishes a fair value hierarchy which
requires classification based on observable and unobservable inputs when
measuring fair value. There are three levels of inputs that may be used to
measure fair value:
Level 1
-
|
Quoted prices in active markets
for identical assets or
liabilities.
|
Level 2
-
|
Observable inputs other than Level
1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for substantially the
full term of the assets or
liabilities.
|
Level 3
-
|
Unobservable inputs that are
supported by little or no market activity and that are significant to the
fair value of the assets or
liabilities.
|
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.
The carrying values of cash and cash
equivalents, trade and other receivables and payables, and short-term debts
approximate fair values due to their short maturities.
Assets
and liabilities measured at fair value on a recurring basis are summarized as
follows:
As of March 31, 2009
|
||||||||||||||||
Fair
value measurement using inputs
|
Carrying
|
|||||||||||||||
Financial
instruments
|
Level
1
|
Level
2
|
Level 3
|
amount
|
||||||||||||
Short-term
investment:
|
||||||||||||||||
Marketable
equity securities
|
$ | 29,380 | $ | - | $ | - | $ | 29,380 | ||||||||
Total
|
$ | 29,380 | $ | - | $ | - | $ | 29,380 |
As of March 31, 2008
|
||||||||||||||||
Fair
value measurement using inputs
|
Carrying
|
|||||||||||||||
Financial
instruments
|
Level
1
|
Level
2
|
Level 3
|
amount
|
||||||||||||
Short-term
investment:
|
||||||||||||||||
Unlisted
unit trusts
|
$ | - | $ | 262,911 | $ | - | $ | 262,911 | ||||||||
Marketable
equity securities
|
50,597 | - | - | 50,597 | ||||||||||||
Total
|
$ | 50,597 | $ | 262,911 | $ | - | $ | 313,508 |
There was no asset or liability measured
at fair value on a non-recurring basis as of March 31, 2009 and
2008.
F-12
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
In June
2009, the FASB established the FASB Accounting Standards CodificationTM (ASC)
as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The ASC superseded all previously existing non-SEC
accounting and reporting standards, and any prior sources of U.S. GAAP not
included in the ASC or grandfathered are not authoritative. New accounting
standards issued subsequent to June 30, 2009 are communicated by the FASB
through Accounting Standards Updates (ASUs). The ASC did not change current U.S.
GAAP but changes the approach by
referencing authoritative literature by topic (each a “Topic”) rather than by
type of standard. The ASC is effective for interim and annual periods
ending after September 15, 2009. Adoption of the ASC did not have a material
impact on the Company’s Consolidated Financial Statements, but references in the Company’s Notes
to Consolidated Financial Statements to former FASB positions, statements,
interpretations, opinions, bulletins or other pronouncements are now presented
as references to the corresponding Topic in the ASC.
New
accounting pronouncement to be adopted
Effective
April 1, 2009, the first day of fiscal 2010, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, Determination of the
Useful Life of Intangible Assets), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets. The Company will apply ASC 350-30 and ASC 275-10-50
prospectively to intangible assets acquired subsequent to the adoption date. The
adoption of these revised provisions had no impact on the Company’s Consolidated
Financial Statements.
Effective
April 1, 2009, the first day of fiscal 2010, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
Disclosures about
Derivative Instruments and Hedging Activities), which amends and expands previously
existing guidance on derivative instruments to require tabular disclosure of the
fair value of derivative instruments and their gains and losses., This ASC also requires disclosure
regarding the credit-risk related contingent features in derivative agreements,
counterparty credit risk, and strategies and objectives for using derivative
instruments. The adoption of this ASC did not have a material impact on the
Company’s Consolidated Financial Statements.
Upon initial adoption of
SFAS 157 on April 1, 2008,
the Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2, Effective Date of
FASB Statement 157), which
deferred the provisions of previously issued fair value guidance for
nonfinancial assets and liabilities to the first fiscal period beginning
after November 15, 2008. Deferred nonfinancial assets and liabilities include
items such as goodwill and other non-amortizable intangibles. Effective April
1, 2009, the Company adopted the fair value guidance for nonfinancial assets and
liabilities. The adoption of FASB ASC 820-10 did not have a material impact on
the Company’s Consolidated Financial Statements.
Effective
April 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160,
Non-controlling
Interests in Consolidated Financial Statements — an amendment of ARB No.
51), which amends
previously issued guidance to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the non-controlling interest be clearly
identified and presented on the face of the consolidated income
statement. The adoption of the provisions in this ASC did not have a
material impact on the Company’s Consolidated Financial
Statements.
F-13
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (continued)
Effective
April 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R,
Business
Combinations), which
establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in an acquiree and the
goodwill acquired. In addition, the provisions in this ASC require
that any additional reversal of deferred tax asset valuation allowance
established in connection with fresh start reporting on January 7, 1998 be
recorded as a component of income tax expense rather than as a reduction to
the goodwill established in connection with the fresh start reporting.
The Company will apply ASC 805-10
to any business combinations subsequent to adoption.
Effective April 1, 2009, the Company
adopted FASB ASC 805-20 (formerly FSP FAS 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies), which
amends ASC 805-10 to require that an acquirer recognize at fair value, at
the acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of ASC Topic 450,
Contingences, to
determine whether the contingency should be recognized at the acquisition date
or after such date. The adoption of ASC 805-20 did not have a
material impact on the Company’s Consolidated Financial
Statements.
Effective July 1, 2009, the Company
adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and Accounting Principles
Board 28-1, Interim Disclosures
about Fair Value of Financial Instruments), which amends previous guidance to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of FASB ASC 825-10-65 did not have a material impact on
the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted
FASB ASC 320-10-65 (formerly FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). Under ASC 320-10-65, an
other-than-temporary impairment must be recognized if the Company has the intent
to sell the debt security or the Company is more likely than not will be
required to sell the debt security before its anticipated recovery. In addition,
ASC 320-10-65 requires
impairments related to credit loss, which is the difference between the present
value of the cash flows expected to be collected and the amortized cost basis
for each security, to be recognized in earnings while impairments related to all
other factors to be recognized in other comprehensive income. The adoption of
ASC 320-10-65 did not have
a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS
157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly), which
provides guidance on how to determine the fair value of assets and liabilities
when the volume and level of activity for the asset or liability has
significantly decreased when compared with normal market activity for the asset
or liability as well as guidance on identifying circumstances that indicate a
transaction is not orderly. The adoption of ASC 820-10-65 did not have a
material impact on the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted
FASB ASC 855-10 (formerly SFAS 165, Subsequent
Events), which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date, but before financial statements are issued or are
available to be issued. Adoption of ASC 855-10 did not have a
material impact on the Company’s Consolidated Financial
Statements.
F-14
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (continued)
In
December 2008, the FASB issued ASC
715, Compensation –
Retirement Benefits (formerly FASB FSP FAS 132(R)-1,
Employers’
Disclosures about Postretirement Benefit Plan Assets), which expands the disclosure
requirements about plan assets for defined benefit pension plans and
postretirement plans. The Company has adopted these disclosure requirements in
the quarter ended December 31, 2009. The adoption of these disclosure
requirements did not have any material effect on the Company’s Consolidated
Financial Statements.
In August, 2009, the FASB issued ASC
Update No. 2009-05 to provide guidance on measuring the fair value of
liabilities under FASB ASC 820 (formerly SFAS 157, Fair Value
Measurements). The Company has adopted
Update 2009-05 in the quarter ended December 31, 2009. The adoption of this Update did not have
any material effect on the Company’s Consolidated Financial
Statements.
In June 2009, the FASB issued SFAS
No. 166, Accounting for
Transfers of Financial Assets – an amendment of FASB Statement
No. 140, (codified by
ASU No. 2009-16 issued in December 2009). SFAS
No. 166 limits the circumstances in which a financial asset should be
derecognized when the transferor has not transferred
the entire financial asset by taking into consideration the transferor’s
continuing involvement. The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale. The concept of a qualifying
special-purpose entity is removed from SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
along with the exception from applying FIN 46(R), Consolidation of
Variable Interest Entities.
The standard is effective for the first annual reporting period that begins
after November 15, 2009 (i.e. the Company’s fiscal ending March 31, 2011).
Earlier application is prohibited. It is expected the adoption of this Statement
will have no material effect on the Company’s Consolidated Financial
Statements.
In June 2009, the FASB issued SFAS
No. 167, Amendments to FASB
Interpretation No. 46(R), (codified by ASU No.
2009-17 issued in December 2009). The standard
amends FIN No. 46(R) to require a company to analyze whether its interest
in a variable interest entity (“VIE”) gives it a controlling financial interest.
A company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance. Ongoing reassessments of whether a company is the primary
beneficiary are also required by the standard. SFAS No. 167 amends the
criteria to qualify as a primary beneficiary as well as how to determine the
existence of a VIE. The standard also eliminates certain exceptions that were
available under FIN No. 46(R). This Statement will be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009 (i.e. the Company’s fiscal ending March 31, 2011).
Earlier application is prohibited. Comparative disclosures will be required for
periods after the effective date. It is expected the adoption of this Statement
will have no material effect on the Company’s Consolidated Financial
Statements.
In October 2009, the FASB concurrently
issued the following ASC Updates (ASU):
· ASU No. 2009-13—Revenue Recognition
(ASC Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No.
08-1). ASU No. 2009-13 modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements, such as product,
software, services or support, to a customer at different times as part of a
single revenue generating transaction. This standard provides
principles and application guidance to determine whether multiple deliverables
exist, how the individual deliverables should be separated and how to allocate
the revenue in the arrangement among those separate deliverables. The standard
also expands the disclosure requirements for multiple deliverable revenue
arrangements.
F-15
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (continued)
· ASU No. 2009-14—Software (ASC Topic
985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No.
09-3).
ASU No. 2009-14 removes
tangible products from the scope of software revenue recognition guidance and
also provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product, such as embedded software, are
within the scope of the software revenue guidance.
ASU No. 2009-13 and ASU No. 2009-14
should be applied on a prospective basis for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be adopted in
the same period using the same transition method. The Company expects to apply
these ASU Updates on a prospective basis for revenue arrangements entered into
or materially modified beginning April 1, 2011. The Company is
currently evaluating the potential impact these ASC Updates may have on its
financial position and results of operations.
In October 2009, the FASB also issued
ASU No. 2009-15—Accounting for
Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or
Other Financing. ASU 2009-15 amends ASC 470-20,
Debt
with Conversion and Other Options, to provide accounting and reporting
guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 with retrospective application
required.
In January 2010, the FASB issued the
following ASC Updates:
· ASU No. 2010-01—Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and
Cash. This Update clarifies
that the stock portion of a distribution to shareholders that allows them to
elect to receive cash or stock with a potential limitation on the total amount
of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this Update are effective for interim and annual
periods ending on or after December 15, 2009 with retrospective
application.
· ASU No. 2010-02—Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This Update
amends Subtopic 810-10 and related guidance to clarify that the scope of the
decrease in ownership provisions of the Subtopic and related guidance applies to
(i) a subsidiary or group of assets that is a business or nonprofit activity;
(ii) a subsidiary that is a business or nonprofit activity that is transferred
to an equity method investee or joint venture; and (iii) an exchange of a group
of assets that constitutes a business or nonprofit activity for a
non-controlling interest in an entity, but
does not apply to: (i) sales of in substance real estate; and (ii) conveyances
of petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in Subtopic
810-10).
· ASU No. 2010-05—Compensation—Stock
Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of
Compensation. This Update
simply codifies EITF Topic D-110, “Escrowed Share Arrangements and the
Presumption of Compensation” issued on June 18, 2009. In EITF Topic No.
D-110, SEC staff clarified that entities should consider the substance of the
transaction in evaluating whether the presumption of compensation may be
overcome, including whether the transaction was entered into for a reason
unrelated to employment, such as to facilitate a financing transaction. In that
situation, the staff generally believes that the escrowed shares should be
reflected as a discount in the allocation of proceeds.
F-16
NOTE 2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (continued)
· ASU No. 2010-06—Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value
Measurements. This Update amends Subtopic 820-10 that requires new
disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3
fair value measurements. This Update also amends Subtopic 820-10 to clarify
certain existing disclosures. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after December 15,
2010.
The Company expects that the adoption of
the above Updates issued in January 2010 will not have any significant impact on
its financial position and
results of operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
NOTE 3
|
RESTRICTED
CASH
|
Restricted
cash represents the Company’s bank deposits held as collaterals for the
Company’s credit facilities as discussed in Note 11.
NOTE 4
|
ACCOUNTS RECEIVABLE,
NET
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
receivable
|
$ | 15,054,940 | $ | 2,956,785 | ||||
Less:
Allowance for doubtful debts
|
- | - | ||||||
$ | 15,054,940 | $ | 2,956,785 |
Based on
the Company’s assessment of collectibility, there has been no allowance for
doubtful accounts recognized during the two years ended March 31,
2009.
NOTE 5
|
INVENTORIES
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Finished
goods, consisting of parts
|
$ | 103,197 | $ | 30,871 | ||||
Less:
Allowance for stock obsolescence
|
(30,998 | ) | - | |||||
$ | 72,199 | $ | 30,871 |
F-17
March
31,
|
||||||||
2009
|
2008
|
|||||||
Prepaid
operating expenses
|
$ | 1,534 | $ | 6,589 | ||||
Tender
deposits
|
150,509 | - | ||||||
Rental
deposits
|
66,684 | - | ||||||
Prepayment
to suppliers
|
6,488,056 | 4,148,012 | ||||||
Advances
to staff for normal business purposes
|
105,632 | 13,564 | ||||||
Other
receivables from unrelated entities, net of $nil allowance
|
15,160,782 | 67,176 | ||||||
Total
|
$ | 21,973,197 | $ | 4,235,341 |
NOTE
7
|
PLEDGED
TRADING SECURITIES
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Unlisted unit
trusts
|
$ | - | $ | 262,911 | ||||
Marketable
equity securities
|
29,380 | 50,597 | ||||||
$ | 29,380 | $ | 313,508 |
As of March 31, 2009 and March 31, 2008,
all of the Company’s trading securities were pledged as
collaterals for the Company’s banking facilities (see Note 11). The unit trusts and marketable equity
securities are reported at fair value based on quoted market prices in less
active (Level 2 inputs) and active (Level 1 inputs) markets, respectively, with
gains or losses resulting from changes in fair value recognized currently in
earnings.
NOTE
8
|
PROPERTY
AND EQUIPMENT
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Office
equipment
|
$ | 49,909 | $ | - | ||||
Leasehold
improvements
|
119,383 | - | ||||||
Total
cost
|
169,292 | - | ||||||
Less:
Accumulated depreciation
|
(23,559 | ) | - | |||||
Net
|
$ | 145,733 | $ | - |
Depreciation expenses in aggregate for
the years ended March 31, 2009 and 2008 were $23,474 and $nil respectively.
F-18
NOTE
9
|
INTANGIBLE
ASSETS
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Computer
software
|
$ | 5,852 | $ | - | ||||
Software
copyright
|
5,968,489 | - | ||||||
Less:
Accumulated amortization
|
(199,681 | ) | - | |||||
Net
|
$ | 5,774,660 | $ | - |
In
December 2008, the Company purchased a software copyright on data processing
platform software for application in petrochemical productions for a cash
consideration of RMB40,800,000 (or $5,941,459), which is due for payment by
March 31, 2010. This software copyright has been registered with the National
Copyright Administration of the People’s Republic of China in the name of
Beijing Jianxin and is protected under the relevant copyright law of the PRC for
50 years from November 11, 2008, the date of first publication of the software.
This software copyright is amortized over its estimated useful life of ten years
using the straight-line method.
Amortization expenses for the years
ended March 31, 2009 and 2008 were $198,777 and $nil respectively.
NOTE 10
|
OTHER PAYABLES AND ACCRUED
EXPENSES
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Business
tax and value added tax payable
|
$ | 1,173,497 | $ | - | ||||
Accrued
operating expenses
|
47,938 | 25,070 | ||||||
Other
payables
|
54,276 | 47,221 | ||||||
Total
|
$ | 1,275,711 | $ | 72,291 |
F-19
NOTE 11
|
CREDIT
FACILITIES
|
As of March 31, 2009, the Company had
available banking facilities (“General Facilities”) which consisted of combined overdraft,
guarantee line and import loan facilities up to an aggregate amount of
HK$15,000,000 (equivalent to $1,935,494), and facilities for negotiation of
export documentary credit bills against letters of indemnity up to
HK$1,500,000 (equivalent to approximately $193,600). Guarantee line represents
performance or payment guarantees issued by the bank on behalf of the Company.
On August 6, 2009, the combined overdraft, guarantee line and import loan facilities under the General
Facilities were reduced to HK$10,000,000 (equivalent to approximately
$1,290,300), which has remained available up to the date of approval of these
financial statements. The General Facilities are subject to the bank’s review by July 15,
2010.
As of March 31, 2009, there were
outstanding shipping guarantees of $443,701 and irrevocable letters of credit of
$1,039,653, related to the Company’s imports, issued by the bank on behalf
of the Company under the General Facilities. There was no other borrowing under
the General Facilities as of March 31, 2009.
Collaterals for the General Facilities
include the Company’s bank deposits and marketable
securities, an assignment over an insurance policy in the name of Mr. Jianzhong
Zuo (CEO of the Company),
an unlimited guarantee from Mr. Jianzhong Zuo, and a letter of undertaking from the
Company to maintain the Company’s tangible net worth (i.e. paid-up
capital plus retained earnings) at no less than HK$5,000,000 (equivalent to
approximately
$645,100).
NOTE
12
|
STATUTORY
RESERVES
|
The
Company’s subsidiary, Beijing Jianxin, incorporated in the PRC is required on an
annual basis to make appropriations of retained earnings set at certain
percentage of after-tax profit determined in accordance with PRC accounting
standards and regulations (“PRC GAAP”). Beijing Jianxin must make appropriations
to (i) general reserve and (ii) enterprise expansion fund in
accordance with the Law of the PRC on Enterprises Operated Exclusively with
Foreign Capital.
The
general reserve fund requires annual appropriations of 10% of after-tax profit
(as determined under PRC GAAP at each year-end and after setting off against any
accumulated losses from prior years) until such fund has reached 50% of Beijing
Jianxin’s registered capital whereas enterprise expansion fund appropriation is
at its discretion. Appropriation to the general reserve must be made before
distribution of dividends to stockholders. The general reserve fund and
statutory reserve fund can only be used for specific purposes, such as setting
off the accumulated losses, enterprise expansion or increasing the registered
capital. The enterprise expansion fund was mainly used to expand the production
and operation; it also may be used for increasing the registered
capital.
Appropriations
to these funds are classified in the consolidated balance sheets as statutory
reserves. During the years ended March 31, 2009 and 2008, the Company made total
appropriations of $1,138,733 and $nil from retained earnings to these statutory
reserves, respectively.
There are
no legal requirements in the PRC to fund these reserves by transfer of cash to
restricted accounts, and the Company has not done so.
F-20
NOTE
13
|
INCOME
TAXES
|
The entities within the Company file
separate tax returns in the
respective tax jurisdictions that they operate.
British Virgin
Islands
China Liandi, being incorporated in the British
Virgin Islands (“BVI”), is not subject to any income tax in
the BVI.
Hong Kong
Under the Inland Revenue Ordinance of Hong Kong, only profits
arising in or derived from Hong Kong are chargeable to Hong Kong profits tax,
whereas the residence of a taxpayer is not relevant. Therefore, Hua Shen, Petro
HK and Bright Flow are generally subject to Hong Kong income tax on its taxable income derived from the
trade or businesses carried out by them in Hong Kong at 16.5% for the year ended
March 31, 2009 and 17.5% for the year ended March 31, 2008.
PRC
In March 2007, the PRC government
enacted the PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated
related regulation, Implementing Regulations for the PRC Enterprise Income Tax
Law. The law and regulation became effective from January 1, 2008. The PRC
Enterprise Income Tax Law, among other things, imposes a unified income tax rate
of 25% for both domestic and foreign invested enterprises registered in the
PRC.
Beijing Jianxin being established in the
PRC is generally subject to PRC enterprise income tax (“EIT”). Beijing Jianxin
has been recognized by the relevant PRC tax authority as a software enterprise
with its own software copyright and is entitled to tax preferential treatment –
a tax holiday for two-year EIT exemption from its first profitable year and a
50% reduction on its EIT rate for the three ensuing years.
The Company’s income tax expense consisted
of:
Year
ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Current – PRC income
tax
|
$ | 41,720 | $ | 23,594 | ||||
Deferred
|
- | - | ||||||
Total
|
$ | 41,720 | $ | 23,594 |
A reconciliation of the provision for
income taxes determined at the US federal corporate
income tax rate to the Company’s effective
income tax rate is as follows:
Year
ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Pre-tax
income
|
$ | 7,128,704 | $ | 3,034,828 | ||||
US
federal rate
|
35 | % | 35 | % | ||||
Income tax expense
computed at U.S.
federal rate
|
2,495,046 | 1,062,190 | ||||||
Reconciling
items:
|
||||||||
Rate differential for domestic
earnings
|
(346,216 | ) | (531,093 | ) | ||||
Tax holiday of Beijing
Jianxin
|
(2,846,832 | ) | - | |||||
Non-deductible/taxable expenses
(income)
|
734,181 | (507,304 | ) | |||||
Other
|
5,541 | (199 | ) | |||||
Effective tax
expense
|
$ | 41,720 | $ | 23,594 |
As of
March 31, 2009 and 2008, the Company did not have any significant temporary
differences and carryforwards that may result in deferred tax.
F-21
NOTE
13
|
INCOME
TAXES (CONTINUED)
|
Uncertainties
exist with respect to how the New EIT Law applies to the tax residency status of
the Company's subsidiaries organized outside of the PRC. The New EIT Law
includes a provision specifying that legal entities organized outside of the PRC
will be considered residents for PRC income tax purposes if their place of
effective management or control is within the PRC. The Implementation Rules to
the New Law provide that non-resident legal entities will be considered PRC
residents if substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc.
occurs within the PRC. However, because the New EIT Law and
Implementation Rules are new, no official guidance or application of this new
“residency” classification has been available. Despite the uncertainties on the
issue, the Company does not believe that its legal entities organized outside of
the PRC should be treated as PRC residents for the New EIT Law's purposes. If
one or more of the Company's legal entities organized outside of the China were
characterized as China tax residents, the impact would adversely affect the
Company's results of operation.
The
Company has made its assessment of the level of tax authority for each tax
position (including the potential application of interest and penalties) based
on the technical merits, and has measured the unrecognized tax benefits
associated with the tax positions. Based on the evaluation by the Company, it
was concluded that there are no significant uncertain tax positions requiring
recognition in the consolidated financial statements.
The
Company classifies interest and/or penalties related to unrecognized tax
benefits as a component of income tax provisions; however, as of March 31, 2009
and 2008, there was no interest and penalties related to uncertain tax
positions, and the Company has no material unrecognized tax benefit which would
materially affect the effective income tax rate in future
periods. The Company does not anticipate any significant increases or
decreases to its liability for unrecognized tax benefit within the next 12
months.
The new EIT law also imposes a
withholding tax of 10% unless reduced by a tax treaty, for dividends distributed
by a PRC-resident enterprise to its immediate holding company outside the PRC
for earnings accumulated beginning on January 1, 2008 and undistributed earnings
generated prior to January 1, 2008 are exempt from such withholding tax. The
Company has not provided for withholding income taxes on accumulated earnings of
Beijing Jianxi as of December 31, 2009 or March 31, 2009 since its earnings are
intended to be reinvested indefinitely in the overseas jurisdictions. It is not
practicable to estimate the amount of additional taxes that might be payable on
such undistributed earnings.
According
to the Hong Kong profits tax law, the statue of limitations is six
years. Accordingly, the income tax returns of the Company’s Hong Kong
subsidiaries for the years ended March 31, 2004 through 2009 are open to
examination by the Hong Kong tax authority.
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the
underpayment of taxes is due to computational or other errors made by the
taxpayer or the withholding agent. The statute of limitations extends
to five years under special circumstances. In the case of transfer pricing
issues, the statute of limitation is ten years. There is no statute of
limitation in the case of tax evasion. Accordingly, the income tax returns of
Beijing Jianxi for the years ended March 31, 2007 through 2009 are open to
examination by the PRC state and local tax authorities.
F-22
NOTE
14
|
DUE
TO SHAREHOLDERS
|
March
31,
|
||||||||
2009
|
2008
|
|||||||
Due
to Mr. Zuo (shareholder, CEO and chairman of the Company, see also Note
1)
|
$ | 4,581,934 | $ | 9,896,966 | ||||
Due
to SJ Asia Pacific Limited
(shareholder of the Company, see also Note 1)
|
21,660,402 | - | ||||||
Total
|
$ | 26,242,336 | $ | 9,896,966 |
The
amount due to Mr. Zuo is unsecured, interest free and payable on demand. The
amount due to SJ Asia Pacific Limited is also unsecured and payable on demand,
but bears interest at 3% to 5% per annum.
F-23
NOTE
15
|
CERTAIN
RISKS AND CONCENTRATION
|
Credit
risk and concentration of customers
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, trading
securities, accounts receivable, and prepayments and other current assets. As of
December 31, 2009, March 31, 2009 and 2008, substantially all of the Company’s
cash and cash equivalents and trading securities were held by major financial
institutions located in the PRC and Hong Kong, which management believes are of
high credit quality.
The
Company primarily derived its revenue from petroleum, petrochemical and energy
companies operating in the PRC and had certain concentration of customers as
follows:
· As
of March 31, 2009, four customers individually accounted for 39%, 37%, 11% and
10% of the accounts receivable of the Company, respectively. As of
March 31, 2008, one single customer accounted for 100% of the accounts
receivable of the Company. Except for the afore-mentioned, there was
no other single customer who accounted for more than 10% of the Company’s
accounts receivable as of March 31, 2009 or 2008.
· During
the year ended March 31, 2009, three customers individually accounted for 30%,
17% and 15% of the Company’s net revenue, respectively. During the
year ended March 31, 2008, two customers individually accounted for 43% and 42%
of the Company’s net revenue, respectively. Except for the
afore-mentioned, there was no other single customer who accounted for more than
10% of the Company’s net revenue for the each of two years ended March 31,
2009.
Concentration
of suppliers
The
Company sourced industrial valves and other equipment from a few suppliers who
individually accounted for more than 10% of the Company’s costs of revenue:
during the year ended March 31, 2009, five suppliers altogether accounted for
83% of the Company’s costs of revenue (23%, 18%, 15%, 15% and 12%
individually). During the year ended March 31, 2008, two suppliers
altogether accounted for 84% of the Company’s costs of revenue (42% and 42%
individually).
Risk
arising from operations in foreign countries
The
majority of the Company’s operations are conducted within the PRC. The Company’s
operations in the PRC are subject to various political, economic, and other
risks and uncertainties inherent in the PRC. Among other risks, the Company’s
operations in the PRC are subject to the risks of restrictions on transfer of
funds, export duties, quotas, and embargoes, domestic and international customs
and tariffs, changing taxation policies, foreign exchange restrictions; and
political conditions and governmental regulations.
Currency
convertibility risk and restriction on dividends and net
assets
The
Company’s PRC subsidiary may only pay dividend out of its retained earnings
determined in accordance with the accounting standards and regulations in the
PRC and after it has met the PRC requirements for appropriation to statutory
reserves (see Note 12).
Part of
the Company’s businesses is transacted in RMB, which is not freely convertible
into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People’s Bank of China.
Approval of foreign currency payments by the People’s Bank of China or other
regulatory institutions requires submitting a payment application form together
with suppliers’ invoices, shipping documents and signed contracts. These
exchange control measures imposed by the PRC government authorities may restrict
the ability of the Company’s PRC subsidiary (i.e. Beijing Jianxi) to transfer
its net assets, which amounted to $12,735,897 as of March 31, 2009, to the
Company through loans, advances or cash dividends.
F-24
NOTE
16
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases Commitments
In the
normal course of business, the Company entered into operating lease agreements
for offices rental. The Company was obligated under operating leases requiring
minimum rentals as of March 31, 2009 as follows:
Payable
within fiscal year ending March 31,
|
||||
-
2010
|
$ | 386,985 | ||
-
2011
|
379,204 | |||
-
2012
|
267,857 | |||
-2013
|
219,385 | |||
-
2014
|
14,016 | |||
-
Thereafter
|
- | |||
Total
minimum lease payments
|
$ | 1,267,447 |
During
the years ended March 31, 2009 and 2008, rental expenses under operating leases
amounted to $377,317and $62,390, respectively.
NOTE
17
|
SEGMENT
DATA
|
The
Company follows FASB ASC Topic 280, Segment Reporting, which
requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their
performance.
The
Company operates and manages its business as a single segment that includes
primarily the delivering of industrial valves and other equipment with related
technical services, and selling of related data processing platform software for
applications in petroleum and petrochemical productions.
The
following tables set out the analysis of the Company’s net revenue:
Year ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Product and services
|
||||||||
Industrial
valves and other equipment with related technical services
|
$ | 25,952,152 | $ | 3,898,944 | ||||
Data
processing platform software for applications in petroleum and
petrochemical productions
|
4,791,901 | 2,950,340 | ||||||
Technical
consultancy services
|
521,232 | - | ||||||
Total
|
$ | 31,265,285 | $ | 6,849,284 |
During
the two years ended March 31, 2009, the Company derived all of its revenue from
delivering products and services to customers whose operations were located in
China (including Hong Kong).
F-25
NOTE
18
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated events subsequent to the balance sheet date through March
3, 2010, which represents the date these financial statements were available to
be issued.
Share
Exchange
On
February 26, 2010, the Company entered into a Share Exchange Agreement (the
“Exchange Agreement”) with Remediation Services, Inc. (“Remediation”, a company
incorporated in Nevada and whose shares are listed on the Over-The-Counter
Bulletin Board) and shareholders of the Company and Remediation. Pursuant to the
terms of the Exchange Agreement, the Company’s shareholders transferred to
Remediation all of the Company’s shares in exchange for the issuance of
27,354,480 shares of Remediation’s common stock (“Common Stock”), par value
$0.001 per share (such transaction, the “Share Exchange”).
Prior to
the Share Exchange, Remediation had 5,906,950 shares of common stock issued and
outstanding. Immediately prior to the Share Exchange, 4,690,000 shares of
Remediation’s common stock then outstanding were cancelled and retired, so that
immediately after the Share Exchange Remediation had 28,571,430 shares issued
and outstanding. The Company also deposited $275,000 into an escrow account
which amount was paid to an owner of the cancelled shares of Remediation, as a
result of the Share Exchange having been consummated.
The Share
Exchange resulted in a change-in-control of Remediation as the Company’s
shareholders have acquired the majority ownership of the combined
entity.
In
accordance with the Accounting and Financial Reporting Interpretations and
Guidance issued by the staff of the U.S. Securities and Exchange Commission (the
“SEC”), the Share Exchange will be accounted for as a reverse acquisition
whereby Remediation (the legal acquirer) is considered the accounting acquiree
and the Company (the legal acquiree) is considered the accounting acquirer. The
consolidated financial statements of the combined entity will be in substance
those of the Company’s, with the assets and liabilities, and revenues and
expenses, of Remediation being included effective from the date of consummation
of the Share Exchange. Remediation will be deemed to be a continuation of the
Company’s business. The outstanding stock of Remediation prior to the Share
Exchange will be accounted for at their net book value with no goodwill being
recognized.
Private
Placement
Immediately
after the Share Exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with certain accredited investors
(collectively, the “Investors”) for the issuance and sale in a private placement
of 787,342 units (the “Units”) at a purchase price of $35 per Unit, consisting
of, in the aggregate, (a) 7,086,078 shares of Series A convertible preferred
stock, par value $0.001 per share (the “Series A Preferred Stock”) convertible
into the same number of shares of Common Stock, (b) 787,342 shares of Common
Stock (the “Shares”), (c) three-year Series A Warrants to purchase up to
1,968,363 shares of Common Stock, at an exercise price of $4.50 per share (the
“Series A Warrant Shares”), and (d) three-year Series B Warrants to purchase up
to 1,968,363 shares of Common Stock, at an exercise price of $5.75 per share
(the “Series B Warrant Shares”), for aggregate gross proceeds of approximately
$27.56 million (the “Private Placement”).
In
conjunction with the Private Placement, the Company also entered into the
following agreements:
▪
|
a
registration rights agreement (the “Registration Rights Agreement”) with
the Investors, in which the Company agreed to file a registration
statement (the “Registration Statement”) with the SEC to register for
resale the Shares, the Common Stock issuable upon conversion of the Series
A Preferred Stock, the Series A Warrant Shares and the Series B Warrant
Shares, within 30 calendar days of the Closing Date, and to have the
registration statement declared effective within 150 calendar days of the
Closing Date or within 180 calendar days of the Closing Date in the event
of a full review of the registration statement by the
SEC.
|
F-26
NOTE
18
|
SUBSEQUENT
EVENTS (CONTINUED)
|
▪
|
a
make good escrow agreement with the Investors (the “Securities Escrow
Agreement”), pursuant to which China LianDi Energy Resources Engineering
Technology Ltd. (“LianDi Energy”), an affiliate of Mr. Zuo, CEO and
Chairman of the Company, delivered into an escrow account 1,722,311 shares
of Common Stock to be used as a share escrow for the achievement of a
Fiscal Year 2011 net income performance threshold of $20.5
million.
|
▪
|
a
lock-up agreement whereby LianDi Energy is prohibited from selling
Remediation’s securities until six months after the effective date of the
registration statement required to be filed under the Registration Rights
Agreement. For one year thereafter, it will be permitted to
sell up to 1/12 of its initial holdings every
month.
|
F-27
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(AMOUNTS
EXPRESSED IN US DOLLAR)
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 18,153,762 | $ | 5,018,813 | ||||
Restricted
cash
|
1,640,333 | 989,475 | ||||||
Accounts
receivable, net of $nil allowance
|
8,246,985 | 15,054,940 | ||||||
Notes
receivable, net of $nil allowance
|
5,519,312 | - | ||||||
Deferred
costs of revenue
|
1,282,365 | 15,063,883 | ||||||
Inventories
|
66,626 | 72,199 | ||||||
Prepaid
expenses and other current assets
|
12,077,151 | 21,973,197 | ||||||
Pledged
trading securities
|
8,820 | 29,380 | ||||||
Total
current assets
|
46,995,354 | 58,201,887 | ||||||
Other
Assets
|
||||||||
Property
and equipment, net
|
133,129 | 145,733 | ||||||
Intangible
assets, net
|
5,343,136 | 5,774,660 | ||||||
Total
assets
|
$ | 52,471,619 | $ | 64,122,280 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 11,922 | $ | - | ||||
Deferred
revenue
|
2,609,356 | 18,938,681 | ||||||
Other
payables and accrued expenses
|
3,135,160 | 1,275,711 | ||||||
Provision
for income tax
|
59,832 | 59,869 | ||||||
Payable
for intangible
|
5,975,220 | 5,968,490 | ||||||
Due
to shareholders
|
8,392,314 | 26,242,336 | ||||||
Total
current liabilities
|
20,183,804 | 52,485,087 | ||||||
Total
liabilities
|
20,183,804 | 52,485,087 | ||||||
Commitments
and Contingencies (Note 17)
|
||||||||
Shareholders’
Equity
|
||||||||
Common
stock, $1 par value, 50,000 shares authorized, issued and
outstanding
|
50,000 | 50,000 | ||||||
Additional
paid-in capital
|
9,329,878 | - | ||||||
Statutory
reserves
|
1,138,733 | 1,138,733 | ||||||
Retained
earnings
|
21,696,085 | 10,392,768 | ||||||
Accumulated
other comprehensive income
|
73,119 | 55,692 | ||||||
Total
shareholders’ equity
|
32,287,815 | 11,637,193 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 52,471,619 | $ | 64,122,280 |
The
accompanying notes form an integral part of these interim condensed consolidated
financial statements.
F-28
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS
EXPRESSED IN US DOLLAR)
Nine months ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
NET
REVENUE
|
$ | 45,604,199 | $ | 8,221,549 | ||||
Cost
of revenue
|
(31,986,380 | ) | (5,868,198 | ) | ||||
Gross
profit
|
13,617,819 | 2,353,351 | ||||||
Operating
expenses:
|
||||||||
Selling
|
(816,281 | ) | (865,090 | ) | ||||
General
and administrative
|
(863,061 | ) | (752,782 | ) | ||||
Research
and development
|
(40,432 | ) | (31,223 | ) | ||||
Total
operating expenses
|
(1,719,774 | ) | (1,649,095 | ) | ||||
Income
from operations
|
11,898,045 | 704,256 | ||||||
Other
income (expenses), net
|
||||||||
Interest
income
|
48,121 | 31,278 | ||||||
Interest
and bank charges
|
(402,674 | ) | (236,051 | ) | ||||
Exchange
gains (losses), net
|
(479,188 | ) | 317,851 | |||||
Value
added tax refund
|
220,758 | - | ||||||
Other
|
19,072 | (18,162 | ) | |||||
(593,911 | ) | 94,916 | ||||||
Income
before income tax
|
11,304,134 | 799,172 | ||||||
Income
tax expense
|
(817 | ) | (3,985 | ) | ||||
NET
INCOME
|
11,303,317 | 795,187 | ||||||
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||
Foreign
currency translation adjustment
|
17,427 | (14,942 | ) | |||||
COMPREHENSIVE
INCOME
|
$ | 11,320,744 | $ | 780,245 |
The
accompanying notes form an integral part of these interim condensed consolidated
financial statements.
F-29
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS
EXPRESSED IN US DOLLAR)
Nine months ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 11,303,317 | $ | 795,187 | ||||
Adjustments
for:
|
||||||||
Depreciation
of property and equipment
|
25,824 | 15,073 | ||||||
Amortization
of intangible assets
|
451,943 | - | ||||||
Impairment
of inventories
|
- | - | ||||||
(Gain)
loss on short-term investments
|
(18,957 | ) | 125,630 | |||||
Decrease
(increase) in assets:
|
||||||||
Accounts
receivable
|
6,809,098 | (259,349 | ) | |||||
Notes
receivables
|
(5,519,312 | ) | - | |||||
Inventories
|
5,573 | (342,844 | ) | |||||
Deferred
costs, prepaid expenses and other current assets
|
7,564,317 | (24,061,184 | ) | |||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
11,922 | 2,412,183 | ||||||
Deferred
revenue and accruals
|
(12,792,683 | ) | 17,273,982 | |||||
Net
cash provided by (used in) operating activities
|
7,841,042 | (4,041,322 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from sales of short-term investments
|
39,509 | 154,329 | ||||||
(Increase)
decrease in restricted cash
|
(651,443 | ) | 1,958,347 | |||||
Purchase
of property and equipment
|
(13,285 | ) | (167,470 | ) | ||||
Purchase
of intangible assets
|
(14,055 | ) | - | |||||
Repayment
from other entities
|
14,425,407 | 4,127,837 | ||||||
Net
cash provided by investing activities
|
13,786,133 | 6,073,043 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
to shareholders
|
(8,519,255 | ) | (5,354,544 | ) | ||||
Net
cash used in financing activities
|
(8,519,255 | ) | (5,354,544 | ) | ||||
Effect
of foreign currency translation on cash
|
27,029 | (19,103 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
13,134,949 | (3,341,926 | ) | |||||
Cash
and cash equivalents, beginning of period
|
5,018,813 | 6,550,092 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 18,153,762 | $ | 3,208,166 | ||||
SUPPLEMENTAL
DISCLOSURE INFORMATION
|
||||||||
Cash
paid for interests
|
$ | 402,674 | $ | 236,051 | ||||
Cash
paid for income tax
|
$ | 220,301 | $ | 646 | ||||
NONCASH
INVESTING AND FINANCING TRANSACTIONS
|
||||||||
Shareholders’
forgiveness of debt contributed as capital
|
$ | 9,329,878 | $ | - | ||||
Payable
for intangibles (see Note 10)
|
- | 5,941,459 |
The
accompanying notes form an integral part of these interim condensed consolidated
financial statements.
F-30
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
(AMOUNTS
EXPRESSED IN US DOLLAR)
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
other
|
|||||||||||||||||||||||||||
Ordinary Shares
|
paid-in
|
Statutory
|
Retained
|
comprehensive
|
||||||||||||||||||||||||
Number
|
Amount
|
capital
|
reserves
|
earnings
|
income
|
Total
|
||||||||||||||||||||||
Balance,
March 31, 2009
|
50,000 | $ | 50,000 | $ | - | $ | 1,138,733 | $ | 10,392,768 | $ | 55,692 | $ | 11,637,193 | |||||||||||||||
Net
income
|
- | - | - | - | 11,303,317 | - | 11,303,317 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 17,427 | 17,427 | |||||||||||||||||||||
Comprehensive
income
|
11,320,744 | |||||||||||||||||||||||||||
Shareholder
forgiveness of debt contributed as capital
|
- | - | 9,329,878 | - | - | - | 9,329,878 | |||||||||||||||||||||
Balance,
December 31, 2009
|
50,000 | $ | 50,000 | $ | 9,329,878 | $ | 1,138,733 | $ | 21,696,085 | $ | 73,119 | $ | 32,287,815 |
The
accompanying notes form an integral part of these interim condensed consolidated
financial statements.
F-31
CHINA
LIANDI CLEAN TECHNOLOGY ENGINEERING LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008.
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION
|
Nature
of operations
China
Liandi Clean Technology Engineering Limited (formerly known as Lian Di
Petrochemical Technology Limited) (“China Liandi”) is a holding company and,
through its subsidiaries, primarily engages in distributing of clean technology
for refineries (unheading units for the delayed coking process), distributing of
a wide range of petroleum and petrochemical valves and equipments, providing
systems integration, developing and marketing optimization software for the
polymerization process and providing related technical and engineering services
to large domestic Chinese petroleum and petrochemical companies and other energy
companies. China Liandi together with its subsidiaries are
collectively referred to as the “Company”
Corporate
organization
China
Liandi was incorporated with limited liability on July 28, 2004 in the British
Virgin Islands under the International Business Companies Act, with a registered
and paid up capital of $50,000.
China
Liandi changed its name from State Expert Limited to Lian Di Petrochemical
Technology Limited on February 21, 2009, and further to China Liandi Clean
Technology Engineering Limited on January 7, 2010.
Details
of China Liandi’s subsidiaries as of March 31, 2009 and December 31, 2009 are as
follows:
Subsidiaries’ names
|
Place and date of
incorporation
|
Percentage
of
ownership
by the
Company
|
Principal activities
|
|||
Hua
Shen Trading (International) Limited (“Hua Shen”)
|
Hong
Kong
January
20, 1999
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services
|
|||
Petrochemical
Engineering Limited (“Petro HK”)
|
Hong
Kong
September
13, 2007
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services, and investment holding
|
|||
Bright
Flow Control Ltd. (“Bright Flow”)
|
Hong
Kong
December
17, 2007
|
100%
|
Delivering
of industrial valves and other equipment with the related integration and
technical services
|
|||
Beijing
Jianxin Petrochemical Engineering Ltd. (“Beijing Jianxin”)
|
People’s
Republic of China (“PRC”)
May
6, 2008
|
100%
(through Petro HK)
|
Delivering
of industrial valves and other equipment with the related integration and
technical services, developing and marketing optimization software for
polymerization processes, and provision of delayed coking solutions for
petrochemical, petroleum and other energy
companies
|
F-32
NOTE
1
|
DESCRIPTION
OF BUSINESS AND ORGANIZATION
(CONTINUED)
|
Corporate
organization (continued)
In July
2004, China Liandi was founded and owned as to 60% by Mr. Jianzhong Zuo (“Mr.
Zuo”) and 40% by another third-party minority shareholder. On October 2, 2007,
Mr. Zuo acquired from that minority shareholder the remaining 40% interest in
China Liandi, and hence became the sole shareholder of China
Liandi. On March 6, 2008, SJ Asia Pacific Limited (a company
incorporated in the British Virgin Island and wholly owned by SJI Inc., which
was incorporated in Japan and whose shares are listed on Jasdaq Securities
Exchange, Inc. in Japan) acquired 51% interest in China Liandi from Mr.
Zuo. As a result, China Liandi is currently owned as to 51% by SJ
Asia Pacific Limited and 49% by Mr. Zuo. Mr. Zuo is also the Chief Executive
Officer and Chairman of the Company.
Hua Shen
was founded by Mr. Zuo in 1999. On January 8, 2008, China Liandi
acquired 100% ownership interest in Hua Shen from Mr. Zuo. As Hua Shen and China
Liandi had been under common control, the acquisition of Hua Shen by China
Liandi has been accounted for using the “as if” pooling method of
accounting.
In 2007,
China Liandi established Petro HK and Bright Flow, as wholly-owned subsidiaries,
in Hong Kong. In 2008, Petro HK established Beijing Jianxi, as a wholly-owned
subsidiary, in the PRC.
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of preparation and consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances between the Company and its subsidiaries are eliminated upon
consolidation.
The
interim condensed consolidated financial statements for the nine-month periods
ended December 31, 2009 and 2008 are unaudited. In the opinion of
management, all adjustments and disclosures necessary for a fair presentation of
these interim condensed consolidated financial statements have been
included. The results reported in the consolidated financial
statements for any interim periods are not necessarily indicative of the results
that may be reported for the entire year. These interim condensed
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission and do not
include all information and footnotes necessary for a complete presentation of
financial statements in conformity with accounting principles generally accepted
in the United States. These unaudited interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the years ended March 31, 2009 and 2008, and accompanying
footnotes.
Use
of estimates
The
preparation of the these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the related disclosure of contingent assets and liabilities at the date of these
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Accordingly, actual results
may differ from these estimates under different assumptions or
conditions.
F-33
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Cash
and cash equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Because of the short maturity of
these investments, the carrying amounts approximate their fair
value. Restricted cash is excluded from cash and cash
equivalents.
Accounts
receivable
Accounts
receivable is stated at cost, net of an allowance for doubtful accounts. The Company
sets aside an allowance for doubtful accounts to account for any estimated
losses resulting from the failure of customers to make required payments. The
Company reviews the accounts receivable on a periodic basis and makes allowances
where there is doubt as to the collectibility of individual balances. In
evaluating the collectibility of individual receivable balances, the Company
considers many factors, including the age of the balance, the customer’s payment
history, its current credit-worthiness and current economic trends.
Inventories
Inventories
are stated at the lower of cost, determined on a specific identification basis,
or market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
will write down the inventories to market value if it is below cost. The
management also regularly evaluates the composition of its inventories to
identify slow-moving and obsolete inventories to determine if valuation
allowance is required.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses, if any. Gains or losses on disposals are reflected as gain or
loss in the year of disposal. The cost of improvements that extend the life of
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets as follows:
Useful Life
|
|
Leasehold
improvements
|
5
years
|
Office
equipment
|
5
years
|
The
carrying value of property and equipment is assessed annually and when factors
indicating impairment is present, the carrying value of the property and
equipment is reduced by the amount of the impairment. The Company determines the
existence of such impairment by measuring the expected future cash flows
(undiscounted and without interest charges) and comparing such amount to the net
asset carrying value. An impairment loss, if exists, is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the
asset.
Intangible
assets
Purchased
software and copyrights are initially recorded at costs and amortized on a
straight-line basis over the shorter of the contractual terms or estimated
useful economic life of 2 to 10 years.
F-34
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Impairment
of long-lived assets
The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. An impairment is considered to exist if the total estimated
future cash flows on an undiscounted basis are less than the carrying amount of
the assets, including goodwill, if any. An impairment loss is measured and
recorded based on discounted estimated future cash flows. In estimating future
cash flows, assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of future cash flows from
other asset groups.
Revenue
recognition
Revenue
is recognized when the following four criteria are met as prescribed by U.S.
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 104 (“SAB 104”): (i) persuasive evidence of an arrangement exists,
(ii) product delivery has occurred or the services have been rendered,
(iii) the fees are fixed or determinable, and (iv) collectibility is
reasonably assured.
Multiple-deliverable
arrangements
The Company derives
revenue from fixed-price sale contracts with customers that may provide for the
Company to deliver equipment with varied performance specifications specific to
each customer and provide the technical services for installation, integration,
testing etc. of the equipment. The contract price is inclusive of the technical
services. These sale contracts include multiple deliverables. Because it
is considered installation and integration are essential to the functionality of
the equipment and due to the lack of objective and reliable evidence of fair
value for each deliverable included in the arrangement, a combined unit of
accounting is used pursuant to ASC Topic 605, Revenue Recognition (formerly
EITF 00-21, Revenue
Arrangements with Multiple Elements). In addition, the arrangement
generally includes customer acceptance criteria that cannot be tested before
installation and integration at the customer’s site, revenue recognition is
deferred until customer acceptance, indicated by an acceptance certificate
signed off by customer.
The
Company may also provide its customers with a warranty for, in general, one year
following the customer's acceptance of the installed equipment. Some contracts
require that 5% to 15% of the contract price be held as retainage for quality
warranty and only due for payment by the customer upon expiry of the warranty
period. For those contracts with retainage clauses, the Company defers the
recognition of the amounts retained as revenue until expiry of the warranty
period when collectibility can reasonably be assured. The Company has not
provided for warranty costs for those contracts without retainage clauses, as
the relevant estimated costs were insignificant based on historical
experience.
Product
only
Revenue
derived from sale contracts that provide for delivery of products only is
recognized when the titles to the products pass to customers.
Software
sale
The
Company recognizes revenue from the delivering of data processing platform
software when the software is delivered to and accepted by the customer,
pursuant to ASC Topic 985, Software (formerly Statement of
Position, or SOP 97-2, Software
Revenue Recognition, as amended) and in
accordance with SAB 104. Cost of software revenue include amortization of
software copyright.
F-35
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Revenue
recognition (Continued)
Service
The
Company recognizes revenue from provision of services when the service has been
performed, in accordance with SAB 104.
The
Company is subject to business tax at 5% and value added tax at 17% on the
revenues earned for services provided and products sold in the PRC,
respectively. The Company presents its revenue net of business tax and related
surcharges and value added tax, as well as discounts and returns. There were no
product returns for the nine-month periods ended December 31, 2009 and
2008.
Deferred
revenue and costs
Deferred
revenue represents payments received from customers on equipment delivery and
installation contracts prior to customer acceptance. As revenues are
deferred, the related costs of equipment paid to suppliers are also deferred.
The deferred revenue and costs are recognized in the consolidated statements of
income in the period in which the criteria for revenue recognition are satisfied
as discussed above.
Research
and development expenses
Research
and development costs are charged to expense when incurred.
Advertising
and promotion costs
Advertising
and promotion costs are charged to expense when incurred. During the
nine-month periods ended December 31, 2009 and 2008, advertising and promotion
costs were insignificant.
Shipping
and handling cost
Shipping
and handling costs were $279,471 and $198,256 for the nine-month periods ended
December 31, 2009 and 2008, respectively.
Income
taxes
The
Company accounts for income taxes in accordance with FASB ASC Topic
740. ASC Topic 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.
In July
2006, the FASB issued ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — An interpretation of FASB Statement No. 109) which became
effective for fiscal years beginning after December 15, 2006. The interpretation
prescribes a recognition threshold and a measurement attribute for the financial
statements recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company’s adoption of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 did
not result in any adjustments to the opening balance of the Company’s retained
earnings as of April 1, 2007.
F-36
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Comprehensive
income
FASB ASC
Topic 220, Comprehensive
Income, establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income and loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Accumulated other comprehensive income arose from
foreign currency translation adjustments.
Foreign
currency
The
Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for
financial reporting purposes. The subsidiaries within the Company maintain their
books and records in their respective functional currency, Chinese Renminbi
(“RMB”) and Hong Kong dollars (“HK$”), being the lawful currency in the PRC and
Hong Kong, respectively. Assets and liabilities of the subsidiaries are
translated from RMB or HK$ into U.S. Dollars using the applicable exchange rates
prevailing at the balance sheet date. Items on the statements of income and
comprehensive income and cash flows are translated at average exchange rates
during the reporting period. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the Company’s financial statements
are recorded as accumulated other comprehensive income.
The
exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars
for the purposes of preparing the consolidated financial statements are as
follows:-
December 31, 2009
|
December 31, 2008
|
March 31, 2009
|
||||
Balance
sheet items, except for equity accounts
|
US$1=RMB6.8282
US$1=HK$7.7551
|
US$1=RMB6.8183
US$1=HK$7.7787
|
US$1=RMB6.8359
US$1=HK$7.7502
|
|||
Items
in statements of income and cash flows
|
US$1=RMB6.8296
US$1=
HK$7.7512
|
US$1=RMB6.8765
US$1=HK$7.7841
|
No
representation is made that the RMB and HK$ amounts could have been, or could
be, converted into U.S. dollars at the above rates.
Whilst
RMB is not a freely convertible currency, its value against U.S. dollars and
other currencies may fluctuate and is affected by, among other things, changes
in China’s political and economic conditions. Any significant revaluation of RMB
may materially affect the Company’s financial condition in terms of U.S. dollar
reporting. The exchange rates used to translate amounts in RMB into U.S.
Dollars are based on the rates quoted by the People’s Bank of
China.
Commitments
and contingencies
The
Company follows ASC Subtopic 450-20, Loss Contingencies in
determining its accruals and disclosures with respect to loss contingencies.
Accordingly, estimated losses from loss contingencies are accrued by a charge to
income when information available prior to issuance of the financial statements
indicates that it is probable that a liability could be been incurred and the
amount of the loss can be reasonably estimated. Legal expenses associated with
the contingency are expensed as incurred. If a loss contingency is not probable
or reasonably estimable, disclosure of the loss contingency is made in the
financial statements when it is at least reasonably possible that a material
loss could be incurred.
F-37
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Fair
value
ASC Topic
820, Fair Value Measurement
and Disclosures, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. There are three
levels of inputs that may be used to measure fair value:
Level 1
-
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level 2
-
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
Level 3
-
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.
The
carrying values of cash and cash equivalents, trade and other receivables and
payables, and short-term debts approximate fair values due to their short
maturities.
Assets
and liabilities measured at fair value on a recurring basis are summarized as
follows:
As of December 31, 2009 (Unaudited)
|
||||||||||||||||
Fair value measurement using inputs
|
Carrying | |||||||||||||||
Financial instruments
|
Level 1
|
Level 2
|
Level 3
|
amount
|
||||||||||||
Short-term
investment:
|
||||||||||||||||
Marketable
equity securities
|
$ | 8,820 | $ | - | $ | - | $ | 8,820 | ||||||||
Total
|
$ | 8,820 | $ | - | $ | - | $ | 8,820 |
As of March 31, 2009
|
||||||||||||||||
Fair value measurement using inputs
|
Carrying
|
|||||||||||||||
Financial instruments
|
Level 1
|
Level 2
|
Level 3
|
amount
|
||||||||||||
Short-term
investment:
|
||||||||||||||||
Marketable
equity securities
|
$ | 29,380 | $ | - | $ | - | $ | 29,380 | ||||||||
Total
|
$ | 29,380 | $ | - | $ | - | $ | 29,380 |
There was
no asset or liability measured at fair value on a non-recurring basis as of
December 31, 2009 and March 31, 2009.
F-38
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements
In June
2009, the FASB established the FASB Accounting Standards CodificationTM (ASC)
as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did not change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC is effective for
interim and annual periods ending after September 15, 2009. Adoption of the ASC
did not have a material impact on the Company’s Consolidated Financial
Statements, but references in the Company’s Notes to Consolidated Financial
Statements to former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as references to the
corresponding Topic in the ASC.
Effective
April 1, 2009, the first day of fiscal 2010, the Company adopted FASB ASC 350-30
and ASC 275-10-50 (formerly FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The Company will apply ASC 350-30 and ASC 275-10-50 prospectively
to intangible assets acquired subsequent to the adoption date. The
adoption of these revised provisions had no impact on the Company’s Consolidated
Financial Statements.
Effective
April 1, 2009, the first day of fiscal 2010, the Company adopted FASB ASC
815-10-65 (formerly SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities), which amends and expands previously
existing guidance on derivative instruments to require tabular disclosure of the
fair value of derivative instruments and their gains and losses., This ASC also
requires disclosure regarding the credit-risk related contingent features in
derivative agreements, counterparty credit risk, and strategies and objectives
for using derivative instruments. The adoption of this ASC did not have a
material impact on the Company’s Consolidated Financial
Statements.
Upon initial adoption of
SFAS 157 on April 1, 2008, the Company adopted FASB ASC 820-10 (formerly
FSP FAS 157-2, Effective
Date of FASB Statement 157), which deferred the provisions of previously
issued fair value guidance for nonfinancial assets and liabilities to the
first fiscal period beginning after November 15, 2008. Deferred nonfinancial
assets and liabilities include items such as goodwill and other non-amortizable
intangibles. Effective April 1, 2009, the Company adopted the fair value
guidance for nonfinancial assets and liabilities. The adoption of FASB ASC
820-10 did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
April 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160, Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51), which
amends previously issued guidance to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the non-controlling interest be clearly
identified and presented on the face of the consolidated income
statement. The adoption of the provisions in this ASC did not have a
material impact on the Company’s Consolidated Financial
Statements.
F-39
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements (continued)
Effective
April 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in an acquiree and the
goodwill acquired. In addition, the provisions in this ASC require
that any additional reversal of deferred tax asset valuation allowance
established in connection with fresh start reporting on January 7, 1998 be
recorded as a component of income tax expense rather than as a reduction to
the goodwill established in connection with the fresh start reporting. The
Company will apply ASC 805-10 to any business combinations subsequent to
adoption.
Effective
April 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies), which amends ASC 805-10 to require that an acquirer
recognize at fair value, at the acquisition date, an asset acquired or a
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value of such an
asset acquired or liability assumed cannot be determined, the acquirer should
apply the provisions of ASC Topic 450, Contingences, to determine
whether the contingency should be recognized at the acquisition date or after
such date. The adoption of ASC 805-20 did not have a material impact on the
Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair
Value of Financial Instruments), which amends previous guidance to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of FASB ASC 825-10-65 did not have a material impact on
the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). Under ASC 320-10-65,
an other-than-temporary impairment must be recognized if the Company has the
intent to sell the debt security or the Company is more likely than not will be
required to sell the debt security before its anticipated recovery. In addition,
ASC 320-10-65 requires impairments related to credit loss, which is the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis for each security, to be recognized in earnings
while impairments related to all other factors to be recognized in other
comprehensive income. The adoption of ASC 320-10-65 did not have a material
impact on the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly), which
provides guidance on how to determine the fair value of assets and liabilities
when the volume and level of activity for the asset or liability has
significantly decreased when compared with normal market activity for the asset
or liability as well as guidance on identifying circumstances that indicate a
transaction is not orderly. The adoption of ASC 820-10-65 did not have a
material impact on the Company’s Consolidated Financial
Statements.
F-40
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements (continued)
Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165, Subsequent Events), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. Adoption of ASC 855-10 did not have a material
impact on the Company’s Consolidated Financial Statements.
In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets), which expands the disclosure
requirements about plan assets for defined benefit pension plans and
postretirement plans. The Company has adopted these disclosure requirements in
the quarter ended December 31, 2009. The adoption of these disclosure
requirements did not have any material effect on the Company’s Consolidated
Financial Statements.
In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157,
Fair Value
Measurements). The Company has adopted Update 2009-05 in the
quarter ended December 31, 2009. The adoption of this Update did not have any
material effect on the Company’s Consolidated Financial Statements.
New
accounting pronouncement to be adopted
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140, (codified
by ASU No. 2009-16 issued in December 2009). SFAS No. 166 limits the
circumstances in which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of
Variable Interest Entities. The standard is effective for the first
annual reporting period that begins after November 15, 2009 (i.e. the
Company’s fiscal ending March 31, 2011). Earlier application is prohibited. It
is expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009).
The standard amends FIN No. 46(R) to require a company to analyze whether
its interest in a variable interest entity (“VIE”) gives it a controlling
financial interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal
ending March 31, 2011). Earlier application is prohibited. Comparative
disclosures will be required for periods after the effective date. It is
expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.
F-41
NOTE
2
|
SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (Continued)
In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):
· ASU
No. 2009-13—Revenue
Recognition (ASC Topic 605): Multiple-Deliverable Revenue Arrangements
(formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies the
revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction. This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.
· ASU
No. 2009-14—Software (ASC
Topic 985): Certain Revenue Arrangements That Include Software Elements
(formerly EITF Issue No. 09-3). ASU No. 2009-14 removes
tangible products from the scope of software revenue recognition guidance and
also provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product, such as embedded software, are
within the scope of the software revenue guidance.
ASU No. 2009-13 and ASU No. 2009-14
should be applied on a prospective basis for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be adopted in
the same period using the same transition method. The Company expects to apply
these ASU Updates on a prospective basis for revenue arrangements entered into
or materially modified beginning April 1, 2011. The Company is
currently evaluating the potential impact these ASC Updates may have on its
financial position and results of operations.
In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15
amends ASC 470-20, Debt with
Conversion and Other Options, to provide accounting and reporting
guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 with retrospective application
required.
In
January 2010, the FASB issued the following ASC Updates:
· ASU
No. 2010-01—Equity (Topic
505): Accounting for Distributions to Shareholders with Components of Stock and
Cash. This Update clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS
prospectively and is not a stock dividend for purposes of applying Topics 505
and 260 (Equity and Earnings Per Share). The amendments in this Update are
effective for interim and annual periods ending on or after December 15, 2009
with retrospective application.
· ASU
No. 2010-02—Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This Update amends Subtopic 810-10 and related guidance to
clarify that the scope of the decrease in ownership provisions of the Subtopic
and related guidance applies to (i) a subsidiary or group of assets that is a
business or nonprofit activity; (ii) a subsidiary that is a business or
nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in Subtopic
810-10).
F-42
NOTE
2
|
SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
New
accounting pronouncement to be adopted (continued)
· ASU No. 2010-05—Compensation—Stock
Compensation (Topic 718):
Escrowed Share Arrangements and the Presumption of Compensation. This Update simply codifies EITF Topic
D-110, “Escrowed Share Arrangements and the Presumption of Compensation”
issued on June 18, 2009. In EITF Topic No. D-110, SEC staff clarified
that entities should consider the substance of the transaction in evaluating
whether the presumption of compensation may be overcome, including whether the
transaction was entered into for a reason unrelated to employment, such as to
facilitate a financing transaction. In that situation, the staff generally
believes that the escrowed shares should be reflected as a discount in the
allocation of proceeds.
· ASU No. 2010-06—Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value
Measurements. This Update amends Subtopic 820-10 that requires new
disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3
fair value measurements. This Update also amends Subtopic 820-10 to clarify
certain existing disclosures. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after December 15,
2010.
The Company expects that the adoption of
the above Updates issued in January 2010 will not have any significant impact on
its financial position and
results of operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
NOTE
3
|
RESTRICTED
CASH
|
Restricted
cash represents the Company’s bank deposits held as collaterals for the
Company’s credit facilities as discussed in Note 12.
NOTE 4
|
ACCOUNTS RECEIVABLE,
NET
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Accounts
receivable
|
$ | 8,246,985 | $ | 15,054,940 | ||||
Less:
Allowance for doubtful debts
|
- | - | ||||||
$ | 8,246,985 | $ | 15,054,940 |
Based on
the Company’s assessment of collectibility, there has been no allowance for
doubtful accounts recognized during the nine-month periods ended December 31,
2009 and 2008.
F-43
NOTE 5
|
NOTES
RECEIVABLE
|
Notes
receivable as of December 31, 2009 consist of bank acceptance notes from
customers for settlement of the Company’s sales. These notes mature in periods
ranging from 3 to 6 months and do not bear any interests. As these notes
receivable are guaranteed by banks, the Company believes they are fully
collectible and has not recognized any allowance for doubtful accounts
thereon.
NOTE 6
|
INVENTORIES
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Finished
goods, consisting of parts
|
$ | 97,624 | $ | 103,197 | ||||
Less:
Allowance for stock obsolescence
|
(30,998 | ) | (30,998 | ) | ||||
$ | 66,626 | $ | 72,199 |
NOTE 7
|
PREPAID EXPENSES AND OTHER CURRENT
ASSETS
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Prepaid
operating expenses
|
$ | 43,935 | $ | 1,534 | ||||
Tender
deposits
|
268,893 | 150,509 | ||||||
Rental
deposits
|
66,747 | 66,684 | ||||||
Prepayment
to suppliers
|
11,214,905 | 6,488,056 | ||||||
Advances
to staff for normal business purposes
|
195,871 | 105,632 | ||||||
Income
tax refundable
|
222,189 | - | ||||||
Other
receivables from unrelated entities, net of $nil allowance
|
64,611 | 15,160,782 | ||||||
Total
|
$ | 12,077,151 | $ | 21,973,197 |
NOTE
8
|
PLEDGED
TRADING SECURITIES
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Marketable
equity securities
|
$ | 8,820 | $ | 29,380 | ||||
$ | 8,820 | $ | 29,380 |
As of December 31, 2009 and March 31, 2009, all of the
Company’s trading securities were pledged as
collaterals for the Company’s banking facilities (see Note 12).
The marketable equity
securities are reported at fair value based on quoted market prices in active
(Level 1 inputs) markets,
with gains or losses resulting from changes in fair value recognized currently
in earnings.
F-44
NOTE
9
|
PROPERTY
AND EQUIPMENT
|
December 31,
2009
|
March 31,
2009 |
|||||||
(Unaudited)
|
||||||||
Office
equipment
|
$ | 54,397 | $ | 49,909 | ||||
Leasehold
improvements
|
128,100 | 119,383 | ||||||
Total
cost
|
182,497 | 169,292 | ||||||
Less:
Accumulated depreciation
|
(49,368 | ) | (23,559 | ) | ||||
Net
|
$ | 133,129 | $ | 145,733 |
Depreciation expenses in aggregate for
the nine-month
periods ended December 31, 2009 and 2008 were $25,824 and $15,073,
respectively.
NOTE
10
|
INTANGIBLE
ASSETS
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Computer
software
|
$ | 19,918 | $ | 5,852 | ||||
Software
copyright
|
5,975,219 | 5,968,489 | ||||||
Less:
Accumulated amortization
|
(652,001 | ) | (199,681 | ) | ||||
Net
|
$ | 5,343,136 | $ | 5,774,660 |
In
December 2008, the Company purchased a software copyright on data processing
platform software for application in petrochemical productions for a cash
consideration of RMB40,800,000 (or $5,941,459), which is due for payment by
March 31, 2010. This software copyright has been registered with the National
Copyright Administration of the People’s Republic of China in the name of
Beijing Jianxin and is protected under the relevant copyright law of the PRC for
50 years from November 11, 2008, the date of first publication of the software.
This software copyright is amortized over its estimated useful life of ten years
using the straight-line method.
Amortization expenses for the
nine-month
periods ended December 31, 2009 and 2008 were $451,943 and $nil respectively.
F-45
NOTE 11
|
OTHER PAYABLES AND ACCRUED
EXPENSES
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Business
tax and value added tax payable
|
$ | 2,683,903 | $ | 1,173,497 | ||||
Accrued
operating expenses
|
144,407 | 47,938 | ||||||
Other
payables
|
306,850 | 54,276 | ||||||
Total
|
$ | 3,135,160 | $ | 1,275,711 |
NOTE 12
|
CREDIT
FACILITIES
|
As of March 31, 2009, the Company had
available banking facilities (“General Facilities”) which consisted of combined overdraft,
guarantee line and import
loan facilities up to an aggregate amount of HK$15,000,000 (equivalent to
approximately $1,934,200), and facilities for negotiation of export documentary
credit bills against letters of indemnity up to HK$1,500,000 (equivalent to
approximately $193,400). Guarantee line represents
performance or payment guarantees issued by the bank on behalf of the Company.
On August 6, 2009, the combined overdraft, guarantee line and import loan
facilities under the General Facilities were reduced to HK$10,000,000 (equivalent to approximately
$1,289,500), which has remained available as of December 31, 2009. The General
Facilities are subject to the bank’s review by July 15,
2010.
As of March 31, 2009, there were
outstanding shipping guarantees of $443,701 and irrevocable letters of credit of
$1,039,653, related to the Company’s imports, issued by the bank on behalf
of the Company under the General Facilities. As of December 31, 2009, there were
outstanding shipping guarantees of $360,647 and irrevocable letters of credit of $270,000, related to the
Company’s imports, issued by the bank on behalf
of the Company under the General Facilities. There was no other borrowing under
the General Facilities as of March 31, 2009 and December 31,
2009.
Collaterals for the General Facilities include the
Company’s bank deposits and marketable
securities, an assignment over an insurance policy in the name of Mr. Jianzhong
Zuo (CEO of the Company), an unlimited guarantee from Mr. Jianzhong Zuo,
and a letter of undertaking
from the Company to
maintain the Company’s tangible net worth (i.e. paid-up
capital plus retained earnings) at no less than HK$5,000,000 (equivalent to
approximately $644,700).
On August 6, 2009, the Company obtained
a banking facility for import facilities up to HK$6,000,000 (equivalent to
approximately $773,700) under a Special Loan Guarantee Scheme sponsored and
guaranteed by the Government of the Hong Kong Special Administrative Region
(“Government Sponsored
Facility”). Collaterals for the
Government Sponsored Facility include a guarantee for
HK$6,000,000 from China Liandi. As of December 31, 2009, there was no borrowing under the
Government Sponsored Facility.
F-46
NOTE
13
|
OTHER
INCOME – VALUE ADDED TAX REFUND
|
Beijing Jianxi has been recognized by
the PRC government as a
software enterprise with its own software copyright. Under the PRC
government’s preferential policies for software
enterprises, Beijing Jianxi is entitled to a refund of 14% value added tax in respect of its
sales of self-developed software products. The Company
recognizes the value added tax refund as revenue only when it has been received
and there is no condition to the use of the fund received.
NOTE
14
|
INCOME
TAXES
|
The entities within the Company file
separate tax returns in the
respective tax jurisdictions that they operate.
British Virgin
Islands
China Liandi, being incorporated in the British
Virgin Islands (“BVI”), is not subject to any income tax in
the BVI.
Hong Kong
Under the Inland Revenue Ordinance of
Hong Kong, only profits
arising in or derived from Hong Kong are chargeable to Hong Kong profits tax,
whereas the residence of a taxpayer is not relevant. Therefore, Hua Shen, Petro
HK and Bright Flow are generally subject to Hong Kong income tax on its taxable
income derived from the trade or businesses
carried out by them in Hong Kong at 16.5% for the nine-month periods ended December 31, 2009 and 2008.
PRC
In March 2007, the PRC government
enacted the PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated
related regulation, Implementing Regulations for the PRC Enterprise Income Tax
Law. The law and regulation became effective from January 1, 2008. The PRC
Enterprise Income Tax Law, among other things, imposes a unified income tax rate
of 25% for both domestic and foreign invested enterprises registered in the
PRC.
Beijing Jianxin being established in the
PRC is generally subject to PRC enterprise income tax (“EIT”). Beijing Jianxin
has been recognized by the relevant PRC tax authority as a software enterprise
with its own software copyright and is entitled to tax preferential treatment –
a tax holiday for two-year EIT exemption from its first profitable year and a
50% reduction on its EIT rate for the three ensuing years.
The Company’s income tax expense consisted
of:
Nine months ended December
31,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Current – PRC income
tax
|
$ | 817 | $ | 3,985 | ||||
Deferred
|
- | - | ||||||
Total
|
$ | 817 | $ | 3,985 |
F-47
NOTE
14
|
INCOME
TAXES (CONTINUED)
|
A reconciliation of the provision for
income taxes determined at the US statutory
corporate income tax rate to the Company’s effective
income tax rate is as follows:
Nine months ended December
31,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Pre-tax
income
|
$ | 11,304,134 | $ | 799,172 | ||||
US
federal rate
|
35 | % | 35 | % | ||||
Income tax expense computed at
U.S. federal rate
|
3,956,447 | 279,710 | ||||||
Reconciling
items:
|
||||||||
Rate differential for domestic
earnings
|
(1,056,811 | ) | (173,691 | ) | ||||
Tax holiday of Beijing
Jianxin
|
(2,882,246 | ) | - | |||||
Non-deductible/taxable expenses
(income)
|
29,055 | (102,124 | ) | |||||
Other
|
(45,628 | ) | 90 | |||||
Effective tax
expense
|
$ | 817 | $ | 3,985 |
As of
December 31, 2009 and March 31, 2009, the Company did not have any significant
temporary differences and carryforwards that may result in deferred
tax.
Uncertainties
exist with respect to how the New EIT Law applies to the tax residency status of
the Company's subsidiaries organized outside of the PRC. The New EIT Law
includes a provision specifying that legal entities organized outside of the PRC
will be considered residents for PRC income tax purposes if their place of
effective management or control is within the PRC. The Implementation Rules to
the New Law provide that non-resident legal entities will be considered PRC
residents if substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc.
occurs within the PRC. However, because the New EIT Law and
Implementation Rules are new, no official guidance or application of this new
“residency” classification has been available. Despite the uncertainties on the
issue, the Company does not believe that its legal entities organized outside of
the PRC should be treated as PRC residents for the New EIT Law's purposes. If
one or more of the Company's legal entities organized outside of the China were
characterized as China tax residents, the impact would adversely affect the
Company's results of operation.
The
Company has made its assessment of the level of tax authority for each tax
position (including the potential application of interest and penalties) based
on the technical merits, and has measured the unrecognized tax benefits
associated with the tax positions. Based on the evaluation by the Company, it
was concluded that there are no significant uncertain tax positions requiring
recognition in the consolidated financial statements.
The
Company classifies interest and/or penalties related to unrecognized tax
benefits as a component of income tax provisions; however, as of December 31,
2009 and March 31, 2009, there was no interest and penalties related to
uncertain tax positions, and the Company has no material unrecognized tax
benefit which would materially affect the effective income tax rate in future
periods. The Company does not anticipate any significant increases or
decreases to its liability for unrecognized tax benefit within the next 12
months.
F-48
NOTE
14
|
INCOME
TAXES (CONTINUED)
|
The new EIT law also imposes a
withholding tax of 10% unless reduced by a tax treaty, for dividends distributed
by a PRC-resident enterprise to its immediate holding company outside the PRC
for earnings accumulated beginning on January 1, 2008 and undistributed earnings
generated prior to January 1, 2008 are exempt from such withholding tax. The
Company has not provided for withholding income taxes on accumulated earnings of
Beijing Jianxi as of December 31, 2009 or March 31, 2009 since its earnings are
intended to be reinvested indefinitely in the overseas jurisdictions. It is not
practicable to estimate the amount of additional taxes that might be payable on
such undistributed earnings.
According
to the Hong Kong profits tax law, the statue of limitations is six
years. Accordingly, the income tax returns of the Company’s Hong Kong
subsidiaries for the years ended March 31, 2004 through 2009 are open to
examination by the Hong Kong tax authority.
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the
underpayment of taxes is due to computational or other errors made by the
taxpayer or the withholding agent. The statute of limitations extends
to five years under special circumstances. In the case of transfer pricing
issues, the statute of limitation is ten years. There is no statute of
limitation in the case of tax evasion. Accordingly, the income tax returns of
Beijing Jianxi for the years ended March 31, 2007 through 2009 are open to
examination by the PRC state and local tax authorities.
NOTE
15
|
DUE
TO SHAREHOLDERS
|
December 31,
2009
|
March 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Due
to Mr. Zuo (shareholder, CEO and chairman of the Company, see also Note
1)
|
$ | 837,036 | $ | 4,581,934 | ||||
Due
to SJ Asia Pacific Limited
(shareholder of the Company, see also Note 1)
|
7,555,278 | 21,660,402 | ||||||
Total
|
$ | 8,392,314 | $ | 26,242,336 |
The
amount due to Mr. Zuo is unsecured, interest free and payable on demand. The
amount due to SJ Asia Pacific Limited is also unsecured and payable on demand,
but bears interest at 3% to 5% per annum.
F-49
NOTE 16
|
CERTAIN RISKS AND
CONCENTRATION
|
Credit
risk and concentration of customers
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, trading
securities, accounts receivable, and prepayments and other current assets. As of
December 31, 2009 and March 31, 2009, substantially all of the Company’s cash
and cash equivalents and trading securities were held by major financial
institutions located in the PRC and Hong Kong, which management believes are of
high credit quality.
The
Company primarily derived its revenue from petroleum, petrochemical and energy
companies operating in the PRC and had certain concentration of customers as
follows:
· As
of December 31, 2009, four customers individually accounted for 32%, 17%, 13%
and 12% of the accounts receivable of the Company, respectively. As
of March 31, 2009, four customers individually accounted for 39%, 37%, 11% and
10% of the accounts receivable of the Company, respectively. Except
for the afore-mentioned, there was no other single customer who accounted for
more than 10% of the Company’s accounts receivable as of December 31, 2009 or
March 31, 2009.
· During the nine-month periods ended
December 31, 2009, two customers individually accounted for 54%, and 17% of the
Company’s net revenue, respectively. During the nine-month
periods ended December 31, 2008, four customers individually accounted for 29%, 19%,18% and 15% of
the Company’s net revenue, respectively. Except for the
afore-mentioned, there was no other single customer who accounted for more than
10% of the Company’s net revenue for the nine-month periods ended December 31,
2009 or 2008.
Concentration of
suppliers
The Company sourced industrial valves
and other equipment from a few suppliers who individually accounted for more
than 10% of the Company’s costs of revenue as follows:
· During the nine-month periods ended
December 31, 2009, one supplier accounted for 62% of the Company’s costs of
revenue, respectively. During the nine-month periods ended December
31, 2008, two suppliers individually accounted for 49% and 35% of the Company’s
costs of revenue, respectively.
Risk
arising from operations in foreign countries
The
majority of the Company’s operations are conducted within the PRC. The Company’s
operations in the PRC are subject to various political, economic, and other
risks and uncertainties inherent in the PRC. Among other risks, the Company’s
operations in the PRC are subject to the risks of restrictions on transfer of
funds, export duties, quotas, and embargoes, domestic and international customs
and tariffs, changing taxation policies, foreign exchange restrictions; and
political conditions and governmental regulations.
F-50
NOTE 16
|
CERTAIN RISKS AND
CONCENTRATION (CONTINUED)
|
Currency convertibility risk and
restriction on dividends and net assets
The
Company’s PRC subsidiary may only pay dividend out of its retained earnings
determined in accordance with the accounting standards and regulations in the
PRC and after it has met the PRC requirements for appropriation to statutory
reserves.
Part of the Company’s businesses is
transacted in RMB, which is not freely convertible into foreign currencies. All
foreign exchange transactions take place either through the People’s Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People’s Bank of China. Approval of foreign
currency payments by the People’s Bank of China or other regulatory institutions
requires submitting a payment application form together with suppliers’
invoices, shipping documents and signed contracts. These exchange control
measures imposed by the PRC government authorities may restrict the ability of the
Company’s PRC subsidiary (i.e. Beijing Jianxin) to transfer its net assets,
which amounted to $25,182,106 (unaudited) and $12,735,897 as of December 31, 2009 and March 31, 2009, respectively,
to the Company through loans, advances or cash dividends.
NOTE
17
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases Commitments
In the
normal course of business, the Company entered into operating lease agreements
for offices rental. The Company was obligated under operating leases requiring
minimum rentals as of December 31, 2009 as follows:
(Unaudited)
|
||||
Payable
within:
|
||||
-
reminder of fiscal year ending March 31, 2010
|
$ | 109,409 | ||
-
fiscal year ending March 31, 2011
|
379,204 | |||
-
fiscal year ending March 31, 2012
|
267,857 | |||
-
fiscal year ending March 31, 2013
|
219,385 | |||
-
fiscal year ending March 31, 2014
|
14,016 | |||
-
thereafter
|
- | |||
Total
minimum lease payments
|
$ | 989,871 |
During
the nine-month periods ended December 31, 2009 and 2008, rental expenses under
operating leases amounted to $231,166 and $136,716, respectively.
F-51
NOTE
18
|
SEGMENT
DATA
|
The
Company follows FASB ASC Topic 280, Segment Reporting, which
requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their
performance.
The
Company operates and manages its business as a single segment that includes
primarily the delivering of industrial valves and other equipment with related
technical services, and
selling of related data processing platform software for applications in
petroleum and petrochemical productions.
The
following tables set out the analysis of the Company’s net revenue:
Nine months ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Product and services
|
||||||||
Industrial valves and other
equipment with related technical services
|
$ | 39,149,946 | $ | 8,221,549 | ||||
Data
processing platform software for applications in petroleum and
petrochemical productions
|
6,432,532 | - | ||||||
Technical
consultancy services
|
21,721 | - | ||||||
Total
|
$ | 45,604,199 | $ | 8,221,549 |
During the nine-month periods ended
December 31, 2009 and 2008, the Company derived all of its revenue from
delivering products and services to customers whose operations were located in
China (including Hong Kong).
NOTE 19
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated events subsequent to the balance sheet date through March
3, 2010, which represents the date these financial statements were available to
be issued.
Share
Exchange
On
February 26, 2010, the Company entered into a Share Exchange Agreement (the
“Exchange Agreement”) with Remediation Services, Inc. (“Remediation”, a company
incorporated in Nevada and whose shares are listed on the Over-The-Counter
Bulletin Board) and shareholders of the Company and Remediation. Pursuant to the
terms of the Exchange Agreement, the Company’s shareholders transferred to
Remediation all of the Company’s shares in exchange for the issuance of
27,354,480 shares of Remediation’s common stock (“Common Stock”), par value
$0.001 per share (such transaction, the “Share Exchange”).
Prior to
the Share Exchange, Remediation had 5,906,950 shares of common stock issued and
outstanding. Immediately prior to the Share Exchange, 4,690,000 shares of
Remediation’s common stock then outstanding were cancelled and retired, so that
immediately after the Share Exchange Remediation had 28,571,430 shares issued
and outstanding. The Company also deposited $275,000 into an escrow account
which amount was paid to an owner of the cancelled shares of Remediation, as a
result of the Share Exchange having been consummated.
F-52
NOTE 19
|
SUBSEQUENT EVENTS (CONTINUED)
|
The Share
Exchange resulted in a change-in-control of Remediation as the Company’s
shareholders have acquired the majority ownership of the combined
entity.
In
accordance with the Accounting and Financial Reporting Interpretations and
Guidance issued by the staff of the U.S. Securities and Exchange Commission (the
“SEC”), the Share Exchange will be accounted for as a reverse acquisition
whereby Remediation (the legal acquirer) is considered the accounting acquiree
and the Company (the legal acquiree) is considered the accounting acquirer. The
consolidated financial statements of the combined entity will be in substance
those of the Company’s, with the assets and liabilities, and revenues and
expenses, of Remediation being included effective from the date of consummation
of the Share Exchange. Remediation will be deemed to be a continuation of the
Company’s business. The outstanding stock of Remediation prior to the Share
Exchange will be accounted for at their net book value with no goodwill being
recognized.
Private
Placement
Immediately
after the Share Exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with certain accredited investors
(collectively, the “Investors”) for the issuance and sale in a private placement
of 787,342 units (the “Units”) at a purchase price of $35 per Unit, consisting
of, in the aggregate, (a) 7,086,078 shares of Series A convertible preferred
stock, par value $0.001 per share (the “Series A Preferred Stock”) convertible
into the same number of shares of Common Stock, (b) 787,342 shares of Common
Stock (the “Shares”), (c) three-year Series A Warrants to purchase up to
1,968,363 shares of Common Stock, at an exercise price of $4.50 per share (the
“Series A Warrant Shares”), and (d) three-year Series B Warrants to purchase up
to 1,968,363 shares of Common Stock, at an exercise price of $5.75 per share
(the “Series B Warrant Shares”), for aggregate gross proceeds of approximately
$27.56 million (the “Private Placement”).
In
conjunction with the Private Placement, the Company also entered into the
following agreements:
▪
|
a
registration rights agreement (the “Registration Rights Agreement”) with
the Investors, in which the Company agreed to file a registration
statement (the “Registration Statement”) with the SEC to register for
resale the Shares, the Common Stock issuable upon conversion of the Series
A Preferred Stock, the Series A Warrant Shares and the Series B Warrant
Shares, within 30 calendar days of the Closing Date, and to have the
registration statement declared effective within 150 calendar days of the
Closing Date or within 180 calendar days of the Closing Date in the event
of a full review of the registration statement by the
SEC.
|
▪
|
a
make good escrow agreement with the Investors (the “Securities Escrow
Agreement”), pursuant to which China LianDi Energy Resources Engineering
Technology Ltd. (“LianDi Energy”), an affiliate of Mr. Zuo, CEO and
Chairman of the Company, delivered into an escrow account 1,722,311 shares
of Common Stock to be used as a share escrow for the achievement of a
Fiscal Year 2011 net income performance threshold of $20.5
million.
|
▪
|
a
lock-up agreement whereby LianDi Energy is prohibited from selling
Remediation’s securities until six months after the effective date of the
registration statement required to be filed under the Registration Rights
Agreement. For one year thereafter, it will be permitted to
sell up to 1/12 of its initial holdings every
month.
|
F-53
Pro
Forma Combined Financial Statements
The
following pro forma balance sheet has been derived from the balance sheet of
Remediation Services, Inc. at December 31, 2009, and adjusts such information to
give the effect of the acquisition of China Liandi Clean Technology Engineering
Limited, a British Virgin Island corporation, as if the acquisition had occurred
at December 31, 2009. The following pro forma EPS statement has been
derived from the income statement of China Liandi Clean Technology Engineering
Limited, and adjusts such information to give the effect that the acquisition by
Remediation Services, Inc. at March 31, 2009 and December 31, 2009,
respectively. The pro forma balance sheet and EPS statement is
presented for informational purposes only and does not purport to be indicative
of the financial condition that would have resulted if the acquisition had been
consummated at March 31, 2009 and December 31, 2009.
PRO FORMA
CONSOLIDATED BALANCE SHEET
(Unaudited)
China Liandi
Clean
Technology
Engineering,
Limited
|
Remediation
Services, Inc.
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2009
|
2009
|
Adjustments
|
Proforma
|
|||||||||||||
(unaudited)
|
(audited)
|
|||||||||||||||
ASSETS
|
||||||||||||||||
Current
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 18,153,762 | $ | 1,785 | $ | (1,785 | )A | $ | 43,228,762 | |||||||
$ | (275,000 | )C | ||||||||||||||
25,350,000 | E | |||||||||||||||
Restricted
cash
|
1,640,333 | $ | 1,640,333 | |||||||||||||
Notes
receivable, net of $nil allowance
|
5,519,312 | $ | 5,519,312 | |||||||||||||
Accounts
receivable, net of $nil allowance
|
8,246,985 | A | 8,246,985 | |||||||||||||
Deferred
costs of revenue
|
1,282,365 | 1,282,365 | ||||||||||||||
Inventories
|
66,626 | 66,626 | ||||||||||||||
Prepaid
expenses and other current assets
|
12,077,151 | 12,077,151 | ||||||||||||||
Inventories
|
- | |||||||||||||||
Pledged
trading securities
|
8,820 | - | 8,820 | |||||||||||||
Total
current assets
|
46,995,354 | 1,785 | 25,073,215 | $ | 72,070,354 | |||||||||||
Property
and equipment, net
|
133,129 | - | - | A | 133,129 | |||||||||||
Intangible
assets, net
|
5,343,136 | - | 5,343,136 | |||||||||||||
Other
long-term assets, net
|
- | 185,088 | (185,088 | )A | - | |||||||||||
Total
assets
|
$ | 52,471,619 | $ | 186,873 | $ | 24,888,127 | $ | 77,546,619 | ||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||
Current
liabilities:
|
||||||||||||||||
Accounts
payable
|
$ | 11,922 | $ | 15,022 | (15,022 | )A | $ | 11,922 | ||||||||
Deferred
revenue
|
$ | 2,609,356 | - | 2,609,356 | ||||||||||||
Other
payable and accrued expenses
|
3,135,160 | 7,467 | (7,467 | )A | 3,135,160 | |||||||||||
Provision
for income tax
|
59,832 | - | - | 59,832 | ||||||||||||
Payable
for intangible
|
5,975,220 | - | A | 5,975,220 | ||||||||||||
Due
to shareholders
|
8,392,314 | - | - | 8,392,314 | ||||||||||||
Due
to related parties
|
- | 51,407 | (51,407 | )A | - | |||||||||||
Line
of credit
|
- | 6,000 | (6,000 | )A | - | |||||||||||
Customer
Deposit
|
6,950 | (6,950 | )A | - | ||||||||||||
Notes
payable
|
41,000 | (41,000 | )A | |||||||||||||
Current
portion of mortgage payable
|
- | 3,764 | (3,764 | )A | - | |||||||||||
Total
Current Liabilities
|
20,183,804 | 131,610 | (131,610 | )A | $ | 20,183,804 | ||||||||||
Long
term liabilities:
|
||||||||||||||||
Long-term
portion of mortgage payable
|
- | 79,353 | (79,353 | )A | - | |||||||||||
Total
Liabilities
|
20,784,441 | 210,963 | (210,963 | )A | $ | 20,784,441 | ||||||||||
Stockholders'
equity
|
||||||||||||||||
Common
stock ($1 par value; authorized - 50,000 shares; issued and outstanding -
10,000 shares)
|
50,000 | 5,907 | 27,354 | B | 29,358 | |||||||||||
(50,000 | )D | |||||||||||||||
(4,690 | )C | |||||||||||||||
787 | E | |||||||||||||||
Preferred
stock,$0.001 par value, 25,000 authorized, none issued and
outstanding
|
- | - | 7,086 | E | 7,086 | |||||||||||
Additional
paid in capital
|
9,329,878 | 262,218 | (268,125 | )A | 34,418,434 | |||||||||||
(27,354 | )B | |||||||||||||||
50,000 | D | |||||||||||||||
(270,310 | )C | |||||||||||||||
25,342,127 | E | |||||||||||||||
Statutory
earnings
|
1,138,733 | 1,138,733 | ||||||||||||||
Retained
earning
|
21,696,085 | (292,215 | ) | 292,215 | A | 21,696,085 | ||||||||||
Accumulated
other comprehensive income
|
73,119 | - | $ | 73,119 | ||||||||||||
Total
stockholders' equity
|
$ | 32,287,815 | $ | (24,090 | ) | $ | 25,099,090 | 57,326,371 | ||||||||
Total
liabilities and stockholders' equity
|
$ | 52,471,619 | 186,873 | 24,888,127 | $ | 77,546,619 |
See notes
to financial statements
F-54
PRO FORMA
EPS (UNAUDITED)
China Liandi
Clean
Technology
Engineering,
|
China Liandi
Clean Technology
Engineering,
Limited
|
|||||||
Limited Year Ended |
Nine Months
Ended
|
|||||||
March 31,
|
December 31,
|
|||||||
2009
|
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Net
income/(loss)
|
$ | 7,086,984 | $ | 11,303,317 | ||||
Other
comprehensive income (loss)
|
||||||||
Foreign
currency translation gain
|
43,119 | 17,427 | ||||||
Comprehensive
income (loss)
|
$ | 7,130,103 | $ | 11,320,744 | ||||
Net
income (loss) per Share
|
||||||||
Basic
|
$ | 0.26 | $ | 0.41 | ||||
Diluted
|
$ | 0.26 | $ | 0.41 | ||||
Weighted
average shares outstanding
|
||||||||
Basic
|
27,354,480 | 27,354,480 | ||||||
Diluted
|
27,354,480 | 27,354,480 |
See notes
to financial statements
F-55
PRO FORMA
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
China Liandi Clean
Technology
Engineering, Limited
|
Remediation
Services, Inc.
|
|||||||||||||||
Nine Months Ended
|
Nine Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2009
|
2009
|
Adjustments
|
Proforma
|
|||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
Revenue
|
$ | 45,604,199 | $ | 58,301 | (58,301 | )A | 45,604,199 | |||||||||
Cost
of sales
|
31,986,380 | 28,254 | (28,254 | ) | 31,986,380 | |||||||||||
Gross
profit (loss)
|
13,617,819 | 30,047 | (30,047 | )A | 13,617,819 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
|
816,281 | 479 | (479 | )A | 816,281 | |||||||||||
General
and administrative
|
863,061 | 17,234 | (17,234 | )A | 863,061 | |||||||||||
Depreciation
and amortization
|
- | 12,318 | (12,318 | )A | - | |||||||||||
Research
and development
|
40,432 | - | 40,432 | |||||||||||||
Total
|
1,719,774 | 30,031 | (30,031 | )A | 1,719,774 | |||||||||||
Income/(loss)
from operations
|
11,898,045 | 16 | (16 | ) | 11,898,045 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income (expense)
|
48,121 | (8,196 | ) | 8,196 | A | 48,121 | ||||||||||
Interest
and bank charges
|
(402,674 | ) | - | - | (402,674 | ) | ||||||||||
Exchange
gains (losses), net
|
(479,188 | ) | - | - | (479,188 | ) | ||||||||||
Value
added tax refund
|
220,758 | 220,758 | ||||||||||||||
Other
|
19,072 | - | - | 19,072 | ||||||||||||
Other
income (expense), net
|
(593,911 | ) | (8,196 | ) | 8,196 | A | (593,911 | ) | ||||||||
Income
(loss) before income tax expense
|
11,304,134 | (8,180 | ) | 8,180 | 11,304,134 | |||||||||||
Income
tax expense
|
817 | - | 817 | |||||||||||||
Net
income/(loss)
|
$ | 11,303,317 | $ | (8,180 | ) | $ | 8,180 | A | 11,303,317 | |||||||
Other
comprehensive income (loss)
|
||||||||||||||||
Foreign
currency translation adjustment
|
17,427 | - | - | 17,427 | ||||||||||||
Total
comprehensive income (loss)
|
$ | 11,320,74 | $ | (8,180 | ) | $ | 8,180 | 11,320,744 | ||||||||
Net
income (loss) per Share
|
||||||||||||||||
Basic
and diluted
|
$ | 226.07 | $ | (0.00 | ) | $ | 0.41 | |||||||||
Basic
and diluted
|
$ | 226.07 | $ | (0.00 | ) | $ | 0.41 | |||||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
50,000 | 5,906,950 | 21,397,530 | B,C,E | 27,354,480 | |||||||||||
Diluted
|
50,000 | 5,906,950 | 21,397,530 | B,C,E | 27,354,480 |
See notes
to financial statements
F-56
Unaudited
Notes to Pro Forma Combined Financial Statements
On
February 26, 2010, Remediation Services, Inc., (the "Company"), entered into a
Share Exchange Agreement (the “Exchange Agreement”), with (i) China Liandi Clean
Technology Engineering Limited, a company organized under the laws of British
Virgin Islands (“China LianDi”), (ii) China LianDi’s shareholders, SJ Asia
Pacific Ltd., a company organized under the laws of the British Virgin Islands,
which is a wholly-owned subsidiary of SJI Inc, a Jasdaq listed company organized
under the law of Japan, China Liandi Energy Resources Engineering Technology
Limited, a company organized under the laws of the British Virgin Islands, Hua
Shen Trading (International) Limited, a company organized under the laws of the
British Virgin Islands, Rapid Capital Holdings Limited, a company organized
under the laws of the British Virgin Islands, and TriPoint Global Equities, LLC,
a limited liability company organized under the laws of Maryland (collectively,
the “China LianDi Shareholders”), who together own shares constituting 100% of
the issued and outstanding ordinary shares of China LianDi (iii) Reed Buley, the
principal stockholder of the Company (the “Remediation Principal Shareholder”).
Pursuant to the terms of the Exchange Agreement, the China Liandi Shareholders
transferred to us all of the China LianDi shares in exchange for the issuance of
27,354,480 shares of our common stock. As a result of the Share
Exchange, we are now a holding company, which through certain contractual
arrangements with operating companies in the People’s Republic of China (“China”
or the “PRC”), provides downstream flow equipment and engineering services to
the leading petroleum and petrochemical companies in the PRC.
Immediately
prior to the Share Exchange, 4,690,000 shares of our outstanding common stock
were cancelled and retired. China LianDi also deposited $275,000 into
an escrow account, which amount was paid to the Remediation Principal
Shareholder, who owned the 4,690,000 shares, as a result of the Share Exchange
having been consummated.
As a
result of the transactions described above, we became the record and beneficial
owner of 100% of the share capital of China LianDi and therefore own 100% of the
share capital of its subsidiaries and Variable Interest Entities
indirectly.
As a
result of the Share Exchange, the cancellation of 4,690,000 shares and the
closing of Series A financing, we had 29,358,772 shares of common stock and
7,086,078 shares of Series A preferred issued and
outstanding. Pursuant to the terms of the Agreement, China LianDi’s
officers and directors were appointed as our officers and directors, and Reed
Buley resigned as our President, CEO and sole director. However, the
change in our board of directors will not be effective until 10 days after the
mailing of a Schedule 14F Information Statement to our shareholders, which we
expect to do promptly after the closing of the Share Exchange.
The
transaction was regarded as a reverse merger whereby China LianDi was considered
to be the accounting acquirer as it retained control of Remediation after the
Share Exchange.
All
amounts of Remediation were reversed as the net assets assumed by China LianDi
in the reverse merger were $0 after the Company satisfied the remaining portion
of a $6,000 line of credit with part of the $275,000 escrow deposit (described
above).
Hua Shen was founded by Mr. Zuo in
1999. On January 8, 2008, China LianDi acquired 100% ownership
interest in Hua Shen from Mr. Zuo. As Hua Shen and China LianDi had been under
common control, the acquisition of Hua Shen by China LianDi has been accounted for using the
“as if” pooling method of
accounting. In 2007, China LianDi established Petro HK
and Bright Flow, as wholly-owned subsidiaries, in Hong Kong. In 2008, Petro HK
established Beijing Jianxi, as a wholly-owned subsidiary, in the PRC.
F-57
The
consolidated financial statements reflect all predecessor statements of income
and cash flow activities and include the accounts of China LianDi Clean
Technology Engineering Limited, and its subsidiaries and Variable Interest
Entities (VIEs). China Liandi (and its historical financial statements) is the
continuing entity for financial reporting purposes.
The
preceding unaudited pro forma combined balance sheet represents the combined
financial position of China LianDi as of December 31, 2009, as if the reverse
merger acquisition occurred on December 31, 2009. The unaudited
combined income statements give effect to the reverse acquisition of China
LianDi by Remediation assuming that the reverse acquisition took place on
January 1, 2010.
The
unaudited pro forma combined financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have been achieved if the reverse acquisition of China LianDi had been
consummated as of the beginning of the period indicated, nor is necessarily
indicative of the resulted of future operations.
Assumptions
and Adjustments:
A)
|
Per
the terms of the Share Exchange, Remediation was delivered with zero
assets and zero liabilities at time of
closing;
|
B)
|
At
closing and pursuant to the Exchange Agreement, we acquired all of the
issued and outstanding capital stock of China LianDi in exchange for the
issuance of 27,354,480 common stock
shares;
|
C)
|
In
exchange for $275,000, the Company agreed to cancel 4,690,000 shares of
common stock;
|
D)
|
At
closing, common stock of China LianDi will be reclassified to additional
paid-in-capital to reflect the additional shares of common stock issued as
part of the Share Exchange; and
|
E)
|
Remediation
issues 7,086,078 shares of convertible Series A preferred stock and
787,342 shares of common stock at $3.50 per share to investors for net
proceeds of approximately
$25,077,000.
|
F-58
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
estimated expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered are as follows:
SEC
Registration Fee
|
$ | 3,697.28 | ||
Legal
Fees and Expenses *
|
||||
Accounting
Fees and Expenses *
|
||||
Miscellaneous
*
|
||||
Total
*
|
$ |
* To be
completed by amendment
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Indemnification. Our
directors and officers are indemnified as provided by our articles of
incorporation, our bylaws and the Nevada Revised Statutes. Our bylaws and
articles of incorporation provide that we will indemnify our directors,
officers, employees, and agents, to the fullest extent to the extent required by
the Nevada Revised Statutes and shall indemnify such individuals to the extent
permitted by the Nevada Revised Statutes. We may purchase and maintain liability
insurance, or make other arrangements for such obligations or otherwise, to the
extent permitted by the Nevada Revised Statutes. Our bylaws and Nevada laws
permit us to 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 or she 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 or her in connection with
the action, suit or proceeding if he has exercised his powers in good faith and
with a view to the interests of the corporation; or acted in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
We will
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 or
she 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 or her in connection
with the defense or settlement of such action or suit if he or she acted in good
faith and in a manner which he or she 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 person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amount 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.
Limitation of Liability. Our
articles of incorporation limit the liability of our directors and officers
under certain circumstances. Our articles of incorporation provide that the
liability of directors or officers for monetary damages are eliminated to the
fullest extent permitted by Nevada law.
II-1
In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will (unless in the opinion of our counsel, the
matter has been settled by controlling precedent) submit to a court of
appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue. The legal process relating to this matter if
it were to occur is likely to be very costly and may result in us receiving
negative publicity, both of which are likely to materially reduce the market and
price for our shares.
RECENT
SALES OF UNREGISTERED SECURITIES
On
February 26, 2010, we entered into a securities purchase agreement (the
“Purchase Agreement”) with certain investors (collectively, the “Investors”) for
the issuance and sale in a private placement of 787,342 units (the “Units”) at a
purchase price of $35 per Unit, consisting of, in the aggregate, (a) 7,086,078
shares of Series A convertible preferred stock, par value $0.001 per share (the
“Series A Preferred Stock”) convertible into the same number of shares of Common
Stock, (b) 787,342 shares of Common Stock, (c) three-year Series A Warrants (the
“Series A Warrants”) to purchase up to 1,968,363 shares of Common Stock, at an
exercise price of $4.50 per share (the “Series A Warrant Shares”), and (d)
three-year Series B Warrants (the “Series B Warrants” and, together with the
Series A Warrants, the “Warrants”) to purchase up to 1,968,363 shares of Common
Stock, at an exercise price of $5.75 per share (the “Series B Warrant Shares”
and, together with the Series A Warrant Shares, the “Warrant Shares”), for
aggregate gross proceeds of approximately $27.56 million (the “Private
Placement”).
The
holders of the Series A Preferred Stock have a beneficial ownership limitation
on conversion, such that no holder may convert its shares of Series A Preferred
Stock if after such conversion the holder would beneficially own, together with
its affiliates, more than 9.99% of the then issued and outstanding shares of or
Common Stock (the “Maximum Amount”). Each share of Series A Preferred Stock is
convertible into such number of fully paid and nonassessable shares of our
Common Stock equal to the quotient of the liquidation preference amount per
share of Series A Preferred Stock (equal to $3.50, plus any accrued but unpaid
dividends thereon, whether or not declared, together with any other dividends
declared but unpaid thereon) divided by the conversion price, which initially is
$3.50 per share, subject to adjustments for stock splits and combinations,
issuance of additional shares of Common Stock and other events as set forth in
the terms therein (the “Conversion Price”). The Series A Preferred Stock
automatically converts into shares of Common Stock up to the Maximum Amount,
upon the earlier to occur of (x) the 24-month anniversary after the Closing
Date, and (y) such time that the volume weighted average price of the Common
Stock is no less than $5.00 for a period of ten consecutive trading days with
the daily volume of at least 50,000 shares per day.
We
entered into a placement agent agreement with TriPoint Global Equities, LLC
(“TriPoint Global”) on October 27, 2009 whereby we paid a cash fee to TriPoint
Global equal to 7% of the gross proceeds received by us in connection with the
Private Placement and we issued to TriPoint Global and its designees (i)
Warrants to purchase 787,342 shares of Common Stock, (ii) Series A Warrants to
purchase 196,836 shares of Common Stock and (iii) Series B Warrants to purchase
196,836 shares of Common Stock.
The
issuance of the Units and other securities was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and
Regulation D or Regulation S promulgated thereunder. We have relied
on the status of the Investors as (i) accredited investors under Regulation D,
or (ii) non-US persons under Regulation S, in claiming the exemption from
registration of the units, and the securities underlying the units sold in the
Private Placement.
II-2
EXHIBITS
Exhibit
No.
|
Description
|
2.1
|
Share
Exchange Agreement dated February 26, 2010, by and among Remediation
Services, Inc., Reed Buley, China LianDi Clean Technology Engineering
Ltd., and the shareholders of China LianDi Clean Technology Engineering
Ltd. (1)
|
3.1++
|
Articles
of Incorporation of Remediation Services, Inc., as
amended
|
3.3
|
Certificate
of Designation (1)
|
3.4++
|
By-laws
|
4.1
|
Registration
Rights Agreement dated February 26, 2010 by and among Remediation
Services, Inc. and certain investors listed therein (1)
|
4.2
|
Form
of Series A Warrant (1)
|
4.3
|
Form
of Series B Warrant (1)
|
5.1++
|
Opinion
of Lionel Sawyer & Collins
|
10.1
|
Securities
Purchase Agreement dated as of February 26, 2010 by and among Remediation
Services, Inc. and certain investors listed therein (1)
|
10.2
|
Securities
Escrow Agreement dated as of February 26, 2010 by and among Remediation
Services, Inc., China LianDi Energy Resources Engineering Technology Ltd.
and certain investors listed therein (1)
|
10.3
|
Lock-up
Agreement dated February 26, 2010 by and among Remediation Services, Inc.
and China LianDi Energy Resources Engineering Technology Ltd.
(1)
|
10.4
|
Form
of Employment Agreement with Jianzhong Zuo and Yong Zhao
(1)
|
10.5
|
Sales
Contract by and between Hua Shen Trading (International) Limited and China
Petrochemical International Co. Ltd. dated as of September 28, 2007
(1)
|
10.6
|
Cooper
Cameron Valves Authorization Letter dated as of September 6, 2006
(1)
|
10.7
|
Form
of Rotork Authorization Letter (1)
|
10.8
|
International
Distributor Agreement by and between Petrochemical Engineering Limited and
DeltaValve dated as of February 12, 2010 (1)
|
10.9
|
Poyam
Authorization Letter dated as of March 20, 2008 (1)
|
10.10
|
After-sale
Services Agreement by and between Petrochemical Engineering Limited and
AMPO S. Coop Poyam Valves dated as of January 20, 2010
(1)
|
10.11
|
Entrustment
purchase agreement by and between Beijing JianXin Petrochemical
Engineering Ltd. and Petrochemical Engineering Limited
(1)
|
21.1++
|
Subsidiaries
of the Registrant
|
II-3
Exhibit
No.
|
Description
|
23.1+
|
Consent
of AGCA CPA Limited, an independent registered accounting
firm
|
23.2++
|
Consent
of Lionel Sawyer & Collins (included in its opinion filed as Exhibit
5.1)
|
24.1+
|
Power
of Attorney (contained in the signature page to this registration
statement)
|
+
Filed herewith
++ To
be filed by amendment.
(1) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 4, 2010.
UNDERTAKINGS.
Undertaking
Required by Item 512 of Regulation S-K.
(a) The
undersigned registrant will:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) reflect
in the prospectus any facts or events arising after the effective date of this
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration statement;
and
(iii) include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(b)
For determining liability of the registrant under the Securities Act to
any purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of the registrant relating to the
offering required to be filed pursuant to Rule 424;
II-4
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Beijing, PRC on March 29,
2010.
REMEDIATION
SERVICES, INC.
|
||
By:
|
/s/
Jianzhong Zuo
|
|
Name:
|
Jianzhong
Zuo
|
|
Title:
|
Chairman,
Chief Executive Officer and
President
(Principal Executive Officer)
|
|
By:
|
/s/
Yong Zhao
|
|
Name:
|
Yong
Zhao
|
|
Title:
|
Chief
Financial Officer (Principal Financial
and
Accounting
Officer)
|
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jianzhong Zuo and Yong Zhao as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments, exhibits thereto
and other documents in connection therewith) to this Registration Statement and
any subsequent registration statement filed by the registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons and in the capacities and on
the dates indicated.
Dated:
March 29, 2010
|
By:
|
/s/
Jianzhong Zuo
|
Name:
|
Jianzhong
Zuo
|
|
Title:
|
Chairman,
Chief Executive Officer and President
(Principal
Executive Officer)
|
|
Dated:
March 29, 2010
|
By:
|
/s/
Yong Zhao
|
Name:
|
Yong
Zhao
|
|
Title:
|
Chief
Financial Officer (Principal Financial and
Accounting
Officer)
|
|
Dated:
March 29, 2010
|
By:
|
/s/
Hirofumi Kotoi
|
Name:
|
Hirofumi
Kotoi
|
|
Title:
|
Director
|
II-6