Attached files
| file | filename |
|---|---|
| EX-10.15 - ZAPNAPS, INC. | v209446_ex10-15.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
(Amendment No.
2)
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): November 22, 2010
FUSIONTECH,
INC.
(Exact name of registrant as specified in its charter)
|
Nevada
|
000-53837
|
26-1250093
|
||
|
(State
or other Jurisdiction of
|
(Commission
File Number)
|
(IRS
Employer Identification No.)
|
||
|
Incorporation)
|
|
No.
26 Gaoneng Street, High Tech Zone, Dalian,
Liaoning
Province, China
|
116025
|
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (86)
0411-84799486
No.
8 Mingshui Road
Changchun,
Jilin Province, China 130000
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
|
¨
|
Written communications pursuant
to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
¨
|
Soliciting material pursuant to
Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
¨
|
Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
|
¨
|
Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
|
Throughout this
Current Report on Form 8-K, we will refer to FusionTech, Inc. as
“FusionTech,” the “Company,”
“we,” “us” and “our.”
Item
1.01 Entry into a Material Definitive Agreement.
On
November 22, 2010, FusionTech, Inc., a Nevada corporation (the “Company”),
entered into and consummated a series of agreements that resulted in the
acquisition by the Company of all of the ownership interests of Dalian Heavy
Mining Equipment Manufacturing Co., Ltd. (“Dalian”), a foreign joint venture
company organized under the laws of the People’s Republic of China
(“PRC”).
The
acquisition of Dalian’s ownership interests was accomplished pursuant to the
terms of a Share Exchange Agreement and Plan of Reorganization, dated November
22, 2010 (the “Share Exchange Agreement”), by and between Dalian, its owners,
and the Company. Pursuant
to the Share Exchange Agreement, we acquired 100% of Dalian from the owners of
Dalian in exchange for the issuance of 24,990,000 shares of our common stock
(the “Share Exchange”). The owners also agreed pursuant to the Share Exchange to
make such administrative filings in the PRC as necessary to record the transfer
of ownership of Dalian to the Company as a wholly foreign owned enterprise.
Concurrent with the closing of the transactions contemplated by the Share
Exchange Agreement and as a condition thereof, we entered into an agreement with
Mr. David Lu, our Chief Executive Officer and Director prior to the Share
Exchange and acquisition by the Company of Dalian, pursuant to which he returned
80,000,000 shares of our common stock to us for cancellation. Mr. Lu received
compensation of $80,000 from us for the cancellation of his shares of our common
stock. Upon completion of the foregoing Share Exchange transactions, we had
29,390,000 shares of common stock issued and outstanding. For accounting
purposes, the Share Exchange transaction was treated as a reverse acquisition
and recapitalization of Dalian because, prior to the transaction, the Company
was a non-operating public shell and, subsequent to the transaction, Dalian’s
owners beneficially owned a majority of the outstanding Common Stock of the
Company and will exercise significant influence over the operating and financial
policies of the consolidated entity. We have no other operations or businesses
other than those acquired in the Dalian acquisition.
We issued
the shares of common stock to the owners of Dalian in reliance upon the
exemption from registration provided by Regulation S under the Securities Act of
1933, as amended (the “Securities Act”).
Item
2.01 Completion of Acquisition or Disposition of Assets.
We refer
to Item 1.01 above, “Entry into a Material Definitive Agreement,” and
incorporate the contents of that section herein, as if fully set forth under
this Section 2.01.
Description
of Our Company
Historical
Business
Prior to
the transaction described in Item 1.01 above, we were a development stage
company with no revenues and no operations that intended to produce mini-paper
towels.
We were
incorporated in the State of Nevada on October 10, 2007, under the name ZapNaps,
Inc. by Ms. Peggy Lalor, our former President and Director. On
December 3, 2007, we issued 10,000,000 shares of our common stock to Ms. Lalor
at $.001 per share for $10,000, representing Ms. Lalor’s initial investment in
the Company.
On May 7,
2010 Ms. Lalor sold 10,000,000 shares of the Company’s common stock to Mr. David
Lu for $40,000, in a private transaction exempt from registration under the
Securities Act of 1933, as amended. Concurrently, Ms. Lalor resigned from her
positions with the Company, and Mr. Lu was appointed as President, Chief
Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director of
the Company.
In
anticipation of the Share Exchange and related transactions described in Item
1.01 above, on October 28, 2010 we changed our name from ZapNaps, Inc. to
FusionTech, Inc. through a merger with our wholly-owned non-operational
subsidiary, FusionTech, Inc., which was established to change the Company’s name
as permitted under Nevada Law. We also authorized an increase in our authorized
shares of common stock from 75,000,000 to 100,000,000, effective November 1,
2010, and an 8-for-1 forward split of our common stock, effective November 12,
2010. Prior to the forward split we had 10,550,000 shares of our common stock
outstanding, and after giving effect to the forward split, we had 84,400,000
shares of our common stock outstanding immediately preceding the Share Exchange.
We authorized the increase in authorized shares and forward stock split to
provide a sufficient number of shares to accommodate the trading of our common
stock in the OTC marketplace after the acquisition of Dalian.
On
November 22, 2010 we entered into the Share Exchange Agreement and related
transactions described in Item 1.01 above, resulting in our acquisition of all
of the ownership interests of Dalian.
Our
common stock trades on the OTC Bulletin Board under the symbol “ZPNP.”
1
Description
of FusionTech
We design
and manufacture clean technology (“CleanTech”) industrial machinery used in the
coking process, a critical but traditionally highly pollutive step in the
production of crude steel. Our products are sold to large and medium size steel
mills and coking plants in China who use or are planning to use the coke dry
quenching (“CDQ”) method of coking, a more environmentally friendly and energy
conservative method of coking as compared to the traditional coke wet quenching
method.
We
currently design and manufacture CDQ transport cars used in complete CDQ systems
and CleanTech coke oven products such as coke oven elevators, smoke transfer
machines, and coal cleaning machines. These CleanTech coke oven products are
used for maintaining coke ovens and reducing the amount of pollution they
emit. Since 1992, Dalian has also designed and manufactured core coke
oven products such as coke drums, coke drum carriers, wet quenching cars, coal
freight cars, coke guide cars, and coke pushers. These core coke oven products
are necessary components for all coke oven systems.
In the
second quarter of 2011, we plan to provide our proprietary steel plate fusion
services (“Steel Plate Fusion”) to a large steel plate manufacturer in northern
China, Minmetals Yingkou Medium Plate Co., Ltd. (“Minmetals Yingkou”). Minmetals
Yingkou is an established steel plate manufacturer in China with over 30 years
of experience in producing steel plates. It is a subsidiary of the reputable
China Minmetals Corporation, a Fortune Global 500 Company based in China
focusing on the development and production of metals and minerals.
On June
2, 1010, we entered into a non-exclusive strategic agreement, as amended on
August 9, 2010, with Minmetals Yinkgou to produce fused metal slabs using our
Steel Plate Fusion services from raw metal slabs produced by Minmetals Yingkou.
Minmetals Yingkou will manufacture finished steel plates from our fused metal
slabs for sale to their customers. The agreement provides for the production of
200,000 tons of steel plates per year, adjustable based on market demand up to a
goal of 500,000 tons per year. We will receive a processing fee based on the
size, type and market demand of each ton of fused metal slabs
produced.
We
believe that Steel Plate Fusion is a next generation technology that is superior
in both cost and efficiency to conventional methods used to manufacture clad
metal plates and extra-thick carbon steel plates. Steel Plate Fusion uses an
electron beam welding machine in a vacuum chamber and a proprietary process of
surface treatment and manipulation of pressure and temperature of the fusion
process to fuse together metal slabs that can be hot rolled/compressed to
produce:
|
|
·
|
clad
metal plates (“clad metal plates”), manufactured by fusing two dissimilar
metal plates such as stainless steel plates and carbon steel plates (“clad
steel plates”). Clad steel plates offer a more economical alternative to
pure stainless steel plates since they combine inexpensive carbon steel
and stainless steel. In addition, clad steel plates provide similar
functionalities as stainless steel plates and can be used in similar
industrial applications. Clad steel plates are used and highly demanded in
heavy industrial applications such as the construction of ships, piping,
nuclear reactors, pressure vessels, heat exchangers, power generation
equipment, and coking equipment, all of which require the anti-corrosive
properties of clad steel plates.
|
|
|
·
|
specialty
extra-thick carbon steel plates (“extra-thick carbon steel plates”), more
than 80 millimeters thick, used and highly demanded in heavy industrial
applications such as the construction of large ships, bridges, buildings,
metallurgical equipment, mining equipment, and power generation equipment,
all of which require the strength of extra-thick carbon steel plates of
certain standards and
specifications.
|
We
operate through Dalian, our subsidiary organized under the laws of the People’s
Republic of China (“PRC”). Our principal executive offices are located at No.
26, Gaoneng Street, High Tech Zone, Dalian, Liaoning Province, China 116025. Our
phone number is (86) 0411-84799486 and our website address is www.cleanfusiontech.com.
Clean
Coking and Related Products
FusionTech
designs and manufactures a wide variety of CleanTech coke oven products
including coke dry quenching (“CDQ”) transport cars, coke oven elevators, smoke
transfer machines, and coal cleaning machines. FusionTech also designs and
manufactures core coke oven products including wet quenching cars, coal freight
cars, coke guide cars, and coke pushers. FusionTech’s products are sold to the
China domestic steel and coking industries and have significant CleanTech
applications including use in complete CDQ systems. A complete CDQ system can
recycle the wasted heat produced during the coking process to generate
electricity and/or steam. CDQ systems are being phased into the coking process
in the China steel and coke industries because of these environmental and energy
conservation benefits. Additionally, PRC regulations set forth by the Ministry
of Industry and Information Technology (“MIIT”) now require all newly
constructed or reconstructed coke ovens to be accompanied by the installation of
a CDQ system. (1)
2
Industry
Overview
China is
the world’s largest steel producer and is projected to further expand its output
as domestic demand for the metal grows. According to statistics
released on the World Steel Association website, www.worldsteel.org, China
accounted for 47% of the world’s total crude steel output in 2009 and is on pace
to produce a record 600 million metric tons in 2010. As the China domestic steel
industry expands, environmental issues related to its production have become
more pressing. Within China’s industrial sector the steel industry accounts for
15% of aggregate energy consumption, 14% of aggregate wastewater production, and
17% of aggregate solid waste emission. (1)
The processes of smelting, coking, and steel casting,
contribute in excess of 70% of the total pollution and energy consumed within
the steel industry itself.(1)
Coking is
the process by which coke is produced, a basic raw material used in the
production of iron. Coking involves baking coal at extremely high temperatures
in an oxygen-free oven (“coke oven”) and then rapidly cooling it. In the
conventional cooling process, the hot coke is cooled by drenching it with cold
water (“coke wet quenching”). Cooling the coke in this manner emits noxious
gases and the heat energy contained in the hot coke is lost. The modern CDQ
system cools the coke by circulating an inert gas in an enclosed heat exchange
system. This process reduces the harmful environmental effects associated with
the conventional cooling process as water is not contaminated with toxic
pollutants nor are air pollutants released.
CDQ
systems also promote renewable energy production as the wasted heat is recycled
to generate electricity. Compared to the coke wet quenching process, a steel
mill using two CDQ systems can produce approximately 167 gigawatt hours of
electricity from waste heat annually, saving approximately $9.2 million each
year on electricity costs, saving approximately 3.7 million tons of water, and
reducing its carbon dioxide emissions by approximately 130,000 metric tons.(2)
The PRC
government identified the steel industry as one of its primary targets for
pollution reduction in its 11th Five
Year Plan. In July 2010 China’s MIIT, to reduce emissions in the steel industry,
mandated that China’s existing steel mills consolidate to form larger more
efficient mills. Currently China’s steel industry includes many small steel
mills that use outdated technology. As steel industry consolidation progresses
in China, larger steel mills have sought to produce higher quality steel more
efficiently through the use of production methods which reduce environmental
impact.
In July
2010, China’s MIIT also mandated that the construction of new coke ovens or the
reconstruction of old coke ovens be accompanied by the installation of a
complete CDQ system. MIIT has targeted 90% of coking output by large and medium
size steel mills and coking plants, and 40% of coking output from the entire
coking industry, to be produced using the CDQ method before 2013. (1)
(1)
Source: PRC Ministry of Industry and Information Technology “Steel and Coking
Industry CDQ Technology Marketing and Implementation Plan” January 20,
2010.
(2) United
Nations Framework Convention on Climate Change: Baotou Iron & Steel CDQ and
Waste Heat Utilization for Electricity Generation Project, 03/08/2007, and
“CDQ-Modern coking technology,” by Anhui Vocational College of Metallurgy and
Technology. Assumptions made in calculations: Steel mill using two CDQ systems,
each with 125 tons/hour coal capacity and 15 megawatt electricity generating
capacity, and $0.055/kilowatt hour (based on average cost per KWH paid by
Huaneng in 2009).
3
Products
CDQ
Transport Cars
We design
and manufacture CDQ transport cars that are key components to a complete CDQ
system.
|
A
complete CDQ system requires two CDQ transport cars, three coke drums, and
three coke drum carriers. A coke drum carrier is a long flatcar that runs
along a railway and is used to hold a coke drum, a large cylindrical
container made of metal used to hold coke. The CDQ transport car is a
powered locomotive engine that connects to the drum carrier and pulls it
along the railway from the coke oven to the CDQ machine for processing. An
operator controls the speed of the car from a control room located on top
of the CDQ transport car.
FusionTech
manufactures CDQ transport cars by welding together steel plates to form
the car’s structure and then integrating electronic components such as
engines, wheels, and mechanical controls. Manufacture of CDQ transport
cars requires advanced technical knowledge as CDQ transport cars must be
acutely responsive to an operator’s commands to ensure the CDQ transport
car stops at a precise location where dangerous hot coke can be loaded and
unloaded safely. Management believes that FusionTech’s CDQ transport cars
are known in the coking industry for their high quality and competitive
pricing.
|
 CDQ Transport Car for 6.25m Coke
Oven
Source: The
Company
|
The
primary markets for FusionTech’s CDQ transport cars are new steel mills and
coking plants in the China domestic market and existing steel mills and coking
plants being modernized or seeking replacements for existing CDQ transport cars.
Management estimates that CDQ transport cars have a useful life expectancy of
approximately ten years.
|
Coke
Oven Elevator
We
design and manufacture coke oven elevators used to repair damages and
prevent toxic leaks as part of coke oven maintenance.
According
to the U.S. Department of Energy, the largest environmental issue with the
steelmaking process is the carburizing of coal into coke for use in the
iron-making process.(3)
Coke ovens, in addition to emitting dust and particulate emissions,
produce noxius gases including nitrogen oxide, carbon monoxide, and carbon
dioxide. The
PRC government has stated publicly that it plans to respond to these
environmental issues by including new pollutants such as nitrogen oxide in
its emission control list in China’s 12th
Five Year Plan.(4)
We believe the demand for coke oven maintenance products will
increase as a result of the inclusion of these pollutants, and that our
coke oven elevators are well-suited to meet this demand.
|
 Source: The
Company
|
Coke oven
elevators are used to transport workers to the top of a coke oven where they can
repair damages and inspect for signs of toxic leaks. Regular coke oven
maintenance is one of the primary ways pollution emission can be controlled
during the coking process. We are one of the few manufacturers in
China for coke oven elevators that attach to coke ovens 7 meters and 7.63 meters
in height. Management believes that FusionTech’s coke oven elevators for these
specifications are of superior quality as our elevators are powered by an
internal battery rather than diesel fuel. Additionally, demand for coke oven
elevators with these specifications is increasing due to the government directed
consolidation of the China steel industry. As small inefficient steel mills and
coking plants are closed and integrated into larger operations, all
reconstructed coke ovens or newly installed coke ovens will likely exceed 5.5
meters in height to take advantage of the increased production efficiencies a
larger coke oven provides. When a coke oven higher than 6 meters high is
installed, an area adjacent to the coke oven is typically reserved for the
installation of a coke oven elevator which can help reduce pollution emission
and maintain the coke oven for optimal performance.
(3) United
States Department of Energy. “Steel Industry Technology Roadmap.” December 2001.
Available at
http://www1.eere.energy.gov/industry/steel/roadmap.html.
(4) Jing,
Li. “New pollution reduction targets listed.” China
Daily. January 26, 2010.
4
We sell
our coke oven elevators to new steel mills and coking plants in China and to
steel mills and coking plants that are replacing and/or reconstructing old coke
oven elevators. Management estimates that CDQ transport cars have a useful life
expectancy of approximately ten years.
Production
We
manufacture our CleanTech coke oven products and core coke oven products in our
three facilities in Liaoning Province, China. We base our production schedule on
customer orders and schedule deliveries on a just-in-time basis. Our
manufacturing operations principally involve the welding together of large steel
plates and the integration of electronic components. It takes us approximately
three months to design a CDQ transport car according to our customers’
specifications, and approximately another three months to manufacture. Coke oven
elevators can be designed and manufactured within three months. We received ISO
9001:2008 Quality Management System certification in January 2008, which
certification demonstrates our adherence to formalized business processes and
the ability to consistently produce products meeting customer requirements. We
have implemented comprehensive quality control procedures, including
non-destructive tests for defect detection conducted by our own quality control
group consisting of 10 employees.
Sales and
Marketing
We employ
approximately 10 sales people, all of whom are full-time employees of the
Company, to sell and market our products directly to customers. Our sales people
also engage in bidding for specific projects and maintain our relationships with
long-term clients. We currently sell our products directly to large and medium
scale China domestic steel mills and coking plants, and through four general
contractors that are hired by steel mills and coking plants to install complete
CDQ systems. We fund our marketing costs through our working
capital.
Suppliers
Our
principal raw material purchases include carbon steel, stainless steel, and
mechanical and electrical components. We have several suppliers for each of the
materials we use to manufacture our products. We believe we will be able to
obtain an adequate supply of steel and mechanical and electrical components to
meet our manufacturing requirements. We maintain a good business relationship
with all of our suppliers.
Customers
Our
customer base for our coking products includes large and medium scale steel
mills and coking plants in China. We sell our products either directly to these
steel mills and coking plants or through four general contractors in China of
CDQ systems. We believe we have strong business relationships with these four
general contractors, ACRE Coking and Refractory Engineering Consulting
Corporation Co., Ltd., Sinosteel Equipment and Engineering Co., Ltd.,
China-Japan Energy and Environment Engineering Technology Co., Ltd., and Jinan
Iron and Steel Corp.
In 2009,
our three largest customers, ACRE Coking and Refractory Engineering Consulting
Corporation, Co., Ltd., Sinosteel Equipment and Engineering Co., Ltd., and Jinan
Iron and Steel Corp., accounted for approximately 32%, 28%, and 8%,
respectively, of our total revenues.
For the
nine months ended September 30, 2010, our three largest customers, ACRE Coking
and Refractory Engineering Consulting Corporation, Co., Ltd., Jinan Iron and
Steel Corp., and Sinosteel Equipment and Engineering Co. Ltd., accounted for
approximately 38%, 28%, and 22%, respectively, of our total
revenues.
We do not
have any material contracts with any of our customers with respect to our clean
coking and related products business. We execute standard sales contracts and
purchase orders in the ordinary course of business, forms of which provided by
our major customers, for the clean coking and related products we
manufacture.
Intellectual
Property
We rely
on the patent laws in China, along with confidentiality procedures and
contractual provisions, to protect our intellectual property and maintain our
competitive edge in the marketplace. We own seven patents, three for different
models of our CDQ transport cars, one for our coke oven elevator, one for our
coal cleaning machine, one for our steel belt feeding roller, and one for our
smoke transfer car. One of our CDQ transport car patents will expire
in 2016 and two will expire in 2017. Our coke oven elevator patent will expire
in 2019, our coal cleaning machine patent will expire in 2018, and our steel
belt feeding roller and smoke transfer car patents will expire in
2020.
5
The
applications for all of our patents were filed in the Company’s name and have
been solely owned by the Company since the date of their initial grant. As we
continue to develop our CleanTech coke oven products we will apply for new
patents to protect our innovations. We have also executed non-disclosure
agreements with key employees to protect our patents and other trade secrets
related to our business.
Competition
Our
coking products compete against both China domestic manufacturers and
international manufacturers. The manufacturing industry for coking
products in China is highly fragmented with many different manufacturers holding
small shares of the total market. Our primary international competitors for our
CDQ transport cars are Nippon Steel Corporation and Schalke GmbH. Our deep
industry expertise for the past 18 years has allowed us to successfully design
and manufacture products that we believe meet the demand and satisfaction of our
clients. We believe we have strong relationships with our existing customer base
and that our products are recognized for their high quality and innovation. Many
of our competitors have manufacturing operations that span many different heavy
machinery industries, and as a result they may have larger operations and
greater financial resources than us. We plan to remain competitive by continuing
to market our eighteen year operating history, our reputation for superior
products, by funding research and development to improve our current line of
CleanTech coke oven products, and by focusing on developing new innovative
products that focus on environmental conservation.
|
|
·
|
Proprietary product
designs - We own seven different patents including three for
different models of our CDQ transport
cars.
|
|
|
·
|
Award winning technology
– We designed and manufactured a CDQ transport car which was an integral
component of a major CDQ project commenced in 2004 in Maanshan, China.
This CDQ project received the Metallurgical Technology First Class Award
from the China Iron and Steel Association and the Chinese Society for
Metals in 2005. In 2009 this CDQ project also received the National
Science and Technology Second Class
Award.
|
|
|
·
|
Strong business
relationships – We have strong business relationships with the four
CDQ general contractors who are believed within the industry to occupy the
majority of the domestic China CDQ market. Management believes its
relationships with these contractors will continue, providing the Company
with a valuable and growing distribution channel for its CleanTech coke
oven products.
|
|
|
·
|
Industry Experience – We
have an eighteen year operating history and are led by our Chief Executive
Officer, Mr. Lixin Wang, who has over thirty years of metallurgical, heavy
machinery, and coke industry experience. At our inception in
1992 we only manufactured traditional core coke oven products. In 2002 we
were able to successfully expand our product offerings to include coke dry
quenching products.
|
|
|
·
|
Customer Service – We
work closely with our customers to design and manufacture products to
their custom specifications. Our technical staff provides onsite guidance
through the installation process.
|
Seasonality
We
typically experience stronger sales in the third and fourth quarters of our
fiscal year ending December 31st.
General contractors of CDQ systems, coking plants, and steel mills typically
place their orders with us at the beginning of each fiscal year. We typically
ship these orders and record our revenues in the second half of our fiscal
year.
Employees
As of
November 22, 2010 we had a total of 160 employees, all of who work for us
full-time. We plan to hire an additional 100 employees, who will work for us
full-time, by the end of 2011. We believe that relations with our employees are
satisfactory and retention has been stable. We enter into standard labor
contracts with our employees as required by the PRC government and adhere to
state and provincial employment regulations. We provide our employees with all
social insurance as required by state and provincial laws, including pension,
unemployment, basic medical and workplace injury insurance. These state mandated
programs are sponsored by state and provincial governments. We do not maintain
any material Company-sponsored benefit programs for our executive officers or
other employees. We have no collective bargaining agreements with our
employees.
6
Planned
Expansion: Steel Plate Fusion
In the
second quarter of 2011, we plan to expand our existing operations to offer our
proprietary Steel Plate Fusion services to China steel plate manufacturers of
clad metal plates and extra-thick carbon steel plates.
Clad
metal plates is a general term used to describe metal plates composed of two
dissimilar metals. For example, a clad metal plate may combine stainless and
carbon steel, titanium and steel, aluminum and steel, or nickel and steel. Our
Steel Plate Fusion services will be initially used in the production of clad
steel plates, composed of stainless and carbon steel. However, management
believes that Steel Plate Fusion can be used to manufacture all types of clad
metal plates.
A clad
steel plate is a composite steel plate manufactured by bonding stainless steel
with carbon steel. Currently the most common method of producing clad steel
plates in China is through the use of a technique called explosion welding. Clad
steel plates have the structural strength of carbon steel and the anticorrosive
and heat resistant properties of stainless steel, but are less costly than pure
stainless steel plates because they combine cheaper carbon steel with stainless
steel. In addition, clad steel plates provide similar functionalities
as stainless steel plates and can be used for similar industrial applications.
Clad steel plates have widespread industry applications, especially in areas of
rapid growth in China. Clad steel plates are used in heavy industrial
applications such as in the construction of ships, piping, nuclear reactors,
pressure vessels, heat exchangers, power generation equipment, and coking
equipment, all of which require the anti-corrosive and heat resistant properties
of clad steel plates.
An
extra-thick carbon steel plate is a steel plate over 80 millimeters thick and is
currently manufactured in China through either mold casting or electroslag
remelting. Extra-thick carbon steel plates are also used in heavy industrial
applications such as in the construction of ships, bridges, buildings,
metallurgical equipment, mining equipment, and power generation equipment, all
of which require the strength and endurance of extra-thick carbon steel plates
of certain standards and specifications.
China’s
growing demand for steel is reflected in the China domestic clad steel plate and
extra-thick carbon steel plate market. The market demand for clad steel plates
is estimated to have been 2.4 million tons or $6.1 billion in 2010.
The demand for clad steel plates is expected to grow to 8.5 million tons or $22
billion by 2015. The market demand for extra-thick carbon steel plates, or
carbon steel plates that exceed 80 millimeters in thickness, is estimated
to have been 8.2 million tons or $9 billion in 2010. By 2015, demand
is expected to increase to 26 million tons or $28.7 billion. 5
We
believe Steel Plate Fusion will transform the way clad steel plates and
extra-thick carbon steel plates are made in China as it is a unique and
innovative method of production that will offer significant cost savings and
production efficiencies to China steel plate manufacturers who currently use
conventional methods.
Conventional Production
Methods
Clad
Steel Plates
Conventional
clad steel plate manufacturing occurs through a three step process:
|
|
1.
|
Continuous
casting - Molten steel is solidified into a thick rectangular slab through
a process known as continuous casting, a low-cost and efficient mass
production method of producing high quality carbon and stainless steel
slabs.
|
|
|
2.
|
The
resulting carbon and stainless steel slabs are hot rolled/compressed
through a steel rolling mill which flattens the slabs into rectangular
carbon and stainless steel plates.
|
|
|
3.
|
The
stainless steel plate is then welded to the carbon steel plate through a
technique known as explosion welding. Explosion welding uses force
generated from controlled explosions to weld together two dissimilar metal
plates. It is the most commonly used method of welding together metal
plates in China.
|
The end
product is a clad steel plate which is comprised of a carbon steel plate and an
anti-corrosive layer of a stainless steel plate. Explosion welding can be
extremely dangerous as the use of explosives to weld together metal plates is an
inherently dangerous activity. Additionally, the explosions used to weld the
plates together can often produce unwanted bubbles on the outer surface of the
plate. These bubbles must be manually corrected, requiring significant time and
expense on the part of the steel plate manufacturer.
(5)
Source: Zero Power Intelligence Research “China Thick Steel Plate Industry
Research and Analysis” 2010. (the “Steel Plate
Report”)
7
Extra-Thick
Carbon Steel Plates
Extra-thick
carbon steel plates are conventionally manufactured through either one of two
processes, mold casting or electroslag remelting.
|
|
1.
|
Mold
Casting - Molten steel is poured into a rectangular cast and cooled within
the cast until it solidifies. The resultant thick steel slab is compressed
through a steel rolling mill to produce an extra-thick carbon steel plate.
Mold casting is currently the most commonly used method to produce
extra-thick carbon steel plates in
China.
|
|
|
2.
|
Electroslag
Remelting (ESR) – Molten steel is solidified into a thick rectangular slab
through continuous casting and then remelted in a metal mold. Once the
remelted slab is cooled and solidified within the mold, it is compressed
through a steel rolling mill to produce an extra-thick carbon steel plate.
ESR is used instead of mold casting for certain industry applications that
require higher quality plates because it produces an extra-thick carbon
steel plate with fewer flaws. However, ESR is costlier than mold casting
because the steel is melted twice and the rejection rate for the final
steel plate is higher.
|
Management
believes that Steel Plate Fusion services are a more cost effective and
efficient method to produce extra-thick carbon steel plates. Steel Plate Fusion
uses continuous casting in the production of extra-thick carbon steel plates
while mold casting can not be processed in this fashion. Continuous casting is
generally accepted as the cheapest and most efficient method for producing metal
slabs up to a certain thickness and also produces a higher quality end product.
Steel Plate Fusion does not require the added step of remelting the solidified
metal slab prior to compression in the steel rolling mill as does electroslag
remelting, thereby saving time and expense in the production
process.
Steel Plate
Fusion
Steel
Plate Fusion is our proprietary technology that we believe is the first and only
of its kind in China. We plan to offer Steel Plate Fusion as a value added
service to steel plate manufacturers in China. We believe Steel Plate Fusion
will be in high demand as it will lower production costs and improve
efficiencies in the manufacture of clad and extra-thick carbon steel plates in
China.
Steel
Plate Fusion uses electron-beam welding technology as part of its proprietary
process, which includes the manipulation of pressure and temperature during the
fusion process, to fuse together large metal slabs used in the production of
clad steel plates and extra-thick carbon steel plates. Electron-beam welding is
a fusion welding process that was first developed in 1958 to weld together
component parts used in modern technology such as jet engines, electric motors,
and automobiles. Electron-beam welding employs a high-velocity electron beam in
a vacuum to fuse together desired components. Through research and development,
FusionTech modified traditional electron beam welding technology so it could be
used to fuse together large metal slabs to produce clad steel plates or
extra-thick carbon steel plates. Management believes that Steel Plate Fusion
will be a cheaper, faster, and higher yielding method by which to produce clad
steel plates and extra-thick carbon steel plates in China, as compared to
conventional methods of production.
8
To
manufacture clad steel plates and extra-thick carbon steel plates through Steel
Plate Fusion, coal, limestone and iron ore are first processed by a blast
furnace to produce molten steel. The molten steel is then transformed into
rectangular steel slabs through the continuous casting process. After the slabs
have cooled and solidified, a truck transports the steel slabs to our processing
facilities which are adjacent to the steel plate manufacturing plant. At our
facility our staff mounts the rectangular steel slabs and fuses them together
using Steel Plate Fusion. The fused slab is then transported back to the steel
plate manufacturer where it is heated and compressed through a steel rolling
mill to produce the final clad steel or extra-thick carbon steel
plate.
During
our testing of Steel Plate Fusion we successfully produced clad steel plates and
extra-thick carbon steel plates in the facilities of a large steel manufacturer
in China. Microscopic and x-ray testing of the steel slabs fused together
through Steel Plate Fusion exceeded the stringent testing standards required by
steel plate manufacturers who produce clad steel plates and extra-thick carbon
steel plates. According to our tests, the final clad steel plates and
extra-thick carbon steel plates produced through Steel Plate Fusion are of
higher quality than those produced through explosion welding or mold casting
respectively. The clad steel plates produced through Steel Plate Fusion were
free of air bubbles often present in clad steel plates manufactured through
explosion welding. Additionally, we were able to produce extra-thick carbon
steel plates thicker than 100 millimeters and with an overall lower rejection
rate than plates produced through mold casting or electroslag
remelting.
Steel Plate Fusion
Intellectual Property
We filed
an application for an invention patent covering Steel Plate Fusion in China on
September 13, 2010. If the invention patent is granted, it will be solely owned
by the Company. The
invention patent offers stronger protection for new technological processes than
the more commonly used utility patent. If granted, the invention patent will
prevent competitors from utilizing our patented technology for a period of
twenty years as compared to only ten years for a utility patent. We strongly
believe that the application for the invention patent will be approved as no
other company in China uses technology similar to the technology utilized in our
Steel Plate Fusion process for which we have applied for patent
protection.
9
Although
the application process takes approximately eighteen months to complete, the
filing of an invention patent in China grants the applicant temporary protection
during this time. Should any competitor in China seek to use the technology for
which we have applied for patent protection in their own operations, FusionTech
intends
to protect its rights to the fullest extent permissible under the
law.
The
operation of Steel Plate Fusion requires specific skills and operational
knowledge to prevent defects in production and waste of expensive raw materials.
We will protect our operational knowledge of Steel Plate Fusion as a trade
secret. FusionTech plans to implement confidentiality procedures and contractual
provisions with its employees who work with proprietary
information related to Steel Plate Fusion as
production begins. Steel plate manufacturers who work with
FusionTech will also be required to follow strict confidentiality procedures
with respect to Steel Plate Fusion. We believe these steps will adequately
protect our proprietary knowledge of the operational and technical aspects of
Steel Plate Fusion.
Potential
Customers
We
believe our customer base for Steel Plate Fusion will be medium and large-scale
steel plate manufacturers across China who produce clad steel plates and
extra-thick carbon steel plates. We believe that the cost and efficiency
advantages Steel Plate Fusion has over conventional methods of clad and
extra-thick carbon steel plate production will help drive demand for our
services.
We plan
to market our Steel Plate Fusion technology directly to steel plate
manufacturers across China through our existing sales team for our CleanTech
coke oven products. We believe that our pre-existing relationships with steel
manufacturers formed through the sale of our coking products will provide
avenues for marketing and selling the Steel Plate Fusion value added
service.
In the
second quarter of 2011, we plan to provide Steel Plate Fusion to a large steel
plate manufacturer in northern China, Minmetals Yingkou. Minmetals Yingkou is an
established steel plate manufacturer in China with over 30 years of experience
in producing steel plates. It is a subsidiary of the reputable China Minmetals
Corporation, a Fortune Global 500 Company based in China focusing on the
development and production of metals and minerals.
FusionTech
is currently constructing a Steel Plate Fusion processing facility adjacent to
Minmetals Yingkou’s steel plate production facilities. Minmetals Yingkou will
produce carbon and stainless steel slabs using its own continuous casting
system, and the slabs will then be sent to the adjacent FusionTech processing
facility to be fused together using Steel Plate Fusion. These fused metal slabs
will then be sent back to the Minmetals Yingkou steel plate production
facilities where they will be compressed in Minmetals Yingkou’s rolling
machinery to produce finished clad steel plates and extra-thick carbon steel
plates. The Company plans to hire an additional 70 employees to work in the
Steel Plate Fusion processing facility in Yingkou.
Minmetals
Yingkou will be responsible for selling the steel plates to their customers.
Minmetals Yingkou, an established and reputable steel plate manufacturer in
China, plans to use its existing wide distribution network and customer
relationships to sell and market the clad and
extra-thick steel plates manufactured using Steel Plate Fusion. Our
agreement with Minmetals Yingkou provides for the production of 200,000 tons of
steel plates per year, adjustable based on market demand up to a goal of 500,000
tons per year. We will receive a processing fee based on the size, type and
market demand of each ton of fused metal slabs produced. We believe
that Steel Plate Fusion will begin generating revenues by the third quarter of
2011.
FusionTech
plans to use a similar business model with other medium and large-scale steel
plate manufacturers across China. We believe this model of expansion, where we
build processing factories adjacent to major China steel plate manufacturers and
charge a value added fee, will provide us with a first mover advantage
and discourage potential competitors from entering our newly created
market.
Steel Plate Fusion Business
Strategy
We
believe that we are the only company in China to offer Steel Plate Fusion as a
method of producing clad steel plates and extra-thick carbon steel plates. We
believe that the production efficiencies and cost savings offered by Steel Plate
Fusion will enable us to successfully compete in a market dominated by less
efficient and more costly production methods. We plan to remain competitive by
vigorously protecting our intellectual property and heavily marketing our Steel
Plate Fusion technology as the low-cost, higher efficiency alternative to
conventional production methods for clad steel plates and extra-thick carbon
steel plates.
|
|
·
|
First mover advantage
–We believe our Steel Plate Fusion services will be successful because
FusionTech is the only company to offer this low cost and high efficiency
method of producing clad steel plates and extra-thick carbon steel plates
in China, the market demand for which are expected to grow in the next
five years by 262% and 217% respectively, according to the Steel Plate
Report.
|
10
|
|
·
|
Established barriers to
entry – The high research and development costs necessary to
develop Steel Plate Fusion technology discourages competitors from
entering our newly created market. FusionTech has also applied for an
invention patent for Steel Plate Fusion which, if granted, will provide
legal protection for our proprietary technology for twenty
years. We believe that the invention patent will be approved.
Additionally, we believe our model of expansion will strengthen our
presence throughout different areas of China. The construction of
processing facilities adjacent to steel plate manufacturers will also
create strong barriers to entry and discourage potential
competitors.
|
|
|
·
|
Significant costs savings and
higher efficiencies over existing technologies – Based on our
testing of Steel Plate Fusion, management estimates that Steel Plate
Fusion technology will save steel plate manufacturers considerable costs,
time, resources, and help to expand production output of both clad steel
plates and extra-thick carbon steel
plates.
|
|
|
·
|
Asset-light, value added
service business model - As management
plans to pursue a strategy where clients pay FusionTech for its Steel
Plate Fusion services rather than for final steel plates produced,
FusionTech will not invest in expensive continuous casting and steel
rolling equipment in order to earn revenues from Steel Plate Fusion. We
believe this is a superior business model as compared to producing clad
steel plates and extra-thick carbon steel plates which require high
capital expenditures for steel slab production and their subsequent
compression through hot rolling. We also plan to leverage the existing
distribution network and customer base of Minmetals Yingkou for steel
plates to expand steel plate production using our Steel Plate Fusion
technology.
|
Research
and Development
We spent
$88,604 on research and development in 2008 and $140,700 in 2009. For
the nine months ended September 30, 2010, we spent $162,185. We estimate that
we spent an additional $58,660 on research and development in the fourth
quarter of 2010. We continue to evaluate opportunities to develop new products
and will increase or decrease expenditures for research and development
accordingly.
Governmental
and Environmental Regulation
Environmental
Matters
We are
subject to the National Environmental Protection Law of the PRC as well as local
laws regarding pollutant discharge, air, water and noise pollution, with which
we comply. Neither
the manufacturing of our coke oven products nor the fusion of steel plates using
our Steel Plate Fusion technology generates any material air emission, waste
water discharge, solid waste or noise pollution. As such, we do not
currently incur any material costs in order to comply with applicable
environmental laws.
We are
not subject to any other government regulations that would require us to obtain
a special license or approval from the PRC government to operate our coke oven
products business or Steel Plate Fusion services.
M&A
Rules
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or
MOFCOM, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, which became effective on September 8, 2006, and was amended
by MOFCOM on June 22, 2009 (the “M&A Rules”). According to Rule 52 of the
M&A Rules and Guidance Manual on Administration of Entry of Foreign
Investment, as amended, issued by the Department of Foreign Investment
Administration of the Ministry of Commerce in December 2008, conversion from a
joint venture enterprise to a wholly owned foreign entity by way of equity
transfer from a Chinese party to a foreign shareholder or investor, shall not be
subject to the M&A Rules.
The
M&A Rules require offshore companies formed for overseas listing purposes
through acquisitions of PRC domestic companies and controlled by PRC Operating
Companies or individuals to obtain the approval of the CSRC prior to the public
listing of their securities on an overseas stock exchange. On September 21,
2006, pursuant to the M&A Rules and other PRC Laws, the CSRC published on
its official website relevant guidance with respect to the listing and trading
of PRC domestic enterprises’ securities on overseas stock exchanges (“Related
Clarifications”), including a list of application materials regarding the
listing on overseas stock exchanges by special purpose vehicles. However, the
CSRC currently has not issued any definitive rule concerning whether the
transactions effected by the overseas listing would be subject to the M&A
Rules and Related Clarifications. Article 238 of the PRC Securities Law also
provides that any domestic enterprise that directly or indirectly issues any
securities abroad or lists its securities abroad for trading shall be subject to
the approval of the securities regulatory authority under the State Council
according to the relevant provisions of the State Council.
11
The
M&A Rules do not have express provisions in terms of penalties for failure
to obtain CSRC approval prior to the public listing of our securities. However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of the above rules, and CSRC has yet to promulgate any written
provisions or formally to declare or state whether the overseas listing of a
PRC-related company similar to ours is subject to the approval of CSRC. Any
violation of these rules could result in fines and other penalties on our
operations in China, restrictions or limitations on remitting dividends outside
of China, and other forms of sanctions that may cause a material and adverse
effect to our business, operations and financial conditions.
Notwithstanding
the foregoing, we have been advised by our PRC counsel that the M&A Rules
did not apply to our share exchange transaction. The share exchange did not
require CSRC approval because we were not a special purpose vehicle formed or
controlled by PRC Operating Companies or PRC individuals and because our foreign
ownership of Dalian is qualified as a foreign joint venture, it is not subject
to the M&A Rules.
Foreign
Investment in PRC Operating Companies
The
Foreign Investment Industrial Catalogue jointly issued by MOFCOM and the
National Development and Reform Commission (“NDRC”) in 2007 classified various
industries/business into three different categories: (i) encouraged for foreign
investment; (ii) restricted to foreign investment; and (iii) prohibited from
foreign investment. For any industry/business not covered by any of these three
categories, they will be deemed industries/business permitted to have foreign
investment. Except for those expressly provided restrictions, encouraged and
permitted industries/business are usually 100% open to foreign investment and
ownership. With regard to those industries/business restricted to or prohibited
from foreign investment, there is always a limitation on foreign investment and
ownership. The reason that our business is not subject to limitation on foreign
investment and ownership is as follows:
(i) Our business, including the
proposed steel plate fusion services, falls under the class which is
encouraged for foreigninvestment and open to 100%
foreign investment and ownership; and
(ii) our
business does not fall under the industry categories that are restricted to, or
prohibited from foreign investment.
Properties
Our
principal executive offices and our designing and manufacturing facilities for
our CleanTech coke oven products and core coke oven products are located in
Liaoning Province, China. We lease four buildings in and around Dalian including
our office headquarters and three separate manufacturing
facilities. We believe these three manufacturing facilities are
adequate for our current coke oven products business as they have an estimated
annual production capacity of 150 units.
Our
office headquarters is located at No. 26 Gaoneng Street, High Tech Zone, Dalian,
Liaoning Province, China, and is approximately 1,600 square meters. Our lease
for this premise commenced on February 1, 2010 and will expire on February 1,
2011. We will pay a total of approximately $39,706 during the one year lease
term. We plan to renew this lease prior to its
expiration.
Our first
manufacturing facility is located in the city of Wafangdian, approximately 75
miles from Dalian, and is approximately 2,500 square meters. Our lease for this
premise commenced on November 1, 2008 and will expire October 31, 2013. The
leased premise includes a bridge crane and crane arm we use in our manufacturing
operations, and the surrounding 13 acres of land. We pay approximately $67,650
yearly for this facility.
Our
second manufacturing facility is located in the city of Wafangdian and is
approximately 2,000 square meters. Our lease on this premise commenced on
January 1, 2010 and will expire January 1, 2013. The leased premise
includes a bridge crane we use in our manufacturing operations. We
pay approximately $53,000 yearly for this facility.
Our third
manufacturing facility is located near the city of Dalian and is approximately
3,600 square meters. Our lease on this premise commenced
on August 10, 2010 and will expire August 10, 2012. The leased premise includes
a 64 square meter office and two bridge cranes we use in our manufacturing
operations. We pay approximately $88,235 yearly for this facility.
We are in
the process of obtaining the land-use rights from the PRC government for 100
acres of land in Liaoning Province, where we have begun construction of a
processing facility for Steel Plate Fusion. Based on our communications with the
Management Committee of Laobian Industrial Park, the local authority charged
with administering the land, we expect to receive the land-use rights by
February 2011. The foundation for the Steel Plate Fusion facility has been
completed, and we expect construction to be completed and the facility to be
fully functional in time to commence our Steel Plate Fusion operation in the
second quarter of 2011. The facility is expected to be approximately
40,000 square meters with an
estimated annual production capacity of 200,000 tons of fused metal slabs,
expandable with the purchase of additional equipment up to 800,000
tons.
We are in
the process of obtaining the land-use rights from the PRC government for 132
acres of land located in Liaoning Province, China. We are planning to build
manufacturing facilities for our coke oven products business on this land;
although no specific arrangements or plans have been made to
date. Based on our communications with the Zhuanghe Port Industrial
Zone Management Committee, the local authority charged with administering the
land, we expect to receive the land-use rights by February
2011.
12
Legal
Proceedings
FusionTech
may occasionally become involved in various lawsuits and legal proceedings
arising in the ordinary course of business. Litigation is subject to inherent
uncertainties and an adverse result in these or other matters that may arise
from time to time may have an adverse affect on our business, financial
conditions or operating results. FusionTech is currently not aware of any such
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse affect on our business, financial condition or operating
results.
Risk
Factors
Risks
Related to Our Business
Our
plans for growth rely on a new business that we have not yet commenced. This
line of business will be critical to our success in the future, and if it is
unsuccessful our potential for growth may be adversely affected.
Steel
Plate Fusion is a new service offered by the Company that will commence
operations in the second quarter of 2011. While we have already signed an
agreement with a large steel plate manufacturer in China to provide these
services, we have not yet commenced mass production at any
facility. We cannot assure you that large scale production will be
profitable or that the production techniques we use will be suitable for mass
production. Moreover, while during the testing of Steel Plate Fusion we
successfully produced clad and extra-thick carbon steel plates and the final
produced steel plates met or exceeded the quality standards required by our
customer, we cannot assure you that we will be able to maintain such standards
when we commence mass production. Therefore we cannot assure you that Steel
Plate Fusion will be a profitable line of business and will ultimately succeed
as currently planned. Any significant setback in our plans for Steel Plate
Fusion may adversely affect our future profitability and potential for
growth.
We
may need additional capital to execute our business plan and fund operations and
may not be able to obtain such capital on acceptable terms or at
all.
In
connection with the planned expansion of our business to offer Steel Plate
Fusion services we will likely require additional capital to fund our operations
of approximately $9 million in 2011. Management anticipates that our existing
capital resources and cash flows from operations and current short-term bank
loans will be adequate to satisfy our liquidity requirements for our current
business for the next 12 months. However, if available liquidity is not
sufficient to meet our plans for expansion, current operating expenses and loan
obligations as they come due, our plans include pursuing alternative financing
arrangements. Our ability to obtain additional capital on acceptable terms or at
all is subject to a variety of uncertainties, including:
|
|
§
|
investors’ perceptions of, and
demand for, companies in our
industry;
|
|
|
§
|
investors’ perceptions of, and
demand for, companies operating in
China;
|
|
|
§
|
conditions of the United States
and other capital markets in which we may seek to raise
funds;
|
|
|
§
|
our future results of operations,
financial condition and cash
flows;
|
|
|
§
|
governmental regulation of
foreign investment in companies in particular
countries;
|
|
|
§
|
economic, political and other
conditions in the United States, China, and other countries;
and
|
|
|
§
|
governmental policies relating to
foreign currency borrowings.
|
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There is no
assurance we will be successful in locating a suitable financing transaction in
a timely fashion or at all. In addition, there is no assurance we will obtain
the capital we require by any other means. Future financings through equity
investments are likely to be dilutive to our existing shareholders. Also, the
terms of securities we may issue in future capital transactions may be more
favorable for our new investors. Newly issued securities may include preferences
or superior voting rights, be combined with the issuance of warrants or other
derivative securities, or be the issuances of incentive awards under equity
employee incentive plans, which may have additional dilutive effects.
Furthermore, we may incur substantial costs in pursuing future capital and
financing, including investment banking fees, legal fees, accounting fees,
printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we may issue,
such as convertible notes and warrants, which will adversely impact our
financial condition.
13
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital we are able
to raise from financing activities, together with our revenues from operations,
is not sufficient to satisfy our capital needs, even to the extent that we
reduce our operations accordingly, we may be required to cease
operations.
We
are a major purchaser of certain raw materials that we use in the manufacturing
process of our clean coking and related products, and price changes for the
commodities we depend on may adversely affect our profitability.
The
Company’s largest raw materials purchases consist of stainless steel and carbon
steel. As such, fluctuations in the price of steel in the China domestic market
will have an impact on the Company’s operating costs and related profits.
International steel prices were lower in 2009 than in 2008, but prices have
increased in 2010 along with the general economic recovery. The iron ore import
price in China has also increased since 2009, which will impact the price and
volume of steel produced by the China domestic steel industry.
Our
profitability depends in part upon the margin between the cost to us of certain
raw materials, such as stainless steel and carbon steel, used in the
manufacturing process, as well as our fabrication costs associated with
converting such raw materials into assembled products, compared to the selling
price of our products, and the overall supply of raw materials. It is our
intention to base the selling prices of our products in part upon the associated
raw materials costs to us. However, we may not be able to pass all increases in
raw material costs and ancillary acquisition costs associated with taking
possession of the raw materials through to our customers. Although we are
currently able to obtain adequate supplies of raw materials, it is impossible to
predict future availability or pricing. The inability to offset price increases
of raw materials by sufficient product price increases, and our inability to
obtain raw materials, would have a material adverse effect on our consolidated
financial condition, results of operations and cash flows.
The
Company does not engage in hedging transactions to protect against raw material
fluctuations, but attempts to mitigate the short-term risks of price swings by
purchasing raw materials in advance.
We
derive a substantial part of our revenues from a few major customers. If we lose
any of these customers or they reduce the amount of business they do with us,
our revenues may be seriously affected.
Our three
largest customers accounted for approximately 68% of total sales for the fiscal
year ended December 31, 2009, and our largest customer accounted for
approximately 32% of total sales in the fiscal year ended December 31, 2009. Our
three largest customers accounted for approximately 88% of total sales for the
nine months ended September 30, 2010, and our largest customer accounted for
approximately 38% of total sales for the nine months ended September 30, 2010.
These customers may not maintain the same volume of business with us in the
future. If we lose any of these customers or they reduce the amount of business
they do with us, our revenues and profitability may be seriously affected. We do
not foresee our relying on these same customers for revenue generation as we
introduce new product lines, new generations of existing product lines, and
expand our business to include Steel Plate Fusion services. We cannot be
assured, however, that we will be able to successfully introduce new products or
services.
In
addition, we currently only have one prospective customer, Mimnetals Yingkou,
for our Steel Plate Fusion services. Our success in developing the Steel Plate
Fusion business depends, in part, upon our delivery of products to our customer
that meets their specifications in a timely, cost-effective manner. If we are
unable to deliver products in this manner this customer could terminate our
relationship, which would adversely affect our plans for growth. We cannot
assure you that we will be able to diversify our services by entering into
relationships with steel plate manufacturers in the future.
We
may lose customers for our traditional coke oven products due to consolidation
of the steel industry in China.
We
currently sell our traditional coke oven products to a number of medium size
steel mills and coking plants in China. If these medium size steel mills and
coking plants are forced to close or consolidate with larger operations, we may
lose them as our customers. While we believe that consolidation of the steel
industry in China will increase the demand for our clean coking products as
larger steel mills and coking plants with greater capital resources are formed,
there are no guarantees that we will be able to successfully retain these larger
steel mills and coking plants as our customers.
The
steel industry is cyclical in nature and is subject to the fluctuations of the
global economy, a downturn in which could adversely affect our revenues and the
profitability of our planned expansion into Steel Plate Fusion.
Our clean
coking and related products are used by large and medium size steel mills and
coking plants in China whose businesses are dependent on the strength of the
global steel industry. Any drop in the demand for steel due to global economic
factors may cause these steel mills and coking plants to reduce their level of
capital expenditures which in turn could adversely affect our revenues from our
coke oven products. Such an occurrence may also negatively affect the
profitability of our planned expansion into Steel Plate Fusion.
14
If
we are not able to manage our growth, we may not be profitable.
Our
continued success will depend on our ability to expand and manage our operations
and facilities. There can be no assurance we will be able to manage our growth,
meet the staffing requirements for our current or planned business or
successfully assimilate and train new employees. In addition, to manage our
growth effectively, we may be required to expand our management base and enhance
our operating and financial systems. If we continue to grow, there can be no
assurance the management skills and systems currently in place will be adequate.
Moreover, there can be no assurance we will be able to manage any additional
growth effectively. Failure to achieve any of these goals could have a material
adverse effect on our business, financial condition or results of
operations.
Our
accounts receivables remain outstanding for a significant period of time, which
has a negative impact on our cash flow and liquidity.
Our
agreements with our customers related to our clean coking and related products
generally provide that approximately 30% of the purchase price is due upon the
placement of an order, 30% when the manufacturing process is substantially
complete and 30% upon customer acceptance of the product. As a common practice
in the manufacturing business in China, payment of the final 10% of the purchase
price is due no later than the termination date of our warranty period, which
is typically a negotiated term of up to 12 to 18 months from the
acceptance date. Sales revenue, including the final 10% of the purchase price,
is recognized after delivery is complete, customer acceptance of the product
occurs and collectability is reasonably assured. Payments
received before satisfaction of all relevant criteria for revenue recognition
are recorded as unearned revenue.
We
may experience material disruptions to our operations.
We depend
upon three facilities to operate our business. While we seek to operate our
facilities in compliance with applicable rules and regulations and take measures
to minimize the risks of disruption at our facilities, a material disruption at
one of our facilities could prevent us from meeting customer demand, reduce our
sales and/or negatively impact our financial results. Any of our facilities, or
any of our machines within an otherwise operational facility, could cease
operations unexpectedly due to a number of events, including: prolonged power
failures; equipment failures; disruptions in the transportation infrastructure
including roads, bridges, railroad tracks; and fires, floods, earthquakes, acts
of war, or other catastrophes.
We
cannot be certain our innovations and marketing successes will
continue.
We
believe our past performance has been based on, and our future success will
depend, in part, upon our ability to continue to improve our existing products
through product innovation and to develop, market and produce new products and
services. We cannot assure you that we will be successful in introducing,
marketing and producing any new products or services, or that we will develop
and introduce in a timely manner innovations to our existing products which
satisfy customer needs or achieve market acceptance. Our failure to develop new
products or services and introduce them successfully and in a timely manner
could harm our ability to grow our business and could have a material adverse
effect on our business, results of operations and financial
condition.
The
technology used in our products and services may not satisfy the changing needs
of our customers.
While we
believe we have hired or engaged personnel who have the experience and ability
necessary to keep pace with advances in technology, and while we continue to
seek out and develop “next generation” technology through our research and
development efforts, there is no guarantee we will be able to keep pace with
technological developments and market demands in our target industries and
markets. Although certain technologies in the industries we occupy are well
established, we believe our future success depends in part on our ability to
enhance our existing products and develop new products and services in order to
continue to meet customer demands. With any technology, including the technology
of our current and proposed products and services, there are risks that the
technology may not address successfully all of our customers’ needs. Moreover,
our customers’ needs may change or vary. This may affect the ability of our
present or proposed products and services to address all of our customers’
ultimate technology needs in an economically feasible manner, which could have a
material adverse affect on our business.
15
We
may not be able to keep pace with competition in our industry.
Our clean coking and related products
business is subject to risks associated with competition from new or existing
industry participants who may have more resources and better access to capital.
The manufacturing industry for coking products in China is highly fragmented
with many different manufacturers holding small shares of the total market. Our
primary international competitors for our CDQ transport cars are Nippon Steel
Corporation and Schalke GmbH. Many of our competitors and potential
competitors may have substantially greater financial and government support,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we do. Among other things, these industry participants compete
with us based upon price, quality, location and available capacity. We cannot be
sure we will have the resources or expertise to compete successfully in the
future. Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs to increase market share. We cannot
be sure we will be able to match cost reductions by our competitors or that we
will be able to succeed in the face of current or future
competition.
We will
face different market dynamics and competition as we develop new products and
services to expand our target markets. In some markets, our future competitors
would have greater brand recognition and broader distribution than we currently
enjoy. We may not be as successful as our competitors in generating revenues in
those markets due to lower recognition of our brand, lower customer acceptance,
lower product quality history and other factors. As a result, any new expansion
efforts could be more costly and less profitable than our efforts in our
existing markets.
If we are
not as successful as our competitors in our target markets, our sales could
decline, our margins could be impacted negatively and we could lose market
share, any of which could materially harm our business.
Our
coking products may contain defects, which could adversely affect our reputation
and cause us to incur significant costs.
Despite
testing by us, defects may be found in existing or new products. Any such
defects could cause us to incur significant return and exchange costs,
re-engineering costs, divert the attention of our engineering personnel from
product development efforts, and cause significant customer relations and
business reputation problems. Any such defects could force us to undertake a
product recall program, which could cause us to incur significant expenses and
could harm our reputation and that of our products. If we deliver defective
products, our credibility and the market acceptance and sales of our products
could be harmed.
The
nature of our products creates the possibility of significant product liability
and warranty claims, which could harm our business.
Material
failure of any of our clean coking or related products would have a material
adverse affect on our business. Customers use some of our products in
potentially hazardous applications that can cause injury or loss of life and
damage to property, equipment or the environment. In addition, some of our
products are integral to the production process for some end-users and any
failure of our products could result in a suspension of their operations.
Although we have a quality control group consisting of 10 employees specifically
charged with inspecting our products prior to delivery, we cannot be certain our
products will be completely free from defects. Moreover, we do not have any
product liability insurance and may not have adequate resources to satisfy a
judgment in the event of a successful claim against us. While we have not yet
experienced any product liability claims against us, we cannot predict whether
product liability claims will be brought against us in the future or the impact
of any resulting negative publicity on our business. The successful assertion of
product liability claims against us could result in potentially significant
monetary damages and require us to make significant payments.
Our
Steel Plate Fusion technology and the steel plates it is used to produce may
contain defects, which could adversely affect our planned business
expansion.
While the
tests we have conducted on our Steel Plate Fusion technology have revealed no
defects in the technology or in the steel plates produced, we have not used
Steel Plate Fusion to produce a large quantity of steel plates, and will not do
so until the second quarter of 2011. We cannot be certain that when the
technology is used to produce a large quantity of steel plates that the final
produced steel plates will be free of defects. Any such defects could adversely
affect our planned business expansion.
We
may not be able to protect our technology and other proprietary rights
adequately.
Our
success will depend in part on our ability to obtain and protect our products,
methods, processes and other technologies, to preserve our trade secrets, and to
operate without infringing on the proprietary rights of third parties, both
domestically and abroad. Despite our efforts, any of the following may reduce
the value of our owned and used intellectual property:
|
|
§
|
issued patents and trademarks
that we own or have the right to use may not provide us with any
competitive advantages;
|
|
|
§
|
our efforts to protect our
intellectual property rights may not be effective in preventing
misappropriation of our technology or that of those from whom we license
our rights to use;
|
|
|
§
|
our
efforts may not prevent the development and design by others of products
or technologies similar to or competitive with, or superior to those we
use or develop; or
|
16
|
|
§
|
another party may obtain a
blocking patent and we or our licensors would need to either obtain a
license or design around the patent in order to continue to offer the
contested feature or service in our
products.
|
Effective
protection of intellectual property rights may be unavailable or limited in
certain foreign countries. If we are unable to protect our proprietary rights
adequately, it would have a negative impact on our operations.
We
may be subject to claims that we have infringed the proprietary rights of
others, which could require us to obtain a license or change
designs.
Although
we do not believe any of our products or services infringe upon the proprietary
rights of others, there is no assurance that infringement or invalidity claims
(or claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against us or that any such assertions or prosecutions
will not have a material adverse affect on our business. Regardless of whether
any such claims are valid or can be asserted successfully, defending against
such claims could cause us to incur significant costs and could divert resources
away from our other activities. In addition, assertion of infringement claims
could result in injunctions that prevent us from distributing our products. If
any claims or actions are asserted against us, we may seek to obtain a license
to the intellectual property rights that are in dispute. Such a license may not
be available on reasonable terms, or at all, which could force us to change our
designs.
Our
application for an invention patent covering Steel Plate Fusion may not be
granted, which could adversely impact our planned business
expansion.
There can
be no absolute assurances that the PRC State Intellectual Property Officer, or
SIPO, will grant our patent. If we do not obtain a patent covering Steel Plate
Fusion we will have to rely on protecting our Steel Plate Fusion technology from
potential competitors as a trade secret, which may require greater resources and
may not be as effective in protecting the technology from use by potential
competitors.
Our
business could be subject to environmental liabilities.
We are
subject to the National Environmental Protection Law of the PRC as well as local
laws regarding, pollutant discharge, air, water and noise pollution. Neither the
manufacturing of our coke oven products nor the fusion of steel plates using our
Steel Plate Fusion technology generates any material air emission, waste water
discharge, solid waste or noise pollution at this time. As such, we
do not currently incur any material costs in order to comply with applicable
environmental laws. However, the risk of environmental liability and
charges associated with maintaining compliance with PRC environmental laws is
inherent in the nature of our business, and there is no assurance that material
environmental liabilities and compliance charges will not arise in the
future.
If
we lose our key personnel, or are unable to attract and retain additional
qualified personnel, the quality of our services may decline and our business
may be adversely impacted.
We rely
heavily on the expertise, experience and continued services of our senior
management, including our Chief Executive Officer, Mr. Lixin Wang. Loss of his
services could adversely impact our ability to achieve our business
objectives. Mr. Wang is a key factor in our success because of his
extensive industry experience and reputation. The continued development and
planned expansion of our business depends upon the continued employment of Mr.
Wang. We do not currently have an employment agreement with Mr. Wang, and his
standard labor contract does not include provisions for non-competition or
confidentiality.
We
believe our future success will depend upon our ability to retain key employees
and our ability to attract and retain other skilled personnel. The rapid growth
of the economy in China has caused intense competition for qualified personnel.
We cannot guarantee that any employee will remain employed by us for any
definite period of time or that we will be able to attract, train or retain
qualified personnel in the future. Such loss of personnel could have a material
adverse effect on our business and company. Moreover, qualified employees
periodically are in great demand and may be unavailable in the time frame
required to satisfy our customers’ requirements. We need to employ additional
personnel, including employees to work on manufacturing our coking products, and
employees to operate our Steel Plate Fusion services, in order to expand our
business. There is no assurance we will be able to attract and retain sufficient
numbers of highly skilled employees in the future. The loss of personnel or our
inability to hire or retain sufficient personnel at competitive rates could
impair the growth of our business.
17
We
will incur significant costs as a result of our operating as a public company
and our management will be required to devote substantial time to new compliance
initiatives.
While we
are a public company, our compliance costs prior to the Share Exchange in
November 2010 were not substantial in light of our limited operations. Dalian
never operated as a public company prior to the Share Exchange. As a public
company with substantial operations, we will incur increased legal, accounting
and other expenses. The costs of preparing and filing annual and quarterly
reports, proxy statements and other information with the SEC and furnishing
audited reports to shareholders is time-consuming and costly.
It will
also be time-consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”). Members of our management, including our
Chief Financial Officer, have no experience operating a company whose securities
are listed on a national securities exchange in the United States or with the
rules and reporting practices required by the federal securities laws and
applicable to a publicly traded company. We will need to recruit, hire, train
and retain additional financial reporting, internal control and other personnel
in order to develop and implement appropriate internal controls and reporting
procedures. If we are unable to comply with the internal controls requirements
of the Sarbanes-Oxley Act, we may not be able to provide certifications required
by the Sarbanes-Oxley Act.
If
we fail to establish and maintain an effective system of internal controls, we
may not be able to report our financial results accurately or prevent fraud. Any
inability to report and file our financial results accurately and timely could
harm our business and adversely impact the trading price of our common
stock.
We are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act and the rules promulgated by the SEC. Our management, including our Chief
Executive Officer and Chief Financial Officer, cannot guarantee that our
internal controls and disclosure controls will prevent all possible errors or
prevent all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all control
systems, no system of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Furthermore, controls can be circumvented by individual acts
of some persons, by collusion of two or more persons, or by management override
of the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, a control may become inadequate because
of changes in conditions or the degree of compliance with policies or procedures
may deteriorate. Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.
Our
accounting personnel who are primarily responsible for the preparation and
supervision of the preparation of our financial statements under generally
accepted accounting principles in the United States (“U.S. GAAP”) have limited
relevant education and training in U.S. GAAP and SEC rules and regulations
pertaining to financial reporting which could impact our ability to prepare our
financial statements and convert our books and records to U.S.
GAAP.
Our operations are in China and we have historically maintained our books and records in accordance with generally accepted accounting principles in the PRC (“PRC GAAP”). Prior to the Share Exchange, we were not required to comply with U.S. GAAP. Our accounting personnel in the PRC who have the primary responsibilities of preparing and supervising the preparation of financial statements under U.S. GAAP have limited relevant education and training in U.S. GAAP and related SEC rules and regulations. As such, they may be unable to identify potential accounting and disclosure issues that may arise upon the conversion of our books and records from PRC GAAP to U.S. GAAP which could affect our ability to prepare our financial statements in accordance with U.S. GAAP. We have taken steps to ensure that our financial statements are in accordance with U.S. GAAP, including our hiring of a U.S. accounting firm with personnel trained and educated in U.S. GAAP and related SEC rules and regulations to work with our PRC accounting personnel and management to convert our books and records to U.S. GAAP and prepare our financial statements. In addition, our annual financial statements are audited by an independent auditor for compliance with U.S. GAAP and to ensure that all necessary and appropriate adjustments from PRC GAAP to U.S. GAAP have been made and our quarterly financial statements are reviewed by our auditors. However, the measures we have taken may not be sufficient to fully mitigate the foregoing risks associated with the limited education and training of our accounting personnel in U.S. GAAP and related SEC rules and regulations.
Capital
outflow policies in China may hamper our ability to declare and pay dividends to
our shareholders.
China has
currency and capital transfer regulations, which may require us to comply with
complex regulations for the movement of capital. Although our management
believes we will be in compliance with these regulations, should these
regulations or the interpretation of them by courts or regulatory agencies
change, we may not be able to pay dividends to our shareholders outside of
China. In addition, under current PRC law, we must retain a reserve equal to 10%
of net income after taxes, not to exceed 50% of registered capital. Accordingly,
this reserve will not be available to be distributed as dividends to our
shareholders. We presently do not intend to pay dividends in the foreseeable
future. Our management intends to follow a policy of retaining all of our
earnings to finance the development and execution of our strategy and the
expansion of our business.
We
are a holding company that depends on cash flow from our wholly owned subsidiary
to meet our obligations.
After the
Share Exchange, we became a holding company with no material assets other than
the stock of our wholly owned subsidiary, Dalian. Accordingly, Dalian will
conduct all of our operations, which are responsible for research, production
and delivery of goods. We currently expect that we will primarily retain the
earnings and cash flow of our subsidiary for use by us in our
operations.
All
of Dalian’s liabilities survived the Share Exchange and there may be undisclosed
liabilities that could have a negative impact on our financial
condition.
Before
the Share Exchange, certain due diligence activities on the Company and Dalian
were performed by the Company, its auditors, and its attorneys. The due
diligence process may not have revealed all liabilities (actual or contingent)
of the Company and Dalian that existed or which may arise in the future relating
to the Company’s activities before the consummation of the Share Exchange.
Notwithstanding that all of the Company’s pre-closing liabilities were
transferred to the seller pursuant to the terms of the Share Exchange Agreement,
it is possible that claims for such liabilities may still be made against us,
which we will be required to defend or otherwise resolve. The transfer pursuant
to the Share Exchange Agreement may not be sufficient to protect us from claims
and liabilities, and any breaches of related representations and warranties. Any
liabilities remaining from the Company’s pre-closing activities could harm our
financial condition and results of operations.
18
New
accounting standards could result in changes to our methods of quantifying and
recording accounting transactions, and could affect our financial results and
financial position.
Changes
to the U.S. Generally Accepted Accounting Principles arise from new and revised
standards, interpretations, and other guidance issued by the Financial
Accounting Standards Board, the SEC, and others. In addition, these or other
U.S. entities may issue new or revised Cost Accounting Standards or Cost
Principles. The effects of such changes may include prescribing an accounting
method where none had been previously specified, prescribing a single acceptable
method of accounting from among several acceptable methods that currently exist,
or revoking the acceptability of a current method and replacing it with an
entirely different method, among others. Such changes could result in
unanticipated effects on our results of operations, financial position, and
other financial measures.
We
may not be able to attract the attention of major brokerage firms because we
became public by means of a share exchange.
There may
be risks associated with our becoming public through the Share Exchange
Agreement. Analysts of major brokerage firms may not provide coverage for our
company because there is no incentive for brokerage firms to recommend the
purchase of our common stock. Furthermore, we can give no assurance that
brokerage firms will, in the future, want to conduct any secondary offerings on
our behalf.
Risks
Related to Our Business being Conducted in China
We
face risks associated with managing domestic operations.
All of
our operations are conducted in China. There are a number of risks inherent in
doing business in such market, including the following:
|
|
§
|
unfavorable political or
economical factors;
|
|
|
§
|
fluctuations in foreign currency
exchange rates;
|
|
|
§
|
potentially adverse tax
consequences;
|
|
|
§
|
unexpected legal or regulatory
changes;
|
|
|
§
|
lack of sufficient protection for
intellectual property
rights;
|
|
|
§
|
difficulties in recruiting and
retaining personnel, and managing international operations;
and
|
|
|
§
|
less developed
infrastructure.
|
Our
inability to manage successfully the risks in our China domestic activities
could adversely affect our business. We can provide no assurances that any new
market expansion will be successful because of the risks associated with
conducting such operations, including the risks listed above.
China’s
economic policies could affect our business.
All of
our assets are located in China and all of our revenue is derived from our
operations in China. Accordingly, our results of operations and prospects are
subject, to a significant extent, to the economic, political and legal
developments in China. While China’s economy has experienced significant growth
in the past twenty years, such growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of China, but they may also
have a negative effect on us. For example, operating results and financial
condition may be adversely affected by the government control over capital
investments or changes in tax regulations. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. In
recent years, the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform and the reduction of state
ownership of productive assets, and the establishment of corporate governance in
business enterprises; however, a substantial portion of productive assets in
China are still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, the control of payment of
foreign currency-denominated obligations, the setting of monetary policy and the
provision of preferential treatment to particular industries or
companies.
19
We
may have difficulty establishing adequate management, legal and financial
controls in China.
Historically,
China has not adopted a Western style of management or financial reporting
concepts and practices, nor modern banking, computer and other control systems.
For example, we have not traditionally operated through a Board of Directors or
similar framework. We may have difficulty in hiring and retaining a sufficient
number of qualified employees to work in China. As a result of these factors, we
may experience difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards.
Because
we do not have a functioning audit committee or compensation committee,
stockholders will have to rely on our Board of Directors, whose two members are
not independent, to perform these functions.
We do not
have an audit or compensation committee comprised of independent directors.
These functions are performed by the Board of Directors as a whole. The members
of our Board of Directors are not independent. Thus, there is a potential
conflict in that the board members are also engaged in the business of the
Company and participate in decisions concerning management compensation and
audit issues that may affect management performance.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various national banks located in China. Our cash
accounts are not insured or otherwise protected. Should any bank holding our
cash deposits become insolvent, or if we are otherwise unable to withdraw funds,
we would lose the cash on deposit with that particular bank.
We
do not carry business insurance coverage and may incur losses due to business
interruptions resulting from natural and man-made disasters.
The
insurance industry in China is still in an early stage of development and
insurance companies located in China offer limited business insurance products.
We currently do not carry property and casualty insurance for our buildings,
plant and equipment. Should any natural catastrophes such as earthquakes,
floods, or any acts of terrorism occur where our primary operations are located
and most of our employees are based, or elsewhere, we might suffer not only
significant property damage, but also loss of revenues due to interruptions in
our business operations. The occurrence of a significant event for which we are
not fully insured or indemnified could materially and adversely affect our
operations and financial condition. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates we consider
reasonable.
Tax
laws and regulations in China are subject to substantial revision, some of which
may adversely affect our profitability.
The
Chinese tax system is in a state of flux, and it is anticipated that China’s tax
regime will be altered in the coming years. Tax benefits that we presently enjoy
may not be available to us in the wake of these changes, and we could incur tax
obligations to the Chinese government that are significantly higher than
currently anticipated. These increased tax obligations could negatively impact
our financial condition and our revenues, gross margins, profitability and
results of operations may be adversely affected as a result.
We
may face judicial corruption in China.
The
political, governmental and judicial systems in China are sometimes impacted by
corruption. There is no assurance we will be able to obtain recourse in any
legal disputes with suppliers, customers or other parties with whom we conduct
business, if desired, through China’s poorly developed and sometimes corrupt
judicial systems.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
20
China
could change its policies toward private enterprise or even nationalize or
expropriate private enterprises.
Our
business is subject to significant political and economic uncertainties and may
be affected by political, economic and social developments in China. Over the
past several years, the PRC government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The PRC government may not continue to pursue these policies
or may significantly alter them to our detriment from time to time with little,
if any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to shareholders, or devaluations of currency
could cause a decline in the price of our common stock, should a market for our
common stock ever develop. Nationalization or expropriation could even result in
the total loss of your investment.
The
nature and application of many laws of China create an uncertain environment for
business operations and they could have a negative effect on us.
The legal
system in China is a civil law system. Unlike the common law system, the civil
law system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, China began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes to existing laws and the abrogation of local regulations by national
laws could cause a decline in the price of our common stock. In addition, as
these laws, regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty.
Fluctuation
of the Renminbi may affect our financial condition and the value of our
securities.
Although
we use the United States dollar for financial reporting purposes, most of the
transactions effected by our operating subsidiary are denominated in
China’s Renminbi. The value of the Renminbi fluctuates and is subject to changes
in China’s political and economic conditions. Since June 2008, the Renminbi has
been pegged to the U.S. dollar. Since the People’s Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term.
Moreover, it is possible that in the future the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. In fact, In June 2010, The People’s
Bank of China announced that it will manage the renminbi’s (RMB) exchange rate
more flexibly, following nearly two years in which the Chinese currency has been
pegged to the US dollar.
Future
movements in the exchange rate of the Renminbi could adversely affect our
financial condition as we may suffer financial losses when transferring money
raised outside of China into the country or paying vendors for services
performed outside of China. Moreover, fluctuations in the exchange rate between
the U.S. dollar and the Renminbi will affect our financial results reported in
U.S. dollar terms without giving effect to any underlying change in our
business, financial condition or results of operations. The value of our common
stock likewise will be affected by the foreign exchange rate between U.S.
dollars and RMB, and between those currencies and other currencies in which our
sales may be denominated. Fluctuations in the exchange rate will also affect the
relative value of any dividend we may issue in the future that will be exchanged
into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future. For example, if we need to
convert U.S. dollars into RMB for our operational needs and the RMB appreciates
against the U.S. dollar at that time, our financial position, our business, and
the price of our common stock may be harmed. Conversely, if we decide to convert
our RMB into U.S. dollars for the purpose of declaring dividends on our common
stock or for other business purposes and the U.S. dollar appreciates against the
RMB, the U.S. dollar equivalent of our earnings from our subsidiary in China
would be reduced.
Inflation
in China could negatively affect our profitability and growth.
The rapid
growth of China’s economy has been uneven among economic sectors and
geographical regions of the country. China’s economy grew at an annual rate of
9.60% in the third quarter of 2010, as measured by the year-over-year change in
Gross Domestic Product, according to the National Bureau of Statistics of China.
Rapid economic growth can lead to growth in the money supply and rising
inflation. According to the National Bureau of Statistics of China, the
inflation rate in China declined in the second half of 2008 and much of 2009
during the current worldwide economic downturn, before climbing again to a high
point of 1.9% in 2009, as compared to 8.7% and 6.9% in 2008. The inflation rate
in China is expected to continue to increase in 2010 as the worldwide economy
recovers, reaching 3.6% as of September 2010. If prices for our products
and services fail to rise at a rate sufficient to compensate for the increased
costs of supplies, such as raw materials, due to inflation, it may have an
adverse effect on our profitability.
21
Furthermore,
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 future
economic growth. The People’s Bank of China, the central bank of the PRC, kept
interest rates fixed during the recent economic crisis, but in the past has
effected increases in the interest rates in response to inflationary concerns in
the China’s economy. If the central bank raises interest rates from the current
crisis levels, economic activity in China could slow and, in turn, materially
increase our costs and reduce demand for our products and services.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
As our
executive officers and directors, including the Chairman of our Board of
Directors and CEO, are citizens of the PRC, it may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit is
initiated against us and/or our officers and directors by a shareholder or group
of shareholders in the United States based on any claim or cause of action.
Also, because our operating subsidiary and assets are located in China, it may
be extremely difficult or impossible for individuals to access those assets to
enforce judgments rendered against us or our directors or executive offices by
United States courts. In addition, the courts in China may not permit the
enforcement of judgments arising out of United States federal and state
corporate, securities or similar laws. Accordingly, United States investors may
not be able to enforce judgments against us for violation of United States
securities laws.
PRC
regulations relating to mergers, off-shore companies and Chinese resident
shareholders, if applied to us, may limit our ability to operate our business as
we see fit.
PRC
regulations govern the process by which we may participate in an acquisition of
assets or equity interests. Depending on the structure of the transaction, these
regulations require involved parties to make a series of applications and
supplemental applications to various government agencies. In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be
completed and reported to the government agencies. Compliance with the new
regulations is likely to be more time consuming and expensive than in the past
and the government can now exert more control over the combination of two
businesses. Accordingly, due to PRC regulations, our ability to engage in
business combination transactions in China through our subsidiary in China has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate transactions acceptable to us or sufficiently
protective of our interests.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
Renminbi is currently convertible under the “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our China subsidiary may purchase foreign currencies for settlement
of current account transactions, including payments of dividends to us, without
the approval of the State Administration of Foreign Exchange (“SAFE”). However,
the relevant PRC government authorities may limit or eliminate their ability to
purchase foreign currencies in the future. Since a significant amount of our
future revenues will be denominated in Renminbi, any existing and future
restrictions on currency exchange may limit our ability to utilize revenues
generated in Renminbi to fund our business activities outside China that are
denominated in foreign currencies.
Foreign
exchange transactions by our China subsidiary under the capital account continue
to be subject to significant foreign exchange controls and require the approval
of or need to register with PRC governmental authorities, including SAFE. In
particular, if our China subsidiary borrows foreign currency loans from us or
other foreign lenders, these loans must be registered with SAFE, and if we
finance our China subsidiary by means of additional capital contributions, these
capital contributions must be approved by certain government authorities,
including the NDRC, Ministry of Commerce (“MOFCOM”), or their respective local
counterparts. These limitations could affect the ability of our Chinese
subsidiary to obtain foreign exchange through debt or equity
financing.
Recent
PRC regulations relating to the registration requirements for China resident
shareholders owning shares in off-shore companies as well as registration
requirements of employee stock ownership plans or share option plans may subject
the Company’s China resident shareholders to personal liability and limit its
ability to acquire Chinese companies or to inject capital into its operating
subsidiary in China, limit its subsidiary’s ability to distribute profits to the
Company, or otherwise materially and adversely affect the Company.
The SAFE
issued a public notice in October 2005 (“Circular 75”) requiring PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “off-shore special purpose company,” for the purpose of
acquiring any assets of or equity interest in PRC companies and raising funds
from overseas. In addition, any PRC resident who is the shareholder of an
off-shore special purpose company is required to amend his or her SAFE
registration with the local SAFE branch, with respect to that off-shore special
purpose company in connection with any increase or decrease of capital, transfer
of shares, merger, division, equity investment or creation of any security
interest over any assets located in China. To clarify further the implementation
of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24,
2005 and May 29, 2007, respectively. Under Circular 106, a PRC subsidiary of an
off-shore special purpose company are required to coordinate and supervise the
filing of SAFE registrations by the off-shore holding company’s shareholders who
are PRC residents in a timely manner. If these shareholders fail to comply, the
PRC subsidiary is required to report to the local SAFE authorities. If the PRC
subsidiary of the off-shore parent company does not report to the local SAFE
authorities, they may be prohibited from distributing their profits and proceeds
from any reduction in capital, share transfer or liquidation to their off-shore
parent company and the off-shore parent company may be restricted in its ability
to contribute additional capital into its PRC subsidiary. Moreover, failure to
comply with the above SAFE registration requirements could result in liabilities
under PRC laws for evasion of foreign exchange restrictions. We cannot predict
fully how Circular 75 will affect our business operations or future strategies
because of ongoing uncertainty over how Circular 75 will be interpreted and
implemented, and how or whether SAFE will apply it to us.
22
We have
requested our PRC resident beneficial owners, including our Chairman and CEO, to
make the necessary applications, filings and amendments as required under SAFE
regulations in connection with their equity interests in us. We attempt to
ensure that our subsidiary in China complies, and that our PRC resident
beneficial owners subject to these rules comply, with the relevant SAFE
regulations. The Company cannot provide any assurances that all of our present
or prospective direct or indirect PRC resident beneficial owners will comply
fully with all applicable registrations or required approvals. The failure or
inability of our PRC resident beneficial owners to comply with the applicable
SAFE registration requirements may subject these beneficial owners or the
Company to fines, legal sanctions and restrictions described above.
On March
28, 2007, SAFE released detailed registration procedures for employee stock
ownership plans or share option plans to be established by overseas listed
companies and for individual plan participants. Although the Company has no
employee stock ownership plan or share option plan in effect at this time, we
may in the future implement one or more of such plans. Any failure to comply
with the relevant registration procedures may affect the effectiveness of the
Company’s employee stock ownership plans or share option plans and subject the
plan participants, the companies offering the plans or the relevant
intermediaries, as the case may be, to penalties under PRC foreign exchange
regime. Such penalties could prevent the Company from being able to make
distributions or pay dividends, as a result of which the Company’s business
operations and its ability to distribute profits could be materially and
adversely affected.
We
operate in the PRC through our operating entity Dalian the acquisition of which
through the share exchange we believe, on advice of counsel, is exempt from PRC
rules governing the acquisition of domestic enterprises by foreign investors and
China Securities Regulatory Commission approval. However, regulators have wide
latitude in the enforcement of the relevant regulations and if they determine
that our acquisition of Dalian is subject to regulation; it could have a
material adverse effect on our business and shareholders.
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or
MOFCOM, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the M&A Rules, which became effective on September 8,
2006, and was amended by MOFCOM on June 22, 2009. According to Rule 52 of the
M&A Rules and Guidance Manual on Administration of Entry of Foreign
Investment, as amended, issued by the Department of Foreign Investment
Administration of the Ministry of Commerce in December 2008, conversion from a
joint venture enterprise to a wholly owned foreign entity by way of equity
transfer from a Chinese party to a foreign shareholder or investor, shall not be
subject to the M&A Rules.
The
M&A Rules require offshore companies formed for overseas listing purposes
through acquisitions of PRC domestic companies and controlled by PRC Operating
Companies or individuals to obtain the approval of the CSRC prior to the public
listing of their securities on an overseas stock exchange. On September 21,
2006, pursuant to the M&A Rules and other PRC Laws, the CSRC published on
its official website relevant guidance with respect to the listing and trading
of PRC domestic enterprises’ securities on overseas stock exchanges (“Related
Clarifications”), including a list of application materials regarding the
listing on overseas stock exchanges by special purpose vehicles. However, the
CSRC currently has not issued any definitive rule concerning whether the
transactions effected by the overseas listing would be subject to the M&A
Rules and Related Clarifications. Article 238 of the PRC Securities Law also
provides that any domestic enterprise that directly or indirectly issues any
securities abroad or lists its securities abroad for trading shall be subject to
the approval of the securities regulatory authority under the State Council
according to the relevant provisions of the State Council.
The
M&A Rules do not have express provisions in terms of penalties for failure
to obtain CSRC approval prior to the public listing of our securities. However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of the above rules, and CSRC has yet to promulgate any written
provisions or formally to declare or state whether the overseas listing of a
PRC-related company similar to ours is subject to the approval of CSRC. Any
violation of these rules could result in fines and other penalties on our
operations in China, restrictions or limitations on remitting dividends outside
of China, and other forms of sanctions that may cause a material and adverse
effect to our business, operations and financial conditions.
Notwithstanding
the foregoing, we have been advised by our PRC counsel that the M&A Rules
did not apply to our share exchange transaction. The share exchange did not
require CSRC approval because we were not a special purpose vehicle formed or
controlled by PRC Operating Companies or PRC individuals and because our foreign
ownership of Dalian is qualified as a foreign joint venture, it is not subject
to the M&A Rules.
However,
the meaning of many of the provisions of the M&A Rules is still unclear, and
regulators have wide latitude in the enforcement of these and other relevant
regulations. Notwithstanding the opinion of our PRC counsel, if MOFCOM
subsequently determines that we should have obtained the approval of MOFCOM’s
central office for the share exchange transaction, we may be subject to
fines and penalties on our operations in China, have our operating privileges
limited, or the payment or remittance of dividends paid by Dalian delayed or
restricted, or be subject to other regulatory or administrative actions that
could have a material adverse effect on our business, financial condition,
results of operations, reputation and prospects, as well as the trading price of
our shares.
23
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise”
of China. Such classification will likely result in unfavorable tax consequences
to us and our non-PRC resident shareholders.
China
passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing
rules, both of which became effective on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a “resident enterprise,” meaning that it must be treated as
a PRC domestic enterprise for enterprise income tax purposes. The implementing
rules of the EIT Law define de facto management as “substantial and overall
management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Off-shore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation regarding non-PRC enterprise
or group controlled off-shore entities. Pursuant to the Notice, an enterprise
incorporated in an off-shore jurisdiction and controlled by a PRC enterprise or
group will be classified as a “non-domestically incorporated resident
enterprise” if: (i) its senior management in charge of daily operations reside
or perform their duties mainly in China; (ii) its financial or personnel
decisions are made or approved by bodies or persons in China; (iii) its
substantial assets and properties, accounting books, corporate chops, board and
shareholder minutes are kept in China; and (iv) at least half of its directors
with voting rights or senior management often reside in China. A “resident
enterprise” would be subject to an enterprise income tax rate of 25% on its
worldwide income and must pay a withholding tax at a rate of 10% when paying
dividends to its non-PRC shareholders. However, detailed measures on imposition
of tax from non-domestically incorporated resident enterprises are not yet
available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
We may be
deemed to be a “resident enterprise” by PRC tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the EIT Law and
its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as “resident enterprises” for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
“resident enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from transferring our
shares. If we were treated as a “resident enterprise” by PRC tax authorities, we
would be subject to taxation in both the U.S. and China, and our PRC tax may not
be creditable against our U.S. tax.
The
discontinuation, reduction or delay of any of the preferential tax treatment or
other government incentives available to us in the PRC or imposition of any
additional PRC taxes on us could adversely affect our financial condition and
results of operations.
China has
passed a new PRC Enterprise Income Tax Law and its implementing rules, both of
which became effective on January 1, 2008. The PRC Enterprise Income Tax
Law significantly curtails tax incentives granted to foreign-invested
enterprises under the Foreign-Invested Enterprise Income Tax Law in effect
before January 1, 2008. The PRC Enterprise Income Tax Law, however,
(i) reduces the statutory rate of the enterprise income tax from 33% to
25%, (ii) permits companies established before March 16, 2007 to
continue to enjoy their existing tax incentives, adjusted by certain
transitional phase-out rules promulgated by the State Council on
December 26, 2007, and (iii) introduces new tax incentives, subject to
various qualification criteria. The PRC Enterprise Income Tax Law and its
implementing rules permit certain “high and new technology enterprises” which
hold independent ownership of core intellectual property and simultaneously meet
a list of other criteria, to enjoy a reduced 15% enterprise income tax rate
subject to certain new qualification criteria.
Our PRC
subsidiary was certified as a “high and new technology enterprise” in August 20,
2010 and as a result is eligible to enjoy a reduced 15% enterprise income tax
rate from January 1, 2010 to December 31, 2012. If our PRC subsidiary fails to
maintain the status of “high and new technology enterprise” after December 31,
2012, it will not be able to enjoy the reduced tax rate, and its tax rate will
increase to 25% or the then current rate. Loss of this preferential tax
treatment could have a material adverse effect on our financial condition and
results of operation.
24
The Company’s PRC subsidiary may be
exposed to penalties by the PRC government due to noncompliance with taxation,
land use and construction administration, environmental and employment
rules.
While the
Company believes its PRC subsidiary has been in compliance with PRC taxation,
land use and construction administration, environmental and employment rules
during its operations in China, the Company has not obtained letters from the
competent PRC government authorities confirming such compliance. If any
competent PRC government authority takes the position that there is
noncompliance with the taxation, land use and construction administration,
environmental or employment rules by the Company’s PRC subsidiary, it may be
exposed to penalties by such PRC government authority, in which case the
operation of the Company’s PRC subsidiary may be adversely
affected.
The
Share Exchange Agreement may be subject to additional registration and filing
requirements with various PRC governmental agencies.
We have
entered into the Share Exchange Agreement with Dalian and its owners, and all of
the parties have contractually agreed that the laws of the State of Nevada
governing the purchase and sale of Dalian shall apply. However, we
cannot assure you that either the PRC Ministry of Finance or SAFE will apply
Nevada law to the Share Exchange Agreement. Therefore, Dalian and the owners of
Dalian have agreed to make such filings and recordation of the transfer as
required under PRC law to additionally qualify the purchase and transfer of
ownership with the relevant PRC ministries. We cannot offer
assurances as to when these filings will be completed. If the
applications are rejected for any reason, an adverse effect upon the Company
could result if the relevant PRC ministries refuse to honor the choice of law
selected by the parties to the Share Exchange Agreement.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act (the
“FCPA”), which prohibits U.S. companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices occur from time-to-time in mainland China.
If our competitors engage in these practices, they may receive preferential
treatment from personnel of some companies, giving our competitors an advantage
in securing business or from government officials who might give them priority
in obtaining new licenses, which would put us at a disadvantage. Although we
inform our personnel that such practices are illegal, we cannot assure you that
our employees or other agents will not engage in such conduct for which we might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties.
Risks
Related to Our Securities
The
market price for our common stock may be volatile.
The
trading price of our common stock may fluctuate widely in response to various
factors, some of which are beyond our control. These factors include, but not
limited to, our quarterly operating results or the operating results of other
companies in our industry, announcements by us or our competitors of
acquisitions, new products, product improvements, commercial relationships,
intellectual property, legal, regulatory or other business developments and
changes in financial estimates or recommendations by stock market analysts
regarding us or our competitors. In addition, the stock market in general, and
the market for companies based in China in particular, has experienced extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
or disproportionate to their operating performance. These broad market
fluctuations may materially affect our stock price, regardless of our operating
results. Furthermore, the market for our common stock is limited and we cannot
assure you that a larger market will ever be developed or maintained. The price
at which investors purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, these factors may make it more difficult
or impossible for you to sell our common stock for a positive return on your
investment.
Shares
of our common stock lack a significant trading market.
Shares of
our common stock are not yet eligible for trading on any national securities
exchange. Our common stock has been determined to be eligible for quoting on the
over-the-counter market on the OTC Bulletin Board or in what are commonly
referred to as “pink sheets.” However, there is no active market for our common
stock at this time. These markets are highly illiquid. Although we plan to apply
for listing of our common stock on the NASDAQ Stock Market or the New York Stock
Exchange, national securities exchanges, there can be no assurance of if and
when such application would be granted. There is no assurance that an active
trading market in our common stock will develop, or if such a market develops,
that it will be sustained. In addition, there is a greater chance for market
volatility for securities quoted on the OTC Bulletin Board as opposed to
securities traded on a national exchange. This volatility may be caused by a
variety of factors, including the lack of readily available quotations, the
absence of consistent administrative supervision of “bid” and “ask” quotations
and generally lower trading volume. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, our common stock, or to obtain coverage for significant news events
concerning us, and the common stock could become substantially less attractive
for margin loans, for investment by financial institutions, as consideration in
future capital raising transactions or for other purposes.
25
Future
sales of shares of our common stock by our shareholders could cause our stock
price to decline.
As
of November 22, 2010, Mr. Lixin Wang, our Chairman and Chief Executive
Officer, and our largest shareholder, beneficially owned approximately 46.77% of
our outstanding shares. In addition, Mr. Wang’s son, Yang Wang, and wife, Peili
Wang, hold approximately 12.75% and 8.5% of our outstanding shares respectively.
Mr. Wang is also currently one of two insider members of the Company’s Board of
Directors.
Future
sales of shares of our common stock could adversely affect the prevailing market
price of our stock. If our significant shareholders sell a large number of
shares, or if we issue a large number of shares, the market price of our stock
could decline. Moreover, the perception in the public market that shareholders
might sell shares of our stock could depress the market for our shares. If our
shareholders who received shares of our common stock issued in the Share
Exchange sell substantial amounts of our common stock in the public market upon
the effectiveness of a registration statement, or upon the expiration of any
holding period under Regulation S, or the applicable lockup period to which they
are contractually bound, which is generally three years from the date the
Company becomes listed on a national securities exchange, such sales could
create a circumstance commonly referred to as an “overhang” and in anticipation
of which the market price of our common stock could fall. The existence of an
overhang, whether or not sales have occurred or are occurring, also could make
it more difficult for us to raise additional financing through the sale of
equity or equity-related securities in the future at a time and price we deem
reasonable or appropriate. The shares of common stock issued in the Share
Exchange will be freely tradable upon the earlier of (i) effectiveness of a
registration statement covering such shares and (ii) the date on which such
shares may be sold without registration pursuant to Regulation S under the
Securities Act and the sale of such shares could have a negative impact on the
price of our common stock.
We
may issue additional shares of our capital stock or debt securities to raise
capital or complete acquisitions, which would reduce the equity interest of our
shareholders.
Our
Articles of Incorporation, as amended, authorize the issuance of up to
100,000,000 shares of common stock, par value $.001 per share. As
of November 22, 2010, there were approximately 70,610,000 authorized and
unissued shares of our common stock that have not been reserved and are
available for future issuance. Although we have no commitments as of the date of
this registration statement to issue our securities, we may issue a substantial
number of additional shares of our common stock to raise capital. The issuance
of additional shares of our common stock may (i) significantly reduce the equity
interest of our existing shareholders and (ii) adversely affect prevailing
market prices for our common stock.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
Our
common stock may be subject to the “penny stock” rules adopted under Section
15(g) of the Securities Exchange Act of 1934. The penny stock rules apply to
non-NASDAQ-listed issuers whose common stock trades at less than $5.00 per share
or that have a tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from those rules, to deliver a standardized risk disclosure document
prepared by the SEC, which contains the following information:
|
|
§
|
a description of the nature and
level of risk in the market for penny stocks in both public offerings and
secondary trading;
|
|
|
§
|
a description of the broker’s or
dealer’s duties to the customer and of the rights and remedies available
to the customer with respect to violation to such duties or other
requirements of securities
laws;
|
|
|
§
|
a brief, clear, narrative
description of a dealer market, including “bid” and “ask” prices for penny
stocks and the significance of the spread between the “bid” and “ask”
prices;
|
|
|
§
|
a toll free telephone number for
inquiries on disciplinary
actions;
|
|
|
§
|
definitions of any significant
terms in the disclosure document or in the conduct of trading in penny
stocks; and
|
|
|
§
|
such other information and is in
such form (including language, type, size and format), as the SEC shall
require by rule or
regulation.
|
26
Prior to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer with the following information:
|
|
§
|
bid and offer quotations for the
penny stock;
|
|
|
§
|
compensation of the broker-dealer
and our salesperson in the
transaction;
|
|
|
§
|
number of shares to which such
bid and ask prices apply, or other comparable information relating to the
depth and liquidity of the market for such stock;
and
|
|
|
§
|
monthly account statements
showing the market value of each penny stock held in the customer’s
account.
|
The penny
stock rules further require that, prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving penny stocks
and a signed and dated copy of a written suitability statement.
Due to
the requirements of the penny stock rules, many brokers have decided not to
trade penny stocks. As a result, the number of broker-dealers willing to act as
market makers in such securities is limited. If we remain subject to the penny
stock rules for any significant period, that could have an adverse effect on the
market, if any, for our securities. Moreover, if our securities are subject to
the penny stock rules, investors will find it more difficult to dispose of our
securities.
We
do not expect to pay dividends in the foreseeable future. Any return on
investment may be limited to the value of our common stock.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
The payment of dividends on our common stock will depend on earnings, financial
condition and other business and economic factors affecting it at such time as
the Board of Directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on your investment will occur
only if our stock price appreciates.
Our
principal shareholder has the ability to exert significant control in matters
requiring a shareholder vote and could delay, deter or prevent a change of
control in our company.
As
of November 22, 2010, Mr. Lixin Wang, our Chairman and Chief Executive
Officer, and our largest shareholder, beneficially owned approximately 46.77% of
our outstanding shares. In addition, Mr. Wang’s son, Yang Wang, and wife, Peili
Wang, hold approximately 12.75% and 8.5% of our outstanding shares respectively.
Mr. Wang is also currently one of two inside members of the Company’s Board of
Directors. Mr. Wang possesses significant influence over us, giving him the
ability, among other things, to exert significant control over the election of
all or a majority of the Board of Directors and to approve significant corporate
transactions. Such stock ownership and control may also have the effect of
delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination, or discouraging a
potential acquiror from making a tender offer or otherwise attempting to obtain
control of our company. Without the consent of Mr. Wang, we could be prevented
from entering into potentially beneficial transactions if they conflict with our
principal stockholder’s interests. The interests of this stockholder may differ
from the interests of our other stockholders.
Provisions
in our Articles of Incorporation and Amended and Restated Bylaws could make it
very difficult for you to bring any legal actions against our directors or
officers for violations of their fiduciary duties or could require us to pay any
amounts incurred by our directors or officers in any such actions.
Pursuant
to our Articles of Incorporation, members of our Board of Directors and our
officers will have no liability for breaches of their fiduciary duty of care as
a director or officer, except in limited circumstances. This means you may be
unable to prevail in a legal action against our directors or officers even if
you believe they have breached their fiduciary duty of care. In addition, our
Articles of Incorporation and Amended and Restated Bylaws allow us to indemnify
our directors and officers from and against any and all costs, charges and
expenses resulting from their acting in such capacities with us. This means if
you were able to enforce an action against our directors or officers, in all
likelihood, we would be required to pay any expenses they incurred in defending
the lawsuit and any judgment or settlement they otherwise would be required to
pay.
27
Taxation
We
will not obtain an opinion of legal counsel regarding the United States income
tax consequences of an investment in our securities.
We will
not obtain an opinion of counsel regarding the U.S. income tax consequences of
investing in our securities including whether we will be treated as a company
for U.S. income tax purposes. Recent changes in tax laws have not, as yet, been
the subject of administrative or judicial scrutiny or interpretation. Moreover,
there is no assurance that future legislation may not further affect the tax
consequences of an investment in our securities. INVESTORS ARE URGED TO CONSULT
WITH THEIR TAX ADVISORS REGARDING THE POSSIBLE U.S. FEDERAL, STATE, AND LOCAL
TAX CONSEQUENCES OF INVESTING IN OUR SECURITIES.
Cautionary
Notice Regarding Forward-Looking Statements
This
Current Report on Form 8-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar expressions. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those listed under the heading “Risk Factors” and those listed in
our other Securities and Exchange Commission filings. The following discussion
should be read in conjunction with our Financial Statements and related Notes
thereto included elsewhere in this Current Report. Throughout this Current
Report, we will refer to FusionTech, Inc. as “FusionTech,” the “Company,” “we,”
“us” and “our.”
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We design
and manufacture clean technology (“CleanTech”) industrial machinery used in the
coking process, a critical but traditionally highly pollutive step in the
production of crude steel. Our products are sold to large and medium size steel
mills and coking plants in China who use or are planning to use the coke dry
quenching (“CDQ”) method of coking, a more environmentally friendly and energy
conservative method of coking as compared to the traditional coke wet quenching
method.
We
currently design and manufacture CDQ transport cars used in complete CDQ systems
and CleanTech coke oven products such as coke oven elevators, smoke transfer
machines, and coal cleaning machines. These CleanTech coke oven products are
used for maintaining coke ovens and reducing the amount of pollution they
emit. Since 1992, Dalian has also designed and manufactured core coke
oven products such as coke drums, coke drum carriers, wet quenching cars, coal
freight cars, coke guide cars, and coke pushers. These core coke oven products
are necessary components for all coke oven systems. While we believe steel
industry consolidation in China will increase demand for our clean coking
products as larger steel mills and coking plants with greater capital resources
are formed, consolidation may reduce the number of medium size steel mills and
coking plants we currently sell our products to. We still expect
steady growth in our clean coke oven and related products business which we plan
to finance through the cash flow we receive from sales of these
products.
In the
second quarter of 2011, we plan to provide our proprietary steel plate fusion
services (“Steel Plate Fusion”) to a large steel plate manufacturer in northern
China, Minmetals Yingkou Medium Plate Co., Ltd. (“Minmetals Yingkou”). Minmetals
Yingkou is an established steel plate manufacturer in China with over 30 years
of experience in producing steel plates. It is a subsidiary of the reputable
China Minmetals Corporation, a Fortune Global 500 Company based in China
focusing on the development and production of metals and minerals.
On June
2, 1010, we entered into a non-exclusive strategic agreement, as amended on
August 9, 2010, with Minmetals Yinkgou to produce fused metal slabs using our
Steel Plate Fusion services from raw metal slabs produced by Minmetals Yingkou.
Minmetals Yingkou will manufacture finished steel plates from our fused metal
slabs for sale to their customers. The agreement provides for the production of
200,000 tons of steel plates per year, adjustable based on market demand up to a
goal of 500,000 tons per year. We will receive a processing fee based on the
size, type and market demand of each ton of fused metal slabs
produced.
We
believe Steel Plate Fusion is a next generation technology that is superior in
both cost and efficiency to conventional methods used to manufacture clad metal
plates and extra-thick carbon steel plates. Steel Plate Fusion uses an electron
beam welding machine in a vacuum chamber, and a proprietary process of surface
treatment and manipulation of pressure and temperature of the fusion process, to
fuse together metal slabs that can be hot rolled/compressed to
produce:
|
·
|
clad
metal plates (“clad metal plates”), manufactured by fusing two dissimilar
metal plates such as stainless steel plates and carbon steel plates (“clad
steel plates”). Clad steel plates offer a more economical alternative to
pure stainless steel plates since they combine inexpensive carbon steel
and stainless steel. In addition, clad steel plates provide similar
functionalities as stainless steel plates and can be used in similar
industrial applications. Clad steel plates are used and highly demanded in
heavy industrial applications such as the construction of ships, piping,
nuclear reactors, pressure vessels, heat exchangers, power generation
equipment, and coking equipment, all of which require the anti-corrosive
properties of clad steel plates.
|
|
·
|
specialty
extra-thick carbon steel plates (“extra-thick carbon steel plates”), more
than 80 millimeters thick, used and highly demanded in heavy industrial
applications such as the construction of large ships, bridges, buildings,
metallurgical equipment, mining equipment, and power generation equipment,
all of which require the strength of extra-thick carbon steel plates of
certain standards and
specifications.
|
28
To expand
our business to include our proprietary Steel Plate Fusion services, we
anticipate additional capital expenditures in 2011 of approximately $9 million,
which will be used for the construction a steel plate fusion processing facility
and to purchase new equipment. We believe expanding our business to include
Steel Plate Fusion services will positively impact our revenue and net income
while creating a need for additional cash to finance our capital expenditures
and working capital. We anticipate raising the capital needed for our
Steel Plate Fusion expansion through debt and/or equity
financing. Currently we are not engaged in any contractual
obligations in which we are liable for payments relating to the Steel Plate
Fusion expansion. Our plans for expansion will progress according to
our ability to obtain the necessary financing. Once we obtain the
capital for Steel Plate Fusion, we anticipate increases in working capital will
be generated internally as we steadily increase revenue from this new
service.
We
operate through Dalian, our subsidiary organized under the laws of
the PRC.
Results of
Operations
Comparison
of the nine months ended September 30, 2010 and 2009
Revenues: Revenues increased
to $9,877,237 for the nine months ended September 30, 2010 from $6,248,007 for
the nine months ended September 30, 2009, an increase of $3,629,230 or 58.1%.
The increase was primarily due to the increase in completed orders under
existing contracts, increased sales to new customers, and an increase in selling
prices.
Costs of Revenue: Cost of
revenue increased to $7,724,279 for the nine months ended September 30, 2010
from $5,046,372 for the nine months ended September 30, 2009, an increase of
$2,677,907 or 53.1%. Cost of revenue as a percentage of sales was 78.2% and
80.8% for the nine months ended September 30, 2010 and 2009, respectively. The
decrease in cost of revenue as a percentage of revenues was due to increased
cost savings related to higher sales volume, improved margins due to higher
selling prices, and increased efficiency in the production process.
Gross Profit: Gross profit
increased to $2,152,958 for the nine months ended September 30, 2010 from
$1,201,635 for the nine months ended September 30, 2009, an increase of $951,323
or 79.2%. Gross profit margin increased to 21.8% for the nine months ended
September 30, 2010, from 19.2% for the 2009 period.
Selling Expenses: Selling
expenses decreased to $174,661 for the nine months ended September 30, 2010 from
$254,359 for the nine months ended September 30, 2009, a decrease of $70,698 or
28.8%. The decrease was primarily attributable to the decrease in warranty
expenses of $42,000 attributable to lower product maintenance expenses
associated with a new product, coke oven elevator, introduced in
2009. With improvements in product design following customer
feedback, the coke oven elevator product line experienced significantly less
warranty expense in 2010. Selling expenses as a percentage of revenue decreased
to 1.8% for the nine months ended September 30, 2010 from 3.9% for the nine
months ended September 30, 2009.
General and Administrative
Expenses: General and administrative expenses increased to $673,279 for
the nine months ended September 30, 2010 from $520,479 for the nine months ended
September 30, 2009, an increase of $152,800 or 29.4%. The increase was primarily
due to an increase in office expense of $94,000 and an increase in bad debt
allowance of $111,000. The increase in general and administrative
expenses was offset by a decrease in salaries of $19,000 and a decrease in
repair and maintenance expense of $44,000. As a result of increased sales volume
and our continued efforts to maintain low overhead costs, general and
administrative expenses as a percentage of revenue decreased to 6.8% for the
nine months ended September 30, 2010 from 8.3% for the nine months ended
September 30, 2009.
29
Interest Expense: Interest
expense increased to $95,992 for the nine months ended September 30, 2010 from
$19,592 for the nine months ended September 30, 2009, an increase of $76,400 or
390%. The increase was primarily due to the interest on a $1.7 million loan with
an interest rate of 5.84% we took out on January 12,
2010.
Provision for income tax:
Provision for income tax increased to $326,437 for the nine months ended
September 30, 2010 from $61,142 for the nine months ended September 30, 2009, an
increase of $265,295 or 434%. The tax provision as a percentage of income before
tax was 25% and 12% for the nine months ended September 30, 2010 and 2009,
respectively.
Net Income: Net income for
the nine months ended September 30, 2010, increased to $979,312 from $441,461
for the nine months ended September 30, 2009, an increase of $537,851 or 121.8%.
Net income as a percentage of net sales for the nine months ended September 30,
2010, was 9.9% compared to 7.1% for the 2009 period.
Comparison
of the years ended December 31, 2009 and 2008
Revenues: Revenues increased
to $9,947,893 for the year ended December 31, 2009 from $6,043,828 for the year
ended December 31, 2008, an increase of $3,904,065 or 64.6%. The increase was
due to the introduction of new products, expanding sales to new customers,
increased sales to existing customers, and expansion into a new facility which
allowed us to expand our capacity and fulfill more contracts. We had an increase
in sales to one customer who accounted for approximately $2.7 million in new
business during 2009.
Costs of Revenue: Cost of
revenue increased to $7,817,162 for the year ended December 31, 2009 from
$5,269,971 for the year ended December 31, 2008, an increase of $2,547,191 or
48.3%. Cost of revenue as a percentage of revenues was 78.6% and 87.2% for
the years ended December 31, 2009 and 2008, respectively. The decrease in our
costs of revenue as a percentage of revenues was due to higher profit margins
from our new products, increased cost savings related to higher sales volume,
and a focus on cutting costs by improving manufacturing efficiency.
Gross Profit: Gross profit
increased to $2,130,731 for the year ended December 31, 2009 from $773,857 for
the year ended December 31, 2008, an increase of $1,356,874 or 175.3%. Gross
profit margin increased to 21.4% from the year ended December 31, 2009, from
12.8% for the same period in 2008.
Selling Expenses: Selling
expenses increased to $382,671 for the year ended December 31, 2009 from
$290,617 for the year ended December 31, 2008, an increase of $92,054 or 31.7%.
The increase was primarily due to an increase in warranty expense of $120,000 as
we incurred costs adjusting and repairing new products introduced to the market
during 2009 and an increase in salaries as we hired additional employees due to
our growth. Increases in selling expenses were offset by decreases in
bidding service expenses of $32,000. Selling expenses as a percent of
net sales for the year ended December 31, 2009 was 3.8% as compared to 4.8% for
the 2008 period. This decrease was the result of us leveraging our existing
sales team to benefit from efficiencies as a result of higher sales
volume.
General and Administrative
Expenses: General and administrative expenses increased to $732,735 for
the year ended December 31, 2009 from $564,814 for the year ended December 31,
2008, an increase of $167,921 or 29.7%. The increase was primarily due to the
general expansion of our business which resulted in an increase in salaries of
$42,000 as we hired additional employees, an increase in depreciation expense of
$42,000 as we purchased additional equipment, and an increase in bad debt of
$69,000 due to higher sales volume. General and administrative expense as a
percent of net sales for the year ended December 31, 2009 was 7.4% as compared
to 9.3% for the 2008 period. This decrease was a result of us leveraging our
existing overhead costs to benefit from increased efficiencies as a result of
higher sales volume.
Interest Expense: Interest
expense increased to $31,223 for the year ended December 31, 2009 from $23,158
for the year ended December 31, 2008, an increase of $8,065 or 34.8%. The
increase was primarily due to interest charged for retentions that are factored
to the bank.
Provision for income tax:
Provision for income tax increased to $204,632 for the year ended December 31,
2009 from $0 for the year ended December 31, 2008, an increase of $204,632. The
tax provision as a percentage of income before tax was 19% for the year ended
December 31, 2009.
Net Income: Net income
increased to $869,302 for the year ended December 31, 2009 from $93,275 loss for
the year ended December 31, 2008. Net margin for the year ended December 31,
2009 was 8.7%.
30
Liquidity and Capital
Resources
We have
been able to generate cash flow to finance our working capital needs based on
the terms of our agreements with our customers, and believe this will be
sufficient to fund our existing clean coking and related products
business over the next 12 months. We typically receive orders
that take approximately three to six months to manufacture which includes
purchasing of raw materials, construction of products, delivery of the products,
and assembly of the products at the customer site. Generally our
agreements with our customers provide that approximately 30% of the purchase
price is due upon the placement of an order, 30% when the manufacturing process
is substantially complete and 30% upon customer acceptance of the product. As a
common practice in the manufacturing business in China, payment of the final 10%
of the purchase price is due no later than the termination date of our warranty
period, which is typically a negotiated term of between 12 and 18 months from
the acceptance date. The fluctuations in our year-over-year cash flows due to
changes in balance sheet accounts are due to the nature of the sales cycle for
our products.
Operating
Activities
As of
September 30, 2010, we had $1,001,213 in cash and equivalents. During the
nine months ended September 30, 2010, our net cash used in operating activities
was $740,710 compared to cash provided by operating activities of $26,053 for
the nine months ended September 30, 2009. The change in net cash used in
operating activities was driven primarily by the changes in accounts receivable,
inventory, accounts payable and unearned revenue.
Accounts
Receivable
Cash
increased by $353,760 in the nine months ended September 30, 2009 because
approximately 13% of the nine month sales of $6,248,007 occurred in the third
quarter of 2009. The Company was able to convert the account
receivables generated from sales that occurred in the first quarter and second
quarter of 2009 into cash. In contrast, cash decreased by $2,174,193
for the nine months ended September 30, 2010 because third quarter 2010 sales
accounted for roughly 67% of the $9,877,237 of sales during the nine months
ended September 30, 2010. Two customers accounted for approximately
$2,600,000 of the increase in account receivables upon receiving their products
during the third quarter of the 2010 which was offset by other customers who
paid us during the third quarter of 2010. The fluctuations in cash
flow associated with accounts receivable are consistent with our normal
operations.
Inventory
Decreases
in inventory generated cash of $2,273,558 during the nine months ended September
30, 2010. This was largely due to 67% of the $9,877,237 of sales
occurring in the third quarter of 2010. The inventory level dropped
when the products were delivered. Increases in inventory used cash of
$3,800,453 during the nine months ended September 30, 2009. This was
largely due to us purchasing raw materials and incurring production costs for
four customers totaling approximately $2,300,000 for products that were not
delivered during the same quarter. The third quarter only accounted
for 13% of the nine months sales of $6,248,007. Hence, inventory
increased using $3,800,453 of cash.
Accounts
Payable
Increases
in accounts payable generated $1,679,298 and $401,433 of cash in the nine months
ended September 30, 2009 and 2010, respectively. Through our
operating history, our vendors and suppliers have been willing to accommodate
our working capital needs. Oftentimes, they are willing to wait until
we finish production, ship our products, and get paid by our customers before
they are paid by us.
Unearned
Revenue
Sales in
the third quarter of 2010 accounted for roughly 67% of the $9,877,237 of sales
during the nine months ended September 30, 2010. The concentration of
sales in the third quarter caused unearned revenue to experience a significant
drop resulting in a decrease of $3,162,071 of cash. Sales in the
third quarter of 2009 accounted for only 13% of sales for nine months ended
September 30, 2009. Hence, unearned revenue increased as we continued
to manufacture products and accrued additional unearned revenue which increased
cash flow by $1,726,729.
Investing
Activities
We
purchased property and equipment of $121,703 during the nine months ended
September 30, 2010 compared to $135,467 for the nine months ended September 30,
2009.
31
Financing
Activities
During
the nine months ended September 30, 2010, we received proceeds of $1,765,200
from a short-term note from Shanghai Pudong Development Bank. The note is due
January 11, 2011, bears interest at 5.841% and is guaranteed by Dalian
Union-Changye Bonding Company (“Dalian Union”). To guarantee the loan,
Dalian Union required (1) that we pay an RMB 1,200,000 (approximately $180,000)
deposit, (2) pledge 17 private homes belonging to the our staff,
(3) Dalian's CEO and his wife pledge their ownership interests in
Dalian, (4) Dalian’s CEO and his wife guarantee the debt with joint liability
and (5) a third party guarantees the debt as a joint liability
counter-guarantor. The pledge of Dalian's CEO and his wife's ownership
interests was subsequently canceled on September 10, 2010. In August 2010, we
repaid $294,200 of the note’s principal balance. On January 11, 2011,
we repaid the outstanding balance on the short-term note in full. During the
nine months ended September 30, 2010, we repaid $147,100 of advances from
related parties and paid dividends of $512,750. On
January 19, 2011, we entered into a credit facility with Shanghai Pudong
Development Bank through which we can borrow up to $3.34 million for working
capital needs from time to time until February 1, 2012. Only $1.67 million
may be outstanding on the credit facility at any time. Any loan drawn
down through the credit facility will bear interest, adjustable quarterly,
at a floating rate of 120% of China’s benchmark interest rate, which was 5.8% as
of January 28, 2011. The dates for the payment of interest and repayment of
principal will be mutually determined by the parties at the time each loan is
drawn down from the credit facility. As of January 28, 2011, we have not drawn
down any loans through the credit facility.
We will
continue to finance operations through collection of our accounts receivable and
sale of our inventory. As of September 30, 2010, we have working capital of
$932,248 which we believe is sufficient to finance our current operations for
the foreseeable future. In order to expand our business to include our
proprietary Steel Plate Fusion services, we anticipate additional capital
expenditures in 2011 of approximately $9 million, which will be used for the
construction of a steel plate fusion processing facility and the purchasing of
new equipment. We anticipate raising the capital needed for the Steel Plate
Fusion expansion through debt and/or equity financing. Currently we are not
engaged in any contractual obligations in which we are liable for payments
relating to the Steel Plate Fusion expansion. Our plans for expansion will
progress according to our ability to obtain the necessary
financing.
Contractual
Obligations
Our
significant contractual obligations as of September 30, 2010 are as
follows:
|
Payments due by Period
|
||||||||||||||||||||
|
Less than
|
One to
|
Three to
|
More Than
|
|||||||||||||||||
|
One Year
|
Three Years
|
Five Years
|
Five Years
|
Total
|
||||||||||||||||
|
Short-term
note
|
$
|
1,497,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,497,000
|
||||||||||
|
Factory
and office leases
|
222,059
|
282,353
|
5,637
|
-
|
510,049
|
|||||||||||||||
|
Total
|
$
|
1,719,059
|
$
|
282,353
|
$
|
5,637
|
$
|
-
|
$
|
2,007,049
|
||||||||||
Off-Balance Sheet
Arrangements
We have
no outstanding off-balance sheet guarantees, interest rate swap transactions or
foreign currency contracts.
Critical Accounting
Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires our
management to make assumptions, estimates and judgments that affect the amounts
reported, including the notes thereto, and related disclosures of commitments
and contingencies, if any. We have identified certain accounting policies
that are significant to the preparation of our financial statements. These
accounting policies are important for an understanding of our financial
condition and results of operation. Critical accounting policies are those that
are most important to the portrayal of our financial conditions and results of
operations and require management's difficult, subjective, or complex judgment,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. Certain
accounting estimates are particularly sensitive because of their significance to
financial statements and because of the possibility that future events affecting
the estimate may differ significantly from management's current judgments.
We believe the following critical accounting policies involve the most
significant estimates and judgments used in the preparation of our financial
statements.
32
Use of
Estimates
The
preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to the
determination of depreciation rates for equipment, reserves for slow moving and
obsolete inventory, future tax rates used to determine future income taxes, and
the carrying values of goodwill and accrued derivative liabilities. Actual
results could differ from these estimates upon which the carrying values were
based.
Fair Value
Measurements
For
certain of our financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, accrued liabilities and
short-term debt, the carrying amounts approximate their fair values due to their
short maturities. In addition, we have long-term debt with financial
institutions. The carrying amounts of the line of credit and other long-term
liabilities approximate their fair values based on current rates of interest for
instruments with similar characteristics.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held us. ASC Topic 825, “Financial Instruments”
defines fair value, and establishes a three-level valuation hierarchy for
disclosures of fair value measurement that enhances disclosure requirements for
fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
|
|
·
|
Level 1 inputs to the valuation
methodology are quoted prices for identical assets or liabilities in
active markets
|
|
|
·
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.
|
|
|
·
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
|
We
analyze all financial instruments with features of both liabilities and equity
under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
Long-Lived
Assets
In
accordance with ASC Topic 360, “Property, Plant and Equipment,” the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances that may suggest impairment.
We recognize impairment when the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its
estimated fair value.
Foreign Currency
Translation
Our
reporting currency is the U.S. dollar. Our subsidiary uses its local
currency, the RMB, as its functional currency. Assets and liabilities are
translated using the exchange rates prevailing at the balance sheet date.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the consolidated statements of
stockholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Revenue
Recognition
Our
revenue recognition policies are in compliance with Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in ASC Topic
605). Sales revenue, including the final 10% of the purchase price,
is recognized after delivery is complete, customer acceptance of the product
occurs and collectability is reasonably assured. Customer acceptance occurs
after we ship the product, assemble the product on the customer’s site, and the
customer agrees to accept the product. Payments received before
satisfaction of all relevant criteria for revenue recognition are recorded as
unearned revenue. Unearned revenue consists of payments received from customers
prior to customer acceptance of the products. The Company also provides a
product warranty to its customers, which is typically a negotiated term between
12 and 18 months from the acceptance date.
33
The
Company’s warranty is provided to all customers and is not considered an
additional service; rather it is an integral part of the product sale. The
Company believes the existence of the product warranty in a sales contract does
not constitute a deliverable in the arrangement and thus there is no need to
apply FASB ASC TOPIC 605-25 separation and allocation model for a multiple
deliverable arrangement. FASB ASC Topic 450 specifically addresses the
accounting for standard warranties and neither SAB 104 nor FASB ASC TOPIC 605-25
supersedes FASB ASC TOPIC 450. During 2009, the Company introduced a
new product, coke oven elevator, for which it incurred additional one time
warranty expense. No material expenses were incurred for the coke
oven elevator in 2010.
Unearned
Revenue
Unearned
revenue consists of payments received from customers prior to customer
acceptance of our products. Generally our sales contracts with customers provide
that approximately 30% of the purchase price is due upon the placement of an
order, 30% when the manufacturing process is substantially complete and 30% upon
customer acceptance of the product. As a common practice in the manufacturing
business in China, payment of the final 10% of the purchase price is due no
later than the termination date of our warranty period, which is typically a
negotiated term of between 12 and 18 months from the acceptance date. We account
for payments received from customers prior to customer acceptance of the product
as unearned revenue.
Warranties
We offer
a warranty to our customers on our products depending on the contract terms
negotiated with our customers. Warranty terms are typically 12 to 18 months. We
record warranty costs as incurred, which are included in our selling expenses.
Warranty expenses are associated with parts, labor, and travel expenses
associated with repairing products post sale and within the warranty period. The
majority of the warranty costs are incurred within a short period of time after
the final installation and acceptance of our products by our customers. Our
warranty costs were $59,240 (unaudited), $101,151 (unaudited), $194,947 and
$74,703 for the nine months ended September 30, 2010 and 2009 and for the years
ended December 31, 2009 and 2008, respectively. We
account for our standard warranty using ASC Topic 450 and will continue to
monitor warranty claims and accrue for warranty expense
accordingly.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Under
ASC 740, a tax position is recognized as a benefit only if it is “more likely
than not” that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The evaluation of a tax position is a
two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred. No significant penalties or interest relating to income taxes
were incurred during the years ended December 31, 2009 and 2008. GAAP also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition.
Recent
Pronouncements
In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This
ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this ASU did not have a significant impact on the Company’s financial
statements.
34
On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting. The adoption of this ASU did not have a material impact on
the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-17 Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
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. This ASU is effective for fiscal years beginning on or
after November 15, 2009, and interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on the Company’s financial
statements.
In March
2010, FASB issued ASU No. 2010-10 Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s financial statements.
On
February 25, 2010, the FASB issued 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 U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s financial
statements.
On
March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU was effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its financial statements.
35
Directors
and Executive Officers
The
following persons became our executive officers and directors on November 22,
2010, upon effectiveness of the Share Exchange and hold the positions set forth
opposite their respective names.
|
Name
|
Position
|
Age
|
||
|
Mr.
Lixin Wang
|
Chairman
and Chief Executive Officer
|
55
|
||
|
Mr.
Linqiang Yang
|
Chief
Financial Officer
|
34
|
||
|
Mr.
Yueqi Zou
|
Director
|
35
|
||
|
Ms.
Yiran Wang
|
|
Corporate
Secretary
|
|
30
|
Our
executive officers are appointed by, and serve at the discretion of, our Board
of Directors. Each executive officer is a full time employee. Our directors hold
office for one-year terms or until their successors have been elected and
qualified. There are no family relationships between any of our directors,
executive officers or other key personnel and any other of our directors,
executive officers or key personnel.
Mr.
Lixin Wang, Chairman and Chief Executive Officer
Mr. Wang
was appointed Chairman and Chief Executive Officer of the Company on November
22, 2010. Mr. Wang was one of the founders of Dalian in December 1992, which is
now a wholly owned subsidiary of the Company, and was appointed its Chairman of
the Board and Chief Executive Officer in December 1992. From 1990 to 1992 Mr.
Wang served as Manager of Dalian Xinkai Electronics Co., Ltd. and from 1987 to
1990 he was the Manager of Dalian Metallurgical Machinery Plant, Co. Ltd. Mr.
Wang has designed three patented models of coke dry quenching transport cars.
Mr. Wang graduated from the Technical School of Lushan and Dalian in 1977. As
one of the Company’s founders, Mr. Wang brings to the Board of Directors his
extensive knowledge of the operations and long-term strategy of the Company. The
Board of Directors believes that Mr. Wang’s vision, leadership and extensive
knowledge of the Company is essential to our future growth. His skills include
operations, marketing, business strategy and product development.
Mr.
Linqiang Yang, Chief Financial Officer
Mr. Yang
was appointed Chief Financial Officer of the Company on November 22, 2010. Mr.
Yang joined Dalian in 2003 as its Chief Financial Officer. From 2001 to 2002, he
served as an accountant for Dalian Jilian Whole Set Metallurgical Machinery
Equipment Co., Ltd. From 1998 to 2000, Mr. Yang served as Chief Accountant of
Jinan Qiya Machinery and Equipment Co., Ltd. Mr. Yang graduated from
Shaanxi University of Finance and Economics in 1998.
Mr.
Yueqi Zou, Director
Mr. Zou
was appointed Director of the Company on November 22, 2010. Mr. Zou has had
significant experience in the sales and marketing of heavy industrial
equipment. He joined Dalian in 2004 as Dalian’s Deputy Manager of
Sales. Previously, he was the Project Manager of Sales from 2003-2004, and the
Vice Director of Technology from 1998-2003, at Dalian Heavy Industry Group. Mr.
Zou graduated from Shenyang University of Technology in 1996.
Ms.
Yiran Wang, Corporate Secretary
Ms. Wang
was appointed Corporate Secretary of the Company on November 22,
2010. Previously, she was the General Assistant Manager and a Human
Resources Supervisor for Dalian East Sign Design & Engineering Co.,
Ltd. She graduated from the Dalian University of Foreign Languages in
2002 with a major in English studies and from the Dalian Maritime University
where she received a business English degree. Ms. Wang is fluent in Mandarin
Chinese and English.
36
Security
Ownership of Certain Beneficial Owners and Management
The
following table provides information concerning the beneficial ownership of our
common stock as of November 22, 2010, by (i) each person that we know
beneficially owns more than 5% of our outstanding common stock, (ii) each of our
named executive officers, (iii) each of our directors and (iv) all of our named
executive officers and directors as a group.
The
amounts and percentages of common stock beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
“beneficial owner” of a security if that person has or shares “voting power,”
which includes the power to vote or to direct the voting of such security, or
“investment power,” which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days of November 22, 2010. Under these rules, more than one
person may be deemed a beneficial owner of the same securities and a person may
be deemed to be a beneficial owner of securities as to which such person has no
economic interest. As of November 22, 2010, there were 29,390,000 shares of our
common stock issued and outstanding.
Unless
otherwise indicated, each of the stockholders named in the table below, or his
or her family members, has sole voting and investment power with respect to such
shares of common stock. Except as otherwise indicated, the address of each of
the stockholders listed below is: c/o FusionTech, Inc., No. 26 Gaoneng Street,
High Tech Zone, Dalian, Liaoning Province, China 116025.
|
Name of beneficial owner
|
Number of shares
|
Percent of class
|
||||||
|
5%
Stockholders
|
||||||||
|
Yang
Wang
|
3,748,500 | 12.75 | % | |||||
|
Peili
Wang
|
2,499,000 | 8.5 | % | |||||
|
Directors
and Named Executive Officers
|
||||||||
|
Lixin
Wang
|
13,744,500 | 46.77 | % | |||||
|
Linqiang
Yang
|
— | * | % | |||||
|
Yueqi
Zou
|
— | * | % | |||||
|
All
Directors and Named Executive Officers as a Group (3
Persons)
|
13,744,500 | 46.77 | % | |||||
*Represents
less than 1% of shares outstanding.
We are
not aware of any arrangements that could result in a change in control of the
Company.
Executive
Compensation
As a
“smaller reporting company,” we have elected to follow scaled disclosure
requirements for smaller reporting companies with respect to the disclosure
required by Item 402 of Regulation S-K. Under the scaled disclosure obligations,
the Company is not required to provide a Compensation Discussion and Analysis,
Compensation Committee Report and certain other tabular and narrative
disclosures relating to executive compensation.
The
following table sets forth information concerning the compensation for the years
ended December 31, 2009 and 2008, of certain of our executive
officers.
|
Summary Compensation Table
|
|||||||||||||||||||||||
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Nonequity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||
| 2010 | 12,000 | 13,714 | 25,714 | ||||||||||||||||||||
|
Lixin
Wang
|
2009
|
12,000 | 2,286 | 14,286 | |||||||||||||||||||
|
Chairman
and Chief Executive Officer
|
2008
|
12,000 | 2,286 | 14,286 | |||||||||||||||||||
| 2010 | 12,000 | 6,571 | 18,571 | ||||||||||||||||||||
|
Linqiang
Yang
|
2009
|
12,000 | 2,286 | 14,286 | |||||||||||||||||||
|
Chief
Financial Officer
|
2008
|
12,000 | 2,286 | 14,286 | |||||||||||||||||||
37
Narrative
Disclosure to Summary Compensation Table
Employment
Agreements
Neither
the Company nor its subsidiary has employment agreements with their respective
officers currently. We have entered into standard China domestic labor contracts
with Mr. Lixin Wang, our Chairman and Chief Executive Officer, and Mr. Linqiang
Yang, our Chief Financial Officer, which specify the general terms and
conditions of employment. These labor contracts have indefinite
terms, require the Company to establish a safe working environment, and provide
for social insurance as required by state and provincial laws, including
pension, unemployment, basic medical and workplace injury
insurance.
We do not
have any formal arrangements with our executive officers regarding their
compensation. In the future, changes in our executive officers’ compensation
will be considered by our Board of Directors.
Change-In-Control
/ Separation Agreements
The
standard labor contracts with our CEO and CFO specify the conditions under which
the contract may be terminated and set forth minimum severance payments general
equal to one month’s salary for each year of employment in cases where the
Company initiates the termination other than for “cause.”
We do not
have any existing arrangements providing for payments or benefits in connection
with the resignation, severance, retirement or other termination of any of our
named executive officers, or a change in control of the Company or a change in
the named executive officer’s responsibilities following a change in
control.
Equity
Incentive Plans
We have
no equity incentive plan currently, although we may in the future adopt an
equity incentive plan in order to further the growth and general prosperity of
the Company by enabling our officers, employees, contractors and service
providers to acquire our common stock, increasing their personal involvement in
the Company and thereby enhancing the ability of the Company to attract and
retain its officers, employees, contractors and service providers.
Outstanding
Equity Awards at Fiscal Year-End
As of
December 31, 2009, there were no outstanding equity awards held by the executive
officers of the Company.
Compensation
of Directors
As of
December 31, 2009, we had two directors and none of our directors has received
any compensation from us for serving as our directors.
We do not
currently compensate our directors for acting as such, although we may do so in
the future, including with cash and/or equity.
We have
not compensated, and will not compensate, our non-independent directors, such as
Mr. Wang and Mr. Zou, for serving as our directors, although they are entitled
to reimbursements for reasonable expenses incurred in connection with attending
our board meetings.
We do not
maintain a medical, dental or retirement benefits plan for our
directors.
Legal
Proceedings
During
the past ten years, none of the Company’s directors or executive officers has
been:
|
|
§
|
the subject of any bankruptcy
petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy
or within two years prior to that
time;
|
38
|
|
§
|
convicted in a criminal
proceeding or is subject to a pending criminal proceeding (excluding
traffic violations and other minor
offenses);
|
|
|
§
|
subject to any order, judgment or
decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking
activities;
|
|
|
§
|
found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, that has not been reversed, suspended, or
vacated;
|
|
|
§
|
subject of, or a party to, any
order, judgment, decree or finding, not subsequently reversed, suspended
or vacated, relating to an alleged violation of a federal or state
securities or commodities law or regulation, law or regulation respecting
financial institutions or insurance companies, law or regulation
prohibiting mail or wire fraud or fraud in connection with any business
entity; or
|
|
|
§
|
subject of, or a party to, any
sanction or order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization, any registered entity or any equivalent
exchange, association, entity or organization that has disciplinary
authority over its members or persons associated with a
member.
|
Certain
Relationships and Related Transactions, and Director Independence
On
January 12, 2010, Dalian received a short-term loan of approximately $1,765,200
from Shanghai Pudong Development Bank. The loan is due on January 11, 2011 and
bears an interest rate of 5.841%. The loan is currently guaranteed by Dalian
Union-Chuangye Bonding Co. Ltd. Lixin Wang, Chairman, Chief Executive Officer,
and named beneficial owner of the Company’s common stock, and his wife, Peili
Wang, also a named beneficial owner of the Company’s common stock, also
personally guaranteed the loan. Mr. and Mrs. Wang undertook to counter-guarantee
Dalian Union Chuangye Bonding Co. Ltd, by pledging their ownership interests in
Dalian on January 12, 2010. Mr. and Mrs. Wang’s pledge of ownership interests to
Dalian Union-Cuangye Bonding Co., Ltd. was subsequently canceled on September
10th,
2010. On January 11, 2011, Dalian repaid the outstanding balance on the
short-term note in full.
From time
to time, Dalian has made loans to Dalian Yujiu, a company that is 40% owned by
the Chief Executive Officer of Company’s son, Yang Wang. Mr. Yang Wang is also a
named beneficial owner of the Company’s common stock. As of September
30, 2010, December 31, 2009 and December 31, 2008, Dalian Yujiu owed Dalian
$50,289, $96,226, and $172,433, respectively. All amounts due to Dalian from
Dalian Yujiu have been paid as of November 2, 2010. There are no
future commitments of Dalian to fund Dalian Yujiu.
On
Feburary 8, 2010 Dalian, prior to becoming a public company, declared a one-time
dividend to its two shareholders, Lixin Wang, the Company’s Chairman and Chief
Executive Officer, and Peili Wang, his wife and named beneficial owner of the
Company’s common stock. Lixin Wang received $328,160 and Peili Wang received
$184,590, as dividends payable pursuant to their respective ownership interests
in Dalian.
On
January 19, 2011, Dalian entered into a credit facility with Shanghai Pudong
Development Bank through which Dalian can borrow up to $3.34 million for working
capital needs from time to time until February 1, 2012. Any loan received
through the credit facility will bear interest, adjustable quarterly, at a
floating rate of 120% of China’s benchmark interest rate, which was 5.8% as of
January 28, 2011. The Company’s Chief Executive Officer, Lixin Wang, Chief
Financial Officer, Linqiang Yang, and director, Yueqi Zou, will mortgage
their private homes to guarantee any loan under the credit facility.
As of January 28, 2011, Dalian has not drawn down any loans through
the credit facility.
There
were no other transactions with any related persons aside from those disclosed
above (as that term is defined in Item 404 of Regulation SK) since the beginning
of the Company’s last fiscal year, and for the two fiscal years preceding the
Company’s last fiscal year, or any currently proposed transaction, in which the
Company was or is to be a participant and the amount involved was in excess of
$120,000 and in which any related person had a direct or indirect material
interest.
We rely
on our Board of Directors to review related party transactions involving our
Company on an ongoing basis to prevent conflicts of interest. The Board of
Directors reviews a transaction in light of the affiliations of the director,
officer or employee and the affiliations of such person’s immediate family.
Transactions are presented to the Board of Directors for approval before they
are entered into or, if this is not possible, for ratification after the
transaction has occurred. If the Board of Directors finds that a conflict of
interest exists, then it will determine the appropriate remedial action, if any.
The Board of Directors approves or ratifies a transaction if it determines that
the transaction is consistent with the best interests of the
Company. These policies and procedures are not evidenced in
writing.
39
Director
Independence
Our Board
of Directors currently is comprised of two directors. None of our current
directors qualifies as an “independent” director for the purposes of the listed
company standards of The NASDAQ Stock Market LLC (“NASDAQ”) currently in effect
and approved by the SEC and all applicable rules and regulations of the SEC. The
Company intends to add independent directors to its Board of Directors as a
requirement to the listing of its common stock on a national securities
exchange. The composition of our Board of Directors, and that of its committees,
will be subject to the corporate governance provisions of the Company’s primary
trading market, including the requirement for the appointment of independent
directors in accordance with the Sarbanes-Oxley Act of 2002 and regulations
adopted by the SEC and NASDAQ pursuant thereto.
Audit
Committee
We have a
separately designated Audit Committee of the Board of Directors, which functions
are currently performed by our Board of Directors. None of our directors
currently is deemed “independent”—our Chairman is also our Chief Executive
Officer and our other director is the Director of Sales of the Company. None of
our directors is an “audit committee financial expert” as defined under Item
407(d) of Regulation S-K.
We plan
to establish a fully functioning Audit Committee prior to seeking listing of our
Company’s securities on a national exchange. Our Audit Committee will be
responsible for: (i) selection and oversight of our independent registered
public accounting firm; (ii) establishing procedures for the receipt, retention
and treatment of complaints regarding accounting, internal controls and auditing
matters; (iii) establishing procedures for the confidential, anonymous
submission by our employees of concerns regarding accounting and auditing
matters; (iv) engaging outside advisors; and, (v) funding for the independent
registered public accounting firm and any outside advisors engaged by the Audit
Committee.
Compensation
Committee
We intend
to establish a Compensation Committee of the Board of Directors. The
Compensation Committee would review and approve our salary and benefits
policies, including the compensation of executive officers. The Compensation
Committee would also administer our equity incentive plans and recommend and
approve grants of stock options under such plans.
Indemnification
of Directors and Officers
The
Nevada Revised Statutes provide that a director or officer is not individually
liable to the corporation or its shareholders or creditors for any damages as a
result of any act or failure to act in his capacity as a director or officer
unless it is proven that his act or failure to act constituted a breach of his
fiduciary duties as a director or officer and his breach of those duties
involved intentional misconduct, fraud or a knowing violation of law. The
Articles of Incorporation or an amendment thereto may, however, provide for
greater individual liability. Furthermore, directors may be jointly and
severally liable for the payment of certain distributions in violation of
Chapter 78 of the Nevada Revised Statutes.
This
provision is intended to afford directors and officers protection against and to
limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, shareholders of our company will be unable to recover
monetary damages against directors or officers for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct meets the requirements of Nevada law to impose such liability. The
provision, however, does not alter the applicable standards governing a
director’s or officer’s fiduciary duty and does not eliminate or limit the right
of our company or any shareholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary duty.
The
Nevada Revised Statutes also provide that under certain circumstances, a
corporation may indemnify any person for amounts incurred in connection with a
pending, threatened or completed action, suit or proceeding in which he is, or
is threatened to be made, a party by reason of his being a director, officer,
employee or agent of the corporation or serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person (a) is not
liable for a breach of fiduciary duty involving intentional misconduct, fraud or
a knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Additionally, a
corporation may indemnify a director, officer, employee or agent with respect to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, if such person (a) is not liable
for a breach of fiduciary duty involving intentional misconduct, fraud or a
knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, however, indemnification may not be made for any claim, issue or
matter as to which such a person has been adjudged by a court to be liable to
the corporation or for amounts paid in settlement to the corporation, unless the
court determines that the person is fairly and reasonably entitled to indemnity
for such expenses as the court deems proper. To the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, the corporation shall indemnify
him against expenses, including attorneys’ fees, actually and reasonably
incurred by him in connection with the defense.
40
Our
Articles of Incorporation and Amended and Restated Bylaws provide, among other
things, that a director, officer, employee or agent of the corporation may be
indemnified against expenses (including attorneys’ fees inclusive of any
appeal), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such claim, action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best of our interests, and
with respect to any criminal action or proceeding, such person had no reasonable
cause to believe that such person’s conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
provided for directors, officers, employees, agents or persons controlling an
issuer pursuant to the foregoing provisions, the opinion of the SEC is that such
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
Available
Information
We file
annual, quarterly, and special reports and other information with the SEC. You
may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549, on official business
days during the hours of 10 a.m. to 3 p.m. You may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our
filings are also available to the public from commercial document retrieval
services and at the website maintained by the SEC at www.sec.gov.
Item
3.02 Unregistered Sales of Equity Securities.
Pursuant
to the Share Exchange Agreement, we issued an aggregate of 24,990,000 shares of
common stock to 7 non-U.S. persons, as contemplated by Rule 902 under the
Securities Act of 1933, as amended (the “Securities Act”), in exchange for all
of the ownership interests of Dalian. The issuance of our common stock to these
non-U.S. persons was exempt from the registration requirements of the Securities
Act pursuant to Regulation S. The shares issued pursuant to Regulation S were
issued in an “offshore transaction” as defined in, and pursuant to, Rule 902
under the Securities Act, on the basis that the purchasers were not offered the
shares in the United States and did not execute or deliver any agreement within
the United States.
Description
of Registrant’s Securities
The
following information describes our securities and provisions of our Articles of
Incorporation and Amended and Restated Bylaws, all as in effect upon the closing
of the Share Exchange. This description is only a summary. You should also refer
to our Articles of Incorporation and Amended and Restated Bylaws, copies of
which have been incorporated by reference or filed as exhibits to this Current
Report on Form 8-K.
After
giving effect to the Share Exchange, there are approximately 40 holders of
record of our common stock and our issued and outstanding securities, on a fully
diluted basis, consist of:
|
|
§
|
29,390,000 shares of common
stock, approximately 85% of which are held by the former stockholders of
Dalian and approximately 15% of which are held by the existing
stockholders of the Company;
|
|
|
§
|
No options to purchase any
capital stock or securities convertible into capital stock;
and,
|
|
|
§
|
No warrants to purchase any
capital stock or securities convertible into capital
stock.
|
Description
of Common Stock
The
holders of common stock are entitled to one vote per share. Our Articles of
Incorporation does not provide for cumulative voting. The holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by our Board of Directors out of legally available funds; however, the current
policy of our Board of Directors is to retain earnings, if any, for operations
and growth. Upon liquidation, dissolution or winding-up, the holders of common
stock are entitled to share ratably in all assets that are legally available for
distribution. The holders of common stock have no preemptive, subscription,
redemption or conversion rights.
41
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Dalian is
and always has been a privately held company and now is a wholly owned
subsidiary of the Company. There is not and never has been a public market for
the securities of Dalian. Our common stock qualified for quotation on the OTC
Bulletin Board (“OTCBB”) maintained by the Financial Industry Regulatory
Authority (“FINRA”) on December 12, 2009, under the symbol “ZPNP.” Our common
stock traded under the symbol “ZPNPD” for a 20-day period beginning on November
12, 2010, pursuant to FINRA rules governing corporate actions, after which
period our symbol reverted to “ZPNP.” There currently is no liquid trading
market for our common stock. Since its initial listing, no trades of our common
stock have occurred through the facilities of the OTCBB.
As soon
as practicable, and assuming we satisfy all necessary initial listing
requirements, we intend to apply to have our common stock listed for trading on
a national securities exchange such as The NASDAQ Stock Market or the New York
Stock Exchange, although we cannot be certain that our application will be
approved.
Dividends
Dividends
may be declared and paid out of legally available funds at the discretion of our
Board of Directors. We do not anticipate or contemplate paying dividends on our
common stock in the foreseeable future. We currently intend to utilize all
available funds to develop our business. We can give no assurances that we will
ever have excess funds available to pay dividends.
In
addition, our ability to pay dividends may be affected by the foreign exchange
controls in China that restrict the payment of dividends to the Company by its
subsidiary in China. China has adopted currency and capital transfer regulations
that may require our subsidiary in China to comply with complex regulations for
the movement of capital. These regulations include a public notice issued in
October 2005 by the State Administration of Foreign Exchange (“SAFE”) requiring
PRC residents, including both legal persons and natural persons, to register
with the competent local SAFE branch before establishing or controlling any
company outside of China. Although the Company believes its subsidiary in China
is in compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change, the Company may
not be able to pay dividends outside of China.
Securities
Authorized for Issuance under Equity Compensation Plans
During
the year ended December 31, 2009, we did not have a formal equity compensation
plan in effect. We did not grant any equity based compensation awards during the
year ended December 31, 2009, nor do we have any equity compensation plan not
approved previously by security holders.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Interwest Transfer Company,
Inc., 1981 Murray Holladay Road, Suite 100, Salt Lake City,
UT 84117. Our transfer agent’s telephone number is (801)
272-9294.
Item
5.01 Changes in Control of Registrant.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
On
November 22, 2010, as of the closing of the Share Exchange, Mr. David Lu and Mr.
David Xu resigned as our directors and Mr. Lixin Wang was appointed Chairman of
the Board of Directors and Mr. Yueqi Zou was appointed to our Board of
Directors. As a result, Mr. Wang and Mr. Zou became the sole members of our
Board of Directors.
On
November 22, 2010, as of the closing of the Share Exchange, Mr. Lu resigned as
President, Chief Executive Officer, Chief Financial Officer, Treasurer,
and Secretary of the Company and Mr. Lixin Wang was appointed Chief
Executive Officer, Mr. Linqiang Yang as Chief Financial Officer, and Ms. Yiran
Wang as Corporate Secretary.
Reference
is made to the disclosure of the biographies of each of the new directors and
officers as set forth under Item 2.01 of this Current Report on Form 8-K, which
disclosure is incorporated herein by reference.
42
There are
no family relationships between any of our directors, executive officers or
other key personnel and any other of our directors, executive officers or key
personnel. Other than those transactions disclosed and set forth under Item 2.01
of this Current Report on Form 8-K, there were no transactions since the
beginning of our last fiscal year, and for the two fiscal years preceding the
Company’s last fiscal year, or any currently proposed transaction, in which we
were or are to be a participant and the amount involved exceeds the lesser of
$120,000 or one percent of the average of our total assets at year-end for the
last three completed fiscal years, and in which any of our directors or officers
had or will have a direct or indirect material interest, other than the
ownership of shares of our common stock as a result of the Share Exchange.
Reference is made to the disclosure of the beneficial ownership of each of the
new directors and officers as set forth under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by reference.
Item
5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On
October 28, 2010, the Company changed its name to FusionTech, Inc. and filed
Articles of Merger with the Secretary of State of the State of Nevada amending
the Articles of Incorporation of the Company to reflect such change in company
name. On November 1, 2010, the Company increased its authorized shares from
75,000,000 to 100,000,000 shares of Common Stock and filed a Certificate of
Change with the Secretary of State of the State of Nevada amending the Articles
of Incorporation of the Company to reflect the increase in authorized shares. No
other changes to the Articles of Incorporation were made. The Articles of Merger
are filed as Exhibit 3.3 and the Certificate of Change is filed as Exhibit 3.4
to this Current Report on Form 8-K.
On
November 22, 2010, the Board of Directors (the “Board”) of the Company, by
unanimous consent, made all of the following amendments to the Company’s
Bylaws:
The Board
amended Article I, Section 1 of the Company’s Bylaws to authorize the Board of
Directors to set the date and time of the Company’s annual meeting of
shareholders, rather than requiring the meeting to be held within 100 days after
the anniversary of the date of incorporation of the Company. The amendment was
effective immediately.
The Board
amended Article I, Section 11 of the Company’s Bylaws to permit actions that
require shareholder approval to be taken by the written consent of a majority of
the Company’s shareholders, rather than requiring unanimous written consent of
the shareholders. The amendment was effective immediately.
The Board
amended Article IV, Section 1 of the Company’s Bylaws to permit shares of the
Company’s Common Stock to be uncertificated, rather than requiring the shares of
the Company’s Common Stock be represented by certificates. The
amendment was effective immediately.
The Board
amended the Article V of the Company’s Bylaws by adding a new section 5 which
provided for the indemnification of directors and officers of the Company. The
amendment was effective immediately.
The
Amended and Restated Bylaws of the Company are filed as Exhibit 3.2 to this
Current Report on Form 8-K.
On
November 22, 2010, as of the closing of the Share Exchange, the Board of
Directors of the Company, by unanimous consent, changed the fiscal year of the
Company to end on December 31 from January 31. Beginning with the periodic
report required pursuant to the Securities Exchange Act of 1934, as amended, for
the quarter in which the transaction contemplated by the Share Exchange
Agreement was consummated, the Company will file annual and quarterly reports
based upon a December 31 fiscal year end.
Item
5.06 Change in Shell Company Status.
On
November 22, 2010, we consummated the transactions contemplated by the Share
Exchange Agreement. As a result of the consummation of the Share Exchange
described in Item 1.01 of this Current Report on Form 8-K, we are no longer a
shell company as that term is defined in Rule 405 under the Securities Act and
Rule 12b-2 under the Exchange Act.
Item
8.01 Other Events
On
October 28, 2010, our Board of Directors authorized an 8-for-1 forward stock
split of all outstanding shares of our common stock, par value $.001 per share,
and an increase in the authorized shares of the Company from 75,000,000 shares
of Common Stock to 100,000,000 shares of Common Stock. The forward stock split
was made effective as of November 12, 2010. The forward stock split increased
the number of shares of Common Stock outstanding but did not affect the par
value of the Common Stock.
The
effect of the forward stock split was to increase the number of shares of Common
Stock issued and outstanding from 550,000 shares to 29,390,000 shares after
giving effect to the Share Exchange Agreement and shares returned to the
treasury for cancellation by Mr. Lu.
43
Our
common stock traded under the symbol “ZPNPD” for a 20-day period beginning on
November 12, 2010, pursuant to FINRA rules governing corporate actions, after
which period our symbol reverted to “ZPNP.”
Item
9.01 Financial Statements and Exhibits
(a)
Financial statements of businesses acquired.
The
audited consolidated financial statements of Dalian for the years ended December
31, 2009 and 2008, and the unaudited consolidated financial statements for the
nine months ended September 30, 2010 and 2009, including the notes to such
financial statements, are incorporated herein by reference to Exhibit 99.3 of
this Current Report on Form 8-K.
(b)
Pro forma financial information
The pro
forma combined balance sheet presents the accounts of FusionTech, Inc. and
Dalian Heavy Mining Equipment Manufacturing Co., Ltd. as if the acquisition of
Dalian by FusionTech occurred on October 31, 2010. The pro forma
combined statement of operations presents the accounts of FusionTech and Dalian
for the year ended January 31, 2010, and for the nine months ended October 31,
2010 as if the acquisition occurred on January 1, 2009. For
accounting purposes, the transaction is being accounted for as a
recapitalization of Dalian. The Company’s pro forma financial
statements are incorporated herein by reference to Exhibit 99.4 of this Current
Report on Form 8-K.
(c)
Shell company transactions.
Reference
is made to Item 9.01(a) of this Current Report on Form 8-K and the exhibit
referred to therein, which are incorporated herein by reference.
(d)
Exhibits.
|
2.1
|
Share
Exchange Agreement and Plan of Reorganization by and between Dalian Heavy
Mining Equipment Manufacturing Co. Ltd. and FusionTech, Inc., dated
November 22, 2010 (Incorporated herein by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
2.2
|
Return
to Treasury Agreement by and between FusionTech, Inc. and David Lu, dated
November 22, 2010 (Incorporated herein by reference to Exhibit 2.2 to the
Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
2.3
|
Agreement
and Plan of Merger by and between ZapNaps, Inc. and FusionTech, Inc.,
dated October 28, 2010 (incorporated herein by reference to Exhibit 2.3 to
the Company’s Quarterly Report on Form 10Q (File No. 000-53837) filed on
November 12, 2010)
|
|
|
3.1
|
Articles
of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the
Company’s Form S-1 (File No. 333-152355) filed on July 16,
2008)
|
|
|
3.2
|
Amended
and Restated Bylaws (Incorporated herein by reference to Exhibit 3.2 to
the Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
3.3
|
Articles
of Merger between ZapNaps, Inc. and FusionTech, Inc., amending the
Articles of Incorporation filed with the Secretary of State of the State
of Nevada on October 28, 2010 (incorporated herein by reference to Exhibit
3.3 to the Company’s Quarterly Report on Form 10Q (File No. 000-53837)
filed on November 12, 2010)
|
|
|
3.4
|
Certificate
of Change pursuant to NRS 78.209, amending the Articles of Incorporation
filed with the Secretary of State of the State of Nevada on November 1,
2010 (Incorporated herein by reference to Exhibit 3.4 to the Company’s
Current Report on Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
3.5
|
Articles
of Exchange of Dalian Heavy Mining Equipment Manufacturing Co. Ltd. and
FusionTech, Inc. filed with the Secretary of State of the State of Nevada
on November 22, 2010 (Incorporated herein by reference to Exhibit 3.5 to
the Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
44
|
10.1
|
Agreement
for Short-Term Loan by and between Shanghai Pudong Development Bank Co.,
Ltd. and Dalian Heavy Mining Equipment Manufacturing, Co.,
Ltd., dated January 1, 2010 (Incorporated herein by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.
000-53837) filed on November 22, 2010)
|
|
|
10.2
|
Contract
to Guarantee by and between Dalian Union-Chuangye Bonding Company, Ltd.
and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated January
12, 2010 (Incorporated herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
10.3
|
Contract
to Guarantee by and between Shanghai Pudong Development Bank Co., Ltd. and
Lixin Wang and Peili Wang, dated January 12, 2010 (Incorporated herein by
reference to Exhibit 10.3 to the Company’s Amended Current Report on Form
8-K/A (File No. 000-53837) filed on January 3, 2011)
|
|
|
10.4
|
Registration
Notice of Cancelling Equity Pledge between Dalian Union-Chuangye Bonding
Company, Ltd. and Lixin Wang, dated September 10, 2010 (Incorporated
herein by reference to Exhibit 10.4 to the Company’s Current Report on
Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
10.5
|
Registration
Notice of Cancelling Equity Pledge between Dalian Union-Chuangye Bonding
Company, Ltd. and Peili Wang, dated September 10, 2010 (Incorporated
herein by reference to Exhibit 10.5 to the Company’s Current Report on
Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
10.6
|
Investment
Agreement by and between Management Committee of Laobian Industrial Park
and Dalian Heavy Mining Equipment Manufacturing Co., Ltd. (Incorporated
herein by reference to Exhibit 10.6 to the Company’s Current Report on
Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
10.7
|
Agreement
by and between Zhuanghe Port Industrial Zone Management Committee and
Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated September 17,
2009 (Incorporated herein by reference to Exhibit 10.7 to the Company’s
Current Report on Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
10.8
|
Lease
Contract at Gaoneng Street Incubating Base by and between Dalian Shuangde
Scientific Industry and Trading Co. Ltd and Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. (Incorporated herein by reference to Exhibit 10.8
to the Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
10.9
|
Workshop
Lease by and between Dalian Yilong Zhongkuan Machine Manufacturing Co.
Ltd., and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated
September 25, 2008 (Incorporated herein by reference to Exhibit 10.9 to
the Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
10.10
|
Lease
Agreement by and between Dalian Yilong Zhongkuan Machine Manufacturing Co.
Ltd. and Dalian Heavy Mining Equipment Manufacturing Co., Ltd., dated
November 20, 2009 (Incorporated herein by reference to Exhibit 10.10 to
the Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
10.11
|
Workshop
Lease and Processing Cooperation Agreement by and between Dalian Shengyang
Heavy Industry Co., Ltd. and Dalian Heavy Mining Equipment Manufacturing
Co., Ltd., dated August 10, 2010 (Incorporated herein by reference to
Exhibit 10.11 to the Company’s Current Report on Form 8-K (File No.
000-53837) filed on November 22, 2010)
|
|
|
10.12
|
Standard
Labor Contract by and between Lixin Wang and Dalian Heavy Mining Equipment
Manufacturing Co., Ltd., dated January 4, 2008 (Incorporated herein by
reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K
(File No. 000-53837) filed on November 22,
2010)
|
45
|
10.13
|
Standard
Labor Contract by and between Linqiang Yang and Dalian Heavy Mining
Equipment Manufacturing Co., Ltd., dated January 18, 2008 (Incorporated
herein by reference to Exhibit 10.13 to the Company’s Current Report on
Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
|
|
10.14
|
Agreement
by and between Minmetals Yingkou Medium Plate Co., Ltd and Dalian Heavy
Mining Equipment Manufacturing Co. Ltd., dated June 2, 2010 as amended on
August 9, 2010 (Incorporated herein by reference to Exhibit 10.14 to the
Company’s Amended Current Report on Form 8-K/A (File No. 000-53837) filed
on January 3, 2011)
|
|
|
10.15
|
Credit Finance Agreement by and between Shanghai Pudong Development Bank Co., Ltd. and Dalian Heavy Mining Equipment Manufacturing, Co., Ltd., dated January 19, 2011 (filed herewith) | |
|
21.1
|
Subsidiaries
of the Company (Incorporated herein by reference to Exhibit 21.1 to the
Company’s Current Report on Form 8-K (File No. 000-53837) filed on
November 22, 2010)
|
|
|
99.3
|
Audited
consolidated financial statements of Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. for the years ended December 31, 2009 and 2008,
and the unaudited financial statements for the nine months ended September
30, 2010 and 2009 (Incorporated herein by reference to Exhibit 99.3
to the Company’s Amended Current Report on Form 8-K/A (File No. 000-53837)
filed on January 3, 2011)
|
|
|
99.4
|
Unaudited
pro forma financial statements of FusionTech, Inc and Dalian Heavy Mining
Equipment Manufacturing Co., Ltd. as of October 31, 2010 (Incorporated
herein by reference to Exhibit 99.4 to the Company’s Current Report on
Form 8-K (File No. 000-53837) filed on November 22,
2010)
|
46
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
FUSIONTECH,
INC.
|
||||
|
(Registrant)
|
||||
|
Date:
|
January 31,
2011
|
By:
|
/s/
Lixin Wang
|
|
|
Name:
|
Lixin
Wang
|
|||
|
Title:
|
Chief
Executive Officer
|
|||
47