Attached files

file filename
EX-5.1 - Asia Cork Inc.v208842_ex5-1.htm
EX-23.1 - Asia Cork Inc.v208842_ex23-1.htm

As filed with the Securities and Exchange Commission on January 25, 2011
Registration Number 333-164893
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO 5 TO
FORM S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
 
ASIA CORK INC.
(Name of Registrant as Specified in Its Charter)
 
Delaware
 
2435
 
13-3912047
(State or Other Jurisdiction of
 
(Primary Standard Industrial
 
(I.R.S. Employer
Incorporation or Organization)
 
Classification Code Number)
 
Identification No.)

3rd Floor, A Tower of Chuang Xin
Information Building
No. 72 Second Keji Road, Hi Tech Zone
Xi’An China
(011) 86 - 13301996766
(Address and Telephone Number of Principal Executive Offices)
 
Steve Schuster, Esq.
McLaughlin & Stern, LLP
260 Madison Avenue
New York, NY 10016
(212) 448-1100
Fax (212) 448-0066
(Name, Address and Telephone Number of Agent for Service)

COPIES TO:

Steve Schuster, Esq.
McLaughlin & Stern, LLP
 
SUNNY J. BARKATS, ESQ
JSBarkats , PLLC
260 Madison Avenue
New York, New York 10016
(212) 448 € 1100
Fax  (212) 448 € 0066
 
110 E. 40 th St., 9 th Fl New York, NY 10016
(646) 502-7001
Fax (646) 607-5544

Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨
 
Accelerated filer   ¨
 
Non-accelerated filer   ¨
 
Smaller reporting company þ

 
 

 

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to Be Registered
 
Amount to Be
Registered
   
Proposed Maximum
Aggregate
Offering Price
   
Amount of
Registration Fee (2)
 
Units, each unit consisting of one share of Common Stock, $0.0001 par value per share, and one warrant to purchase one share of Common Stock
     1,250,000 (1)   $ 8,125,000     $ 579.31  
                         
Common Stock included in the Units
   
1,250,000
    $       $   (3)
                         
Warrants included in the Units
   
1,250,000
              (3)
                         
Common Stock issuable upon exercise of the warrants included in the Units
   
1,250,000
              (3)
                         
Warrants issuable to the Underwriter to purchase Units (4)
   
125,000
              (3)
                         
Units issuable to the Underwriter upon exercise of the Warrants(4)
   
125,000
               
                         
Warrants which are part of the Units that are issuable upon exercise of the Underwriters’ Warrants
   
125,000
              (3)
                         
Common Stock issuable upon exercise of the warrants included in the Underwriter Units
   
125,000
              (3)
                         
Common Stock which is part of  Units that comprise the Underwriter Unit
   
125,000
              (3)
                         
Common Stock (5)
   
3,261,667
    $
1,369,900
    $
97.67
(2)
                         
Common Stock (6)
   
1,666,667
    $
700,000
    $
49.91
(2)
                         
Common Stock (7)
    250,000     $
105,000
    $
7.49
(2)
                         
Total Registration Fee
           $       $
734.38
(8)
 
Anticipated Offering Price Per Unit:  $6.50
 
(1)
In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of additional shares of Common Stock that shall be issuable pursuant to Rule 416 pursuant to the anti-dilution provisions of the Underwriters’ Warrants and warrants previously issued to selling stockholders.

(2)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(h), the maximum offering price, per share and the registration fee were calculated based upon the average of the high and low prices of the Common Stock on January 21, 2011, as quoted on the Over the Counter Bulletin Board.

(3)
In accordance with Rule 457(g) under the Securities Act, no separate registration fee is required.

(4)
Such Units are issuable upon exercise of the certain warrants issued to each of ICM Capital Markets LTD. and Aegis Capital Corporation, the underwriters (the “Underwriters”).  We have agreed to issue, on the closing date of this Offering, certain warrants to each of the Underwriters (the “Underwriters’ Warrants”), exercisable at a rate of one Underwriters' Warrant to purchase one Unit per every ten Units sold by the Registrant. The price to be paid by the Underwriters for the Underwriters’ Warrants is $.01 per Underwriters’ Warrants. The Underwriters will close the purchase of its Underwriters’ Warrants on a date that is mutually acceptable to such Underwriter and the Registrant; provided, however, that the closing date will be on or before June 1, 2011. Assuming a maximum placement at an offering price of $6.50 per Unit, on the closing date the Underwriters would receive an aggregate of 125,000 Underwriters’ Warrants at an aggregate purchase price of $7.80. The exercise price of the Underwriters’ Warrants is equal to 120% of the price per Unit offered hereby.  Assuming a maximum placement and an Underwriters’ Warrant exercise price of $7.80 per Unit, we would receive, in the aggregate, $975,000 upon the exercise of the Underwriters’ Warrant on the assumption that the Underwriter pays cash to exercise the Underwriters' Warrants. The Underwriters’ Warrants are exercisable for Units at the exercise price for a period commencing on the date, which is six months after the closing date and ending on the date, which is five years after the closing date. Because the Units, the shares of the Registrant’s Common Stock and the Warrants underlying the Underwriters’ Warrants are registered hereby, no separate registration fee is required.

 
i

 

(5)
Represents shares of the Registrant’s Common Stock being registered for resale that have been or may be acquired upon the conversion of promissory notes that have been previously issued to selling stockholders (the “Promissory Notes”) named in the Resale Prospectus.  This amount represents the conversion of $350,000 of the entire $700,000 of principal of the notes plus accrued but unpaid interest through January 31, 2011 at a conversion rate of $.21 per share based upon the average of the high and low prices of the Common Stock on January 21, 2011.  Of this amount, no shares of Common Stock have already been issued to the selling stockholders in connection with the conversion of Promissory Notes.

(6)
Represents shares of the Registrant’s Common Stock being registered for resale that have been or may be acquired upon the exercise of warrants that have been previously issued to selling stockholders named in the Resale Prospectus. Of this amount, no shares of Common Stock have already been issued to the selling stockholders in connection with the exercise of warrants.

(7)
Represents shares of the Registrant’s Common Stock being registered for sale by a selling stockholder.

(8)
Previously paid.

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 SPE CIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTIN G PURSUANT TO SAID SECTION 8(a) MAY DETERMINE.

 
ii

 


This Registration Statement contains two prospectuses, as set forth below.

Public Offering Prospectus. A prospectus (the “Public Offering Prospectus”) to be used for the public Offering by the Registrant of up to     Units of the Registrant, each consisting of one share of Common Stock and one Warrant to purchase one share of Common Stock through the Underwriters and such other underwriters as may participate in the Offering (collectively, the “Underwriters”) named on the cover page of the Public Offering Prospectus. We are also registering the Units (including the securities comprising the Units) issuable upon exercise of the warrants to be received by the Underwriter in this Offering (the “Public Offering Prospectus”).

Resale Prospectus.  A prospectus to be used for the resale by selling stockholders (the “Selling Stockholders”) of up to 5,178,334 shares of the Registrant’s Common Stock (including shares that may be acquired upon the exercise of warrants, and shares that may be acquired upon the conversion of Promissory Notes that have been previously issued to selling stockholders named in the Resale Prospectus) (the “Resale Prospectus”).
 
The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following principal points:

 
It contains different outside and inside front covers;

 
It contains different Offering sections in the Prospectus Summary section on page 81;

 
It  contains different Use of Proceeds sections on page 82;

 
The Capitalization and Dilution sections are deleted from the Resale Prospectus;

 
A Selling Stockholders section is included in the Resale Prospectus beginning on page 83;

 
References in the Public Offering Prospectus to the Resale Prospectus will be deleted from the Resale Prospectus;

 
The Underwriting section from the Public Offering Prospectus on page 72 is deleted from the Resale Prospectus and a Plan of Distribution is inserted in its place on page 85;

 
The Legal Matters section in the Resale Prospectus on page 87 deletes the reference to counsel for the Underwriters; and

 
The outside back cover of the Public Offering Prospectus is deleted from the Resale Prospectus.

The Registrant has included in this Registration Statement, after the financial statements, a set of alternate pages to reflect the foregoing differences of the Resale Prospectus as compared to the Public Offering Prospectus.
 
The Selling Stockholders named in the Resale Prospectus holding an aggregate of 5,178,334 shares of Common Stock, including, shares of Common Stock issuable upon the exercise of warrants and shares of Common Stock underlying Promissory Notes, have agreed that they will not sell any of such shares of Common Stock for a period of nine months after the Offering is completed (except for 250,000 of the 5,178,334 shares which are subject to a restriction on sales for a period of six months after the Offering is completed), without the Underwriters’ consent, when all of their shares will be released from the lock-up restrictions.

None of the references to the outstanding shares of our Common Stock in this prospectus give effect to a reverse stock split that the Company will effectuate concurrently with the date of this prospectus (the “Reverse Split”), except that the 1,250,000 Units being sold in the Offering, referenced throughout this prospectus assumes that the ratio of the Reverse Split is 1 for 12.5. The Reverse Split will be in an amount to be ultimately agreed upon between the Board of Directors of the Company and the Underwriters within a range of 1-for-10 to 1-for-30.
 
 
iii

 
  
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion
Preliminary Prospectus Dated January 25, 2011
PROSPECTUS

ASIA CORK, INC.
 
1,250,000 Units
 
Each Unit Consisting of
One Share of Common Stock and One Warrant to Purchase One Share of Common Stock
 
We are offering 1,250,000 units (the “Units”) of Asia Cork, Inc., a Delaware corporation (the “Company”) for aggregate gross proceeds of $8,125,000 (the “Offering”). The number of Units being sold assumes that the Reverse Split ratio is 1 for 12.5.  Each of the Units offered hereby consists of one share of our Common Stock, $.0001 par value per share  (the “Common Stock”), and  one warrant entitling the registered holder of the Unit to purchase one share of Common Stock (the “Warrants”).  The Warrants are exercisable to purchase one share of Common Stock at $7.80 per share through January ___, 2016 (five years after the date of the closing). Each share of Common Stock and Warrant will not be separately tradeable for a period of one year, unless sooner as may be approved by the Underwriters, in its sole discretion.  The Warrants are subject to redemption commencing one year after the date hereof at $.05 per Warrant on 20 days prior written notice provided the closing price of the Common Stock for the twenty (20) consecutive trading days ending within fifteen (15) days of the date of notice of redemption averages in excess of $11.70 per share (180% of the initial Offering price) See “Description of Securities.”  None of our officers, directors or affiliates may purchase Units in this Offering.

We expect that the Offering price of the Units will be between $5.50 and $7.50 per Unit.  For purposes of this prospectus, a mid-point price range of $6.50 per Unit shall be used.

We are a reporting Company under the Securities Exchange Act of 1934, as amended.  Our Common Stock is quoted on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority (“FINRA”) under the symbol “AKRK.” The last reported sale price for our Common Stock on January 24, 2011 was $0.40 per share, as reported on the OTC Bulletin Board.  We intend to  apply to have the Units and Common Stock underlying the Units listed on either the NASDAQ Stock Market LLC (“NASDAQ”) or on NYSE Amex LLC (“AMEX”) under the symbol “AKRK” on or promptly after the date of this prospectus. Prior to the separate trading of the Common Stock and Warrants, we will apply to have the Warrants comprising the units listed on NASDAQ or AMEX.

Concurrently with this Offering, there are being offered, pursuant to a Resale Prospectus, by certain security holders (collectively, the “Selling Stockholders”), 5,178,334shares of Common Stock (collectively, the “Selling Stockholders’ Securities”). Each of the Selling Stockholders has agreed not to sell any of the Selling Stockholders’ Securities for a period of nine  months after the closing of the Offering. (except for 250,000 shares which are subject to a restriction on sales for a period of six months after the closing of the Offering) without the prior consent of the Underwriters of the Offering. Sales of the Selling Stockholders’ Securities in such offering (the “Concurrent Offering”) will be subject to the prospectus delivery requirements and other requirements of the Securities Act.  The Concurrent Offering is not underwritten by the Underwriters.
 
The purchase of the securities involves a high degree of risk. See section entitled “Risk Factors” beginning on page 12 for more information on these risks.
 
Underwriter Discount
 
Per Unit (3)
   
Offering
   
Offering
 
Assumed Public Offering Price
  $ 6.50 (3)                  
Discount and  Commission (1)
  $ .585                      
Proceeds to us, before expenses (2)
  $ .591 (3)                

(1)           Does not include additional compensation to the Underwriters in the form of (i) a non-accountable expense allowance equal to 2.0% of the gross proceeds of this Offering (of which $50,000 has been paid), (ii) the Underwriters’ Warrants to purchase up to ten percent of the Units sold in the Offering (each Unit consisting of one share of Common Stock and one Warrant at an exercise price equal to $7.80  per Unit), and (iii) a $120,000 consulting agreement with ICM Capital Markets LTD.  In addition, the Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended.  See "Underwriting."

 

 


(3)           Includes only the Units being offered hereby by the Company.
 
ICM Capital Markets LTD. and Aegis Capital Corporation have agreed to act as co-managing underwriters in connection with this Offering. The Underwriters are not purchasing the securities offered by us, and are not required to sell any specific number or dollar amount of Units, but will assist us in this Offering on a “best efforts” basis. We have agreed to pay the Underwriters a cash fee equal to an aggregate of 9% of the gross proceeds of the Offering of Units by us, as well as the Underwriters’ Warrants to purchase Units equal to up to 10% of the aggregate number of Units sold in the Offering. The Underwriters’ Warrants will have terms substantially similar to the warrants included in the Units offered hereby, except that the Underwriters’ Warrants will have an exercise price equal to 120% of the public offering price per share of the shares sold at the Closing. We estimate the total expenses of this Offering, excluding the Underwriters’ fees, will be approximately $507,700. Because there is no minimum Offering amount required as a condition to closing in this Offering, the actual public Offering amount, Underwriters fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum Offering amounts set forth above. See “Underwriting” beginning on page 72 of this prospectus for more information on this Offering and the Underwriters arrangements.
 
This Offering will terminate on June 1, 2011, unless the Offering is fully subscribed before that date or we, together with the Underwriters decide to terminate the Offering prior to that date. In either event, the Offering may be closed without further notice to you. All costs associated with the registration will be borne by us.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
ICM Capital Markets LTD.
Aegis Capital Corporation
 
The Date of this Prospectus is: January ____, 2011

 

 

 
 TABLE OF CONTENTS

   
Page
Prospectus Summary
 
1
Risk Factors
 
5
Risks Related To Our Business
 
5
Risks Related To Doing Business in China
 
8
Risks Related to the Market of Our Stock
 
13
Use of Proceeds
 
17
Dividend Policy
 
17
Capitalization
 
18
Market for Common Equity and Related Stockholder Matters
 
19
Dilution
 
19
Accounting for the Share and Exchange
 
20
Description of Business
 
21
Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
40
Management
 
54
Certain Relationships and Related Transactions
 
63
Security Ownership of Certain Beneficial Owners and Management
 
65
Description of Securities
 
66
Shares Eligible for Future Sale
 
71
Underwriting
 
73
Legal Matters
 
76
Experts
 
76
Additional Information
 
76
Financial Statements
 
F-1

Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

You should rely only on information contained in this prospectus. We have not, and the Underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date. We do not undertake to update this prospectus, except as required by law.

 
vi

 


Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading “Risk Factors” beginning on page 12.

As used in this prospectus, unless otherwise indicated, the terms “we”, “our”, “us”, “Company” and “Hanxin” refer to ASIA CORK, INC., a Delaware corporation, formerly known as Hankersen International Corp. (“Hankersen”); its wholly-owned subsidiary, Hanxin (Cork) International Holding Co., Ltd., a Company organized in the British Virgin Islands (“Hanxin International”); its wholly-owned subsidiary, Xi’An Cork Investments Consultative Management co., Ltd., a Company organized in the People’s Republic of China (“Xi’An”); Xian Hanxin Technology co., Ltd. (“Hanxin”), the subsidiary which it owns 92% equity interest and was organized in the People’s Republic of China, and   Cork Import and Export Co., Ltd., a subsidiary in which Hanxin owns a 75% equity interest Company  and was organized in the People’s Republic of China (“Cork I&E”). “China” or “PRC” refers to the People’s Republic of China. “RMB” or “Renminbi” refers to the legal currency of China and “$” or “U.S. Dollars” refers to the legal currency of the United States.

THE COMPANY

Asia Cork, Inc.

We are a holding company whose primary business operations are conducted through our wholly-owned subsidiary Hanxin International, and its subsidiaries, Hanxin and Cork I&E. We are engaged in the development, manufacture and distribution of cork wood floor, wall, sheets, rolls and other cork decorating materials in China and other countries.

Our Background History

Asia Cork Inc. (f/k/a Hankersen International Corp.), was incorporated under the laws of the State of Delaware on August 1, 1996. We were formed in connection with the merger acquisition of Kushi Macrobiotics Corp. (“KMC”) with American Phoenix Group, Inc. (“APGI”) in 1996. Prior to such acquisition, KMC had operated a business of marketing a line of natural foods (the “Kushi Cuisine”). This business was not successful and management determined that it would be in the shareholder’s interest for KMC to operate a different business.

In August 2005, we, through Kushi Sub, Inc., a newly formed Delaware corporation and wholly-owned subsidiary of us ("Acquisition Sub") acquired all the ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin International"), a British Virgin Islands limited liability corporation, organized in September 2004. We acquired Hanxin International in exchange for 24,000,000 shares of Common Stock and 1,000 shares of the Series A Preferred Stock, which such shares converted into 29,530,937 shares of Common Stock. Subsequent to the merger and upon the conversion of the Series A Preferred Stock, the former shareholders of Hanxin International own 95% of the outstanding shares of our Common Stock.

Hanxin International has no other business activities other than owning 100% of Xi'An Cork Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An and Hanxin are People's Republic of China (PRC) corporations. Most of our operating and business activities are conducted through Hanxin.  Hanxin is our principal operating subsidiary.

During the year ended December 31, 2005, Hanxin acquired a 75% equity interest of Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation that engages in cork trading businesses.

We are a reporting Company under Section 13 of the Securities Exchange Act of 1934, as amended.   Our shares of Common Stock are not currently listed or quoted for trading on any national securities exchange or national quotation system but are quoted on the OTC Bulletin Board under the symbol “AKRK.”. We are applying for the listing of our Units and Common Stock on NASDAQ or AMEX on or promptly after the date of this prospectus. Prior to the separate trading of the Common Stock and Warrants, we will apply to have the Warrants comprising the Units listed on NASDAQ or AMEX.

 
1

 


Merger and Change of Name

On July 11, 2008, the Company's wholly-owned subsidiary, Asia Cork Inc., was merged into its parent, the Company, in order to change the name of the Company, after approval by the Board of Directors of the Company pursuant to the Delaware General Corporation Law. The Company is the surviving Company of the merger and, except for the adoption of the new name its Certificate of Incorporation is otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had no material assets. As permitted by Delaware General Corporation Law, the Company assumed the name of its wholly owned subsidiary following the merger and now operates under the name Asia Cork Inc.

Reverse Stock Split
 
Concurrently with the date of this prospectus, the Company will effectuate a reverse stock split (the “Reverse Split”) in an amount to be ultimately agreed upon between the Board of Directors of the Company and ICM Capital Markets LTD., however, the Reverse Split will be within a range of 1-for-10 to 1-for-30. On September 2, 2010, the Board of Directors adopted a resolution seeking shareholder approval of the Company to amend the Company’s certificate of incorporation to affect the Reverse Split and thereafter, stockholders holding approximately 53% of the outstanding shares of the Company’s Common Stock approved the Reverse Split.  The Company filed with the Securities and Exchange Commission and circulated to its shareholders an Information Statement detailing the terms of the Reverse Split.  None of the references to the outstanding shares of our Common Stock in this prospectus give effect to the Reverse Split.
 
THE OFFERING

Securities we are Offering
 
1,250,000 Units, each Unit consisting of one share of  Common Stock and one warrant to purchase one share of Common Stock (1)
     
Common Stock:
   
     
Outstanding Prior to Offering
 
39,175,517 shares (2)
     
Outstanding After Offering
 
_________ shares
     
Warrants:
   
     
Outstanding Prior to Offering
 
0
     
Outstanding After Offering
 
____ (3)
     
Exercisability
 
Each Warrant is exercisable for one share of Common Stock
     
Exercise period
 
The Warrants expire five years from the date of this prospectus and become exercisable one year from the date of issuance.  Each share of Common Stock and Warrant will not be separately tradable for a period of one year, unless sooner as may be approved by the representatives of the Underwriters in their sole discretion.

 
2

 

Redemption
 
The Warrants are subject to redemption commencing one year after the date hereof at $.05 per Warrant on twenty (20) days’ prior written notice, provided the closing price of the Common Stock for the twenty (20) consecutive trading days ending within fifteen (15)   days of the date of notice of redemption averages in excess of $11.70 per share (180% of the initial Offering price).
     
Anticipated Offering Price
 
$5.50 to $7.50 per Unit. For purposes of this prospectus, the Company assumes a $6.50 per Unit price, which is the midpoint of the anticipated offering price, consisting of $6.25 per share and $.25 per Warrant.
     
Use of proceeds
 
We intend to use the net proceeds of this Offering for general corporate purposes, including, without limitation, increasing our working capital and expanding both our domestic and overseas market share by increasing our marketing efforts, expanding our sales channels through additional distributors and increasing our production capacity. See “Use of Proceeds” on page 17 for more information on the use of proceeds.
     
OTC Bulletin Board symbol for our Common Stock
 
AKRK.OB
     
Lock-Up Agreement
 
All of our officers, directors and 5% stockholders have agreed that, for a period of 18 months, they will be subject to a Lock-Up agreement prohibiting any sales or hedging transactions of our securities owned by them.
   
 
Risk Factors
 
Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 12.

(1)
Excludes up to 125,000 units underlying warrants to be received by the Underwriters in this Offering.  The number of Units being sold assumes that the ratio of the Reverse Split is 1 for 12.5.

(2)
Based on 35,663,850 shares of Common Stock issued and outstanding as of  January 24, 2011 plus (i) 3,261,667 shares issuable to the Selling Stockholders upon conversion of certain promissory notes (the Selling Stockholder Promissory Notes “) and (ii) 250,000 shares issuable to a Selling Stockholder. Such amount does not give effect to (i) the Reverse Split,(ii) the  1,250,000 shares of Common Stock included in the Units being issued in the Offering, (iii) the 1,250,000 shares of Common Stock issuable upon exercise of the Warrants, (iv) the 125,000 shares of Common stock issuable upon exercise of the Underwriters’ Warrants to  purchase up to 10% of the Units issued in the Offering) and (v) 1,666,667 shares that may be issuable to the Selling Stockholders upon exercise of their warrants

(3)
Excludes the 125,000 warrants underlying warrants to be received by the Underwriters in this Offering.

 
3

 


The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to these consolidated financial statements appearing elsewhere in this Prospectus. The selected consolidated statements of operations data for the nine months financial period ended September 30, 2010 and 2009, and the selected consolidated balance sheet data as of September 30, 2010 are derived from our unaudited consolidated financial statements, which are included elsewhere herein. The unaudited consolidated financial statements have been prepared on the same basis as our audited financial statements and include, in the opinion of management, all adjustments that management considers necessary for a fair presentation of the financial information set forth in those statements.

The selected consolidated statements of operations data for the financial years ended December 31, 2009, 2008 and 2007 and the selected consolidated balance sheet data as of December 31, 2009 are derived from our consolidated financial statements, and which for the periods ended December 31,l 2009 and 2008 are included elsewhere herein, have been audited by MS Group CPA, LLC, an independent registered public accounting firm, as indicated in their report. Historical results are not necessarily indicative of the results to be expected in future periods.
 
   
Year Ended December 31,
   
Nine Months Ended September 30,
 
   
2007
   
2008
   
2009
   
2009
   
2010
 
                     
(Unaudited)
       
Revenue
  $ 16,051     $ 21,378     $ 24,393     $ 17,056     $ 22,436  
Cost of sales
    10,990       13,937       16,005       11,032       15,745  
Gross profit
    5,061       7,441       8,388       6,024       6,691  
Depreciation and amortization
    249       286       310       223       254  
Selling and distribution expenses
    1,954       2,712       3,115       2,723       1,426  
General and administrative expenses
    513       759       772       501       604  
Loss on disposal of fixed assets
    342       159       -                  
Other income (expense)
    23       74       136       79       98  
Interest income (expense)
    (6 )     (275 )     (304 )     (259 )     (72 )
Income (loss) before income taxes
    2,269       3,610       4,333       2,620       4,687  
Income taxes expenses
    349       597       692       477       702  
Net income attributable to the Shareholders of the Company
  $ 1,762     $ 2,732     $ 3,345     $ 1,964     $ 3,665  
Earnings per Share — basic (US$) (1)
  $ 0.05     $ 0.08     $ 0.09     $ 0.06     $ 0.10  
Earnings per Share — diluted (US$) (2)
  $ 0.05     $ 0.08     $ 0.09     $ 0.06     $ 0.09  

Note:
(1)
Figures in thousands and assume there are shares of basic Common Stock outstanding after this Offering was applied retrospectively.
(2)
Figures in thousands and assume there are shares of diluted Common Stock outstanding after this Offering was applied retrospectively.

 
4

 
   
As at December 31,
   
As of
September 30,
 
   
(figures in thousands)
 
   
2008
   
2009
   
2010
 
               
(Unaudited)
 
Balance Sheet Data:
                 
Cash and cash equivalents
  $ 24     $ 50     $ 1,637  
Total current assets
    11,806       13,829       22,502  
Total assets
    22,348       26,265       32,236  
Short-term borrowings
    1,014       915       700  
Total current liabilities
    2,905       3,192       4,627  
Total stockholders’ equity
    17,641       20,975       25,192  

RISK FACTORS

Any investment in our Units involves a high degree of risk.  Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our Units. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur.  The trading price could decline due to any of these risks, and an investor may lose all or part of his investment.  Some of these factors have affected our financial condition and operating results in the past or are currently affecting our Company. This prospectus also contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.

RISKS RELATED TO OUR BUSINESS

If we fail to obtain additional financing, we will be unable to execute our business plan.

The revenues from the production and sale of cork products and the projected revenues from these products are not adequate to support our expansion and product development programs. Despite our recent financing and the financing described in this prospectus, we may need additional funds to obtain regulatory approvals; file, prosecute, defend and enforce our intellectual property rights; and market our products. Should such needs arise, we intend to seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources.

We cannot assure you that future funding will be available on favorable terms or at all. If additional funding is not obtained, we will need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary. The failure to fund our capital requirements would have a material adverse effect on our business, financial condition and results of operations.

We must be able to effectively improve our products; and if we are unable to improve our products, our business may be adversely affected.

We are seeking to improve our profitability by producing more finished cork products, which generally have higher profit margins, as a percentage of total sales. If we are unable to improve and develop our products, we may not be able to improve our profit margins or improve our ability to compete effectively.

We are dependent on raw materials. Any shortages of the necessary materials would have a materially adverse effect on our business.

The supply of cork raw material is the base of production. The shortfall of raw material will impair the development and production of our products. The supply of these raw materials can also be adversely affected by any material change in the climate or other environmental conditions, which may have a material adverse impact on the costs of raw materials. Our financial performance may be affected by changes in production costs brought about by fluctuations in the prices of our raw materials which may fluctuate due to changes in supply and demand conditions. Any shortage in supply or upsurge in demand of our major raw materials may lead to an increase in prices, which may adversely affect our profitability due to increased production costs and lower profit margins.

 
5

 


We are dependent on the patents licensed to us from Fangshe Zhang, our Chairman and principal shareholder.  He owns 14 cork processing technology related patents in China.  Hanxin has an exclusive license to three patents in consideration for annual payments and Hanxin has an exclusive right to use another 11 patents for free.  Hanxin also owns three patents transferred from Mr. Zhang. As a result, our business activities related to exploiting these patents are dependent on the license granted to us from him. In the event that the license is terminated, such a result would have a material adverse affect on the Company as it would prevent us from using them in our business and deriving revenue associated therewith.

Our overseas growth is dependent on the strategic plan on expanding in foreign markets.

We plan to expand into the foreign markets, especially the U.S. market, within the next few years. We have established cooperation relationships with several large building and decoration material dealers in the U.S. and Taiwan. Should there be any economic turndown that significantly weakens the sales ability of these dealers and other foreign wholesalers and retailers, we may not achieve our goal of revenues and our strategic growth would be significantly and adversely affected.

Due To Fluctuations Any Quarter-To-Quarter Comparisons In Our Consolidated Financial Statements May Not Be Meaningful

Our business is subject to fluctuations, which may cause our operating results to fluctuate from quarter to quarter. As a result, any comparisons from period to period in our financial statements may not provide an accurate picture of our financial condition.  Further, this fluctuation may result in volatility or have an adverse effect on the market price of our Common Stock.

Changes In The Extensive Regulations To Which Hanxin Is Subject Could Increase Its Cost Of Doing Business Or Affect Its Ability To Grow.

The governments of countries where Hanxin’s exports products, including, but not limited to India, the United States, Germany and Japan, may, from time to time, consider regulatory proposals relating to raw materials, market, and environmental regulation, which, if adopted, could lead to disruptions in supply and/or increases in operational costs, and hence indirectly affect Hanxin’s profitability. To the extent that Hanxin increases its product prices as a result of such changes, its sales volume and revenues may be adversely affected. Furthermore, these governments may change certain regulations or impose additional taxes or duties on certain Chinese imports from time to time. Such regulations, if effected, may have a material adverse impact on Hanxin’s operations revenue and/or profitability.

Our Business Activities Are Subject To Certain Laws And Regulations And Our Operation May Be Affected If We Fail To Have In Force The Requisite Licenses And Permits.

We are required to obtain various licenses and permits in order to conduct our business of production and export of cork products. The business is also subject to applicable laws and regulations.  Any failure to comply with the conditions stipulated in our licenses and permits may lead to their revocation or non-renewal. Any failure to observe the applicable laws and regulations may lead to the termination or suspension of some or all of our business activities or penalties being imposed on us. The occurrence of any of these events may adversely affect our business, financial condition and results of operations.

We Are Dependent On Our Customers’ Ability To Maintain And Expand Their Sales And Distribution Channels. Should These Distributors Be Unsuccessful In maintaining And Expanding Their Distribution Channels, Our Results Of Operation Will Be Adversely Affected.

Demand for our products from end-consumers and our prospects depend on the retail growth and penetration rate of our products to end-consumers. Sales of our products are conducted mainly through distributors, over whom we have limited control. These distributors sub-distribute our products. We are thus dependent on the sales and distribution channels of our distributors for broadening the geographic reach of our products. Should these distributors be unable to maintain and expand their distribution channels, our results of operations and financial position will be adversely affected.

 
6

 


We take advantage of favorable tax rates and other beneficial governmental policies afforded to us as a result of the nature of our business. In the event that the program offered to us is amended or rescinded or our business no longer meets the eligibility requirements of the program, we may not be able to enjoy the benefits of these programs and as a result may have to pay higher income taxes, which may have a material adverse affect on us.

Further, the Chinese government may adjust the current industrial policies and tax rates with the growth of its political and economic environment, which may negatively impact our business.

We are controlled by principal shareholders, officers and directors, which may limit our ability to conduct certain activities or take certain actions without their consent.

Messrs. Fangshe Zhang, our Chairman, and Pengcheng Chen, our Chief Executive Officer own in the aggregate approximately 37 percent (37.33%) of our Common Stock. Both were former stockholders of Hanxin International. As a result, such persons may have the ability to control us and direct our affairs and business. Such concentration of ownership may also have the effect of delaying, deferring or preventing change in control of us. See “Security Ownership Of Certain Beneficial Owners And Management.” After giving effect to the Offering and the conversion of the promissory notes held by certain Selling Stockholders (the “Promissory Notes”), Messrs. Zhang and Chen will own, in the aggregate, approximately 36% of our Common Stock.

We Are Dependent On Certain Major Suppliers For Our Raw Materials. In The Event That We Are No Longer Able To Secure Raw Materials From These Suppliers And Are Unable To Find Alternative Sources of Supply At Similar Or More Competitive Rates, Our Operations And Profitability Will Be Adversely Affected.

For the production of our products, we rely on our major suppliers for a significant portion of the supply of raw cork material. Although we purchase supplies from approximately 23 suppliers, four suppliers accounted for about 40% of our supply of raw material in 2009. In the event that we are unable to secure our raw materials from these suppliers and we are unable to find alternative sources of supply at similar or more competitive rates, our business and operations will be adversely affected.

The elimination of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures that could be a drain on our resources by our Company and may discourage lawsuits against our directors, officers and employees.

Our Certificate of Incorporation and applicable Delaware law limits monetary liability against our directors, officers and employees and provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. Accordingly, we will have a much more limited right of action against our directors than otherwise would be the case. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay us if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we would be unable to recoup.   These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit our Company and stockholders.

 
7

 


We do not plan to declare or pay any cash dividends on our shares of Common Stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of the Company at or above the price they paid for them.

We are dependent on key personnel, and the loss of any key employees, officers and/or directors may have a materially adverse effect on our operations.

Our success is substantially dependent on the continued services of our executive officers, particularly Fangshe Zhang, our Chairman, and Pengcheng Chen, our Chief Executive Officer, and other key personnel who generally have extensive experience in the cork industry and have been employed by us for substantial periods of time. The loss of the services of any key employees, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business and results of operations.

The extended payment terms to our major customers may result in a reduction in cash flow.

In connection with the expansion of our domestic market and to promote a series of new products, the Company decided to extend the payment terms to major customers in Beijing, Shanghai, Guangzhou and Sichuan Hanxin from six months to one year. The extended payment terms contributed to an increase in our accounts receivable as of September 30, 2010 to $10,010,818, compared to $5,445,498 as of December 31, 2009.  The large amount of accounts receivable may cause losses as a result of increased bad debt expenses in the event our customers fail to pay us in time or at all.  Reduced cash flow as a result of the extended payment terms may affect our ability to purchase raw materials and may reduce our production and sales.

RISKS RELATED TO DOING BUSINESS IN CHINA

Substantially all of our assets are located in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

We conduct our business primarily through our affiliate Chinese entity, Xi'an Hanxin. Our operations in China are governed by Chinese laws and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

The legal system in China is a system of civil laws, based on provisions and written codes, therefore precedents and cases are not binding on the future decisions of the courts. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, and encourage foreign investment in China.  Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience on new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business.   In some provincial areas, the government agencies and the courts are protectionist and may not fully enforce contractual rights against local parties.  In certain areas, the intellectual property and trade secret protections are not as effective as those in the other areas in China or in the U.S. in general.  Consequently, we cannot clearly foresee the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in the less developed areas in China. The uncertainties, including new laws and regulations and changes of existing laws, as well judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors.

 
8

 


Most of our current operations, including the manufacturing and distribution of our products, are conducted in China. Moreover, all of our directors and officers are nationals and residents of China. All or substantially all of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

We are subject to a variety of environmental laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may have a material adverse effect on our business and results of operations.

Potential liability in connection with environmental regulation arises from the possibility that pollution will be caused by the dust generated when cork barks are ground into fine granules, which is typical for the artificial board industry. This problem is usually solved by installing dust removing facilities. We believe that Hanxin has installed sufficient dust removing systems in its workshops and has been effectively controlling its dust emission. The dust removing systems have been designed by the Company. The cost for installing these facilities is part of  the cost for establishing the production lines.  Although such dust removing systems consume additional electricity, the additional utility expense increased is minimal compared to the total production expenses.  We believe that we face no other issues regarding compliance with environmental laws as our production procedure (1) consumes no water and thus produces no waste water and (2) generates no solid waste as all cork residue is sold as the raw material for feed or fertilizer. Despite the foregoing, we cannot assure you that at all times we will be in compliance with environmental laws and regulations or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits.

We may be affected by global climate change or by legal, regulatory, or market responses to such change.

The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost of key raw materials that we use to produce our products. Additionally, the sale of our products can be impacted by weather conditions.

Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the territories that we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients, and water could all impact our business and financial results.

 
9

 


We expect to experience an increase in our cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions on our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law and more strictly enforced existing labor laws. The new law, which became effective on January 1, 2008, amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. As a result of the new law, the Company has had to reduce the number of hours of overtime its employees can work, substantially increase the salaries of its employees, provide additional benefits to its employees, and revise certain other of its labor practices. The increase in labor costs has increased the Company’s operating costs, which the Company has not always been able to pass through to its customers. As a result, the Company has incurred certain operating losses as its cost of manufacturing increased. In addition, under the new law, employees who either have worked for the Company for 10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches the Company’s rules and regulations or is in serious dereliction of his duty. Such non-cancelable employment contracts will substantially increase its employment related risks and limit the Company’s ability to downsize its workforce in the event of an economic downturn. No assurance can be given that the Company will not in the future be subject to labor strikes or that it will not have to make other payments to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that the labor laws will not change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and results of operations.

The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to foreign exchange control and other regulations of China.

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

Furthermore, the ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and a substantial majority of our revenues are generated in China, a majority of our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. Dollars.

Our inability to receive dividends or other payments from our Chinese operating subsidiary could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from our Chinese operating subsidiary, our liquidity, financial condition and ability to make dividend distributions to our stockholders will be materially and adversely affected.

 
10

 


To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our Common Stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide to convert our Renminbi into U.S. Dollars for the operational needs or paying dividends on our Common Stock, the dollar equivalent of our earnings from our subsidiaries in China would be reduced should the U.S. Dollar appreciate against the Renminbi.

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including U.S. Dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. Dollar. Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the U.S. Dollar.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. During the past decade, the rate of inflation in China has been as high as approximately 20% and China has experienced deflation as low as approximately minus 2%. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of such policies may impede economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. In April 2006, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products and services.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As our ultimate holding Company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 
11

 


On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed Company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed Company’s covered equity compensation plan prior to April 6, 2007. We intend to adopt an equity compensation plan in the future and make substantial option grants to our officers and directors, most of who are PRC citizens. Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens, including or Chief Executive Officer, to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.

A downturn in the economy of the PRC may slow our growth and profitability.

The growth of the Chinese economy has been uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our products or in pressure on us to lower our prices.

Our operations in the PRC are subject to the laws and regulations of the PRC.

As our products are exported from the PRC, we are subject to and have to operate within the framework of the PRC legal system. Any changes in the laws or policies of the PRC or the implementation thereof, for example in areas such as foreign exchange controls, tariffs, trade barriers, taxes, export license requirements and environmental protection, may have a material impact on our operations and financial performance.  The corporate affairs of our companies in the PRC are governed by their articles of association and the corporate and foreign investment laws and regulations of the PRC. The principles of the PRC laws relating to matters such as the fiduciary duties of directors and other corporate governance matters and foreign investment laws in the PRC are relatively new. Hence, the enforcement of investors or shareholders' rights under the articles of association of a PRC Company and the interpretation of the relevant laws relating to corporate governance matters remain largely untested in the PRC.

We cannot predict what effect the interpretation of existing or new the PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of the PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

 
12

 
  
 
levying fines;
 
revoking our business license, other licenses or authorities;
 
requiring that we restructure our ownership or operations; and
 
requiring that we discontinue any portion or all of our business.

Our subsidiaries, operations and significant assets are located outside the U.S. Shareholders may not be accorded the same rights and protection that would be accorded under the Securities Act. In addition, it could be difficult to enforce a U.S. judgment against our Directors and officers.

Our subsidiaries, operations and assets are located in the PRC. Our subsidiaries are therefore subject to the relevant laws in the PRC. U.S. law may provide shareholders with certain rights and protection which may not have corresponding or similar provisions under the laws of the PRC. As such, investors in our Common Stock may or may not be accorded the same level of shareholder rights and protection that would be accorded under the Securities Act. In addition, all our current executive directors are non-residents of the U.S. and the assets of these persons are mainly located outside the U.S. As such, there may be difficult for our shareholders to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against any of these persons.

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. The 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 continue to operate in China may be affected by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

RISKS RELATED TO THE MARKET FOR OUR STOCK

Sales of our Common Stock by the Selling Stockholders in a concurrent Offering may depress our stock price .
 
Commencing nine months after the Offering, our Selling Stockholders (with the exception of Brill Securities Inc. which may commence selling its 250,000 shares six months after the Offering) may offer for sale, from time to time, 5,178,334 shares of our Common Stock. If we sell all 1,250,000 Units we are offering, we would have 42,092,184 shares outstanding (without giving effect to the Reverse Split but after giving effect to the conversion of the Selling Stockholder Promissory Notes and after giving effect to the exercise of the Selling Stockholder warrants and including the shares issuable to Brill Securities), _of which would be freely tradable in the public. Sales of a substantial number of shares of our Common Stock by the Selling Stockholders within a relatively short period of time could have the effect of depressing the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities.
 
We will issue warrants to our Underwriters in connection with the public Offering.
 
We will issue to the Underwriters for the Offering, as additional compensation, the Underwriters’ Warrants to purchase one Unit for each ten Units sold in the Offering, or up to a maximum of 125,000 warrants. The Underwriters’ Warrants may be exercised at any time commencing six months from the date of this prospectus and continuing for five years thereafter to purchase Units at an exercise price equal to 120% of the Offering price of the Units in this Offering.  During the term of the Underwriters’ Warrants, our Underwriters will have the opportunity to profit from an increase in the price of the shares of Common Stock underlying the Underwriters’ Warrants. The existence of the Underwriters’ Warrants may adversely affect the market price of the shares if they become publicly traded on the terms on which we can obtain additional financing. The holders of the Underwriters’ Warrants may exercise their warrants at a time when we would, in all likelihood, be able to obtain additional capital on terms more favorable than those contained in the Underwriters’ Warrants. Please see “Underwriting” and “Description of Securities” for additional information regarding the Underwriters’ Warrants and our Common Stock and Warrants.

 
13

 
 

Specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent the stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our Common Stock. The Company’s Bylaws or Certificate of Incorporation do not contain any other provisions that would have the effect of delaying or preventing a change in control.

You may be one of only a small number of investors in the Offering and, as a result, a substantial percentage of the Offering proceeds may be used to pay for the Offering’s expenses.

This is a best efforts offering, which means that we are not required to sell any specific number of Units or dollar amount of Units in this Offering. To the extent that we sell significantly less than the total number of Units that we are offering through this prospectus, you may be one of only a small number of investors in this Offering and a substantial percentage of the Offering proceeds may be used to pay for the Offering expenses, and not for our general corporate purposes.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

If we fail to maintain effective internal controls over financial reporting, the price of our Common Stock may be adversely affected.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal controls over financial reporting in their annual reports, including Form 10-K. We have established disclosure controls and procedures effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31, 2009.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

 
14

 


The trading price of our common shares is below $5 per share, thus we are deemed a “penny stock” company and the open-market trading of our common shares will be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.

The market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.

Our common shares are thinly traded and you may be unable to sell at or near ask prices or at all if you desire to liquidate your shares.

We cannot predict the extent to which an active public market for our Common Stock will develop or be sustained. Our common shares have historically been sporadically or “thinly-traded” on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small. This situation is attributable to a number of factors, including the fact that we are a small Company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained.  We are applying for listing the Units and Common Stock on the NASDAQ or AMEX, but cannot assure you that this listing or listing on any other exchange will ever occur.

If we do not meet the listing standards established by national securities exchange markets such as NASDAQ and NYSE Amex LLC, our common stock may not become listed for trading on one of those markets, which may restrict the liquidity of shares held by our stockholders.

We have applied for listing of our Units and Common Stock for trading on a national securities exchanges promptly after our registration statement is declared effective.  The listing of our Units and Common Stock on a national securities exchange may result in a more active public market for our common stock, resulting in turn in greater liquidity of shares held by our stockholders.  National securities exchanges such as NASDAQ and NYSE Amex LLC have established certain quantitative criteria and qualitative standards that companies must meet in order to become and remain listed for trading on these markets.  We cannot guarantee that we will be able to maintain all necessary requirements for listing; therefore, we cannot guarantee that our common stock will be listed for trading on a national securities exchange.

Our shares are subject to significant price volatility, which may prevent you from selling your stock at or above your purchase price if at all.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer, which could better absorb those sales without adverse impact on its share price.  In addition, actual or anticipated variations in our quarterly or annual operating results, adverse outcomes and additions or departures of our key personnel may also add to the volatility in the price of our common shares.  The price at which you purchase our Common Stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your Common Stock at or above your purchase price if at all, which may result in substantial losses to you.

 
15

 

Secondly, we are a speculative or “risky” investment due to our fluctuating level of revenues or profits to date and uncertainty of future market acceptance for our current and potential products. As a consequence of this enhanced risk, more risk-averse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance.  We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

Volatility in our common share price may subject us to securities litigation.

The market for our Common Stock has, when compared to seasoned issuers, price volatility and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a Company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict accurately or control. The factors listed above in the section captioned “Risk Factors,” as well as any cautionary language in this Prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our Common Stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Prospectus could have a material adverse effect on our business, results of operations and financial position. We do not intend or assume any obligation to update or reverse these forward-looking statements in light of developments which differ from those anticipated, unless as required by law.

 
16

 

 
We estimate that the net proceeds from the sale of the 1,250,000 Units in the Offering will be approximately $7,393,750 if the maximum Offering is sold after deducting the estimated underwriting discounts and commissions but before estimated offering expenses.  This assumes a mid-point price range of $6.50 per Unit.
 
   
Percentage
of Net
Proceeds
(1)
 
Acquisition of Inventory and Marketing Expenses Related to Expansion of Domestic Markets
    ____ %
 
____
%
Purchase of Equipment to Expand Production
 
____
%
Working Capital (2)
 
____
%
Total net proceeds
    100 %(1)

(1)  The principal purposes of this Offering are to increase our working capital and to expand both our domestic and oversea market shares by increasing our marketing efforts, expanding our sales channels through additional distributors and increasing our production capacity.

The foregoing represents our best estimate of its allocation of the net proceeds of this Offering based upon the current state of our business operations, its current plans, and current economic and industry conditions and is subject to reapportionment among the categories listed above or to new categories.  The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our development efforts, sales and marketing activities, and the amount of cash generated or used by our operations and competition. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending these uses, the proceeds will be invested in short-term, investment grade, interest-bearing securities.
 
DIVIDEND POLICY

We do not expect to declare or pay any cash dividends on our Common Stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our Common Stock will be made by our board of directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that our board of directors considers significant. We did not pay any cash dividends in the nine months ended September 30, 2010 or the fiscal years ended December 31, 2009 and 2008.

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

Furthermore, the ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and a substantial majority of our revenues are generated in China, a majority of our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.

Our inability to receive dividends or other payments from our Chinese operating subsidiary could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from our Chinese operating subsidiary, our liquidity, financial condition and ability to make dividend distributions to our stockholders will be materially and adversely affected.

 
17

 
  

The following table sets forth our capitalization as of September 30, 2010 (Unaudited):

 
On a pro forma basis as adjusted to give further effect to reflect our receipt of estimated net proceeds from the sale of 1,250,000 units in this Offering at an assumed Reverse Split ratio of 1 for 12.5 and an assumed public offering price of $6.50 per Unit, which is the mid-point of the estimated range of the per Unit Offering price, and after deducting estimated underwriting discounts and commissions and estimated Offering expenses of approximately $507,734.38.

You should read this table in conjunction with “Use of Proceeds,” “Summary Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

1,250,000 shares of Common Stock (assuming no
exercise of warrants)
 
September 30, 2010
 
   
Actual (1)
   
Pro Forma
Adjustments
(2)
   
Pro Forma,
As Adjusted
 
   
(Unaudited)
 
Due to shareholder
  $ 181,187     $ -     $ 181,187  
Stockholders' equity:
                       
Common Stock, $0.0001 par value, 200,000,000 shares authorized, 35,663,850 and 36,913,850 issued and outstanding on an actual basis, issued and outstanding on a pro forma basis, and issued and outstanding on a pro forma as-adjusted basis
    3,566       125       3.691  
Additional paid-in capital (3)
    4,485,446       6,885,891       11,371,337  
Additional paid-in capital –stock warrant
    279,386       -       279,386  
Accumulated other comprehensive income
    3,209,301               3,209,301  
Statutory surplus reserve fund
    3,406,136               3,406,136  
Retained earnings
    13,808,249       -       13,808,249  
Total stockholders' equity
  $ 25,192,084     $ 6,886,016     $ 32,078,100  
Total capitalization
  $ 25,373,271     $ 6,886,016     $ 32,259,287  
 
(1)
Before giving effect to the share split of our Common Stock that is being completed as a condition to the Offering.
 
(2)
Before (i) giving effect to the share split of our common shares that is being completed as a condition to the Offering, and (ii) giving effect to the sale of 1,250,000 Units (on a 1 for 12.5 Reverse Split basis) at an assumed public Offering price of $6.50 per share and to reflect the application of the proceeds after deducting the estimated underwriting discounts and our estimated Offering expenses.
 
(3)
Pro forma adjusted for IPO additional paid in capital reflects the net proceeds we expect to receive, after deducting a 9 % underwriting discount, 2% non-accountable expense allowance and $345,234.38 in other expenses. In a 1,250,000 Unit Offering, we expect to receive net proceeds of approximately $6,886,015.62 ($8,125,000 Offering, less underwriting discount of $731,250, non-accountable expense allowance of $162,500 and Offering expenses of $345,234.38).
 
18

 

MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is traded on Over-The-Counter Bulletin Board under the symbol AKRK.OB. As of January 24, 2011, there were approximately 94 holders of record of our Common Stock.  We are applying for the listing of our Units and Common Stock on the NASDAQ or AMEX.  The following table sets forth the range of high and low bid information for the period from first quarter of 2008 to the fourth quarter of 2010.
 
   
High Bid
   
Low Bid
 
Period
           
2010
           
First quarter
 
$
0.55
   
$
0.32
 
Second quarter
 
$
0.57
   
$
0.27
 
Third quarter
 
$
0.31
   
$
0.18
 
Fourth quarter
  $ 0.52     $ 0.21  
2009
               
First quarter
 
$
0.21
   
$
0.11
 
Second quarter
 
$
0.26
   
$
0.10
 
Third quarter
 
$
0.28
   
$
0.20
 
Fourth quarter
 
$
0.53
   
$
0.23
 
2008
               
First quarter
 
$
0.20
   
$
0.09
 
Second quarter
 
$
0.43
   
$
0.07
 
Third quarter
 
$
0.30
   
$
0.21
 
Fourth quarter
 
$
0.244
   
$
0.11
 

The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Our transfer agent is Olde Monmouth Stock Transfer, whose address is 200 Memorial Parkway, Atlantic Highlands, NJ 07716, and their contact number is (732) 872 2727.

There are no securities authorized for issuance under equity compensation plans.
 
DILUTION

If you invest in our Units, your interest will be diluted immediately to the extent of the difference between the public Offering price per share you will pay in this Offering and the net tangible book value per share of Common Stock immediately after this Offering. Dilution results from the fact that the per common share Offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding Common Stock. Our net tangible book value as of September 30, 2010 was $25.19 million, or $0.71 per share (unaudited) based on 35,663,850 shares of Common Stock outstanding, before giving effect to the Reverse Split.

The following table sets forth the estimated net tangible book value per common share after the Offering and the dilution to persons purchasing common shares based on the foregoing 1,250,000 Units maximum Offering assumptions as described throughout this prospectus.

 
19

 

   
Units
Offering (1)
 
Offering price per common share
 
$
6.50
 
Net tangible book value per common share before the Offering (unaudited)
 
$
0.71
 
Increase per common share attributable to payments by new investors
 
$
0.16
 
Pro forma net tangible book value per common share after the Offering
 
$
0.87
 
Dilution per common share to new investors
 
$
5.63
 
 
(1)
Assumes net proceeds from Offering of 1,250,000 Units (1,250,000 shares of Common Stock and assuming no exercise of the Warrants).
 
The discussion and tables above is based on 35,663,850 shares of Common Stock issued and outstanding as of January 24, 2011,  (i) including, 1,250,000 shares of Common Stock included in the Units that are to be issued in the Offering (ii) excluding 125,000 shares of Common Stock issuable upon exercise of the warrants contained in the Units and the Underwriters’ Warrants to purchase up to 125,000 shares of Common Stock but (iii) excluding the shares issuable to the Selling Stockholders. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
 
ACCOUNTING FOR THE SHARE EXCHANGE
 
On August 9, 2005, the Company completed the acquisition of all of the Common Stock of Hanxin International pursuant to a Share Exchange Agreement. We acquired Hanxin International in exchange for 24,000,000 shares of Common Stock and 1,000 shares of the Series A Preferred Stock, which such shares of Common Stock as converted into 29,530,937 shares of Common Stock. Subsequent to the merger and upon the conversion of the Series A Preferred Stock, the former shareholders of Hanxin International own 95% of the outstanding shares of our Common Stock. As a result of this transaction, Hanxin International became a wholly-owned subsidiary of the Company. The transaction is accounted for using the reverse merger acquisition method of accounting in accordance with the FASB issued ASC805, Business Combinations.

 
20

 
 
 
Overview

As used in this prospectus, unless otherwise indicated, the terms “we,” “our,” “us,” “Company” and “Asia Cork” refer to ASIA CORK, INC., a Delaware corporation, formerly known as Hankersen International Corp (“HANKERSEN”).

Our Corporate Structure

The corporate structure of the Company is illustrated as follows:
 
 
Corporate History

Asia Cork Inc. (f/k/a Hankersen International Corp.), was incorporated under the laws of the State of Delaware on August 1, 1996. The Company was formed in connection with the merger acquisition of Kushi Macrobiotics Corp. (“KMC”) with American Phoenix Group, Inc. (“APGI”) in 1996. Prior to such acquisition, KMC had operated a business of marketing a line of natural foods (the “Kushi Cuisine”). This business was not successful and management determined that it would be in the shareholder’s interest for KMC to operate a different business.

In August 2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation and wholly-owned subsidiary of Company us ("Acquisition Sub") acquired all the ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin International"), a British Virgin Islands limited liability corporation, organized in September 2004. The Company acquired Hanxin International in exchange for 24,000,000 shares of Common Stock and 1,000 shares of the Series A Preferred Stock, which such shares converted into 29,530,937 shares of Common Stock. Subsequent to the merger and upon the conversion of the Series A Preferred Stock, the former shareholders of Hanxin International currently own 95% of the outstanding shares of Company our Common Stock.
 
 
21

 
 
Kushi Sub, the surviving entity of the merger with Hanxin International, has no other business activities other than owning 100% of Xi'An Cork Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An and Hanxin are People's Republic of China (PRC) corporations. Most of the Company’s operating and business activities are conducted through Hanxin.

During the year ended December 31, 2005,  Hanxin acquired a 75% equity interest of Cork Import and Export Co. Ltd. (“Cork I&E”), a PRC corporation that engages in cork trading businesses.

On July 11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc. was merged into its parent, the Company as approved by the Board of Directors of the Company pursuant to the Delaware General Corporation Law. The Company is the surviving company of the merger and, except for the adoption of the new name, its Certificate of Incorporation is otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had no material assets. The Certificate of Merger was filed with the Secretary of State of Delaware on July 11, 2008.

As permitted by Delaware General Corporation Law, the Company assumed the name of its wholly-owned subsidiary following the merger and now operates under the name Asia Cork Inc. The Company’s Common Stock is quoted on the Over the Counter Bulletin Board under the trading symbol “AKRK.OB.”

Reverse Stock Split and Change of Domicile

Concurrently with the date of this prospectus, the Company will effectuate the Reverse Split.  The Reverse Split is a condition to the Offering.  None of the references to the outstanding shares of our Common Stock in this prospectus give effect to the Reverse Split.
 
Business Overview
 
The Company, through its subsidiaries, engages in the development, manufacture and distribution of cork wood floor, wall, sheets, rolls and other cork decorating materials, which are generally regarded as environmentally friendly. Located in Xi’an, China, Asia Cork, Inc. is a rapidly growing leader in the industry of cork-based building materials. Cork is a ‘green’ renewable resource harvested only from the bark of the cork oak tree, thus leaving forests generally undamaged.
 
Compared to other similar products, cork products have the characteristics of their impermeability, buoyancy, elasticity, and fire resistance. The sustainability of production and the easy recycling of cork products and by-products are two of its most distinctive aspects. The Company’s product lines include raw cork materials, semi-finished cork products, finished cork products, and by-products, including cork roll, cork paper, crafts and ornaments, cork floorboards and wallboards.
 
The average wholesale price of Hanxin cork floors is around $60/m2, while products from Portugal are usually priced at 75/m2 on average. Hanxin enjoys significant cost advantage as its production activities are all performed in China. Raw cork materials, mainly cork granules in China, cost only 30~40% of the cost of the raw materials from Portugal and, and the average labor cost in China is around 20~10% of the cost in Europe, which gives Asia Cork a pricing advantage and higher margin.  The aforementioned data is assessed by us from our industry experience, information from our clients or business partners, and information generally available in the cork product industry.
 
We have the right to use 17 patents developed by Fangshe Zhang, our Chairman regarding cork processing technologies. We own 3 patents, lease 3 patents, and have exclusive right to use another 11 patents for free. We believe that these 17 patents give us competitive advantages in our product quality.
 
 
22

 

 
   
     
ZL01121762.0 
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
ZL01131761.2  
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
ZL01131763.9  
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
3 patents subject to exclusive lease:
   
     
ZL02114508.3
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
     
ZL02114507.5
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
     
ZL02114510.5 
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
 
11 patents licensed exclusively on a royalty free basis:
   
     
ZL200410025960.x
 
 Effective date from Mar. 17th,  2004 to Mar. 16th, 2024
     
ZL200420041668.2 
 
Effective date from Mar. 17th,  2004 to Mar. 16th, 2014
     
ZL03241926.0
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL03241927.9 
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL03241928.7
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL02261996.8
 
Effective date from July 29th, 2002 to July 28th, 2012
     
ZL03262604.5 
 
Effective date from Aug. 11th, 2003 to Aug. 10th, 2013
     
ZL200420086143.0
 
Effective date from Nov. 4th, 2004 to Nov. 3rd, 2014
     
ZL200420042256.0
 
Effective date from July 27th, 2004, to July 26th, 2014
 
We sell our products under the “Hanxin” brand to customers through sales agents.  All of our sales are to distributors in China, some of whom resell the products or reprocess the products and sell their products overseas.  Our products are currently being exported to India, the United States, Japan, and Germany by those unrelated national distributors and agents.  Our objective is to utilize our technology and cost advantages of being based in China in order to become a leading cork product developer and manufacturer. We intend to continue to develop new products, expand the market for cork floorboard, wallboard and other products globally, and increase our sales revenue. In order to achieve our objectives, we intend to, among other things, increase our sales and marketing efforts, enhance production capacity, ensure our raw material incoming source, acquire other cork manufacturing factories and other cork exporting companies in China, continue expanding domestic market by establishing sales network in China, export our cork products to overseas countries by our own sales network, and establish our own cork plantation in China. Provided that our expansion plans above mentioned can succeed, we expect that our production capacity will increase substantially. There is no assurance that we will be able to achieve these objectives.
 
 
23

 

 
Hanxin intended to purchase a factory’s fixed assets through an unrelated agent, and both parties signed the Entrust Purchase Agreement on November 10, 2005. Hanxin has paid deposits $2,021,717 (equivalent to RMB 13,800,000) to the agent as of December 31, 2009. The agency agreement has no firm commitment on the purchase but it states a maximum price of RMB 50,000,000 that the Company is willing to pay for the fixed assets. However, due to disputes with the factory’s creditors, the agent has been unable to close this purchase. As a result, Hanxin executed a supplementary agreement with this agent on September 27, 2009 to postpone the term. Pursuant to the supplementary agreement, the deposit which Hanxin had paid to the agent is fully refundable if the purchase does not close by June 30, 2010.  Since various issues within the factory’s creditors were not resolved during the second quarter of 2010, the agent was unable to fulfill this agreement. Therefore, the deposit was returned to Hanxin in June 2010 by the unrelated agent

Cork Material and Cork Products
 
Cork material is a green material, a subset of generic cork tissue that is harvested for commercial use primarily from the cork oak tree. Cork is composed of Suberin (please see below the compound structure of cork), hydrophobic substance, and because of its impermeability, buoyancy, elasticity, and fire resistance, it is used in a variety of products.
 
Compound Structure of Cork
 
Source: Universita' Cattolica, Italy
 
Honeycomb structure of cork
 
 
Cork's extraordinary properties derive from its distinctive cellular structure. A one inch cube of natural cork contains more than 200 million tiny air-filled pockets. Some 50% of cork is captive air, which results in excellent buoyancy, compressibility, elasticity, a high degree of imperviousness to both air and water penetration and low thermal conductivity. The following table shows the physical properties, constitutive monomers and average content of the main cork components:
 
 
24

 
  
Component
 
Properties
 
Monomers
 
Average
content
 
Suberin
 
Resilience
Impermeability
 
Fatty acids
Alcohols
    45 %
Lignin
 
Resistance to compression
 
Aromatic alcohols
    27 %
Poly-saccharides
 
Resistance to elongation
 
Monosaccharides
    12 %
Tannins
     
Ellagic acid
Proanthocyanidins
    6 %
Waxes
 
Impermeability
 
Phenols
Fatty acids
    7 %
Source: Universita' Cattolica, Italy
 
Due to the special structure and constitution, cork is noted for the following properties:
 
·              Environmentally friendly – cork barks are harvested with no harmful chemicals used in the harvesting process. Moreover, the cork production process uses no water, emits no CO 2 or other gases, and produces no waste materials that cannot be recycled.  As a result, the cork products can be widely used even in food-related industry, ranging from wine stoppers to the medium for growing mushrooms.
 
·              No toxic evaporation - Cork floor planks contains only 6 milligram formaldehyde every 100 gram, lower than the Chinese national standard of 9 milligram.
 
·              Durability –Cork has a high friction coefficient. As a result, cork products have outstanding durability and can be used for many years when properly maintained.
 
·              Lightness and Low Density – The cellular structure of cork makes it very lightweight, resulting in cork's celebrated buoyancy.
 
·              Impermeability – Cork is impermeable to both liquids and gases, giving it superior sealing capabilities.
 
·              Elasticity – Cork is pliable and rebounds well to original size and shape
 
·              Low conductivity – Cork has one of the best insulating values of any natural material, with very low conductivity of heat, sound or vibrations. This enables cork to reduce heating and cooling costs and makes cork a good sound-proof material for construction and decoration.
 
·              Fire resistance – Cork has a high tolerance to heat.
 
·              Anti-moth  –  Cork floor is fully resistant to damage by moths
 
The distinct appearance of cork facilitates its use for decorating purposes, from floor and wall tiles to wallpaper to decorative specialty uses. Cork’s resilience helps cork products recover from compression or puncture. Longevity under heavy usage is a cork trademark. With many special properties, cork building material can be used to practical and aesthetic effect in diverse environments, including retail stores, restaurants, offices, hotel rooms and lobbies, clinics, resorts, universities, public buildings, houses of worship, and many more public and private environments.
 
 
25

 

 
 
We produce the following cork products:
 
•               Cork Granule: Cork granule comes in varies sizes and is the early stage of cork material processing. Granules of cork can also be mixed into concrete by natural resin glue which is also environmental friendly. The composites made by mixing cork granules and cement have low thermal conductivity, low density and good energy absorption.
 
•               Cork Sheet and Roll: Cork board and sheet/roll are of different thickness according to their usage, which need advanced processing techniques and manufacturing requirements.  Production of cork sheet and cork roll cost more raw bark materials than that of other base materials. Customers process them into cork art crafts and into underlayment for wood floors, notepads and similar products.
 
•               Glue-down Floor: Glue-down cork floor is made of two layers of cork and can be glued down to the flat ground when being installed. The special features of cork material have enabled it to be an ideal flooring material. With its elasticity, cork is a natural floor cushion, being soft, comfortable and less tiring to walk on.   Cork flooring maintains warmth and is used for sound proofing.  Unlike other materials, it resists appearing “worn out”. Cork flooring can also be crafted into many different designs and patterns, many of which are difficult to achieve using other raw materials. We currently produce several series of glue-down cork floor with different designs, colors and granules. This product is of comparatively high profit margin and is currently our major product.
 
•                Floating Floor: Floating cork floor is the high-end cork floor board. The tiles can interlock with each other and are therefore fast and convenient to install. Different from glue-down floor which is usually made of two layers which are both made completely by cork, floating cork floor tiles consist of three layers. The surface layer is made of about three millimeter thick cork with well designed pattern and color; the middle layer made of about seven millimeter thick high density fiberboard, and the under layer is made of about one millimeter thick cork sheet. Besides being convenient and environmentally friendly to install, the thickness provides for better comfort and a more luxurious feeling. This product produces the highest profit margin among all our products f and we are gradually moving our focus from sheet and roll to the production and sale of floating cork floor.
 
The specifications of cork floors we produce are listed below
 
 
Data
 
National Standard
Formaldehyde emission
 
E=7
 
E≤9
Collision sound
 
14-16dB
 
No requirement on collision sound for normal floorboard/wallboard
Heat transmission coefficient
 
0.06mk
 
No requirement on Heat transmission coefficient for normal floorboard/wallboard*
Anti static electricity
 
2.2kv
 
No requirement on static electricity resistance for normal floorboard/wallboard
Abrasion resistance
 
5000 wear cycles
 
4000 wear cycles
Fire resistant coefficient
 
22.2
 
No requirement on fire resistance for normal floorboard/wallboard
Fire resistance rating
 
Level B two
 
Divided into 4 levels according to National Standard GB8624-1997 **
Chemical resistance
 
Can resist muriatic acid for one hour
 
No requirement on chemical resistance for normal floorboard/wallboard***
Source: Tested by Han Xin Quality Control Department.
  (Hanxin Quality Control Department is an internal department of Hanxin)

*The construction and decoration materials industry in China usually regards materials with the heat transmission coefficient of 0.06 W/(m•K) as heat insulating material, while materials with the heat transmission coefficient that is equal to or less than 0.05 W/(m•K) as high-efficiency heat insulating material, although there are no official standards to classify heat insulation materials. The heat transmission coefficient of normal wood floorboard is ranging from 0.070 to 0.233W/(m•K).

**National Standard GB8624-1997 is the fire resistance rating system for general construction materials. Construction materials are categorized into 4 levels as follows:

A            Non-flammable
B1           Flame retardant
B2           Flammable
B3           Highly flammable
 
***According to ISO3810-1987, the international standard on cork floor, cork floor should be able to resist muriatic acid for half an hour.
 
 
26

 

 
Our quality control is done internally through Hanxin. Tests for quality control systems are done for every batch of finished products. Only when test results of the products meets the standards can those products be sold. These standards are established by Hanxin, and are also applied by several other domestic cork producers. All test standards are much higher than those of the national standards for artificial boards. Based on these high standards, we believe the quality of our products is superior in the industry.
 
 
27

 

 
•               Cork Wallboard: Wallboard is a high-end decorative material. All of the wallboard products utilize Hanxin’s special staining technology to create different colors. We produce 16 types of cork wallboard with different patterns. Besides giving a beautiful and luxurious impression for the decorative use, cork wallboard also possesses soundproof qualities, making it especially suitable for rooms and structures  that demand quiet.
 
•               Basic Board : Basic cork board is similar as glue-down cork floor except that it has not been covered by a UV membrane. Basic board can therefore be tailored to different uses according to a customer’s specific needs, such as the underlayment for wood floor or soundproof material.
 
 
28

 

 
 
As of December 31, 2009, the sales percentage based on categories of products for 2009 is as follows:
 
 
 
29

 

 
The sales percentages based on categories of products in 2008 are as follows:
 

Production Procedures, Facilities, & Capacity

According to the special characteristic of cork material produced in China, we have designed a tailored production process and specified the operating requirements in each step, which ensures the quality of our products and becomes our key competitive edge. The basic manufacturing procedure is as follows:
 

From 2002 until 2008, we built five workshops in sequence on over 80 thousand square meters of leased lands which are all located in the vicinity of Xi’an, Shaanxi Province. All of the production procedures are performed in these workshops. Workshop number one to number three were all established and started operation before August 2003. The fourth workshop was built in June 2005 and started operation in September 2005.
 
 
30

 
 
We have two production lines installed in the first four workshops. One line is for the production of floor plank and wallboard, the annual production of which is approximately 300,000 square meters.  The other line is for production of cork sheets and semi-finished products, such as rolls of cork, the annual production of which is approximately 60,000 boxes.  Due to the unique non-standard production procedures for our product, each production line involves several workshops. The major function and output of the four workshops are shown as the following:

No.
 
Functions
 
No. of
workers
 
Major product
 
Output (per shift, 2~3 shifts
every day)
1
 
Cutting, grinding, seasoning, film pressing, slicing, heated compounding, coating, waxing, etc.
 
80~90
 
Cork granule, sheet/role, wall boards
 
100 boxes
500 m 2 wall board
2
 
Cutting, grinding, film pressing, slicing, polishing, etc.
 
70~80
 
Cork sheet/roll
 
100 boxes
3
 
Inspection, packaging, warehousing
 
Around 30
 
Not applicable
 
Not applicable
4
  
Heated pressing and compounding, edging, coating, inspection
  
70~80
  
Cork floor boards
  
>300 m 2
 
The fifth workshop has about 6,000 square meters of capacity.  Construction commenced in the third quarter 2007 and completed in September 2008. We planned to establish a third production line to produce high-end cork floor planks in the fifth workshop. We started to install production equipment in the fifth workshop in October 2008. We expect that, upon fund availability, the new facility will utilize the Company’s advanced patented technologies to primarily produce floating cork floorboards of around 300,000 square meters.  However, due to the adverse market conditions we stopped purchasing new production facilities for the fifth workshop after the completion of part of the production line at the end of 2008. We have not determined when the additional production lines will be completed. At present the fifth workshop is used for part of the production procedure of the new high-end products and for the warehouse of our final products.

Until September 20, 2010, we had an option to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan Hanxin”), one of the major cork raw material providers located in Sichuan Province China and our major supplier.  On September 20, 2009, we entered into an agreement (“Agreement”) with the two shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The Agreement grants us an option to acquire 100% of the shares of Sichuan Hanxin by September 20, 2010. The acquisition price would have been between 120%~150% of the net asset value as shown in the audited financial statements as of December 31, 2009 of Sichuan Hanxin as determined by an audit firm we designate. Since the Company did not obtain financing and the closing conditions were not satisfied as of September 20, 2010, the acquisition agreement terminated.  Sichuan Janxian agreed with us to apply the acquisition deposit of RMB9.3 million (equivalent to $1,362,234 as of December 31, 2009) to the amounts owed by us for the purchase of cork floor products from Sichuan Hanxin in 2010.  We still intend to purchase Sichuan Hanxin but there can be no assurance that the parties can agree upon terms for such acquisition or that we will have sufficient capital to consummate such acquisition.

In order to intend to expand our production capacity and lower our production costs, we signed a cooperation agreement with Sichuan Hanxin for the production of cork floor boards on October 15, 2009. Sichuan Hanxin and we are cooperating to build another production line for manufacturing the cork floor planks at their location in Sichuan province. According to the Cork Floor Production Cooperation Agreement, we provided a set of production equipment and Sichuan Hanxin agreed to provide the workshop and supplementary equipment. We agreed to prepay for raw materials and provide secondary raw materials to Sichuan Hanxin. Nevertheless, Sichuan Hanxin shall be responsible for the production of cork floor products according to our quality specifications and standards.. According to the agreement, we have the exclusive right to sell the cork floor products produced by this production line. This new cork floor production line is expected to commence operation in 2011, with an annual production capacity of approximately 200,000 square meters of products. Accordingly, we will be able to increase our total annual output to 500,000 square meters.  Producing the finished product at Sichuan Hanxin allows us to produce product at a lower cost, as we save the higher transportation costs associated with transporting raw material as compared to finished product. Sichuan Hanxin also has existing buildings with the capacity to house additional production lines.

As of September 30, 2010, we were operating at 98% of our maximum production capacity.  Our own production capacity cannot meet expanding market demand. We are negotiating with several other mid-sized cork product manufacturers to be original equipment manufacturer (“OEM”) and receive our support of technology and standards.  We have not yet entered into any OEM contracts, but expect to develop long-term OEM cooperation with several manufacturers in the near future to enlarge our production output in a more stable manner while saving the cost of building new production facilities.
 
 
31

 

 
Raw Materials
 
Cork is the outer bark of a cork oak tree. During a harvest, the outer bark of a cork oak’s trunk and major branches is carefully stripped by hand – no mechanical stripping devices are allowed. Experienced cork strippers use a specialized cork axe to slit the outer bark and peel it away from the tree. The cork bark is then sorted by quality and thickness. The remaining cork (called “blocker waste," although it is perfectly good material!) is then ground up and processed to be used in the production of agglomerated cork and cork & rubber compounds. These materials are used in a variety of applications from construction and gaskets and friction plates to sound proof materials.
 
A cork tree regenerates its precious outer layer 9 or 10 times during its 150~200-year lifetime. The first stripping of the cork bark occurs when the tree is between 15 years of age, with subsequent yields at 9 to 10 year intervals. Because of the limited time of harvesting the cork tree during its life circle, access to abundant natural resources of cork forest is a very important aspect of our business. At present, the supply and price of raw materials have been stable.  

There are only two species of cork oak tree which can produce barks that are suitable for manufacture of cork building materials, Quarks Suber and Quarks Variabilis. Quarks Suber belongs to evergreen arbor tree, and is native to the western Mediterranean area. On average, ten hectare Quarks Suber can shed cork about 150 kilograms every ten years, while high-quality Portugal Quarks Suber can produce 200 – 250, or even 500 kilograms every hectare. With its vast reservation of over 700 thousand hectare, Portugal is the largest source  of cork products. The following graph shows the world distribution of Quarks Suber in 2006 .

Country
 
Forest Area Hectares
   
% of Worlds Forest Area
   
Production
Tons (000)
   
% of Total
Production
 
Portugal
    736,000       32 %     157       52 %
Spain
    506,000       22 %     88       30 %
Algeria
    414,000       18 %     17       6 %
Morocco
    345,000       15 %     11       4 %
France
    92,000       4 %     3       1 %
Tunisia
    92,000       4 %     8       3 %
Italy
    92,000       4 %     15       5 %
TOTAL
    2,277,000       100 %     340       100 %
 
Source: The Natural Cork Quality Council, US

Quarks Variabilis is a kind of wide-leaved deciduous tree that mainly grows in China. The wild forest area is about 1.2 million hectares. The most important growing area is Shaanxi Province, especially the Qin Ba Mountain area whose reservation occupies over 65% of the wild forest in China. Different from Quarks Suber, the cork from Quarks Variabilis is completely wild grown, while trees of Quarks Suber in Portugal are mainly grown on plantations.
 
 
32

 
 
Raw material, namely bark of Quarks Variablilis is an important aspect of our business.  We have abundant access to the cork raw materials. We purchase all raw materials, including bark, glue, PVC membrane, paint and other materials from over 10 suppliers. None of the suppliers individually provide more than 15% of our total purchase of raw materials. Three suppliers accounting for approximately 40% of our supply of raw materials in 2008 and 2009 and we have purchased product from each of our largest bark suppliers for more than three years.  We usually enter into one year purchase agreements with our suppliers. We believe we have good relationships with our suppliers, and the raw materials supply stays comparatively stable except for normal price fluctuations.  Commencing in the 4th quarter of 2010, the market prices of raw materials and secondary materials began to increase. It is estimated that raw materials have increased by 15% and parts of the secondary raw materials (such as resin glue) have increased by over 20%. In December 2010, the purchase agreements for raw materials were renewed with the suppliers with the new market prices and as a result, the gross profit margin will be affected.  In anticipation of the increase in prices, the Company purchased large amounts of raw materials which the Company believes will be sufficient for approximately six months. The effect of the increase in prices of raw materials shall have a greater impact during the second half of 2011. To deal with this situation, the Company may increase its products’ sales prices in 2011 relative to the actual increase of raw materials and secondary raw materials prices.
 
All our workshops are located in Shaanxi PRC which accounts for more than 65% of total bark production in PRC.  Besides purchasing the barks from wild Quarks Variablilis, we may also acquire lands to establish our own plantation for high quality cork oak trees.
 
Our major  supplier, Sichuan Hanxin, obtained a three-year exclusive right (from 2009 to 2011) from Mian Yang City Forestry Administration which is one of the government bureaus in Mian Yang City Sichuan province to collect, purchase, transport and process the cork bark raw material in four counties in MianYang City.  Sichuan Hanxin has the exclusive right to purchase cork bark from designated areas each year in order to conserve the supply of cork and allow the tress in harvested areas to regrow their bark. The MianYang Municipal government passed a regulation on April 22, 2009 to protect the right of Sichuan Hanxin, which gives Sichuan Hanxin an advantage in the development of its business.
 
Pursuant to our agreement with Shaanxi Shuta dated October 20, 2009, we agreed to purchase from Shaanxi Shuta a land use right of 7,000 Mu (equal to 4,669,000 square meters) located in Baoji District, Shaanxi province. We plan to develop our own cork forest on the land, which will help assure our raw material supply at a lower cost.  Shuta incurred RMB10,000,000 (equivalent to $1,494,509)  expenses in the process of the acquisition. The agreement provides that in the event that we do not purchase the land by October 20, 2011, we will be liable to pay RMB10,000,000 to Shuta as reimbursement for the acquisition expenses. The parties anticipate that should we not purchase the land by October 20, 2011, Shuta will not repay the RMB10 million loan pursuant to Loan Agreement dated October 28, 2009 and the parties will have no further obligation to each other regarding the loan or the land purchase.
 
Our Marketing Strategy
 
We sell our products in China through sales agents, retail sellers, and our own sales employees. The overseas markets primarily are approached through unrelated overseas distributors and agents.
 
Domestic market
 
Sales Agents
 
ð
Strategic Cooperation Agreement with Shaanxi Shuta
 
Shaanxi Shuta is one of the largest wholesale distributors of cork floor boards and wall boards in China. As of December 31, 2009, Shaanxi Shuta had over 10 wholesale stores and four showrooms.
 
 According to our strategic cooperation agreement,, Shaanxi Shuta shall
 
 
·
Order three types of “Shuta Brand” cork flooring plank products to be produced by Hanxin based on the Shuta’s specification and

 
·
Order three types of “Shuta Brand” flooring plank semi-finished products  to be processed by Hanxin.
 
 
33

 

 
As to the “Shuta Brand” cork plank products, Shaanxi Shuta has the exclusive right to distribute these products produced by Hanxin.
 
ð
Other Sales Agents
 
In addition to Shaanxi Shuta, we have distribution contracts with several other companies to distribute our flooring plank and other products. In January 2009, we entered into Distribution Agreements with Shanghai Yuanrui Limited., Suzhou Juwang Ltd., Hangzhou Zhongheng Ltd.  and Shanghai Tangyi Ltd.  These companies mainly distribute glue-down flooring planks and floating flooring planks. We provide product warranties.

We plan to increase the number of our distributors and enhance support for our distributors by providing more high-quality and delicately designed samples, and increasing our efforts in advertising our brand name and educating consumers.
 
Our Sales Team
 
We also distribute products through our own sales team and established sales network of regional distributors.  Xi’An is the headquarters for our sales force, with sales representatives in Beijing, Shanghai and Guangzhou. We plan to hire more contracted sales representatives in two major cities: Jinan and Shenyang, within the central and northeast regions of China to attempt to increase our market reach. Besides our contracted sales representatives within the central and northeast regions of China, we also have long term relationships with over 50 independent sellers in many regions of China. We also seek to expand our existing sales channel for semi-finished products and other cork products such as decoration products, cork office equipment and cork art crafts.  We focus on educating the consumer about cork products through media advertisement. We also may establish our own sales network through  a franchise store in China, in order to enhance the sales of our end-products including cork floor and cork wall board.
 
International market

Our products have been sold internationally though unrelated national distributors and agents. Our products are currently being exported to India, the United States, Japan, and Germany by those unrelated national distributors and agents. Commencing in May 2007, we began selling our products to overseas clients directly through unrelated national distributors and agents. In 2011, we expect to start our own oversea export sales network to Asian and North American markets.

The export destinations and percentage of our exports in 2009 were approximately as follows:
 
 
Our strategic plan is to aggressively explore foreign markets in the next several years. We have established relationships with two building and decorative material dealers in New Jersey.  We do not have written agreements with these distributors. As the construction industry recovers from the financial crisis, and because foreign retailers actively search for suppliers with quality products and lower prices, we intend to more directly penetrate foreign markets and gradually establish our brand name worldwide.
 
 
34

 
As of December 31, 2009, none of our customers accounted for more than 10% of our sales.
 
Market Opportunities and Competition
 
Market Opportunities
 
As an environmentally-friendly construction material, cork has an increased demand for building and home improvement purposes from China’s rapidly-growing middle-class population. Even though cork is priced at a 10-15% premium over hardwood floorboards, significant market demand exists for the obvious advantages mentioned above that only cork flooring possesses.

According to National Bureau of Statistics of China, in 2009, the total sales of commercial residential building were 937,130,000m2, with increase of 42.1% compared to 2008. The decoration industry in China has also grown in recent years. From the data of The First China Economic Census, released by National Bureau of Statistics of China, in 2008, the total output of construction decoration and installation industry was around RMB 1 trillion, while in 2 0 04, this number was RMB430 billion, the annual compound growth rate was 23.5%. Although the global financial shocks commencing in 2008 has had some negative effect to the industry in China, based on the sharp rebound in 2009 we believe that significant market opportunities exist.  The above data is from construction and decoration industry annual statistical reports released by National Bureau of Statistics of China.
 
Chinese consumers are gradually adopting a more proactive environmental stance. According to the director of Interior Environment Supervision Center of China Interior Decoration Association, over 50% of consumers express concerns over environmental safety issue regarding interior decoration materials. Also, more consumers are concerned about the environmental impact of the production procedures for decoration materials. This growing concerns from consumers creates great opportunity for cork decoration products, the harvesting and manufacture process of which is much more environmental protective than that of wooden and other compound floorings, as only the bark is harvested once every nine years, leaving the forest undamaged.
 
In the international market, cork building and decoration materials have been widely recognized as environmentally friendly high-end products. Yet because of the rareness of raw materials and the very limited output of cork floors and wallboards compared to ordinary wood floors, cork decoration materials are not yet fully advertised to and used by end users. We believe there is a much larger potential market in the developed countries as a result of environmental concerns from consumers in these countries who are more educated and informed. In addition, the price of cork floors in these countries is similar to prices for high quality wood floors and ceramic tiles.
 
We also believe we will benefit should the recent financial shock incentivize more distributors and retailers to search for less expensive supplies with outstanding quality. We are able to offer products that can compete with European products in quality and fashion design at only half to 2/3 of their wholesale prices.  We believe this will be a competitive advantage.
 
Competition
 
International Competition
 
The cork industry is originated from Portugal, where the largest cork enterprises such as Amorim are located.  The cork industry has a long history in Portugal as the country has the best Mediterranean climate for oak trees to produce high quality bark. According to information from these large companies, their major product is cork stopper used for wine bottles, which usually accounts for one third of their total sales and even higher percentage of profit.
 
The Portugal cork enterprises usually have their own cork oak plantations where cork oak are grown and thinned by specialized personnel. As a result, the production of cork from these plantations is quite limited and the market volume is heavily dependent on the actual output capacity of these large companies. Spain is also a significant producer of cork.
 
 
35

 

 
Domestic Competition

While our competition for international sales is primarily from Portuguese manufacturers, our competitors within China are other local mid-sized cork manufacturers. These companies’ major products are semi-finished cork boards, sheets and roles. Compared to the competitors, Hanxin’s excels in its technology, experience, as well as product quality and design. Hanxin’s patented technologies cannot be easily circumvented for Chinese manufacturers to produce high quality cork floor and wallboard, which form a high entry barrier for most of their competitors to compete with Hanxin in the high-end cork floor and wallboard market. Thus the competition between domestic cork manufacturers has not fully developed.

We intend to continue to focus our production from our semi-finished products to higher-margin end products, where there is less domestic competition.

 Our competitive strengths include the following:
 
 
· 
Access to abundant raw material resources
 
There are about 2.3million hectares of Quarks Suber cork forest worldwide; 32% in Portugal, and 22% in Spain. However, in terms of production, China trailed Portugal with an annual production of approximately 100,000 tons of Chinese cork oak (Quarks Variabilis), which is abundant in the Shaanxi, Gansu, Henan, Hubei and Sichuan provinces. The raw materials supply to Hanxin is stable and of much lower price compared to that of European raw materials.
 
 
· 
Experienced Management Team

Our senior management team has extensive business and industry experience in cultivating and monitoring forests of oak cork trees, developing technologies in the production of cork products, and marketing of cork products both in China and overseas market.
 
 
·
Strategic Alliance with Top Research Institutions

We have been striving to improve the quality of its products through research and development (R&D) collaboration with educational institutions such as the Northwest Sci-Tech University of Agriculture & Forestry. Senior professors from this institution serve as technical consultants to equip us with the latest technical advancements. In recent years, Hanxin has reduced research and development efforts.  Hanxin intends to strengthen its research and development to develop new products should the sales improve.

Quality Control
 
We place great emphasis on the quality of Hanxin’s products and quality control system. In particular:
 
 
·
In March, 2005, Hanxin cork floor was approved by State plywood Quality Supervision and Test Center for formaldehyde emission, TS water immersion testing. (Certification No. Floor 2005-65/66/6768)
 
 
·
In March, 2005, Hanxin cork wallboard was approved by State plywood Quality Supervision and Test Center for formaldehyde emission testing. (Certification No. Floor 2005-64)
 
 
·
In February 2005, Hanxin cork floor passed material sound absorption testing by Acoustics Research Center from Tong Ji University
 
 
·
In October. 2003, Hanxin cork floor was approved by Xi’an Institute of Supervision & Testing on Product Quality in standard testing of GB18580, GB/T18102-2000, GB/T18103-2000 with Certification NO.G0300708.
 
 
·
In Nov. 2003, Hanxin cork wallboard was approved by Xi’an Institute of Supervision & Testing on Product Quality in standard testing of Q/HX01-2001 with Certification NO.G0300742.
 
 
·
In October 2001, Hanxin’s products and standards were certified by the Xi’an Quality Technology Supervision Bureau, the governmental agency responsible for the inspection of commodities being imported and exported to and from China
 
 
36

 

 
Currently, our ISO9000: 2000 and ISO14001 certifications are pending.
  
Intellectual Property

We have the right to use 17 patents regarding cork processing technologies. We own 3 patents, lease 3 patents from Mr. Fangshe Zhang, our Chairman and a principal shareholder, and also have an exclusive right to use another 11 patents of Mr. Zhang without payment of any royalties.  When our royalty payments with respect to the three patents end in 2011, we will receive an exclusive right to use these patents leased without payment of any royalties.  See “Certain Relationships and Related Transactions.”
 
3 patents owned:
   
     
ZL01121762.0  
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
ZL01131761.2 
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
ZL01131763.9 
 
Effective date from Oct. 24th,  2001 to Oct. 23th, 2021
     
3 patents leased:
   
     
ZL02114508.3  
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
     
ZL02114507.5  
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
     
ZL02114510.5
 
Effective date from Feb. 9th, 2002 to Feb. 8th, 2022
     
11 patents used for free:
   
     
ZL200410025960.x
 
Effective date from Mar. 17th,  2004 to Mar. 16th, 2024
     
ZL200420041668.2
 
Effective date from Mar. 17th,  2004 to Mar. 16th, 2014
     
ZL03241926.0 
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL03241927.9 
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL03241928.7
 
Effective date from Jun. 19th, 2003 to Jun. 18th, 2013
     
ZL02261996.8
 
Effective date from July 29th, 2002 to July 28th, 2012
     
ZL03262604.5
 
Effective date from Aug. 11th, 2003 to Aug. 10th, 2013
     
ZL200420086143.0
 
Effective date from Nov. 4th, 2004 to Nov. 3rd, 2014
     
ZL200420042256.0
 
Effective date from July 27th, 2004, to July 26th, 2014
 
 
37

 
 
PRC Government Regulations
 
Environmental Regulations
 
The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.
 
We do not believe that the costs and effects of compliance with applicable environmental laws are applicable to our business.  Potential liability in connection with environmental regulation arises from the possibility that pollution will be caused by the dust generated when cork barks are ground into fine granules, which is typical for the artificial board industry.  This problem is usually solved by installing dust removing facilities.  We believe that Hanxin has installed sufficient dust removing systems in its workshops and has been effectively controlling its dust emission.  The dust removing systems have been designed by the Company.  The cost for installing these facilities is part of the cost for establishing the production lines.  Although such dust removing systems consume additional electricity, the additional utility expense increased is minimal compared to the total production expenses.  We believe that we face no other issues regarding compliance with environmental laws as our production procedure (1) consumes no water and thus produces no waste water and (2) generates no solid waste as all cork is sold as the raw material foe feed or fertilizer.

We have not been named as a defendant in any legal proceedings alleging violation of environmental laws. We have no reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations due to any non-compliance with environmental laws.

Patent Protection in China
 
The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to most of the world’s major intellectual property conventions, including:
 
  
·
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
  
·
Paris Convention for the Protection of Industrial Property (March 19, 1985);
  
·
Patent Cooperation Treaty (January 1, 1994); and
   
·
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
 
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.
 
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
 
The Patent Law covers three kinds of patents, i.e., patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first to file. This means that, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it should not be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
 
PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license up to now. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.
 
 
38

 

 
PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. Preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Evidence preservation and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one to three times of the license fee under a contractual license. The infringing party may be also fined by the Administration of Patent Management in an amount of up to three times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB 500,000, or approximately $73,195.
 
Tax
 
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to a portion of or a full refund of the VAT that it has already paid or borne. Our imported raw materials that are used for manufacturing export products and are deposited in bonded warehouses are exempt from import VAT.
 
Foreign Currency Exchange
 
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.
 
Dividend Distributions
 
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China are required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
Employees
 
As of September 30, 2010, we had 270 employees, and believe our relationship with our employees is good. All of our employees are based in China. There are no collective bargaining contracts covering any of our employees and we believe that we have good relations with our employees.
 
Properties

Hanxin owns one property in Xi’An of approximately 10,360.3 square meters.. However, in 2007, we renovated the space and built an additional student dormitory. The construction was completed in June 2008. The YuLerYuan Resort, including the new student dormitory, was leased for $22,037 (equivalent to RMB150,000) per month to the university nearby at YuLerYuan and this agreement was extended to February 28, 2011.
 
Hanxin also leases office space of about 436 square meters in Xi’an for approximately $2,402 (equivalent to RMB16,352 included rent  maintenance fee and cleaning fee) per month. The lease for this office space expires on December 31, 2008, and has been renewed for one more year until December 31, 2010.
 
Hanxin also leases the right to use four parcels of land which are all used as our cork processing plant.  One parcel is approximately 53,120 square meters. The lease fee for this processing plant is about $1,469 (equivalent to RMB10,000) per month, and the lease has been extended to October 2047.
 
 
39

 

 
The second parcel of land is approximately 26,666 square meters. The lease fee for this land use right is about $11,753 (equivalent to RMB80,000) per month, and lease term will be expired on December 31, 2010. The landlord from this property had forgiven us approximately $152,793 (equivalent to RMB1,040,000) rent for years 2009 and 2008 international economic crisis, and we had equally allocated this forgiveness to all lease periods.
 
The third parcel of land is approximately 3,333 square meters. The lease fee for this land use right is about $1,469 (equivalent to RMB10,000) per month, and the lease term also will be expired on December 31, 2010. The landlord from this property also had forgiven us approximately $22,037 (equivalent to RMB150,000) rent for years 2009 and 2008 international economic crisis, and we had equally allocated this forgiveness to all lease periods.
 
The forth parcel of land is leased from Sichuan Hanxin. The lease fee for this land is about $5,877 (equivalent to RMB40,000) per month, and the lease term is expiring on October 2, 2011.
For the Quarter Ending
September 30,
 
Amount
 
2011
  $ 114,048  
2012
    17,826  
2013
    17,630  
2014
    17,630  
2015
    17,630  
Thereafter
    564,157  
Total minimum rental payments required
  $ 748,921  
  
Rent and properties maintenance expenses amounted to $143,808 and $87,480 for the nine months ended September 30, 2010 and 2009, respectively.
 
Legal Proceedings
 
There are no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
Forward-Looking Statements
 
The following analysis of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements, including footnotes.
 
This prospectus contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements and we cannot assure you of the actual results or developments.  We do not intend or assume any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated, unless as required by law.
 
Overview
 
Business Summary
 
The Company, through its subsidiaries, engages in developing, manufacturing and distribution of cork wood floor, wall and decorating products. The cork industry is generally regarded as environmentally friendly. The sustainability of production and the easy recycling of cork products and by –products are two of its most distinctive aspects. For the years ended December 31, 2009 and 2008, we sold all our products to our clients in China, and then part of our China clients resold our products to their overseas clients.  Approximately 75% of Hanxin’s products sold in 2009 and approximately 70% in 2010 were to the end users in China by our own sales persons and domestic distributors and agents, with the remaining sales being made to customers overseas through our China clients who included unrelated distributors and sales agents. Internationally, our products have been distributed into India, the United States of America, Germany and Japan. The sales to the distributors, the sales agent and directly to clients have no difference as reflected in accounting policies, as the price and the means of delivery has no material differences. All sales revenues are recognized when reception and inspection of goods are finished by clients.  We have the right to use 17 patents developed by Fangshe Zhang, our Chairman regarding cork processing technologies. We own 3 patents, lease 3 patents, and have exclusive right to use another 11 patents for free. We believe that these 17 patents give us a competitive advantage in our product quality. With the patents we own and develop, we believe that we will be able to keep our leading status in cork production industry in China.
 
 
40

 
 

Foreign Exchange Considerations
 
Even though we are a U.S. Company, because all of our operations are located in the PRC, we face certain risks associated with doing business in that country. These risks include risks associated with the ongoing transition from state business ownership to privatization, operating in a cash-based economy, dealing with inconsistent government policies, unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, challenges in staffing and managing operations in a communist country, differences in technology standards, employment laws and business practices, longer payment cycles and problems in collecting accounts receivable, changes in currency exchange rates and currency exchange controls. We are unable to control the vast majority of these risks associated both with our operations and the country in which they are located and these risks could result in a significant decline in our revenue.
 
Because revenues from our operations in the PRC accounted for 100% of our consolidated net revenues, how we report net revenues from our PRC-based operations is of particular importance to understanding our financial statements. Transactions and balances originally denominated in U.S. dollars are presented in their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining comprehensive net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income or loss.
 
The functional currency of our Chinese subsidiaries is the Chinese RMB, the local currency. The financial statements of the subsidiaries are translated into U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. Until 1994, the RMB experienced a gradual but significant devaluation against most major currencies, including U.S. dollars, and there was a significant devaluation of the RMB on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the RMB relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. dollar. Countries, including the United States, have argued that the RMB is artificially undervalued due to China's current monetary policies and have pressured China to allow the RMB to float freely in world markets.
 
On July 21, 2005, the PRC reported that it would have its currency pegged to a basket of currencies rather than only tying it to a fixed exchange rate to the dollar. The PRC also increased the value of its currency 2% higher against the dollar, effective immediately. If any devaluation of the RMB were to occur in the future, returns on our operations in China, which are expected to be in the form of RMB, will be negatively affected upon conversion to the U.S. dollar. Although we attempt to have most future payments (mainly repayments of loans and capital contributions) denominated in U.S. dollars, if the value of the RMB increases, our product sales in China and in other countries may be negatively affected.
 
Critical Accounting Policies and Estimates
 
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are  believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
 
A summary of significant accounting policies is included in Note 3 to the consolidated financial statements. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
 
We record property and equipment at cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which are from 1 to 35 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. We review the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
 
Our revenues from the sale of products are recognized when reception and inspection of goods are finished by clients. Persuasive evidence of an arrangement is demonstrated via purchase order from customer, product delivery is evidenced by warehouse shipping log as well as bill of lading from the trucking Company and no product return is allowed except defective or damaged products, the sales price to the customer is fixed upon acceptance of purchase order, there is no separate sales rebate, discounts, and volume incentives.
 
 
41

 
Revenue recognition:
 
The Company's revenues from the sale of products are recognized when reception and inspection of goods are finished by clients , the sales price to the customer is fixed and collectability is reasonably assured. Persuasive evidence of an arrangement is demonstrated via purchase order from distributor, our customers, product delivery is evidenced by warehouse shipping log as well as signed bill of lading, or shipping documents from the trucking Company and no product return is allowed except defective or damaged products, the sales price to the customer is fixed upon acceptance of purchase order, there is no separate sales rebate, discounts, and volume incentives.
 
The Company’s PRC subsidiaries recognize their revenues net of value-added taxes (“VAT”). The Company’s PRC subsidiaries are subject to VAT which is levied on the majority of their products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company's PRC subsidiaries in addition to the invoiced value of purchases.
 
Income taxes
 
The Company and its U. S. subsidiary will file consolidated federal income taxes return and state franchise tax annual report individually. The Company's PRC subsidiaries file income tax returns under the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws. The Company's BVI subsidiary is exempt from income taxes.
 
The Company follows the FASB issued ASC 740 - Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
 
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”), codified in FASB ASC Topic 740, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48, and the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.   At September 30, 2010 and December 31, 2009, the Company did not take any uncertain positions that would necessitate recording of tax related liability. 
 
Foreign currency translation
 
The reporting currency of the Company is the U.S. dollar. The functional currencies of the Company's subsidiaries are local currencies, primarily the Chinese Renminbi. The financial statements are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.
 
Recently Adopted Accounting Pronouncements
 
On February 25, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09 Subsequent Events Topic 855, “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. Subsequent events have been evaluated through the date the financial statements were issued.
 
 
42

 

 
In January 2010, FASB amended ASC 820, " Disclosures about Fair Value Measurements ." 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. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has determined the adoption of this ASU does not have a material impact on its financial statements.
 
In December, 2009, FASB amended " Financial Reporting by Enterprises Involved with Variable Interest Entities."  The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company has determined the adoption of this rule does not have a material impact on its financial statements.
 
Results of Operations

NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2009
   
For The Nine Months Ended
September 30,
       
   
2010
   
2009
       
   
(Unaudited)
   
(Unaudited)
   
(Decrease)/ Increase
 
                         
Revenues
  $ 22,436,245     $ 17,056,777     $ 5,379,468       31.54 %
Cost of Goods Sold
    15,744,727       11,032,415       4,712,312       42.71 %
Gross Profit
    6,691,518       6,024,362       667,156       11.07 %
Gross Profit Percentage
    29.82 %     35.32 %                
Operating Expenses
                               
Selling expenses
    1,205,358       2,470,208       (1,264,850 )     -51.20 %
Bad debt
    220,666       253,104       (32,438 )     -12.82 %
Research & development costs
    110,187       73,181       37,006       50.57 %
General and administrative expense
    493,970       427,381       66,589       15.58 %
Total Operating Expenses
    2,030,181       3,223,874       (1,193,693 )     -37.03 %
Income From Operations
    4,661,337       2,800,488       1,860,849       66.45 %
Other Income (Expense)
                               
Interest (expense), net
    (72,269 )     (259,117 )     186,848       -72.11 %
Other income, net
    98,134       78,760       19,374       24.60 %
Total Other Income (Expense)
    25,865       (180,357 )     206,222       -114.34 %
Income  from Continuing Operations Before Taxes
    4,687,202       2,620,131       2,067,071       78.89 %
Income Tax Provision
    702,063       477,030       225,033       47.17 %
Net Income Before Noncontrolling Interest
    3,985,139       2,143,101       1,842,038       85.95 %
Less: Net  income attributable to the noncontrolling interest
    319,663       179,190       140,473       78.39 %
Net  Income Attributable to Asia Cork Inc.
  $ 3,665,476     $ 1,963,911     $ 1,701,565       86.64 %

Revenues
 
For the nine months ended September 30, 2010, our revenues were $22,436,245 as compared to $17,056,777 for the nine months ended September 30, 2009, an increase of $5,379,468 or 31.54%. The primary reason for the increase was that our sales of major finished goods of boards increased for the nine months ended September 30, 2010 as compared to the same period of 2009. Moreover, we manufactured more series of products for wood materials commencing April 2010, which caused the quantities of wood materials to increase significantly during the nine months ended September 30, 2010. In addition, we sold secondary raw materials in the amount of $1,189,002 to Sichuan Hanxin during the first quarter of 2010. No such sales were made in the first quarter of 2009.
 
The following table sets forth information regarding the sales of our principal products during the nine months ended September 30, 2010 and 2009

 
43

 

   
For The Nine Months Ended September 30
                   
   
2010
   
2009
   
2010 Less 2009
 
Product
Name
 
Quantities
(Square
Meter)
   
Amount
   
Sale
%
   
Quantities
(Square
Meter)
   
Amount
   
Sale
%
   
Quantity
(square
meter)
   
Amount
   
Sale
%
 
Wood Materials
   
2,684,477
     
7,035,666
     
31.2
%
   
737,150
     
4,220,428
     
25
%
   
1,947,327
     
2,815,238
     
67
%
Boards
   
230,989
     
2,448,256
     
11.1
%
   
113,717
     
1,024,081
     
6
%
   
117,272
     
1,424,175
     
139
%
Floors
   
599,206
     
11,731,326
     
52.3
%
   
586,085
     
11,747,160
     
69
%
   
13,121
     
(15,834
)
   
0
%
Secondary raw Materials
   
-
     
1,189,002
     
5.3
%
   
-
     
-
     
0
%
   
-
     
1,189,002
     
0
%
Others
   
-
     
31,995
     
0.1
%
   
-
     
65,108
     
0
%
   
-
     
(33,113
)
   
-51
%
Total
   
3,514,672
     
22,436,245
     
100
%
   
1,436,952
     
17,056,777
     
100
%
   
2,077,720
     
5,379,468
     
32
%

The increase in quantities per square meter, as reflected in the table, is primarily attributable to the fact that we increased orders from our new and existing major customer.  We increased sales volume of our products from 1,436,952 for the nine months ended September 30, 2009 to 3,514,672 during the nine months ended September 30, 2010.
 
The following table sets forth information regarding the average unit sales price per square meter of our principal products during the nine months ended September 30, 2010 and 2009
 
 
Average Unit Sales Price
Per Square Meter
   
Basic Change
Per Square
 
Product Name    
 
2010
   
2009
   
Meter
 
Wood Materials    
   
2.62
     
5.73
     
(3.11
)
Boards    
   
10.60
     
9.01
     
1.59
 
Floors    
   
19.58
     
20.04
     
(0.46
)
Overall Average Products
   
6.38
     
11.87
     
(5.49
)

The decrease in average sales price per square meter, as reflected in the table, is primarily because we sold more lower unit sales price products of wood materials in the current period rather than a decrease in the sales price of major products of wood materials. Despite slightly lower unitt sales price for boards commencing October 2009, we sold more products of wood materials during the nine months ended September 30, 2010. Therefore, the average sales price per square meter declined significantly for the nine months ended September 30, 2010.
 
For the nine months ended September 30, 2010, cost of sales amounted to $15,744,727 or 70.18% of net revenues as compared to cost of sales of $11,032,415 or 64.68% of net revenues for the nine months ended September 30, 2009. Gross profit for the nine months ended September 30, 2010 was $6,691,518 or 29.82% of revenues, as compared to $6,024,362 or 35.32% of revenues for the nine months ended September 30, 2009. Gross margin decreased primarily as a result of selling more products of wood materials which generated low gross margins to our major customers for the nine months ended September 30, 2010. Moreover there was a low margin sale of secondary raw materials to Sichuan Hanxin in the first quarter of 2010.  In addition, we raised employee salaries commencing in October 2009 and in May 2010. As a result, our unit costs increased slightly for the nine months ended September 30, 2010 as compared to the same period of 2009.

 
44

 
 
The following table sets forth information regarding the average cost per square meter of our principal products during the nine months ended September 30, 2010 and 2009
 
   
 
Average Cost Per Square
Meter
   
Basic Change
Per Square
 
Product Name    
 
2010
   
2009
   
Meter
 
Wood Materials    
 
$
2.10
     
4.06
     
(1.96
)
Boards    
   
5.99
     
5.95
     
0.04
 
Floors    
   
11.60
     
11.52
     
0.08
 
Overall Average Products
   
4.48
     
7.68
     
(3.20
)
 
The decrease in average cost per square meter, as reflected in the table, is primarily because we sold more lower unit cost products of wood materials for the nine months ended September 30, 2010 as compared to the same periods of 2009.
 
The following table sets forth information regarding the sales and costs of secondary raw materials during the nine months ended September 30, 2010 and 2009
 
   
For  T he Nine Months Ended September 30, 2010
 
   
Total