Attached files
| file | filename |
|---|---|
| EX-2.1 - SRKP 23 Inc | v209485_ex2-1.htm |
| EX-16.1 - SRKP 23 Inc | v209485_ex16-1.htm |
| EX-10.7 - SRKP 23 Inc | v209485_ex10-7.htm |
| EX-10.9 - SRKP 23 Inc | v209485_ex10-9.htm |
| EX-10.5 - SRKP 23 Inc | v209485_ex10-5.htm |
| EX-10.8 - SRKP 23 Inc | v209485_ex10-8.htm |
| EX-10.6 - SRKP 23 Inc | v209485_ex10-6.htm |
| EX-10.10 - SRKP 23 Inc | v209485_ex10-10.htm |
| EX-10.11 - SRKP 23 Inc | v209485_ex10-11.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K/A
(Amendment
No. 1)
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 23,
2010
China
Wesen Recycling Technology, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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000-53022
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26-1357843
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(State
or Other Jurisdiction of Incorporation)
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(Commission
File Number)
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(IRS
Employer Identification No.)
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Room
405, Floor 4, North Tower, 9 Shen Zhou Road,
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Guangzhou
High-tech Industrial Development Zone, Guangzhou
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People’s
Republic of China
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(Address,
including zip code, off principal executive
offices)
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Registrant’s
telephone number, including area code: 86 (20) 32290314
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SRKP
23, Inc.
|
|
4737
North Ocean Drive, Suite 207, Lauderdale by the Sea, Florida
33308
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(Former
Name or Former Address, if Changed Since Last
Report)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
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·
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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·
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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·
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
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·
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
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EXPLANATORY
NOTE
This
Amendment No. 1 (this “Amendment”) on Form 8-K/A amends in its entirety the
Current Report on Form 8-K filed by China Wesen Recycling Technology, Inc. (“we”
or the “Company”) with the Securities and Exchange Commission (the “SEC”) on
November 30, 2010 (the “Original Filing”). On December 27, 2010, the
Company received a comment letter from the staff of the Securities and Exchange
Commission (the “SEC”) on the Original Filing. This Amendment
reflects changes made in response to comments we received from the staff in its
comment letter.
Unless
indicated otherwise, the disclosures in this Amendment continue to describe
conditions as of the date of the Original Filing, and the disclosures contained
herein have not been updated to reflect events, results or developments that
have occurred after the Original Filing, or to modify or update those
disclosures affected by subsequent events. Among other things, forward-looking
statements made in the Original Filing have not been revised to reflect events,
results or developments that have occurred or facts that have become known to us
after the date of the Original Filing, and such forward-looking statements
should be read in their historical context. This Amendment should be read in
conjunction with the Company’s filings made with the SEC subsequent to the
Original Filing, including any amendments to those filings.
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ITEM
1.01
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ENTRY
INTO A MATERIAL DEFINITIVE
AGREEMENT.
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See Item 2.01, below, regarding
the discussion of the Share Exchange Agreement dated of November 12, 2010 (the
“Share Exchange Agreement”), which was entered into by and among SRKP 23, Inc.,
a Delaware corporation (“SRKP 23”); Weixin International Co., Limited, a company
organized under the laws of the British Virgin Islands (“Weixin BVI”); Wei Xin
Holding Group Limited, a company organized under the laws of Hong Kong and a
wholly-owned subsidiary of Weixin BVI (“Weixin HK”); Gangzhou Kelida Intelligent
Equipment Co., Ltd., a company organized under the laws of the People’s Republic
of China and a wholly-owned subsidiary of Weixin HK (“Kelida”); Zhaoqing Hua Su
Plastic Trading Company (“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd. (“Chuang Yi”), Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing
Li Jun Craftwork Co., Ltd. (“Li Jun”), each a company organized under the laws
of the People’s Republic of China and a wholly-owned subsidiary of Kelida;
and all of the shareholders of Weixin BVI (collectively, the “Weixin
Shareholders”), as reported in the Current Report on Form 8-K filed with
the Securities Exchange Commission on November 12, 2010. A copy of
the Share Exchange Agreement is attached hereto as
Exhibit 2.1.
See Item 2.01, below, regarding
the discussion of the Subscription Agreement relating to the private placement
of 1,111,099 shares of our common stock (the “Private Placement”).
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ITEM
2.01
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COMPLETION
OF ACQUISITION OR DISPOSITION OF
ASSETS.
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OVERVIEW
As used in this report, unless
otherwise indicated, the terms “we,” “Company” and “Wesen” refer to China Wesen
Recycling Technology, Inc., a Delaware corporation, formerly known as SRKP 23,
Inc. (“SRKP 23”), its wholly-owned subsidiary, Weixin International Co.,
Limited, a company organized under the laws of the British Virgin Islands
(“Weixin BVI”); Weixin BVI’s wholly-owned subsidiary, Wei Xin Holding Group
Limited, a company organized under the laws of Hong Kong (“Weixin HK”); Weixin
HK’s wholly-owned subsidiary, Gangzhou Kelida Intelligent Equipment Co., Ltd., a
company organized under the laws of the People’s Republic of China (“Kelida”);
and Kelida’s wholly-owned subsidiaries, Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”), each a company organized under the laws of the People’s
Republic of China.
“China” or “PRC” refers to the People’s
Republic of China. “RMB” or “Renminbi” refers to the legal currency
of China and “$” or “U.S. Dollars” refers to the legal currency of the United
States.
HISTORY
SRKP 23 was incorporated in the State
of Delaware on October 11, 2007 and was originally organized as a “blank check”
shell company to investigate and acquire a target company or business seeking
the perceived advantages of being a publicly held corporation.
On November 23, 2010, SRKP 23
(i) closed a share exchange transaction, described below, pursuant to which
SRKP 23 became the 100% parent of Weixin BVI and (ii) assumed the
operations of Weixin BVI and its subsidiaries, including Weixin HK, Kelida, Hua
Su, Chuang Yi, Xin Ye and Li Jun. We changed our name from “SRKP 23, Inc.” to
“China Wesen Recycling Technology, Inc.” on November 24, 2010.
Weixin BVI is a holding company that
was incorporated on December 3, 2009 under the laws of the British Virgin
Islands by Hongbing Wan. Hongbing Wan was the sole shareholder of
Weixin BVI upon its incorporation. On August 9, 2010, Hongbing Wan
transferred 100% of the outstanding shares of Weixin BVI to Hongyu Zhang
pursuant to an instrument of transfer for consideration of $1.00. On
October 28, 2010, Hongyu Zhang transferred 100% of the shares of Weixin BVI to
Wesen Environmental Technology Limited pursuant to an instrument of transfer for
consideration of $1.00. On November 8, 2010, Weixin BVI issued
additional shares to the Weixin Shareholders pursuant to share subscription
applications for consideration of $1.00 per share.
Weixin HK is a liability company
incorporated on December 30, 2005 under the laws of Hong Kong by Hongbing Wan.
Weixin HK is a window for the group to handle business outside China, including
dealing with overseas customers and occasionally, suppliers. Weixin
HK sells metal parts for various home products, including door hardware and lock
parts, to overseas clients. On August 10, 2010, Weixin BVI acquired
all the shares of Weixin HK from Weixin HK’s sole shareholder, Hongbing Wan, for
consideration of 10,000 Hong Kong Dollars pursuant to an instrument of transfer,
sold note and bought note.
Kelida is located in Guangzhou,
Guangdong Province, PRC and was incorporated under the laws of the PRC on
September 29, 2009 by Weixin HK. Since its inception, Kelida has not conducted
any business except for the acquisition of a land use right from Guangzhou
government. Eventually Kelida will be a research and development center of the
Company.
2
Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”) are each located in Zhaoqing City, Guangdong Province,
PRC. Hua Su was incorporated under the laws of the PRC on July 20,
2006 with a registered capital of RMB 500,000. The original
registered shareholders of Hua Su were Luo Jianhua (holding 75% of the
registered capital) and He Jixiong (holding 25% of the registered
capital). The registered capital of Hua Su was later increased to RMB
1,000,000. Each of Chuang Yi, Xin Ye, and Li Jun were incorporated
under the laws of the PRC on September 27, 2007 with registered capital of RMB
1,000,000. The original registered shareholders of Chuang Yi were
Peng Zhizhong and He Jixiong, with each holding 50% of the registered
capital. The original registered shareholders of Xin Ye were Luo
Zeming and Lu Jianzhong, with each holding 50% of the registered
capital. The original registered shareholders of Li Jun were Chen
Wenqing, holding 60% of the registered capital, and Qiu Yuji, holding 40% of the
registered capital.
Hongbing Wan was the actual investor of
the registered capital of each of Hua Su, Chuang Yi, Xin Ye and Li
Jun. Upon the establishment date of each of the companies, Hongbing
Wan entered into entrustment agreements with each of the original registered
shareholders of each of Hua Su, Chuang Yi, Xin Ye and Li Jun, pursuant to which
Hongbing Wan entrusted each of the original registered shareholders to hold the
shares on his behalf without paying any entrustment fees. Under the
entrustment agreements, Hongbing Wan entrusted each registered shareholder of
Hua Su, Chuang Yi, Xin Ye, and Li Jun with all of the shareholders’ rights
prescribed under the PRC Company Law and the articles of Articles of
Association, including, to be registered as the registered shareholders of each
respective company, to act on behalf of Hongbing Wan as the shareholders of Hua
Su, Chuang Yi, Xin Ye, and Li Jun, and to attend the shareholders’ meeting and
to collect dividends on behalf of Hongbing Wan. Hongbing Wan under
the agreements had the right to require each registered shareholder to transfer
his shareholdings to Hongbing Wan or any party designed by Hongbing Wan and no
registered shareholder could transfer his shareholdings in Hua Su, Chuang Yi,
Xin Ye, and Li Jun without Hongbing Wan’s prior written consent.
On November 16, 2009, each registered
shareholder of Hua Su, Chuang Yi, Xin Ye, and Li Jun transferred his shares of
each company to Kelida pursuant to equity transfer agreements for consideration
equal to the percentage of the registered capital that each registered
shareholder owned. Each of Hua Su, Chuang Yi, Xin Ye, and Li Jun
completed the required registration procedures to register Kelida as its sole
shareholder with the competent authority on February 1, 2010.
Through Hua Su, Chuang Yi, Xin Ye and
Li Jun, we are engaged in the processing and recycling of various plastics and
the production of finished products from the recycled plastic which are sold
domestically in China.
CORPORATE
STRUCTURE
The corporate structure of the Company
is illustrated as follows:
3
Our principal executive offices and
corporate offices are located at Room 405, Floor 4, North Tower, 9 Shen Zhou
Road, Guangzhou High-tech Industrial Development Zone, Guangzhou, People’s
Republic of China.
PRINCIPAL
TERMS OF THE SHARE EXCHANGE
On November 12, 2010, SRKP 23 entered
into a Share Exchange Agreement (the “Exchange Agreement”) with Weixin
International Co., Limited, a company organized under the laws of the British
Virgin Islands (“Weixin BVI”); Wei Xin Holding Group Limited, a company
organized under the laws of Hong Kong and a wholly-owned subsidiary of Weixin
BVI (“Weixin HK”); Gangzhou Kelida Intelligent Equipment Co., Ltd., a company
organized under the laws of the People’s Republic of China and a wholly-owned
subsidiary of Weixin HK (“Kelida”); Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”), each a company organized under the laws of the People’s
Republic of China and a wholly-owned subsidiary of Kelida; and all of the
shareholders of Weixin BVI (collectively, the “Weixin Shareholders”). Pursuant
to the Exchange Agreement, SRKP 23 agreed to issue an aggregate of 7,865,556
shares of its common stock, $0.0001 par value per share (the “Common Stock”) to
the Weixin Shareholders in exchange for all of the issued and outstanding
securities of Weixin BVI (the “Share Exchange”). The Share Exchange
closed on November 23, 2010.
Upon the closing of the Share Exchange,
SRKP 23 issued an aggregate of 7,865,556 shares of its Common Stock to the
Weixin Shareholders in exchange for all of the issued and outstanding securities
of Weixin BVI. Prior to the closing of the Share Exchange and the
initial closing of the Private Placement, as described below, stockholders of
SRKP 23 prior to the completion of the Share Exchange (the “SRKP 23
Stockholders”) canceled an aggregate of 6,679,899 shares held by them such that
there were 1,907,455 shares of Common Stock outstanding immediately prior to the
Share Exchange. The SRKP 23 Stockholders also canceled warrants to
purchase an aggregate of 7,804,803 shares of Common Stock such that the SRKP 23
Stockholders held warrants to purchase an aggregate of 782,545 shares of Common
Stock immediately prior to the Share Exchange. In addition, we paid a
$140,000 success fee to WestPark Capital, Inc. for services provided in
connection with the Share Exchange, including coordinating the share exchange
transaction process, interacting with the principals of the shell corporation
and negotiating the definitive purchase agreement for the shell, conducting a
financial analysis of Weixin BVI, conducting due diligence on Weixin BVI and its
subsidiaries and managing the interrelationship of legal and accounting
activities. Immediately after the closing of the Share Exchange and
the initial closing of the Private Placement, we had 10,884,120 shares of common
stock, no shares of preferred stock, no options, and warrants to purchase
782,545 shares of Common Stock issued and outstanding.
Pursuant to the terms of the Share
Exchange and a Registration Rights Agreement entered into with each of the SRKP
23 Stockholders, we agreed to register all of the 1,907,455 shares of Common
Stock and all of the 782,545 shares of Common Stock underlying the warrants held
by the SRKP 23 Stockholders. These shares will be included in a
subsequent registration statement (the “Subsequent Registration Statement”)
filed by us no later than the tenth (10th) day
after the end of the six (6) month period that immediately follows the date on
which we file the registration statement to register the shares issued in the
Private Placement (the “Required Filing Date”). We agreed to use
reasonable efforts to cause the Subsequent Registration Statement to become
effective within one hundred fifty (150) days after the Required Filing Date or
the actual filing date, whichever is earlier, or one hundred eighty (180) days
after the Required Filing Date or the actual filing date, whichever is earlier,
if such Subsequent Registration Statement is subject to a full review by the SEC
(the “Required Effectiveness Date”). If we fail to file the
Subsequent Registration Statement by the Required Filing Date or if it does not
become effective on or before the Required Effectiveness Date we are required to
issue, as liquidated damages, to each of the SRKP 23 Stockholders shares (the
“Penalty Shares”) equal to a total of 0.0333% of their respective shares for
each calendar day that the Subsequent Registration Statement has not been filed
or declared effective by the SEC (and until the Subsequent Registration
Statement is filed with or declared effective by the SEC), as
applicable. However, no Penalty Shares shall be due to the SRKP 23
Stockholders if we are using our best efforts to cause the Subsequent
Registration Statement to be filed and declared effective in a timely
manner.
On November 24, 2010 after the closing
of the Share Exchange, SRKP 23 changed its corporate name from “SRKP 23, Inc.”
to “China Wesen Recycling Technology, Inc.” Our shares of common
stock are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We intend to apply for the
listing of our common stock on the NYSE Amex or the NASDAQ Global
Market.
The transactions contemplated by the
Share Exchange Agreement were intended to be a “tax-free” reorganization
pursuant to the provisions of Sections 351 and/or 368(a) of the Internal
Revenue Code of 1986, as amended.
4
The execution of the Share Exchange
Agreement on November 12, 2010 was reported in a Current Report on Form 8-K
filed with the Securities and Exchange Commission (the “SEC “) on November 12,
2010. A copy of the Share Exchange Agreement is filed as
Exhibit 2.1 to this Current Report on Form 8-K.
THE
PRIVATE PLACEMENT
On November 23, 2010, concurrently with
the closing of the Share Exchange, we consummated an initial closing of a
private placement of shares of the Company’s Common Stock (the “Private
Placement”). Pursuant to Subscription Agreements entered into with
the investors, we sold an aggregate of 1,111,099 shares of Common Stock at $2.25
per share, for gross proceeds of approximately $2.5 million. The
purpose of the Private Placement was to increase our working capital and the net
proceeds from the Private Placement will be used to expand business operations,
including developing direct sources and dealerships, increasing production
capacity, making permitted acquisitions, purchasing manufacturing equipment, and
for general corporate purposes.
We agreed to file a registration
statement covering the shares of Common Stock sold in the Private Placement
within thirty (30) days of the final closing of the Private Placement pursuant
to the subscription agreement entered into with each investor and to cause such
registration statement to be declared effective by the SEC no later than one
hundred fifty (150) days from the date of filing or one hundred eighty (180)
days from the date of filing if the registration statement is subject to a full
review by the SEC. The SRKP 23 Stockholders and the investors in the
Private Placement also entered into lock-up agreements pursuant to which they
agreed that (i) if the proposed public offering that we expect to conduct
is for $5 million or more, then the investors and the SRKP 23 Stockholders would
not be able to sell or transfer their shares until at least six (6) months after
the public offering’s completion, and (ii) if the offering is for less than
$5 million, then one-tenth (1/10th) of
their shares would be released from the lock-up restrictions ninety (90) days
after the offering and there would be a pro rata release of the
shares thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, Inc., the placement agent for the Private
Placement (“WestPark Capital”), in its discretion, may also release some or all
the shares from the lock-up restrictions earlier, however, (i) no early
release shall be made with respect to SRKP 23 Stockholders prior to the release
in full of all such lock-up restrictions on the shares of Common Stock acquired
in the Private Placement and (ii) any such early release shall be made pro
rata with respect to all investors’ shares acquired in the Private
Placement.
Pursuant
to a Placement Agency Agreement entered into with WestPark Capital, we paid
WestPark Capital, Inc. a commission equal to 10.0% with a non-accountable fee of
4.0% of the gross proceeds from the Private Placement. We are also
retaining WestPark Capital for a period of six months following the closing of
the Private Placement to provide us with financial consulting services for which
we will pay WestPark Capital $4,000 per month. Out of the proceeds of
the Private Placement, we paid $250,000 to Keen Dragon Group Limited, a third
party unaffiliated with Weixin BVI, the Company, or WestPark Capital for
services in connection with arranging the Share Exchange.
Pursuant
to the Placement Agency Agreement, we entered into a lock-up agreement pursuant
to which we agreed that we will not, directly or indirectly, indirectly, (a)
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of any
shares of our Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock, or (b) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of shares of Common Stock or such other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock, other than
repurchases at cost or without cost pursuant to the terms of our option and
restricted stock purchase agreements, for a period beginning from the date of
listing or quotation of our Common Stock on either the New York Stock Exchange,
NYSE Amex, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board
(the “Listing Date”) and continuing to and including the date eighteen (18)
months after the Listing Date, without the prior written consent of WestPark
Capital; provided, however, that we may, without the prior written consent of
WestPark Capital, issue equity awards to our employees pursuant to equity
incentive plans approved by our the board of directors and stockholders
(provided that such grants do not exceed 7% of the outstanding shares, which
includes the issuance of the shares issued in connection with the Private
Placement).
Some of the controlling stockholders
and control persons of WestPark Capital were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of the Company,
including Richard Rappaport, who is the Chief Executive Officer of WestPark
Capital and was the President and a significant stockholder of the Company prior
to the Share Exchange, and Anthony C. Pintsopoulos, who is the President
and Treasurer of WestPark Capital and was one of the Company’s controlling
stockholders and an officer and director prior to the Share
Exchange. Mr. Rappaport is the sole owner of the membership
interests in the parent company of WestPark Capital. Each of
Messrs. Rappaport and Pintsopoulos resigned from all of their executive and
director positions with the Company upon the closing of the Share
Exchange.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
5
WESEN’S
BUSINESS
Overview
We recycle engineering plastics from
complex waste streams and end-of-life plastic-rich durable goods such as
computer and business equipment, household appliances, house wares, toys and
many other sources. We produce plastic grains and compounds which are
sold to original equipment manufacturers of consumer products and plastic
injection molders which produce new consumer products using recycled
material. We specialize in the production of high-density
polyethylene, or HDPE, low-density polyethylene, or LDPE, acrylonitrile-butadiene-styrene,
or ABS, and polystyrene, or PS. In addition, we offer a line of
household and construction products which we manufacture with our own recycled
plastic compounds. Our plastic grains are sold to trading companies
and wholesalers, as well as customers in industries such as architecture
industrial equipment and engineering production, chemical and petrochemical
manufacturing. In addition, a substantial portion of our revenue is currently
derived form the resale of recycled plastic materials, including HDPE, LDPE, ABS
and PS material, which we cannot currently recycle due to our current recycling
capabilities.
Industry
China is the world’s second largest
plastic products manufacturing country. China’s plastics industry has
benefited from lower production and labor costs as manufacturing and recycling
of plastics products has been outsourced from higher-cost countries to China and
other low-cost countries.
There is a growing awareness in the
global economy on issues surrounding waste management, and recycling processes
and recycled products are being developed to address those
issues. The advantages of recycling waste material are being
increasingly recognized by the global community. The environmental
benefits of recycled plastics products are well known and recycled plastics are
typically less expensive than virgin poly plastics.
It is estimated that demand for
recycled plastic in China for the foreseeable future will be in the automotive,
office building, materials, household supplies and road and rail construction
industries. We believe that demand for products made from recycled materials
will expand with the increased demand for environmentally-friendly
products.
Products
We currently manufacture recycled
plastics products made from ABS, HDPE, LDPE and PS. Our products are
produced in both translucent and opaque varieties and are colored to the strict
color requirements of our customers. We currently sell substantially
all of our products in China.
Grains and
Compounds
We produce a wide variety of plastic
grains and compounds produced primarily from four types of recycled plastic
compounds. The grade is determined by the chemical properties of the
plastic grain; higher grade plastics grains are typically more
expensive. The following is a list of the recycled plastic compounds
we offer:
High-density polyethylene
(HDPE). HDPE is most commonly used for milk
containers. The Chinese government has set a target mark that 50% of
milk containers must be made of recycled materials by 2020, so it is expected
that the recycling rate of HDPE will likely increase. HDPE is also
used for bleach and other cleaning product containers, and is also found in
films and some thin-gauge carriers and fresh produce bags. HDPE is a
versatile polymer that can be manipulated to control transparency and is also
known for its strength and toughness.
Low-density polyethylene
(LDPE). LDPE is used in food trays, as well as wrapping films
and bags. It is easily cleaned, has strong impact resistance and is
very flexible. LDPE can withstand moderately high temperatures, does
not absorb moisture and is chemical and corrosion resistant. LDPE’s
tensile force is lower than that of HDPE and its resilience is
higher.
Acrylonitrile-butadiene-styrene
(ABS). ABS
is found in the casing of electronics and computer products, beverage bottles,
milk bottles and related products. It is known for its versatility
and ease of recycling.
Polystyrene (PS). PS is found in yogurt
containers and food trays, and in its expanded form, in protective packaging and
hot drinks cups. Research has shown that PS comprises a small part of the waste
stream, but as with other rigid packaging plastics, it is likely to form part of
future fixed plastics recycling trials, which focus on new ways to recycle and
to enhance the collection of recyclable products.
Manufactured Recycled
Products.
In addition to our plastic grains and
compounds, we manufacture and market proprietary end products from our own
recycled plastic material. As a vertically integrated operation, we offer
environmentally friendly products as an alternative to goods manufactured with
traditional raw materials. All of our products are manufactured in our 21,450
square meter warehouse and manufacturing facility located in Zhaoqing City of
Guangdong province.
6
Consumer Products. We
currently offer a line of household products such as tables and chairs, fruit
boxes and other household products.
Construction
Products. We offer products for use in residential and
commercial construction such as window frames and clapboards. These
products have higher margins than our consumer products. The increase in our
production and sale of higher margin end products lessens our dependency on
sales of raw materials for our revenues. Sales of these proprietary end-products
yield higher revenues than sales of raw materials and our consumer products,
which is key to increasing our profitability
Higher End Technology Focused
Products. We intend to expand our business to the production
of proprietary higher end technology focused products such as railway crossties.
We intend to leverage the engineering and production capabilities of our
experienced management team to develop new higher margin product offerings to
further boost our revenues and profitability. We believe that our expansion into
these new product offerings will continue to differentiate us from our
competition and will strengthen our competitiveness in the plastic recycling
industry.
Resale of Recycled Plastic
Material
A substantial portion of
our revenue is currently derived from the resale of recycled plastic materials,
including HDPE, LDPE, ABS and PS waste plastic materials. We currently
import recycled plastic materials in an amount that exceeds our manufacturing
capabilities, but we are able to resell such materials at a premium to our cost
of acquiring the recycled plastic. The resale of our recycled plastic
materials shortens our inventory turn over period and, therefore, improves our
working capital position. We expect that resales of recycled plastics will
decrease as a percentage of revenues as we continue to expand our recycling
capabilities.
Sale of Appliance
Parts
We also sell metal parts for various
home products, including door hardware and lock parts. The sale of
these parts is primarily to overseas customers and accounted for approximately
1%, 1% and 2%, of our total net sales for the nine months ended September 30,
2010 and the years ended December 31, 2009 and 2008, respectively. It
is expected that this portion of our business will be substantially eliminated
by the end of the fourth quarter of fiscal 2010 or the first quarter of fiscal
2011 as we continue to focus exclusively on our recycling business.
The breakdown of our sales by type of
product as a percentage of sales revenue is as follows:
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Nine Months Ended
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Year Ended
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|||||||||||
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September 30,
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December 31,
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2010
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2009
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2008
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Recycled
plastic
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49 | % | 57 | % | 59 | % | ||||||
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Plastic
grains
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23 | % | 22 | % | 37 | % | ||||||
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Construction
products
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20 | % | 7 | % | - | |||||||
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Consumer
products
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7 | % | 13 | % | 2 | % | ||||||
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Appliance
parts
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1 | % | 1 | % | 2 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
Competitive
Strengths
We believe the following strengths
contribute to our competitive advantages:
Comprehensive product
offerings
Our core product offerings consist of
plastic grains and compounds which are sold to original equipment manufacturers
of consumer products and plastic injection molders which produce new consumer
products using recycled material. In addition, we believe we have differentiated
our company from other Chinese recycling companies in that we are able to
manufacture and market proprietary end products from our own recycled plastic
material. As a vertically integrated operation, we offer
environmentally friendly products as an alternative to goods manufactured with
traditional raw materials.
7
Established manufacturing
capabilities
In China, the vast majority of plastic
recycling companies are small-scale operations lacking the capacity to properly
process raw materials, deal with sewage treatment issues and meet required
environmental standards. In comparison, we have a large, 21,450
square meter warehouse and manufacturing facility in which we produces various
plastics products, and also had a sewage treatment facility that is able to
filter and process the waste products resulting from the
manufacturing.
Broad source of recyclable
materials
Plastic waste material supplied by
Chinese suppliers is often of inferior quality due to the fact that it poorly
sorted and much of it has previously been recycled. Use of this material
increases the cost of production and lowers the quality of products produced
with such material. In contrast, we have a steady supply of raw material from
wholesalers who source products from suppliers outside China, as well as direct
sourcing from different suppliers located in the United States. We
have established two direct sources in the United States which provide an
estimated 20,000 tons of post-industrial recycled materials annually and we are
in negotiation with another supplier to obtain a minimum of 26,000 tons of
recycled plastic from North American and Australia. The imported raw material is
of a high quality, allowing us to benefit from efficiencies in our manufacturing
operations and affording us the ability to offer quality plastic grains and
compounds, as well as a comprehensive line of consumer and commercial products
used in demanding applications.
Diversified customer base
During the nine months ended September
30, 2010, we had over 10 different customers for our plastic grains and
compounds across China. Our plastic grain and compound products are
used to produce a wide variety of end products, including shoe soles, outdoor
furniture, and construction materials. Our manufactured recycled
products serve growing residential and commercial construction industries and
benefit from increased infrastructure construction in China. Our client base
spans a wide range of sectors and industries, such as architecture industrial
equipment and engineering production, chemical and petrochemical manufacturing.
We believe that our integrated product offerings and range of our client base
enhances our reputation in the recycling industry positions us to continue to
attract new customers and allows us to be more responsive to clients’ specific
requirements.
Experienced management
team
Our senior management team has
extensive business and industry experience, including an understanding of
changing market trends, consumer needs, technologies and our ability to
capitalize on the opportunities resulting from these market changes. Members of
our senior management team also have significant experience with respect to key
aspects of our operations, including engineering, recycling, sales and
marketing.
Strategy
Our goal is to become a leading
provider of plastic grains and compounds and proprietary products manufactured
from such material in China. We intend to achieve this goal by implementing the
following strategies:
Maximize our existing resources to
increase our profitability
We plan to use our expertise in
plastics recycling and in the production of products produced from our recycled
plastic material to further increase our profitability. Our plan is to actively
capitalize on market opportunities by:
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expanding
our sale force by recruiting experienced and knowledgeable sales personnel
to reach new customers;
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strengthening
relationships with our existing clients to increase the rate of purchase
of existing products; and
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exploring
new opportunities for expanding our product offerings to new and existing
clients.
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Expand output capacity
In November 2009, we began construction
of a new facility in Gangzhou on land for which we have obtained land use
rights. This new facility will primarily act as a research and
development center for our company, and will include a materials laboratory, an
advanced tool shop for researching various end-user products, a showroom and our
new principal corporate offices. The new facility will allow us to improve
our corporate image and increase our ability to develop high-end plastic
compounds and new end-user products, and will lessen our dependence on sales of
raw materials for profitability.
Focus on improved
efficiencies
We will continue to focus on efforts on
improving the overall efficiency of system operations and the operational
performance of our main production plants through additional engineering
improvements, additional automation and modernization of the production process
and reducing non-scheduled shut-downs of equipment. At the same time, we intend
to balance these efforts with additional focus on production safety,
environmental protection, occupational health, energy conservation and emissions
reduction, striving to comply with the requirements for the development of a
low-carbon, green economy with recyclable materials.
8
Strengthen relationships with suppliers
and focus on reducing commodity costs
The purchase of raw material is
fundamental to the recycling business. In order to cut costs and increase profit
margins, we focus on developing relationships with new suppliers and increasing
amount of raw material purchased directly from overseas recyclers, as opposed to
purchasing from domestic wholesalers or intermediaries. We continue to work on
obtaining more favorable terms and discounts by strengthening our relationship
with suppliers and placing more bulk orders. We also continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
Expand our line of proprietary products
manufactured with our recycled plastic
We intend to expand our product
offerings into higher end technology oriented products such as railroad
crossties. We intend to leverage the engineering and production capabilities of
our experienced management team to develop new high margin product offerings to
further boost our revenues and profitability. We believe that our expansion into
these new product offerings will continue to differentiate us from our
competition and will strengthen our competitiveness in the plastic recycling
industry. Additionally, the increase in our production and sale of
end products will lessen our dependency on sales of raw materials for our
revenues. Sales of proprietary higher end products yield higher
revenues than sales of raw materials, which is key to increasing our
profitability.
Pursue acquisitions to broaden our
product offerings and production capability
The plastic recycling market in China
remains highly fragmented, and the majority of recycling companies are
regionally focused with relatively few attaining national scale. We will
consider strategic acquisitions that will provide us with a broader range of
service offerings and access to new markets. When evaluating potential
acquisition targets, we will consider factors such as market position, growth
potential and earnings prospects and strength and experience of
management
Recycling
Process
The plastics recycling process begins
with procuring raw material, which is shipped directly from our suppliers to our
recycling facility where it is classified. Upon receipt, we perform a
number of lab and physical inspections and analyses of the material to verify
its chemical properties, impurity percentages and weight. The material is sorted
by hand based on polymer type and color. Visible impurities such as
metal parts are be sorted and set aside as much as possible.
After sorting, the material is smashed
and cut into pieced by our smashing machines. The material is then
washed and cleaned to eliminate impurities. After drying, the material is fed
into plastic grain machines, which break down the material, add color pursuant
to our customers’ specifications and form it into small plastic grains and
compounds of recycled plastic. The plastic resins are then tested to make sure
the quality meets the customers’ specifications. The recycled material is then
bagged and shipped to consumers in various manufacturing
industries.
The waste water from the washing
process is treated in our sewage treatment area. The water is
discharged into sediment pools which separate inorganic suspended particles and
insoluble organic material. The waste water is then run through a
reaction pool, where coagulant agents are added. The water is then
reprocessed through the sediment pool before it is sand filtered and run back to
our facility for re-use.
Once the plastic resin is produced, we
can produce end-user products using plastic extrusion or injection machines. We
produce our own molds and tooling for our finished products. The proper mold and
tooling is installed onto the injection machine based on different
products. We then load the resin to the material cabin and inject the
melted material into the molds to form the product.
Suppliers
Our key suppliers of raw materials and
wholesalers are located in Hong Kong, Australia and North America which source
raw materials from suppliers outside China. Domestically supplied
waste is often poorly sorted and much of it has previously been recycled which
increases the cost of production and lowers the quality of products produced
with such material. In an effort to expand direct relationships with
primary suppliers and obtain a higher supply of quality and consistently
recyclable materials, we established two direct sources in the United States
which provide an estimated 20,000 tons of post-industrial recycled materials
annually and we are in negotiation with another supplier to obtain a minimum of
26,000 tons of recycled plastic from North American and Australia in
2010.
9
We rely on a small number of suppliers
for our raw materials. For the nine months ended September 30, 2010
we had three suppliers, Tonghe Environmental Holdings Ltd., Canvas Valley LLC
and Global Green Lands LLC, who accounted for 57%, 15% and 10%, respectively, of
our raw material purchases for the period. For the year ended December 31, 2009,
we had four suppliers, Tonghe Environmental Holdings Ltd., Zhaoqing Guangyu
Trade Co., Ltd., Canvas Valley LLC, and Zhaoqing Taihua Plastic Recycling Co.,
Ltd., who accounted for 29%, 26%, 22% and 21%, respectively, of our raw material
purchases for the period. For the year ended December 31, 2008, we had two
suppliers, Canvas Valley LLC and Zhaoqing Guangyu Trade Co., Ltd., who
accounted for 53% and 40%, respectively, of our total raw material purchases for
the period. For the year ended December 31, 2007, we had two
suppliers, Canvas Valley LLC and Zhaoqing Guangyu Trade Co., Ltd., who counted
for 89% and 11%, respectively, of our total purchases of raw material purchases
for the period.
We have master supply agreements with
most of our major suppliers pursuant to which all of our orders are
subject. Our master supply agreements with Tonghe Environmental
Holdings, Ltd., Canvas Valley LLC and Global Green Lands LLC provide that a
deposit of 30% of the purchase price is due upon the execution of a purchase
order contract, with the other 70% due upon the shipment of the
products. The vendor must arrange for shipment within 30 days of the
signing of such purchase order contract. Once a purchase order
contract is signed, we may cancel the order, however, the supplier does not have
the ability to cancel the contract without our consent.
We are located in the Ding Hu District
in Zhaoqing City, which possesses unique geographic strategic advantages.
Zhaoqing is one of the four ports that are allowed to import recycled material
in the Guangdong Province. The Guangzhou – Zhaoqing highway connects to other
highway systems in the region. The raw materials can be transported by ocean
freighter directly from Hong Kong and other major ports to Zhaoqing. This
geographic location affords us a cost-effective way to obtain our supply
shipments and to transport and deliver our finished products to our
customers.
Importers of plastic waste into the PRC
are subject to an import quota regulated by the Ministry of Environmental
Protection. We have been approved for an import quota of 16,100 tons of
plastic waste for 2010. We currently have 17 import licenses which are issued by
the Ministry of Environmental Protection of the People’s Republic of China to
our PRC operating subsidiaries, Hua Su, Chuang Yi, Xin Ye and Li
Jun. The permits are issued annually and expire on December 31st of each
year. We apply for renewals of our permits each year based on our
factory output capacity. As our operations expand and our
factory output capacity increases, we will apply for an increase in our import
quotas, which is subject to review by the Ministry of Environmental Protection,
on an annual basis. Without our import quota, we would be required to
purchase domestically supplied plastic waste, which will negatively impact the
quality of our products, as most plastic waste in China has already been
recycled, which is more flexible and ductile than unrecycled plastic
waste.
Sales
and Marketing
We employ an internal sales team that
focus on selling our raw material products to both manufacturers of
recycled-plastics products and distributors. We currently do not
advertise our products because demand for our products exceeds the available
supply. We monitor the recycled plastics market carefully for changes
and the introduction of new products by our competitors.
All of our customers pre-pay for the
raw material products they purchase and our pricing does not include shipping
and transportation costs. We typically sell our products on a
purchase order basis. The customer base is spread across different geographic
markets and industries, such as construction material manufacturing and outdoor
furniture manufacturing.
The vast majority of our sales are
generated from a small number of customers. For the nine months ended
September 30, 2010, we had three customers, Guangzhou Kialin Industrial
Co., Ltd., Shantou Sky Wing Industrial Limited, and Shenzhen Aoli Metal Hardware
Co., Ltd., who exceeded 10% of our revenues. These customers accounted for 44%,
29% and 12%, respectively, of revenues for the period. These same
customers accounted for 42%, 31% and 14%, respectively, of net sales for the
year ended December 31 2009. For the year ended December 31, 2008, we
had two customers, Shantou Sky Wing Industrial Limited and Beijing Xingping
Weiye Technology Co., Ltd., who each accounted for over 10% of our net
sales. These customers accounted for 63% and 29%, respectively, of
revenues for the period. We expect that we will continue to depend upon a small
number of customers for a significant majority of our sales for the foreseeable
future.
Research
and Development
Currently,
we do not conduct any significant research and development. We
incurred no research and development expenses during the nine months ended
September 30, 2010 or years ended December 31, 2009 and 2008. We are
currently constructing a new research and development facility which we expect
will be completed in the third quarter of 2011. We will focus our
research and development efforts on improving our plastic recycling process and
improving and developing end-products for new applications. We intend
to employ scientific and technical personnel who will be directly engaged in the
research and development of new products and their applications. Our
research professionals will closely observe industry trends in plastics
recycling to design new products. We are in the process of
establishing a strategic cooperation arrangement with the Changchun Institute of
Applied Chemistry, which will help us to develop various new technologies and
products.
10
Competition
The market for recycling plastics in
China is highly fragmented and there are few companies that have vertically
integrated operations that are able to recycle plastics and manufacture end
products. We face competition from other plastic recyclers, as well
as manufacturers of recycled plastics end-products. Many of our
competitors have significantly greater name recognition and financial,
technical, manufacturing, personnel, marketing, and other resources than we
have. Our competitors may be able to respond more rapidly than we can to
new or emerging technologies or changes in customer requirements. Our
primary competitor is Hua Nan Recycled Resource (Zhong Shan) Col, Ltd., which
both recycled plastics and produces end-products. Our other competitors include
Foshan Nanhai Lishui Lisuo Plastic Limited, which specializes in processing PET
waste plastics; Guangdong Foshan Warsing Plastic Limited, which specializes in
processing a wide range of materials such as PS, LDPE, HDPE, polyethylene
terephthalate (‘PET”), polyvinyl chloride (“PVC”), polypropylene (“PP”),
poly(methyl methacrylate) (“PMMA”), and polycarbonate (“PC”); and Tongbao
Environmental Technology Limited, which specializes in processing plastic
materials such as ABS, HDPE, LDPE, PP, PC, PMMA and linear low-density
polyethylene (“LLDPE”).
PRC
Government Regulations
The
plastics recycling industry in China is subject to a number of laws and
regulations, such as those regulations regarding environmental protections and
recycling of renewable resources. This section summarizes the
principal PRC regulations currently relevant to our business and
operations.
Prevention and Control of Environmental
Pollution by Solid Wastes
The Prevention and Control of
Environmental Pollution by Solid Wastes Law of the PRC was enacted in 1995 and
amended in 2004. Under this law, the PRC government authority
encourages and supports scientific research, technological development and the
dissemination of advanced prevention and control technologies and scientific
knowledge in the prevention and control of environmental pollution of solid
wastes. The law forbids the import of solid wastes that cannot be
used as raw materials and those that cannot be utilized through harmless
treatment, and restricts the import of solid wastes that can be used as raw
materials and implements the classification management of automatic licensing
import thereto. The import of solid wastes listed in the catalogue of
import-restricted shall be examined and approved by the environmental protection
administrative department of the State Council in collaboration with the foreign
trade administrative department of the State Council. For any
importation of solid wastes listed in the catalog of automatic licensing import,
formalities on the automatic licensing import shall be gone
through.
Business
License
Any company that conducts business in
the PRC must have a business license that covers the scope of the business in
which such company is engaged. We conduct our business through our
operating subsidiaries, Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun and each
of our operating subsidiaries holds a business license that covers its present
business. Prior to expanding our business beyond the scope covered by
our business licenses, we are required to apply and receive approvals from the
relevant PRC authorities (if applicable, based on the new business in which we
intend to engage) and conduct modification registration formalities with the
competent administration of industry and commerce. Companies that operate
outside the scope of their licenses can be subjected to a fine of not more than
RMB20,000 if such operations do not violate the PRC Criminal Law, or a fine of
not less than RMB20,000 but no more than RMB200,000 if such operations violate
the PRC Criminal Law, or a fine of not less than RMB50,000 but not more than
RMB500,000 if the such operations harm human health, have serious hidden hazards
to safety, threaten public safety or destroy environmental
resources. Other penalties can include disgorgement of income and
being ordered to cease operations.
Environmental Matters
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities.
The major
environmental regulations applicable to us include:
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the
Environmental Protection Law of the
PRC;
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the
Law of the PRC on the Prevention and Control of Water
Pollution;
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Implementation
Rules of the Law of the PRC on the Prevention and Control of Water
Pollution;
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the
Law of the PRC on the Prevention and Control of Air
Pollution;
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Implementation
Rules of the Law of the PRC on the Prevention and Control of Air
Pollution;
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11
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the
Law of the PRC on the Prevention and Control of Solid Waste Pollution;
and
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the
Law of the PRC on the Prevention and Control of Noise
Pollution.
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Due to the fact that our main business
involves the importation of solid waste, we especially focus on the Law of the
PRC on the Prevention and Control of Solid Waste Pollution, which was enacted in
1995 and amended in 2004. Under this law, the PRC government
authority encourages and supports scientific research, technological development
and the dissemination of advanced prevention and control technologies and
scientific knowledge in the prevention and control of environmental pollution of
solid wastes. The law forbids the import of solid wastes that cannot
be used as raw materials and those that cannot be utilized through harmless
treatment. As a means of controlling the importation of waste, solid
waste that can be used as raw materials is classified as either solid waste the
import of which is restricted and solid waste the import of which is
automatically licensed. The administrative department for
environmental protection under the State Council, in conjunction with the
department in charge of foreign trade under the State Council, the department in
charge of comprehensive and macro-economic control under the State Council, the
General Administration of Customs and the department in charge of quality
supervision, inspection and quarantine under the State Council, formulates,
readjusts and publishes the catalogs of solid waste the import of which is
banned, restricted or automatically licensed in order to safeguard state
security, public interest and ethics, and to protect human health or safety, the
lives or health of animals and plants, or the environment. The import of solid
wastes listed in the catalog of import-restricted items must be examined and
approved by the environmental protection administrative department of the State
Council in collaboration with the foreign trade administrative department of the
State Council. For any importation of solid wastes listed in the catalog of
automatic licensing import, a company must apply for an automatic-import license
from the State Environmental Protection Administration. Any failure to obtain
approvals before importing solid wastes listed in the catalog of
import-restricted items will result in the shutout of the goods and fines of not
less than RMB100,000 and RMB1,000,000. Any failure to obtain
approvals before importing solid wastes listed in the catalog of automatic
licensing items will result in the failure of the items to go through customs
clearance.
Our
operating subsidiaries have received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that their
business operations are in material compliance with the relevant PRC
environmental laws and regulations. We are not currently subject to any pending
actions alleging any violations of applicable PRC environmental laws. To date,
our cost of compliance with PRC environmental laws and regulations has been
insignificant. We do not believe the existence of these environmental laws, as
currently written and interpreted, will materially hinder or adversely affect
our business operations; however, there can be no assurances of future events or
changes in laws, or the interpretation of laws, governing our industry. Failure
to comply with PRC environmental protection laws and regulations may subject us
to fines up to RMB1,000,000, the exact amount of which is determined on a case
by case basis, or disrupt our operations and the construction of our new
facilities, result in the shutdown of our operations temporarily or permanently,
which may materially and adversely affect our business, results of operations
and financial condition.
Recycle of Renewable
Resources
Administrative Measures for the Recycle
of Renewable Resources was enacted in 2007, which regulates the operation of the
renewable resource recycling industry. According to this
administrative measure, renewable resources recycling operators should apply for
a business license from the local office of administration for industry and
commerce and register with the local office of Ministry of Commerce within 30
days after obtaining the business license; if the operator is recycling scrap
metal, regardless of whether it is recycles for production or non-production
purposes, a renewable resources recycling operator is also required to register
with the local public security authority. Renewable resources
recycling operators must register any changes in their registration with the
local office of Ministry of Commerce within 30 days and with the local public
security authority within 15 days (if applicable) after such changes take place.
In the event of noncompliance with these regulations, the local office of
Ministry of Commerce and/or local authority of public security may give a
warning, require renewable resources recycling operators who fail to make the
required registration(s) to rectify their non-compliance within a specific time
period and impose a fine of no less than RMB500 and no more than RMB2000, in its
discretion, on the renewable resources recycling operators and make an
announcement of such non-compliance to the public.
Product Liability and Consumers
Protection
Product liability claims may arise if
the products sold have any harmful effect on the consumers. The injured party
may make a claim for damages or compensation. The General Principles of the
Civil Law of the PRC, which became effective in January 1987, state that
manufacturers and sellers of defective products causing property damage or
injury shall incur civil liabilities for such damage or injuries.
The Product Quality Law of the PRC was
enacted in 1993 and amended in 2000 to strengthen the quality control of
products and protect consumers’ rights and interests. Under this law,
manufacturers and distributors who produce or sell defective products may be
subject to confiscation of earnings from such sales, revocation of business
licenses and imposition of fines, and in severe circumstances, may be subject to
criminal liability.
12
The Law of the PRC on the Protection of
the Rights and Interests of Consumers was promulgated on October 31, 1993 and
became effective on January 1, 1994 to protect consumers’ rights when they
purchase or use goods or services. All business operators must comply with this
law when they manufacture or sell goods and/or provide services to
customers.
The Tort Law of the PRC effective on
July 1, 2010 requires that when the product defect endangers people’s life or
property, the injured party may hold the producer or the seller liable in tort
and require that it remove obstacles, eliminate danger, or take other action.
The Tort Law also requires that when a product is found to be defective after it
is put into circulation, the producer and the seller shall give timely warnings,
recall the defective product, or take other remedial measures.
Employment Laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, and social insurance, housing funds
and other welfare. These include local labor laws and regulations,
which may require substantial resources for compliance.
China’s National Labor Law, which
became effective on January 1, 1995, and China’s National Labor Contract
Law, which became effective on January 1, 2008, permit workers in both
state and private enterprises in China to bargain collectively. The
National Labor Law and the National Labor Contract Law provide for collective
contracts to be developed through collaboration between the labor union (or
worker representatives in the absence of a union) and management that specify
such matters as working conditions, wage scales, and hours of
work. The laws also permit workers and employers in all types of
enterprises to sign individual contracts, which are to be drawn up in accordance
with the collective contract. The National Labor Contract Law has
enhanced rights for the nation’s workers, including permitting open-ended labor
contracts and severance payments. The legislation requires employers
to provide written contracts to their workers, restricts the use of temporary
labor and makes it harder for employers to lay off employees. It also
requires that employees with fixed-term contracts be entitled to an
indefinite-term contract after a fixed-term contract is renewed once or the
employee has worked for the employer for a consecutive ten-year
period.
Foreign Currency Exchange
The principal regulations governing
foreign currency exchange in China are the Foreign Exchange Administration
Regulations promulgated by the State Council, as amended on August 5, 2008, or
the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the
RMB is freely convertible for current account items, including the distribution
of dividends, interest payments, trade and service-related foreign exchange
transactions, but not for capital account items, such as direct investments,
loans, repatriation of investments and investments in securities outside of
China, unless prior approval of the PRC State Administration of Foreign
Exchange, or SAFE is obtained and prior registration with the SAFE is
made. Foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital
account item transactions, obtaining approval from the SAFE. Capital
investments by foreign-invested enterprises outside of China are also subject to
limitations, which include approvals by the Ministry of Commerce (“MOFCOM”), the
SAFE and the State Reform and Development Commission.
Dividend Distributions
Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise
in China is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in
the event of liquidation.
Foreign
Ownership of PRC Operating Subsidiaries
The
establishment, approval and registered capital requirement matters of wholly
foreign-owned enterprises, such as our PRC subsidiary, Kelida, are regulated by
the Wholly Foreign-owned
Enterprise Law of the
PRC promulgated and effective on April 12, 1986, as amended on
October 31, 2000, and the Implementation Rules of the Wholly
Foreign-owned Enterprise Law of the PRC effective on December 12,
1990, as amended in 2001. The procedures of establishing Kelida as a wholly
foreign-owned enterprise complied with such law and regulation.
Investment
activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for
Foreign Investment, or the Catalogue, which was promulgated and is
amended from time to time by the Ministry of Commerce and the National
Development and Reform Commission. The Catalogue divides industries into
three categories: encouraged, restricted and prohibited. An industry not
listed in the Catalogue is generally open to foreign investment unless it is
specifically restricted by other PRC regulations. In addition, the
establishment of wholly foreign-owned enterprises is generally permitted in most
industries except for the restricted industries which are listed in the
Catalogue or restricted by other government regulations (which are subject
to governmental approvals) and industries prohibited from foreign
investments. Pursuant to the currently effective Catalogue (2007
version) and other PRC regulations, the business scope of Kelida as
indicated on its business license does not fall within the restricted or
prohibited industries and is not restricted by other PRC regulations and ,
therefore, Weixin HK is permitted to invest in Kelida in the form of a wholly
foreign-owned enterprise.
13
In addition, in accordance with the
Interim Provisions on
Investment Made by Foreign-Invested Enterprises in China promulgated on July 25,
2000 and effective on September 1, 2000, a foreign-invested enterprise in the
form of limited liability enterprise is permitted to establish a new domestic
enterprise or purchase the equity interest of other domestic enterprises in
China. Except as otherwise disclosed in the “Risk Factor - Risk Related To Us
Doing Business In China - Recent PRC regulations relating to acquisitions of PRC
companies by foreign entities may create regulatory uncertainties that could
restrict or limit our ability to operate. Our failure to comply with
PRC regulations relating to corporate restructurings and / or obtain the prior
approval of the China Securities Regulatory Commission, or the CSRC, for our
planned public offering and the listing and trading of our common stock could
have a material adverse effect on our business, operating results, reputation
and trading price of our common stock.”, Kelida’s acquisition of the equity
interest of Chuang Yi, Hua Su, Li Jun and Xin Ye in February 2010 complies with
the aforementioned regulation.
Delayed
Compliance
To
conduct business in China, we are required to comply with multiple laws and
regulations. Currently, we fail to comply with the laws and
regulations of social insurance, the housing provident fund and the registration
requirement of State Administration of Foreign Exchange. For further
information on our failure to comply with these regulations, please see our
disclosure under “Risk Factors” under the captions “Our production costs and
revenues are impacted by increases in the cost of labor,” “We may be exposed to
monetary fines by the local housing authority and claims from our employees in
connection with our PRC subsidiaries’ non-compliance with regulations with
respect to contribution of housing provident funds for employees,” and “Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to comply with PRC regulations relating to
corporate restructurings and/or obtain the prior approval of the China
Securities Regulatory Commission, or the CSRC, for our planned public offering
and the listing and trading of our common stock could have a material adverse
effect on our business, operating results, reputation and trading price of our
common stock.”
We are
not sure we will be always able to comply with all laws and regulations in all
aspects. PRC laws and regulations develop rapidly, we may not be
prompt enough to react to new laws and regulations which would result in our
delayed compliance.
Employees
As of September 30, 2010, we had
approximately 105 employees, 93 of which are full time employees. All of our
employees are based inside China and Hong Kong. We have not
experienced any work stoppages and we consider our relations with our employees
to be good. We have a labor contract with each of our employees as
required PRC law, which includes provisions relating to working conditions, term
of employment, working time, payment of salary and other terms.
Approximately 65% of our employees
currently live in company-provided housing facilities. Under PRC
laws, we are required to make contributions to a housing assistance fund for
employees based in China. Any increase in contributions to the
housing assistance fund will increase the costs and expenses of conducting our
business operations and could have negative effect on our results of
operations.
Properties
Our
principal executive offices are located at Room 405, Floor 4, North Tower, 9
Shen Zhou Road, Guangzhou High-tech Industrial Development Zone, Guangzhou,
People’s Republic of China. We lease these facilities under a two-year lease
that expires on February 28, 2012 for free. This lease agreement has been
registered with the local competent authority.
All of
our manufacturing operations are currently located in mainland China at in
Zhaoqing City, Guangzhou. We lease approximately 34.6 acres of land upon which
our 21,450 square meter manufacturing facility is located. Our
manufacturing facility consists of manufacturing plants, storage areas,
dormitories and research and development facilities. This lease
expires on October 8, 2026 and we have prepaid the rent under this lease through
the duration of the lease. The laws and regulations on the land lease
between a state-owned land-use right holder and the lessee in the PRC are rather
ambiguous, however, we believe that the failure to registration with the land
lease agreement would not result in our loss of our facility and would not
result in material penalties.
Our
current recycling and manufacturing facilities are adequate to meet the need of
our existing customers. We are currently able to process 20,000 tons
of plastic material at our facilities. We are currently operating our
recycling facilities of 80%. The total annual output capacity of our
household and construction products is 2.8 million units. We are
currently operating our household and construction product manufacturing
facilities at 90%. However, due to the increasing competition for
employees in the region in which we operate, we are facing increased labor costs
and difficulties in hiring new employees for our sorting
operations. In 2011, we intend to purchase new, customized sorting
equipment to automate our sorting activities in response to such difficulties
and increased costs and to increase our production efficiency. In
addition, we intend to purchase custom-designed automatic washing and cleaning
equipment, an automatic dispensing machine, an automatic drying machine, new lab
equipment, plastic injection machines and tool making machines in
2011. We anticipate that such equipment could cost up to $10
million.
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In China, only the PRC government and
peasant collectives may own land. On November 15, 2009, we acquired
approximately 12,143 square meters of land in Guangzhou city for a total of RMB
7.29 million ($1.12 million) under a land use right grant from the Guangzhou
Land Resource Bureau that gives us the right to use the land for 50 years
pursuant to an agreement with the government of Guangzhou. In the event we wish
to continue to use the land after the 50-year period, we must apply for an
extension at least one year prior to the land grant’s expiration. We are
currently in the process of building a new facility on this site which will
house our new research and development center and corporate offices, as well as
space to produce tooling and molding equipment. No recycling
operations or manufacturing will be performed at the facility. We
anticipate that the new facility will be completed at the end of 2011 and that
the facility will be up and running in the first quarter of 2012. Our
rights with respect to the land use right grant permit us to develop the land
and construct buildings for industrial applications. We have the right to
transfer or rent the land and use it as collateral for our loans. We anticipate
beginning construction on the facility in March 2011. We anticipate
that our new facility will cost a total of $12 million, $3 million of which has
already been spent as of September 30, 2010 on items such as land use right
costs, construction design fees, environmental evaluation fees, and other
pre-construction related costs. We will also need approximately $8.0
million in additional operation-related expenses for our expansion plans related
to research and development costs for new recycling processes and products,
increased labor and management costs, supply chain and sales channel development
and strengthening our enterprise resource planning and information technology
systems.
New environmental regulations
implemented by the Zhaoqing Environmental Protection Agency in 2010 will require
us to move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. The new regulations limit
the ability of plastics recycling operators located outside of the industrial
park to expand the size of the their operations or increase their import quota
for plastic waste. If we do not move our recycling and manufacturing
operations to the new industrial park, which is located approximately 50 KM from
our current factory location, we will be unable to expand our operations and
will be unable to increase the import quota of plastic waste from the 16,100
tons were are currently able to import. In order to move the
industrial park, we will have to purchase a land use right for space in the
industrial park upon which to build a building to house our recycling and
manufacturing operations. We are currently in the process of trying
to obtain land in the industrial zone upon which to build our new
factory. We anticipate that we will be able to purchase land in the
industrial park and that we would begin construction on a new manufacturing and
recycling facility in the in the first quarter of 2011. We expect
that we would move our operations to the new factory in mid 2011. We
estimate that we will spend approximately $4.0 million in costs related to the
new facility, including costs for the purchase of the land and the design and
construction of the factory building. In addition, we anticipate that
moving costs will total approximately $100,000 for the moving of our factory
equipment and operations to the new facility.
Legal
Proceedings
We are
not involved in any material legal proceedings outside of the ordinary course of
our business.
RISK
FACTORS
Any investment in our common stock
involves a high degree of risk. Investors should carefully consider
the risks described below and all of the information contained in this Current
Report on Form 8-K before deciding whether to purchase our common
stock. Our business, financial condition or results of operations
could be materially adversely affected by these risks if any of them actually
occur. Our shares of common stock are not currently listed or quoted
for trading on any national securities exchange or national quotation
system. If and when our common stock is traded, the trading price
could decline due to any of these risks, and an investor may lose all or part of
his or her investment. Some of these factors have affected our
financial condition and operating results in the past or are currently affecting
us. This Current Report on Form 8-K also contains
forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
described below and elsewhere in this Current Report on
Form 8-K.
RISKS
RELATING TO OUR BUSINESS
Our
future success depends on our ability to increase revenues from our recycling
operations
We believe that our future success
depends on our ability to significantly increase revenue from processing
recycled plastic wastes. We plan to grow by increasing our product
output volume, developing new products utilizing our recycled plastic products
and entering new markets in China and internationally. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by growing companies, including:
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Developing
and enhancing processing methods;
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Entering
new markets in a cost effective
manner;
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Expanding
on domestic and international marketing efforts to increase awareness of
our products and capture market
share;
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Responding
to competitive pressures;
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Maintaining
and developing relationships with customers and suppliers;
and
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Attracting
and retaining qualified management, consultants and
employees.
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The
success of our business is dependent upon our ability to secure plastic wastes
at competitive prices.
Our ability to generate revenue depends
in large part upon our ability to secure plastic wastes at competitive
prices. There is a world-wide market for these raw materials, and we
face competition from other low-cost users. If the market demand for
plastics wastes or the rate at which plastic materials are recycled increase,
this would likely affect both the availability and price of plastics
wastes. Additionally, as the substantial majority of the raw material
used in our manufacturing is imported, an increase in the freight costs or costs
of importing such material would increase our production costs. To
the extent that we are unable to secure sufficient plastics wastes at
competitive prices, our business, financial condition and results of operations
will be materially adversely affected.
We depend on a limited number of
suppliers for a substantial majority of our raw materials.
We import the substantial majority of
plastics wastes from a limited number of suppliers located in Hong Kong,
Australia and the United States. For the nine months ended September
30, 2010, we had six suppliers who accounted for 98% of our total
purchases. For the year ended December 31, 2009, we had four
suppliers who accounted for an aggregate of 98% of our total
purchases. For the year ended December 31, 2008, we had two suppliers
who accounted for an aggregate of 93% of our total purchases of raw
materials. Failure to maintain good relationships with our current
suppliers or to develop new supply sources could negatively affect our ability
to obtain the raw materials used to produce products in a timely
manner. If we are unable to obtain sufficient supplies of raw
material from our existing suppliers or develop alternative supply sources, we
may be unable to satisfy our customers’ orders which would materially and
adversely affect our revenues and our relationship with our
customers. Furthermore, we are dependent on our suppliers for the
timely delivery of raw materials. Should our suppliers fail to
deliver such materials on time, and if we are unable to source these materials
from alternative suppliers on a timely basis, our revenue and profitability
would be adversely affected.
The
Chinese government limits the amount of plastic waste which may be
imported.
The Chinese government limits the
amount of plastic waste which may be imported into China. Imports of
plastic waste are subject to an import quota regulated by the Ministry of
Environmental Protection; we have been approved for an import quota of 16,100
tons of plastic waste for the year ended on December 31,
2010. Although we have not previously experienced difficulties
obtaining and renewing our import license or applying for and obtaining
increases in our import quota, we cannot guarantee that our import license or
any application to increase our quota will be approved in the
future. If we fail to retain our import license or cannot receive
increases in our import quota as needed, we would have to use domestically
supplied plastics wastes which often consist largely of previously recycled
plastics of an inferior quality to virgin plastics waste. If we are
required to use domestically supplied plastics waste, the quality of our
products may decline and we could be required to lower our prices which would
adversely affect our revenue and profitability.
Changes
in Chinese environmental regulations and enforcement policies could subject us
to additional liability and adversely affect our ability to continue certain
operations.
Because Chinese environmental
regulations continue to develop and evolve rapidly, we cannot predict the extent
to which our operations may be affected by future enforcement policies as
applied to existing laws, by changes to current environmental laws and
regulations, or by the enactment of new environmental laws and
regulations. There are numerous Chinese provincial and local laws and
regulations relating to the protection of the environment and the ultimate
impact of complying with such laws and regulations is not always clearly known
or determinable because regulations under some of these laws have not yet been
promulgated or are undergoing revision. Our business and operating
results could be materially and adversely affected if we were required to
increase expenditures to comply with any new environmental regulations affecting
our operations. We may, in the future, receive citations or notices
from governmental authorities that our operations are not in compliance with our
permits or certain applicable regulations, including various transportation,
environmental or land use laws and regulations. Should we receive
such citations or notices, we would generally seek to work with the authorities
to resolve the issues raised by such citations or notices. There can
be no assurance, however, that we will always be successful in this regard, and
the failure to resolve a significant issue could result in adverse consequences
to us. As a result, we could incur material liabilities resulting
from the costs of complying with environmental laws, environmental permits or
any claims concerning noncompliance, or liability from
contamination.
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We cannot predict what environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist at our facilities or at third-party sites for
which we are liable. Enactment of stricter laws or regulations,
stricter interpretations of existing laws and regulations or the requirement to
undertake the investigation or remediation of currently unknown environmental
contamination at our own or third-party sites may require us to make additional
material expenditures, which would adversely affect our
profitability.
If
environmental regulation enforcement is relaxed, the demand for our products may
decrease.
The demand for our products is
substantially dependent upon the public’s concern with, and the continuation and
proliferation of, the laws and regulations governing the recycling of
plastic. A decrease in the level of public concern, the repeal or
modification of these laws, or any signification relaxation of regulations
relating to the recycling of plastic would significantly reduce the demand for
our products and could have a material adverse effect on our operations and
financial condition.
In
order to expand our recycling operations and increase our import quota for
plastic waste, we will have to move our operations to a state-owned industrial
park in Zhaoqing City and if we are unable to move our operations into the
industrial park, our ability to expand will be greatly diminished which will
have a material adverse affect on our results of operations.
The Zhaoqing Environmental Protection
Agency promulgated new environmental regulations in 2010 that will require us to
move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. The new regulations limit
the ability of plastics recycling operators located outside of the industrial
park to expand the size of the their operations or increase their import quota
for plastic waste. If we do not move our recycling and manufacturing
operations to the new industrial park, we will be unable to expand our
operations and will be unable to increase the import quota of plastic waste from
the 16,100 tons were are currently able to import. We are currently
in the process of trying to purchase a land use right in the industrial park
upon which to build our new factory, however, we cannot assure you that we will
be successful in obtaining land in the industrial park. While we hope
to complete construction on a new manufacturing facility in the industrial park
in mid-2011, we cannot assure you that construction will be occur as anticipated
or that we will have enough funds to cover the estimated $4 million in
construction costs for the new facility. If we are unable to move our
operations to a new facility in the industrial park in 2011, our results
operations may be materially adversely affected.
Our
business could be materially affected by a global decrease in crude oil
prices.
Since most plastic resin is made from
refined crude oil byproducts, the price of oil significantly affects the raw
material costs for plastics. Any substantial decrease in the price of oil would
make production of virgin plastic material more attractive and substantially
reduce demand for our recycled plastics products.
We
have depended on a small number of customers for the vast majority of our
sales. A reduction in business from any of these customers could
cause a significant decline in our sales and profitability.
The vast majority of our sales are
generated from a small number of customers. During the nine months ended
September 30, 2010 and the years ended December 31, 2009 and 2008, we had three,
three and two customers that generated revenues of at least 10% of our total
revenues, respectively , with our largest customer accounting for 44%, 42%
and63% of our revenues for each respective period. A total of
approximately 85%, 87% and 92% of our revenues for the nine months ended
September 30, 2010 and the years ended December 31, 2009 and 2008, respectively,
were attributable to customers that each individually accounted for at least 10%
of our sales. We believe that we may depend upon a small number of customers for
a significant majority of our sales in the future, and the loss or reduction in
business from any of these customers could cause a significant decline in our
sales and profitability.
A
substantial portion of our assets has been comprised of accounts receivable
representing amounts owed by a small number of customers. If any of these
customers fails to timely pay us amounts owed, we could suffer a significant
decline in cash flow and liquidity which, in turn, could cause us to be unable
to pay our liabilities or expand our sales volume.
Our accounts receivable represented
approximately 35.7%, 38.2% and 35.9%, of our total current assets as of
September 30, 2010, December 31, 2009 and December 31, 2008, respectively. As of
September 30, 2010, 95.9% of our accounts receivable represented amounts owed by
6 customers, each of which represented over 5% of the total amount of our
accounts receivable. As of December 31, 2009, 94.3% of our trade
receivables were owed to us by 5 customers, each of which represented over 5% of
the total amount of our trade receivables. As of December 31, 2008,
90% of our trade receivables were owed to us by three customers, each of which
represented over 5% of the total amount of our trade receivables. As
a result of the substantial amount and concentration of our trade receivables,
if any of our major customers fails to timely pay us amounts owed, we could
suffer a significant decline in cash flow and liquidity which could adversely
affect our ability to borrow funds to pay our liabilities and to purchase
inventory to sustain or expand our current sales volume.
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In addition, our business is
characterized by long periods for collection from our customers and short
periods for payment to our suppliers, the combination of which may cause us to
have liquidity problems. We experience an average accounts settlement period
ranging from 15 days to as high as three months from the time we sell our
products to the time we receive payment from our customers. In contrast, we
typically need to place certain deposits and advances with our suppliers on a
portion of the purchase price in advance and for some suppliers we must maintain
a deposit for future orders. Because our payment cycle is considerably shorter
than our receivable cycle, we may experience working capital shortages. Working
capital management, including prompt and diligent billing and collection, is an
important factor in our results of operations and liquidity. We cannot assure
you that system problems, industry trends or other issues will not extend our
collection period and adversely impact our working capital.
Our
plastics waste operations are risky and we may be subject to civil liabilities
as a result of hazards posed by such operations.
Our operations are subject to potential
hazards incident to the gathering, processing and storage of plastics waste such
as product spills, leaks, emissions and fires. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, and pollution or other environmental damage, and may
result in curtailment or suspension of operations at the affected
facility. Consequently, we may face civil liabilities in the ordinary
course of our business. At present, we do not carry any insurance to
cover such liabilities in the ordinary course of our business, except that our
employees are insured for injuries occurring at work. Although we
have not faced any civil liabilities historically in the ordinary course of our
waste treatment operations, there is no assurance that we will not face such
liabilities in the future. If such liabilities occur in the future,
they may adversely and materially affect our operations and financial
condition.
Our
business could be subject to potential liability claims.
The testing, manufacturing and
marketing of our products involve inherent risks related to product liability
claims or similar legal theories that may be asserted against us, some of which
may cause us to incur significant defense costs. We do not currently
maintain or intent to procure product liability insurance coverage. A
successful product liability claim or other judgment against us could have a
material adverse effect upon us.
We do not carry any business
interruption or liability insurance. As a result, we may incur uninsured
losses, increasing the possibility that you would lose your entire investment in
our company.
We could be exposed to liabilities or
other claims for which we would have no insurance protection. We do
not currently maintain any business interruption insurance or any other
comprehensive insurance policy, except for a key-man life insurance policy on
certain of officers and directors and liability insurance on our
automobiles. As a result, we may incur uninsured liabilities and
losses as a result of the conduct of our business. Business
disruption insurance is available to a limited extent in China, but we have
determined that the risks of disruption, the cost of such insurance and the
difficulties associated with acquiring such insurance make it impractical for us
to have such insurance. Should uninsured losses occur, any purchasers
of our common stock could lose their entire investment.
Our
business is affected by competition and substantial technological
change.
We currently face competition from many
other recycling and plastics companies that produce recycled plastics at prices
that are substantially lower than the prices we charge. Many of these
companies have substantially greater financial and other resources than us and,
therefore, are able to spend more than us in areas such as product development,
manufacturing and marketing. In addition, several plastic disposable
packaging manufacturers and converters and others have made efforts to increase
the recycling of their products. Increased recycling of plastic
products could lessen their harmful environmental impact, one major basis upon
which we compete.
In addition, there are few proprietary
rights associated with the production of our recycled raw material products.
While we seek to differentiate ourselves from other Chinese recycling companies
through our production of proprietary products manufactured with our recycled
plastic products, there are no significant barriers to entry in the section of
our business devoted to production of recycled raw material products and resale
of plastic scrap materials. For this reason, there may be many substantial
competitors that may enter our markets that we are unable to currently
identify.
Competitors may develop products that
render our products or proposed products uneconomical or results in products
being commercialized that may be superior to our products. In
addition, alternatives to recycled plastics could be developed, which would have
a material adverse affect on us.
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Our
production costs and revenues are impacted by increases in the cost of
labor.
The manufacturing of recycled plastics
is highly labor-intensive as all raw material classification is done by
hand. Recent changes in Chinese labor laws are likely to increase
costs further and impose restrictions on our relationship with our
employees. In June 2007, the National People’s Congress of the
PRC enacted new labor law legislation called the Labor Contract Law and more
strictly enforced existing labor laws. The Labor Contract Law, which
became effective on January 1, 2008, amended and formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions. As a result of the Labor Contract Law, we have had
to increase the salaries of our employees, provide additional benefits to our
employees, and revise certain other of our labor practices. The
increase in labor costs has increased our operating costs, which increase we
have not always been able to pass through to our customers. In
addition, under the Labor Contract Law, employees who either have worked for us
for 10 years or more or who have had two consecutive fixed-term contracts
must be given an “open-ended employment contract” that, in effect, constitutes a
lifetime, permanent contract, which is terminable only in the event the employee
materially breaches our rules and regulations or is in serious dereliction of
his or her duties. Such non-cancelable employment contracts will
substantially increase our employment related risks and limit our ability to
downsize our workforce in the event of an economic downturn. No
assurance can be given that we will not in the future be subject to labor
strikes or that we will not have to make other payments to resolve future labor
issues caused by the new laws. Our PRC subsidiaries have not
purchased sufficient social insurance for all of their employees. If
the local labor authorities order our PRC subsidiaries to do so, we may become
obligated to pay unpaid insurance premiums thereby increasing our labor
costs. Furthermore, there can be no assurance that the labor laws
will not change further or that their interpretation and implementation will
vary, which may have a negative effect upon our business and results of
operations.
We
may be exposed to monetary fines by the local housing authority and claims from
our employees in connection with our PRC subsidiaries’ non-compliance with
regulations with respect to contribution of housing provident funds for
employees.
According
to the relevant PRC regulations on housing provident funds, PRC enterprises are
required to contribute housing provident funds for their employees. The monthly
contributions must beat least 5% of each employee’s average monthly income in
the previous year. None of our PRC subsidiaries have opened the required housing
funds accounts since their establishment. Our PRC subsidiaries have not paid
such funds for their employees since its establishment. As of
November, 2010, the total accumulated unpaid contribution amount was
approximately RMB233,040. Under local regulations on the collection of housing
provident funds in Guangzhou and Zhaoqing where our PRC subsidiaries are
located, the local housing authorities may require our PRC subsidiaries to
rectify their non-compliance by setting up bank accounts and making payments and
relevant filings for the unpaid housing funds for their employees within a
specified time period. If our PRC subsidiaries fail to do so within the
specified time period, the local housing authorities in Guangzhou and Zhaoqing
may seek judicial enforcement against our PRC subsidiaries to make such
payments. Each of our PRC subsidiaries could be also be subject to fines
imposed by the housing funds administrative authority of a minimum of RMB10,000
and maximum of RMB 50,000. Employees of our PRC subsidiaries may
also be entitled to claim payment of such funds individually. If we
receive any notice from the local housing authorities or any claim from our
current and former employees regarding our non-compliance with the regulations,
we will be required respond to the notice and pay all amounts due to the
government, including any administrative penalties imposed, which would require
us to divert our financial resources and/or impact our cash reserves, if any, to
make such payments. Additionally, any administrative costs in excess
of the payments, if material, may impact our operating results.
Our business may be adversely
affected by the global economic downturn, in addition to the continuing
uncertainties in the financial markets.
The global economy is currently in a
pronounced economic downturn. Global financial markets are continuing
to experience disruptions, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic
stability. Given these uncertainties, there is no assurance that
there will not be further deterioration in the global economy, the global
financial markets and consumer confidence. Any economic downturn
generally in the PRC, would have a material adverse effect on our business, cash
flows, financial condition and results of operations.
Although we believe we have adequate
liquidity and capital resources to fund our operations internally, in light of
current market conditions, our inability to access the capital markets on
favorable terms, or at all, may adversely affect our financial
performance. The inability to obtain adequate financing from debt or
capital sources could force us to self-fund strategic initiatives or even forego
certain opportunities, which in turn could potentially harm our
performance.
We
will need additional capital to successfully implement our current business
strategy, which may not be available to us, and if we raise additional capital,
it may dilute your ownership in us.
Our continued growth is dependent upon
our ability to generate increased revenue from our existing customers, obtain
new customers and raise capital from outside sources. In November
2009, we began constructing a new factory in Guangzhou, China. We estimate that
we will expend $5 million in constructing this new facility. An
important element of our growth strategy is expected to be the development of
operational locations outside of Guangzhou, China. We believe that in
order to continue to operate additional market share and general additional
revenue, we will have to raise more capital to fund the construction and
installation of additional facilities and to obtain additional equipment to
collect and process plastics waste for our existing and future
customers. For example, we anticipate that we will require
approximately $30 million in order to fund expansion projects to upgrade our
existing plastics waste processing facilities, to finance the construction and
installation of additional facilities and to obtain additional equipment to
accommodate expected demand for our products and more stringent regulatory
criteria in environmental management. We anticipate that such funding will be
provided through a variety of sources including bank loans, equity financing and
net cash flow generated from operations.
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In the future, we may be unable to
obtain the necessary financing for our capital requirements on a timely basis
and on acceptable terms, and our failure to do so may adversely affect our
financial position, competitive position, growth and
profitability. Our ability to obtain acceptable financing at any time
may depend on a number of factors, including: our financial condition and
results of operations; the condition of the PRC economy and the industrial waste
treatment industry in PRC, and conditions in relevant financial markets in the
United States, PRC and elsewhere in the world.
Our failure to effectively manage
growth could harm our business.
We have rapidly and significantly
expanded our operations since our inception and will endeavor to further expand
our operations in the future. Any additional significant growth in the market
for our services or our entry into new markets may require and expansion of our
employee base for managerial, operational, financial, sales and marketing and
other purposes. During any growth, we may face problems related to our
operational and financial systems and controls, including quality control and
service capacities. We would also need to continue to expand, train and manage
our employee base. Continued future growth will impose significant added
responsibilities upon the members of management to identify, recruit, maintain,
integrate, and motivate new employees.
Aside from increased difficulties in
the management of human resources, we may also encounter working capital issues,
as we will need increased liquidity to finance the development of new products,
to increase our output capacity and to hire additional employees. For effective
growth management, we will be required to continue improving our operations,
management, and financial systems and controls. Our failure to manage growth
effectively may lead to operational and financial inefficiencies that will have
a negative effect on our profitability. We cannot assure investors that we will
be able to timely and effectively meet that demand and maintain the quality
standards required by our existing and potential customers.
We may pursue future growth through
strategic acquisitions and alliances which may not yield anticipated benefits
and may adversely affect our operating results, financial condition and existing
business.
We may seek to grow in the future
through strategic acquisitions in order to complement and expand our business.
The success of our acquisition strategy will depend on, among other
things:
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the
availability of suitable
candidates;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate favorable terms
for those acquisitions;
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the
availability of funds to finance
acquisitions;
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the
ability to establish new informational, operational and financial systems
to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
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the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur
substantial expenses and devote significant management time and resources in
seeking to complete acquisitions. Acquired businesses may fail to
meet our performance expectations. If we do not achieve the
anticipated benefits of an acquisition as rapidly as expected, or at all,
investors or analysts may not perceive the same benefits of the acquisition as
we do. If these risks materialize, our stock price could be
materially adversely affected.
We may be subject to intellectual
property infringement claims, which could result in litigation and substantial
costs to defend.
We cannot be certain that our
operations or any aspects of our business do not or will not infringe upon
patents, copyrights or other intellectual property rights held by third
parties. We may receive notice of claims of infringement of other
parties’ proprietary rights. Such actions could result in litigation
and we could incur significant costs and diversion of resources in defending
such claims. The party making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable
relief. Even if such litigation is not successful, it could result in
substantial costs and diversion of resources and management’s attention from the
operation of our business.
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We face risks related to natural
disasters, terrorist attacks or other unpredictable events in China which could
have a material adverse effect on our business and results of
operations.
Our business could be materially and
adversely affected by natural disasters, terrorist attacks or other events in
China where all of our operations are located. For example, in early
2008, parts of China suffered a wave of strong snow storms that severely
impacted public transportation systems. In May 2008, Sichuan Province
in China suffered a strong earthquake measuring approximately 8.0 on the Richter
scale that caused widespread damage and casualties. The May 2008
Sichuan earthquake has had a material adverse effect on the general economic
conditions in the areas affected by the earthquake. The occurrence of
any future disasters such as earthquakes, fires, floods, wars, terrorist
attacks, computer viruses, transportation disasters or other events, or our
information system or communications network breaks down or operates improperly
as a result of such events, our facilities may be seriously damaged, and we may
have to stop or delay operations. We may incur expenses relating to
such damages, which could have a material adverse effect on our business and
results of operations.
We may adopt an equity incentive plan
under which we may grant securities to compensate employees and other services
providers, which would result in increased share-based compensation expenses
and, therefore, reduce net income.
We may adopt an equity incentive plan
under which we may grant shares or options to qualified
employees. Under current accounting rules, we would be required to
recognize share-based compensation as compensation expense in our statement of
operations, based on the fair value of equity awards on the date of the grant,
and recognize the compensation expense over the period in which the recipient is
required to provide service in exchange for the equity award. We have
not made any such grants in the past, and accordingly our results of operations
have not contained any share-based compensation charges. The
additional expenses associated with share-based compensation may reduce the
attractiveness of issuing stock options under an equity incentive plan that we
may adopt in the future. If we grant equity compensation to attract
and retain key personnel, the expenses associated with share-based compensation
may adversely affect our net income. However, if we do not grant
equity compensation, we may not be able to attract and retain key personnel or
be forced to expend cash or other compensation instead. Furthermore,
the issuance of equity awards would dilute the shareholders’ ownership interests
in our company.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
As substantially all of our assets
are located in the PRC and all of our revenues are derived from our operations
in China, changes in the political and economic policies of the PRC government
could have a significant impact upon the business we may be able to conduct in
the PRC and accordingly on the results of our operations and financial
condition.
Our business operations may be
adversely affected by the current and future political environment in the
PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our
ability to operate in China may be adversely affected by changes in Chinese laws
and regulations, including those relating to taxation, import and export
tariffs, raw materials, environmental regulations, land use rights, property and
other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic
decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without
notice.
Our operations are subject to PRC
laws and regulations that are sometimes vague and uncertain. Any
changes in such PRC laws and regulations, or the interpretations thereof, may
have a material and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Decided legal cases do not have so
much value as precedent in China as those in the common law system prevalent in
the United States. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to, governmental approvals required for conducting business and
investments, laws and regulations governing the plastics recycling industry, as
well as commercial, antitrust, patent, product liability, environmental laws and
regulations, consumer protection, and financial and business taxation laws and
regulations.
The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic
matters. However, because these laws and regulations are relatively
new, and because of the limited volume of published cases and judicial
interpretation and their lack of force as precedents, interpretation and
enforcement of these laws and regulations involve significant
uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
Our PRC subsidiary, Kelida, is
considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:
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levying
fines;
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing
original actions in China based upon U.S. laws, including the federal securities
laws or other foreign laws against us or our management.
All of our current operations are
conducted in China. Moreover, all of our directors and officers are
nationals and residents of China. All or substantially all of the
assets of these persons are located outside the United States and in the
PRC. As a result, it may not be possible to effect service of process
within the United States or elsewhere outside China upon these
persons. In addition, uncertainty exists as to whether the courts of
China would recognize or enforce judgments of U.S. courts obtained against us or
such officers and/or directors predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof, or be competent
to hear original actions brought in China against us or such persons predicated
upon the securities laws of the United States or any state thereof.
The scope of the business licenses
for our subsidiaries organized in the PRC, Kelida, Hua Su, Chuang Yi, Xin Ye,
and Li Jun, is limited, and we may not expand or continue our business without
government approval and renewal, respectively.
Our principal operating entities,
Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun, can only conduct business within
their approved business scopes, which ultimately appears on their business
licenses. The business for Kelida covers its present business to
engage in the research, development and manufacture of intelligent control
systems, metal parts and electronic products, the sale of self-made products and
the provision of after-sale service. The business license for Chuang
Yi covers its present business to engage in the recycling, processing and sale
of plastic and hardware waste, handling goods and technology importation and
exportation as its own business or as an agent. The business licenses
for Hua Su covers its present business to engage in the manufacture and sale of
imported plastic waste and hardware, handling goods and technology importation
and exportation as its own business or as an agent. The business
licenses for Li Jun covers its present business to engage in the
manufacture and sale of recycled
waste plastic products, plastic craft products, handling goods and
technology importation and exportation as its own business or as an agent. The
business licenses for Xin Ye covers its present business to engage in the
manufacture and sale of recycled
waste plastic products and handling goods and technology importation and
exportation as its own business or as an agent. Additionally, we may
choose to enter into new areas and activities that are not currently covered by
our business licenses. Prior to expanding our business and engaging
in activities that are not covered by our current business licenses, we are
required to apply and receive approval from the relevant PRC government
authorities. In order for us to expand our business beyond the scope
of our licenses, we will be required to enter into a negotiation with the PRC
authorities for the approval to expand the scope of our business. PRC
authorities, which have discretion over business licenses, may reject our
request to expand the scope of our business licenses to include our planned
areas of expansion. We will be prohibited from engaging in any
activities that the PRC authorities do not approve in our expanded business
licenses. Companies that operate outside the scope of their licenses
can be subjected to fines, disgorgement of income and ordered to cease
operations. Our business and results of operations may be materially
and adversely affected if we are unable to obtain the necessary government
approval for expanded business licenses that cover any areas in which we wish to
expand.
Contract drafting, interpretation and
enforcement in China involve significant uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As
compared with contracts in the United States, contracts governed by PRC law tend
to contain less detail and are not as comprehensive in defining contracting
parties’ rights and obligations. As a result, contracts in China are
more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be
subject to disputes under our material contracts, and if such disputes arise, we
cannot assure you that we will prevail.
22
Recent PRC regulations relating to
acquisitions of PRC companies by foreign entities may create regulatory
uncertainties that could restrict or limit our ability to
operate. Our failure to comply with PRC regulations relating to
corporate restructurings and / or obtain the prior approval of the China
Securities Regulatory Commission, or the CSRC, for our planned public offering
and the listing and trading of our common stock could have a material adverse
effect on our business, operating results, reputation and trading price of our
common stock.
The PRC State Administration of Foreign
Exchange, or “SAFE,” issued a public notice in November 2005, known as
Circular 75, concerning the use of offshore holding companies controlled by
PRC residents in mergers and acquisitions in China. Circular 75
requires that (1) a PRC resident shall register with a local branch of the
SAFE before he or she establishes or controls an overseas special purpose
vehicle, or SPV, for the purpose of overseas equity financing (including
convertible debt financing); (2) when a PRC resident contributes the assets
of or his or her equity interests in a domestic enterprise to an SPV, or engages
in overseas financing after contributing assets or equity interests to an SPV,
such PRC resident must register his or her interest in the SPV and any changes
in such interest with a local branch of the SAFE; and (3) when the SPV
undergoes a material change outside of China, such as a change in share capital
or merger or acquisition, the PRC resident shall, within 30 days from the
occurrence of the event that triggers the change, register such change with a
local branch of the SAFE. In addition, SAFE issued updated internal
implementing rules, or the Implementing Rules in relation to
Circular 75. However, there exist uncertainties regarding the
SAFE registration for PRC residents’ interests in overseas
companies. If any PRC resident stockholder of a SPV fails to make the
required SAFE registration and amended registration, the onshore PRC
subsidiaries of that offshore company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or
liquidation to the offshore entity. Failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. We have requested our shareholders who are PRC
residents to make the necessary applications, filings and amendments as required
under Circular 75 and other related rules, however, we cannot assure you that
such PRC residents will be able to complete the necessary approval and
registration procedures required by the SAFE regulations. Failure by
any PRC resident beneficial holder to register as required with the relevant
branch of SAFE could subject these PRC resident beneficial holders to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our PRC subsidiaries’ ability to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our business and
prospects. Because of uncertainty in how Circular 75 will be
interpreted and enforced, we cannot be sure how it will affect our business
operations or future plans. For example, our PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with Circular 75 by our PRC resident beneficial holders over
whom we have no control.
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission and SAFE, released a substantially amended
version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect on
September 8, 2006 and was further amended on June 22,
2009. These new rules significantly revised China’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC
government attention to cross-border merger, acquisition and other investment
activities, by confirming MOFCOM as a key regulator for issues related to
mergers and acquisitions in China and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the new
rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese
government to monitor and prohibit foreign control transactions in key
industries.
Among other things, the Revised M&A
Regulations include new provisions that purport to require that an offshore
special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must obtain the approval
of the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on
its official website procedures specifying documents and materials required to
be submitted to it by SPVs seeking CSRC approval of their overseas
listings. However, the application of this PRC regulation remains
unclear with no consensus currently existing among the leading PRC law firms
regarding the scope and applicability of the CSRC approval
requirement. Our PRC counsel, Han Kun Law Offices, believes that it
is uncertain whether the transaction is subject to CSRC’s approval due to the
reasons that (i) Kelida was established by means of direct investment rather
than by merger or acquisition by Weixin HK;, and (ii) in reality, many other
similar companies have completed similar transactions like the share exchange
and private placement contemplated under the Exchange Agreement without CSRC’s
approval and our PRC legal counsel is not aware of any situation in which the
CSRC has imposed a punishment or penalty in connection with any such
transactions. However, if the CSRC or other PRC Government Agencies
subsequently determine that CSRC approval is required for the share exchange and
private placement contemplated under the Exchange Agreement, we may face
material regulatory actions or other sanctions from the CSRC or other PRC
Government Agencies. These regulatory agencies may impose fines and penalties on
our operations in the PRC, limit our operating privileges in the PRC, or take
other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as
the trading price of our common stock. In addition, any uncertainties
and/or negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our common stock.
According to the M&A Regulations, a
“Related Party Acquisition” is defined as having taken place when a PRC business
that is owned by PRC individual(s) is sold to a non-PRC entity that is
established or controlled, directly or indirectly, by those same PRC
individual(s). Under the M&A Regulations, any Related Party
Acquisition must be approved by MOFCOM and any indirect arrangement or series of
arrangements which achieves the same end result without the approval of MOFCOM
is a violation of PRC law. In February 2010, Kelida acquired the
equities of each of Chuang Yi, Hua Su, Li Jun and Xin Ye (the “WFOE
Acquisition”). At the time of the WFOE Acquisition, the WFOE was
indirectly owned by a PRC individual who had an entrustment arrangement with the
PRC shareholders of each of Chuang Yi, Hua Su, Li Jun and Xin
Ye. Under such entrustment arrangement, the PRC shareholders of each
of Chuang Yi, Hua Su, Li Jun and Xin Ye were holding their shares on behalf of
the PRC individual indirectly owning the WFOE prior to and until the WFOE
Acquisition. The WFOE Acquisition has been completed without being
deemed by relevant PRC Government Agencies as Related Party Acquisition which
requires the approval of MOFCOM. However, it remains uncertain that
whether the PRC Government Agencies would later challenge the WFOE Acquisition
with the concern of Related Party Acquisition and require the MOFCOM’s approval
for the WFOE Acquisition and impose material regulatory actions or other
sanctions on us if we are unable to obtain the MOFCOM approval or a waiver of
such approval, if and when procedures are established to obtain such a waiver,
invalidate the WFOE Acquisition, limit our operating privileges in China, delay
or restrict the repatriation of the proceeds from any private placement or
public offerings into China, limit our PRC subsidiaries’ ability to make
distributions or pay dividends to us or take other actions that could have a
material and adverse effect on our business, financial
condition or results of operations, as well as on the trading
price of our common stock.
23
It is uncertain how our business
operations or future strategy will be affected by the interpretations and
implementation of Circular 75 and the Revised M&A
Regulations. It is anticipated that application of the new rules will
be subject to significant administrative interpretation, and we will need to
closely monitor how MOFCOM, SAFE, CSRC and other ministries apply the rules to
ensure that our domestic and offshore activities continue to comply with PRC
law. Given the uncertainties regarding interpretation and application
of the new rules, we may need to expend significant time and resources to
maintain compliance with such rules.
If the land use rights of our
landlord are revoked, we would be forced to relocate
operations.
Under Chinese law, land is owned by the
state or rural collective economic organizations. The state issues to
the land users the land use right certificate. Land use rights can be
revoked and the land users could be forced to vacate at any time when
redevelopment of the land is in the public interest. The public
interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. In November 2009, we
acquired approximately 12,143 square meters of land equity in Guangzhou for a
total of RMB 7.29 million under land use right grant from the Guangzhou Land
Resource Bureau that gives us the right to use the land for 50 years and an
agreement with Guangzhou Land Resource Bureau. Besides our land use
rights in Guangzhou, we rely on our own land use rights and the land use rights
of our landlords in Zhaoqing, and the loss of own land uses rights or our
landlords’ land use rights would require us to identify and relocate our
operations, which could have a material adverse effect on our financial
conditions and results of operations.
The
plants built by Chuang Yi, Hua Su, Li Jun and Xin Ye on the land they leased
from certain landlord are temporary buildings, and we cannot assure you of our
continuity use of the plants and we may be forced to relocate
operations.
Chuang
Yi, Hua Su, Li Jun and Xin Ye lease land from a landlord in
Zhaoqing. Each of Chuang Yi, Hua Su, Li Jun and Xin Ye has built its
own plant on the leased land. All of the plants were built as
temporary buildings and, therefore, Chuang Yi, Hua Su, Li Jun and Xin Ye are not
able to obtain any house ownership certificates for their
plants. Temporary buildings may only exist for a limited period and
the local authority may determine to remove the temporary buildings at its
discretion. If the local authority orders us to remove the plants, we
have to relocate our operations, which could have a material adverse effect on
our financial conditions and results of operations.
We will not be able to complete an
acquisition of prospective acquisition targets in the PRC unless their financial
statements can be reconciled to U.S. generally accepted accounting principles in
a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S.
generally accepted accounting principles. If we attempt to acquire a
significant PRC target company and/or its assets, we would be required to obtain
or prepare financial statements of the target that are prepared in accordance
with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business
combination meeting certain financial significance tests require the public
acquirer to prepare and file historical and/or pro forma financial statement
disclosure with the SEC. These financial statements must be prepared
in accordance with, or be reconciled to U.S. generally accepted accounting
principles and the historical financial statements must be audited in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), or PCAOB. If a proposed acquisition target does not have
financial statements that have been prepared in accordance with, or that can be
reconciled to, U.S. generally accepted accounting principles and audited in
accordance with the standards of the PCAOB, we will not be able to acquire that
proposed acquisition target. These financial statement requirements
may limit the pool of potential acquisition targets with which we may acquire
and hinder our ability to expand our retail operations. Furthermore,
if we consummate an acquisition and are unable to timely file audited financial
statements and/or pro forma financial information required by the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), such as Item 9.01 of
Form 8-K, we will be ineligible to use the SEC’s short-form registration
statement on Form S-3 to raise capital, if we are otherwise eligible to use
a Form S-3. If we are ineligible to use a Form S-3, the
process of raising capital may be more expensive and time consuming and the
terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.
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We face uncertainty from China’s
Circular on Strengthening the Administration of Enterprise Income Tax on
Non-Resident Enterprises’ Share Transfer Income (“Circular 698”) that was
released in December 2009 with retroactive effect from January 1,
2008.
The Chinese State Administration of
Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698) on
December 10, 2009 that addresses the transfer of shares of Chinese resident
companies by nonresident companies. Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in China. While,
Circular 698 does not apply to shareholders who are individuals, two of the
original shareholders of Weixin BVI were BVI companies. The PRC authority has
the discretion to determine whether these enterprise shareholders are treated as
a resident enterprise. If such shareholders are recognized as non-resident
enterprises, Circular 698 may have been applicable to the Share Exchange due to
the transfer of shares of Weixin BVI, which indirectly holds the equity
interests of Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, to the Company by
such enterprise shareholders. Circular 698 provides that where a non-resident
enterprise investor indirectly transfers the equity of a PRC resident
enterprise, if the overseas intermediary holding company being transferred by
the non-resident enterprise is established in a country/region where the
effective tax rate is less than 12.5% or which does not tax the overseas income
of its residents, the non-resident enterprise must submit the required documents
to the PRC tax authority in charge of the PRC resident enterprise within 30 days
after the equity transfer agreement is concluded. However, there is uncertainty
as to the application of Circular 698. For example, while the term "indirectly
transfer" is not defined, it is understood that the relevant PRC tax authorities
have jurisdiction regarding requests for information over a wide range of
foreign entities having no direct contact with China. Moreover, the relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the country or jurisdiction and to
what extent and the process of the disclosure to the tax authority in charge of
that Chinese resident enterprise. We have not provided any information to the
relevant PRC tax authorities regarding the share exchange
transaction.
We have sought the advice, but not an
opinion, of PRC legal counsel regarding the application of and the risks
associated with Circular 698. Circular 698, which provides parties with a short
period of time to comply its requirements, indirectly taxes foreign companies on
gains derived from the indirect sale of a Chinese company. It further provides
that where a foreign investor indirectly transfers equity interests in a Chinese
resident enterprise through an abuse of form of organization and there are no
reasonable commercial purposes such that the corporate income tax liability is
avoided, the PRC tax authority will have the power to re-assess the nature of
the equity transfer in accordance with PRC’s “substance-over-form” principle and
deny the existence of the offshore holding company that is used for tax planning
purposes. However, there are no formal declarations with regard to how to decide
“abuse of form of organization” and “reasonable commercial purpose,” which can
be utilized by us to balance if our company complies with the Circular
698.
Due to the short history of the New EIT
law and lack of applicable legal precedents, it remains unclear how the PRC tax
authorities will determine the PRC tax resident treatment of our holding
companies, Weixin International Co., Limited, a company organized under the laws
of the British Virgin Islands (“Weixin BVI”) and Wei Xin Holding Group Limited,
a company organized under the laws of Hong Kong (“Weixin HK”). If we, Weixin BVI
or Weixin HK is determined to be a PRC resident enterprise by PRC tax
authorities, Circular 698 will not be applicable to any direct or indirect
transfer of our shareholdings in Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun. If
we, Weixin BVI or Weixin HK is determined to be a non-resident enterprise by the
PRC tax authorities and the direct or indirect transfer of our shareholdings in
Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, is recognized by the tax authority
in charge as the transfer of shares of Chinese resident companies by nonresident
companies, we may become at risk of being taxed under Circular 698 and we may be
required to expend valuable resources to comply with Circular 698 or to
establish that we should not be taxed under Circular 698, which could have a
material adverse effect on our financial condition and results of operations.
Because Weixin HK, a Hong Kong company owns 100% of Kelida; Weixin BVI, a
British Virgin Islands company owns 100% of Weixin HK; and the Company, a
Delaware corporation, owns 100% of Weixin BVI, it is possible that Circular 698
could apply to any transfer of shares of the Company, Weixin BVI or Weixin HK,
as an indirect transfer of the equity of Kelida, Hua Su, Chuang Yi, Xin Ye or Li
Jun, if such transfers are not made through a public securities market or by
individuals. If the PRC tax authority determines that Circular 698 applies to
us, we will be obligated to make tax returns filings with the relevant PRC tax
authority in accordance with PRC tax laws and regulations. Failure to do so will
subject us to fines up to RMB 10,000 ($1,471). Furthermore, if the PRC tax
authority determines that our arrangement which resulted in the underpayment of
taxes was done to evade taxation, in addition to paying all the underpaid taxes,
we may be subject to further penalties including late fees, fines ranging from
50% to 500% of the underpaid taxes, and even criminal liabilities under grave
circumstances.
The foreign currency exchange rate
between U.S. Dollars and Renminbi could adversely affect our financial
condition.
Until 1994, the Renminbi experienced a
gradual but significant devaluation against most major currencies, including
dollars, and there was a significant devaluation of the Renminbi on January 1,
1994 in connection with the replacement of the dual exchange rate system with a
unified managed floating rate foreign exchange system. Since 1994, the value of
the Renminbi relative to the U.S. dollar has remained stable and has appreciated
slightly against the U.S. Dollar. Countries, including the United States, have
argued that the Renminbi is artificially undervalued due to China’s current
monetary policies and have pressured China to allow the Renminbi to float freely
in world markets. In July 2005, the PRC government changed its policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy the Renminbi
is permitted to fluctuate within a narrow and managed band against a basket of
designated foreign currencies. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in further and more significant appreciation of the Renminbi
against the U.S. dollar.
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As we may rely on dividends and other
fees paid to us by our subsidiary and affiliated consolidated entities in China,
any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the amount of,
and any dividends payable on, our shares in U.S. dollars. To the
extent that we need to convert U.S. dollars into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the
conversion. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our shares or
for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to
us. In addition, since our functional and reporting currency is the
U.S. dollar while the functional currency of our subsidiary and affiliated
consolidated entities in China is Renminbi, appreciation or depreciation in the
value of the Renminbi relative to the U.S. dollar would have a positive or
negative effect on our reported financial results, which may not reflect any
underlying change in our business, results of operations or financial
condition.
Governmental control of currency
conversion may limit our ability to utilize our revenues.
Substantially all of our revenues and
expenses are denominated in Renminbi. Under PRC laws, the Renminbi is
currently convertible under a company’s “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the company’s “capital account,” which includes foreign direct investment
and loans, without the prior approval of SAFE. SAFE reserves the
discretion to deny the conversion of RMB into foreign currencies for capital
account transactions. Currently our PRC subsidiaries, Kelida, Hua Su,
Chuang Yi, Xin Ye, and Li Jun, may purchase foreign currencies for settlement of
current account transactions, including payments of dividends to us, without the
approval of SAFE. Therefore, Kelida, Hua Su, Chuang Yi, Xin Ye, and
Li Jun may convert the revenues it generates in RMB into other currencies, such
as U.S. Dollars, for settlement of current account transactions without having
to obtain approval from SAFE. However, foreign exchange transactions
by Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun 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. Therefore, Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun may not
convert its sales revenues from RMB into other currencies for capital account
transactions, such as to repay a loan, without first obtaining the approval of
SAFE. If Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun borrow foreign
currency loans from us or other foreign lenders, these loans must first be
registered with the SAFE. If Kelida, a wholly foreign-owned
enterprise, borrows foreign currency, the accumulative amount of its foreign
currency loans shall not exceed the difference between the total investment and
the registered capital of Kelida. If we finance Kelida, Hua Su,
Chuang Yi, Xin Ye or Li Jun by means of additional capital contributions, these
capital contributions must be approved by certain government authorities such as
the Ministry of Commerce or its local counterparts. Additionally, the
existing and future restrictions on currency exchange may affect the ability of
our PRC subsidiary or affiliated entities to obtain foreign currencies, limit
our ability to meet our foreign currency obligations, or otherwise materially
and adversely affect our business.
Inflation in the PRC could negatively
affect our profitability and growth.
While the PRC economy has experienced
rapid growth, such growth has been uneven among various sectors of the economy
and in different geographical areas of the country. Rapid economic
growth can lead to growth in the money supply and rising
inflation. According to the National Bureau of Statistics of China,
the change in China’s Consumer Price Index increased to 8.5% in April
2008. If prices for our products and services rise at a rate that is
insufficient to compensate for the rise in the costs of supplies such as raw
materials, it may have an adverse effect on our profitability.
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. In January 2010, the Chinese government took steps to
tighten the availability of credit including ordering banks to increase the
amount of reserves they hold and to reduce or limit their
lending. The implementation of such policies may impede economic
growth. In October 2004, the People’s Bank of China, the PRC’s
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. In April 2006, the People’s Bank of China
raised the interest rate again. Repeated rises in interest rates by
the central bank would likely slow economic activity in China which could, in
turn, materially increase our costs and also reduce demand for our products and
services.
Because our funds are held in banks
which do not provide insurance, the failure of any bank in which we deposit our
funds could affect our ability to continue in business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A
significant portion of our assets are in the form of cash deposited with banks
in the PRC, and in the event of a bank failure, we may not have access to our
funds on deposit. Depending upon the amount of money we maintain in a
bank that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
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Failure to comply with the United
States Foreign Corrupt Practices Act could subject us to penalties and other
adverse consequences.
As our ultimate holding company is a
Delaware corporation, we are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some
that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time-to-time in the PRC. We
can make no assurance, however, that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of
operations.
If we make equity compensation grants
to persons who are PRC citizens, they may be required to register with the State
Administration of Foreign Exchange of the PRC, or SAFE. We may also
face regulatory uncertainties that could restrict our ability to adopt an equity
compensation plan for our directors and employees and other parties under PRC
law.
On March 28, 2007, SAFE issued the
“Operating Procedures for Administration of Domestic Individuals Participating
in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed
Company, also known as “Circular 78.” It is not clear whether
Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. Domestic individuals
who are granted shares or share options by companies listed on overseas stock
exchanges based on the employee share option or share incentive plan are
required to register with the State Administration of Foreign Exchange or its
local counterparts. Pursuant to Circular 78, PRC individuals
participating in the employee stock option plans of the overseas listed
companies shall entrust their employers, including the overseas listed companies
and the subsidiaries or branch offices of such offshore listed companies in
China, or engage domestic agents to handle various foreign exchange matters
associated with their employee stock options plans. The domestic
agents or the employers shall, on behalf of the domestic individuals who have
the right to exercise the employee stock options, apply annually to the State
Administration of Foreign Exchange or its local offices for a quota for the
conversion and/or payment of foreign currencies in connection with the domestic
individuals’ exercise of the employee stock options. The foreign
exchange proceeds received by the domestic individuals from sale of shares under
the stock option plans granted by the overseas listed companies must be remitted
into the bank accounts in China opened by their employers or PRC
agents. If we adopt an equity compensation plan in the future and
make option grants to our officers and directors, most of whom are PRC citizens,
Circular 78 may require our officers and directors who receive option
grants and are PRC citizens to register with SAFE. We will comply
with Circular 78 if we adopt an equity incentive plan. We
believe that the registration and approval requirements contemplated in
Circular 78 will be burdensome and time consuming. If it is
determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject our PRC
subsidiary when it is deemed a domestic agent as defined under Circular 78
and participants of our incentive plan who are PRC citizens to fines and legal
sanctions and may prevent us from being able to grant equity compensation to our
PRC employees. If we are unable to compensate our PRC employees and
directors through equity compensation, our business operations may be adversely
affected.
Under the New EIT Law, we, Weixin BVI
and Weixin HK may be classified as “resident enterprises” of China for tax
purposes, which may subject us, Weixin BVI and Weixin HK to PRC income tax on
taxable global income.
Under the new PRC Enterprise Income Tax
Law (the “New EIT Law”) and its implementing rules, both of which became
effective on January 1, 2008, enterprises are classified as resident
enterprises and non-resident enterprises. An enterprise established
outside of China with its “de facto management bodies” located within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese domestic enterprise for enterprise income tax
purposes. The implementing rules of the New EIT Law define de facto
management body as a managing body that in practice exercises “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. Due to the short
history of the New EIT law and lack of applicable legal precedents, it remains
unclear how the PRC tax authorities will determine the PRC tax resident
treatment of a foreign company such as us, Weixin BVI and Weixin
HK. The Company has not sought the advice of PRC tax counsel
regarding the risks associated with the New EIT Law. Because our
Weixin BVI’s and Weixin HK’s members of management are located in China, we
believe it is likely that the we, Weixin BVI and Weixin HK meet the
qualifications of a “resident enterprise” and would be recognized as a Chinese
“resident enterprise,” subject to the ultimate judgment of the PRC tax
authority, based on the standard of “de facto management
body”. “Resident enterprise” treatment would not have impacted the
Company’s results since the New EIT Law’s effectiveness, as Weixin BVI and
Weixin HK have no taxable income and no dividends were paid by any of our
subsidiaries, including Weixin BVI, Weixin HK, Kelida, Hua Su, Chuang Yi, Xin Ye
and Li Jun. If the PRC tax authorities determine that we, Weixin BVI
or Weixin HK is a “resident enterprise” for PRC enterprise income tax purposes,
a number of 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, including interest income on the proceeds from the Private Placement, as
well as PRC enterprise income tax reporting obligations. The failure
to pay such taxes will subject us to fines up to RMB10, 000 ($1,471), and
furthermore, if the PRC tax authority determines that our arrangement which
resulted in the underpayment of taxes was done to evade taxation, in addition to
paying all the underpaid taxes, we may be subject to further penalties including
late fees, fines ranging from 50% to 500% of the underpaid taxes, and even
criminal liabilities under grave circumstances. Second, the New EIT
Law provides that dividend paid between “qualified resident enterprises” is
exempted from enterprise income tax. A recent circular issued by the
State Administration of Taxation on April 22, 2010, regarding the standards used
to classify certain Chinese-invested enterprises controlled by Chinese
enterprises or Chinese group enterprises and established outside of China as
“resident enterprises” clarified that dividends and other income paid by such
“resident enterprises” will be considered to be PRC source income, subject to
PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC
shareholders. It is unclear whether the dividends that we, Weixin BVI
or Weixin HK receives from Kelida, Hua Su, Chuang Yi, Xin Ye or Li Jun will
constitute dividends between “qualified resident enterprises” and would
therefore qualify for tax exemption, because the definition of qualified
resident enterprises is unclear and the relevant PRC government authorities 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. We are actively monitoring the possibility of “resident
enterprise” treatment for the applicable tax years and are evaluating
appropriate organizational changes to avoid this treatment, to the extent
possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and
the value of our common stock may be adversely affected.
27
Dividends payable by us to our
foreign investors and any gain on the sale of our shares may be subject to taxes
under PRC tax laws.
If dividends payable to our
stockholders are treated as income derived from sources within China, then the
dividends that stockholders receive from us, and any gain on the sale or
transfer of our shares, may be subject to taxes under PRC tax
laws. We have not consulted with PRC tax counsel regarding the taxes
that may be associated with dividends paid by us.
Under the New EIT Law and its
implementing rules, PRC enterprise income tax at the rate of 10% is applicable
to dividends payable by us to our investors that are non-resident enterprises so
long as such non-resident enterprise investors do not have an establishment or
place of business in China or, despite the existence of such establishment of
place of business in China, the relevant income is not effectively connected
with such establishment or place of business in China, to the extent that such
dividends have their sources within the PRC. Similarly, any gain
realized on the transfer of our shares by such investors is also subject to a
10% PRC income tax if such gain is regarded as income derived from sources
within China and we are considered as a resident enterprise which is domiciled
in China for tax purpose. Additionally, there is a possibility that
the relevant PRC tax authorities may take the view that the purpose of us,
Weixin BVI and Weixin HK is holding Kelida, Hua Su, Chuang Yi, Xin Ye and Li
Jun, and the capital gain derived by our overseas shareholders or investors from
the share transfer is deemed China-sourced income, in which case such capital
gain may be subject to a PRC withholding tax at the rate of up to
10%. If we are required under the New EIT Law to withhold PRC income
tax on our dividends payable to our foreign shareholders or investors who are
non-resident enterprises, or if you are required to pay PRC income tax on the
transfer or our shares under the circumstances mentioned above, the value of
your investment in our shares may be materially and adversely
affected.
In January, 2009, the State
Administration of Taxation promulgated the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct
obligation to make the following payment to a non-resident enterprise shall be
the relevant tax withholders for such non-resident enterprise, and such payment
includes: incomes from equity investment (including dividends and other return
on investment), interests, rents, royalties, and incomes from assignment of
property as well as other incomes subject to enterprise income tax received by
non-resident enterprises in China. Further, the Measures provides
that in case of equity transfer between two non-resident enterprises which
occurs outside China, the non-resident enterprise which receives the equity
transfer payment shall, by itself or engage an agent to, file tax declaration
with the PRC tax authority located at place of the PRC company whose equity has
been transferred, and the PRC company whose equity has been transferred shall
assist the tax authorities to collect taxes from the relevant non-resident
enterprise. However, it is unclear whether the Measures refer to the
equity transfer by a non-resident enterprise which is a direct or an indirect
shareholder of the said PRC company. Given these Measures, there is a
possibility that we may have an obligation to withhold income tax in respect of
the dividends paid to non-resident enterprise investors. If we have
such an obligation, our omission or failure to fulfill such obligation may
subject us to similar penalties to those applied to a taxpayer, including fines
up to RMB10,000, and in the case of being recognized as constituting evasion of
taxation, other than making up for the underpaid taxes, we may be subject to
further penalties including late fees, fines ranging from 50% to 500% of the
underpaid taxes, and even criminal liabilities under grave
circumstances.
SAFE rules and regulations may limit
our ability to transfer the net proceeds from the Private Placement offering to
our PRC subsidiaries, which may adversely affect the business expansion of our
PRC subsidiaries, and we may not be able to convert the net proceeds from the
Private Placement into Renminbi to invest in or acquire any other PRC
companies.
On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into Renminbi by restricting how the converted Renminbi may
be used. The notice requires that the registered capital of a
foreign-invested company settled in Renminbi converted from foreign currencies
may only be used for purposes within the business scope approved by the
applicable governmental authority and may not be used for equity investments
within the PRC. In addition, SAFE strengthened its oversight of the
flow and use of the registered capital of a foreign-invested company settled in
Renminbi converted from foreign currencies. The use of such Renminbi
capital may not be changed without SAFE’s approval, and may not in any case be
used to repay Renminbi loans if the proceeds of such loans have not been
used. Violations of Circular 142 will result in severe penalties,
such as heavy fines. As a result, Circular 142 may significantly
limit our ability to transfer the net proceeds from the Private Placement to our
PRC subsidiaries, Kelida, Hua Su, Chuang Yi, Xin Ye, and Li Jun, and we may not
be able to convert the net proceeds from the Private Placement into Renminbi to
invest in or acquire any other PRC companies.
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Any recurrence of Severe Acute
Respiratory Syndrome (SARS), Avian Flu, or another widespread public health
problem, such as the spread of H1N1 (“Swine”) Flu, in the PRC could adversely
affect our operations.
A renewed outbreak of SARS, Avian Flu
or another widespread public health problem, such as the spread of H1N1
(“Swine”) Flu, in China, where all of our operations are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon our ability to recycle
plastics and sell end-products from our recycled plastic. Such an
outbreak could have an impact on our operations as a result of:
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quarantines
or closures of some of our facilities, which would severely disrupt our
operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the Chinese
economy.
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Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
Risks
Related to Our Capital Structure
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our common stock is not currently
listed or quoted for trading on any national securities exchange or national
quotation system. We intend to apply for the listing of our common
stock on the NYSE Amex or the NASDAQ Global Market in the
future. There is no guarantee that the NYSE Amex or the NASDAQ Global
Market, or any other securities exchange or quotation system, will permit our
shares to be listed and traded. If we fail to obtain listing on NYSE
Amex or NASDAQ Global Market, we may seek quotation on the OTC Bulletin
Board. FINRA has enacted changes that limit quotations on the OTC
Bulletin Board to securities of issuers that are current in their reports filed
with the Securities and Exchange Commission. The effect on the OTC
Bulletin Board of these rule changes and other proposed changes cannot be
determined at this time. The OTC Bulletin Board is an inter-dealer,
over-the-counter market that provides significantly less liquidity than the
NASDAQ Global Market and the NYSE Amex. Quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for the NYSE Amex and the NASDAQ Global Market. Therefore,
prices for securities traded solely on the OTC Bulletin Board may be difficult
to obtain and holders of common stock may be unable to resell their securities
at or near their original offering price or at any price.
The
market price and trading volume of shares of our common stock may be
volatile.
When and if a market develops for our
securities, the market price of our common stock could fluctuate significantly
for many reasons, including for reasons unrelated to our specific performance,
such as reports by industry analysts, investor perceptions, or negative
announcements by customers, competitors or suppliers regarding their own
performance, as well as general economic and industry conditions. For
example, to the extent that other large companies within our industry experience
declines in their share price, our share price may decline as
well. In addition, when the market price of a company’s shares drops
significantly, shareholders could institute securities class action lawsuits
against the company. A lawsuit against us could cause us to incur
substantial costs and could divert the time and attention of our management and
other resources.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
Pursuant to the terms of the Share
Exchange, we agreed to file a registration statement with the Securities and
Exchange Commission to register the shares of our common stock issued in a
Private Placement that was conducted concurrently with the Share
Exchange. The registration statement must be filed within thirty (30)
days of the final closing of the Private Placement. We also intend to
register the 1,907,455 shares of common stock held by the SRKP 23 Stockholders
and all of the 782,545 shares of common stock underlying the warrants held by
the SRKP 23 Stockholders. These shares will be included in a
subsequent registration statement filed by us within ten (10) days after the end
of the six (6)-month period that immediately follows the date on which we file
the registration statement to register the shares issued in the Private
Placement.
Each investor in the Private Placement
and each of the SRKP 23 Stockholders may sell or transfer any shares of the
common stock after the effective date of their respective registration
statement, except that they entered into a lock-up agreement pursuant to which
they agreed that (i) if the proposed public offering that we hope to
conduct is for $5 million or more, then the investors would not be able
sell or transfer their shares until at least six (6) months after the public
offering’s completion, and (ii) if the offering is for less than
$5 million, then one-tenth (1/10th) of the
investors’ shares would be released from the lock-up restrictions ninety (90)
days after offering and there would be a pro rata release of the shares
thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, in its sole discretion, may allow early
releases under the referenced lock-up restrictions; provided, however, that
(i) no early release shall be made with respect to SRKP 23 Stockholders
prior to the release in full of all such lock-up restrictions on shares of the
common stock acquired in the Private Placement and (ii) any such early
release shall be made pro rata with respect to all investors’ shares acquired in
the Private Placement.
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Additionally, following the Share
Exchange, the Weixin Shareholders may be eligible to sell all or some of our
shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144 (“Rule 144”), promulgated under the
Securities Act of 1933, as amended (the “Securities Act”), subject to certain
limitations. Under Rule 144, an affiliate stockholder who has
satisfied the required holding period may, under certain circumstances, sell
within any three (3)-month period a number of securities which does not exceed
the greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four (4) calendar weeks prior to
such sale. As of the closing of the Share Exchange, 1% of our issued
and outstanding shares of common stock was approximately 108,841
shares. Non-affiliate stockholders are not subject to volume
limitations. Any substantial sale of common stock pursuant to any
resale prospectus or Rule 144 may have an adverse effect on the market
price of our common stock by creating an excessive supply. The Weixin
Shareholders have agreed to enter into a lock-up agreement pursuant to which
they will agree not to sell any of their securities of the Company until
twenty-four (24) months after our common stock began to be listed on the NASDAQ
Global Market or NYSE Amex.
Following
the Share Exchange, the Weixin Shareholders have significant influence over
us.
The Weixin Shareholders beneficially
own or control approximately 72.3% of our outstanding shares as of the close of
the Share Exchange and Private Placement and have a controlling influence in
determining the outcome of any corporate transaction or other matters submitted
to our stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors, and other
significant corporate actions. These stockholders may also have the
power to prevent or cause a change in control. In addition, without
the consent of these stockholders, we could be prevented from entering into
transactions that could be beneficial to us. The interests of these
stockholders may differ from the interests of our other
stockholders.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are required to establish and
maintain appropriate internal controls over financial reporting. Failure to
establish those controls, or any failure of those controls once established,
could adversely impact our public disclosures regarding our business, financial
condition or results of operations. Any failure of these controls could also
prevent us from maintaining accurate accounting records and discovering
accounting errors and financial frauds. Rules adopted by the SEC pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our
internal control over financial reporting. The standards that must be met for
management to assess the internal control over financial reporting as effective
are new and complex, and require significant documentation, testing and possible
remediation to meet the detailed standards. We may encounter problems or delays
in completing activities necessary to make an assessment of our internal control
over financial reporting. If we cannot assess our internal control over
financial reporting as effective, investor confidence and share value may be
negatively impacted.
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual or
perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting or disclosure of management’s assessment of our
internal controls over financial reporting may have an adverse impact on the
price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On November 12, 2010, we entered into
the Share Exchange Agreement with Weixin BVI, Weixin HK, Kelida, Hua Su, Chuang
Yi, Xin Ye, Li Jun and the Weixin Shareholders, pursuant to which we agreed to
acquire 100% of the issued and outstanding securities of Weixin BVI in exchange
for shares of our common stock. On November 23, 2010, the Share Exchange closed,
Weixin BVI became our 100%-owned subsidiary, and our sole business operations
became that of Weixin BVI and its subsidiaries. We also have a new
Board of Directors and management consisting mostly of persons from Weixin BVI
and Weixin HK and changed our corporate name from “SRKP 23, Inc.” to “China
Wesen Recycling Technology, Inc.”
We may not realize the benefits that we
hoped to receive as a result of the Share Exchange, which include:
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access
to the capital markets of the United
States;
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the
increased market liquidity expected to result from exchanging stock in a
private company for securities of a public company that may eventually be
traded;
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the
ability to use registered securities to make acquisition of assets or
businesses;
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increased
visibility in the financial
community;
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enhanced
access to the capital markets;
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improved
transparency of operations; and
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
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There can be no assurance that any of
the anticipated benefits of the Share Exchange will be realized with respect to
our new business operations. In addition, the attention and effort
devoted to achieving the benefits of the Share Exchange and attending to the
obligations of being a public company, such as reporting requirements and
securities regulations, could significantly divert management’s attention from
other important issues, which could materially and adversely affect our
operating results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty
for public companies and significantly increased the costs and risks associated
with accessing the public markets and public reporting. For example,
on January 30, 2009, the SEC adopted rules requiring companies to provide
their financial statements in interactive data format using the eXtensible
Business Reporting Language, or XBRL. We will have to comply with
these rules by June 15, 2011. Our management team will need to
invest significant management time and financial resources to comply with both
existing and evolving standards for public companies, which will lead to
increased general and administrative expenses and a diversion of management time
and attention from revenue generating activities to compliance
activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our common stock, which is not
currently listed or quoted for trading, may be considered to be a “penny stock”
if it does not qualify for one of the exemptions from the definition of “penny
stock” under Section 3a51-1 of the Exchange Act, once, and if, it starts
trading. Our common stock may be a “penny stock” if it meets one or
more of the following conditions (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a “recognized” national exchange;
(iii) it is NOT quoted on the NASDAQ Capital Market, or even if so, has a
price less than $5.00 per share; or (iv) is issued by a company that has
been in business less than three (3) years with net tangible assets less than
$5 million.
The principal result or effect of being
designated a “penny stock” is that securities broker-dealers participating in
sales of our common stock will be subject to the “penny stock” regulations set
forth in Rules 15-2 through 15g-9 promulgated under the Exchange
Act. For example, Rule 15g-2 requires broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document at least two (2) business days before effecting any transaction in a
penny stock for the investor’s account. Moreover, Rule 15g-9
requires broker-dealers in penny stocks to approve the account of any investor
for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to
(i) obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are
suitable for the investor and that the investor has sufficient knowledge and
experience as to be reasonably capable of evaluating the risks of penny stock
transactions; (iii) provide the investor with a written statement setting
forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement
from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment
objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any
cash dividends on our shares of common stock in the foreseeable future and
currently intend to retain any future earnings for funding growth. As
a result, investors should not rely on an investment in our securities if they
require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell
their shares of our common stock at or above the price they paid for
them.
31
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this report, including in the documents incorporated by
reference into this report, includes some statement that are not purely
historical and that are forward-looking statements. Such
forward-looking statements include, but are not limited to, statements regarding
our and our management’s expectations, hopes, beliefs, intentions or strategies
regarding the future, including our financial condition, results of operations,
and the expected impact of the Share Exchange on the parties’ individual and
combined financial performance. In addition, any statements that
refer to projections, forecasts or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. The words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The
forward-looking statements contained in this report are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance
that future developments actually affecting us will be those
anticipated. These forward-looking statements involve a number of
risks, uncertainties (some of which are beyond the parties’ control) or other
assumptions that may cause actual results or performance to be materially
different from those expressed or implied by these forward-looking statements,
including the following:
|
|
·
|
Our
ability to develop new products utilizing our recycled plastic
products;
|
|
|
·
|
Our
dependence on a limited number of suppliers for a majority of our raw
materials;
|
|
|
·
|
Our
ability to enter into relationships directly with suppliers to obtain raw
materials;
|
|
|
·
|
Our
ability to secure plastic waste raw materials at competitive
prices;
|
|
|
·
|
Our
reliance on a limited number of customers for our net
sales;
|
|
|
·
|
Our
ability to manage growth
effectively;
|
|
|
·
|
Our
ability hire and retain qualified and knowledgeable employees and
management;
|
|
|
·
|
Our
ability to raise additional capital to fund our
operations;
|
|
|
·
|
Our
ability to collect on accounts
receivables;
|
|
|
·
|
Changes
in the laws of the PRC that affect our operations and our corporate
structure;
|
|
|
·
|
Inflation
and fluctuations in foreign currency exchange
rates;
|
|
|
·
|
Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
|
|
|
·
|
Development
of a public trading market for our
securities;
|
|
|
·
|
The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
|
|
|
·
|
The
other factors referenced in this Current Report, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
|
These
risks and uncertainties, along with others, are also described above under the
heading “Risk Factors.” Should one or more of these risks or
uncertainties materialize, or should any of the parties’ assumptions prove
incorrect, actual results may vary in material respects from those projected in
these forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
32
ADDITIONAL
DISCLOSURE
For
additional information that would be required if the Company were filing a
general form for registration of securities on Form 10, see Item 2.02
for “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Item 3.03 for a description of the Company’s securities
post-Share Exchange and related discussion of market price, and Item 4.01
regarding changes in the Company’s accountant, all incorporated by reference
herein. Required disclosure regarding the change in control of the
Company, the impact on its directors, executive officers, control persons and
related compensation and beneficial ownership issues are addressed in
Item 5.01, incorporated by reference herein. Attention is also
directed to Item 9.01, which provides our unaudited financial statements as
of and for the nine months ended September 30, 2010 and our audited financial
statements as of and for the years ended December 31, 2009, 2008 and 2007
and pro forma financial information regarding the effects of the Share
Exchange.
|
ITEM
2.02
|
RESULTS
OF OPERATIONS AND FINANCIAL
CONDITION.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated statement of operations data contains
consolidated statement of operations data for the nine months ended September
30, 2010 and 2009 (unaudited) and for each of the years in the four-year period
ended December 31, 2009 and the consolidated balance sheet data as of
September 30, 2010 and as of year-end for each of the years in the four-year
period ended December 31, 2009. The consolidated statement of
operations data and balance sheet data were derived from the audited
consolidated financial statements, except for the nine months ended and as of
September 30, 2010 and 2009 and the year ended and as of December 31,
2006. Such financial data should be read in conjunction with the
consolidated financial statements and the notes to the consolidated financial
statements starting on page F-1 and with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Consolidated
Statements of Operations
|
For
the Nine Months Ended
September
30,
|
For
the Year Ended
December
31,
|
|||||||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Revenue
|
$ | 21,972 | $ | 18,428 | $ | 26,151 | $ | 8,687 | $ | 910 | $ | - | ||||||||||||
|
Cost
of revenue
|
13,788 | 12,472 | 17,516 | 6,522 | 649 | - | ||||||||||||||||||
|
Gross
profit
|
8,184 | 5,956 | 8,635 | 2,165 | 261 | - | ||||||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||||||
|
Selling
expenses
|
111 | 79 | 111 | 38 | 8 | - | ||||||||||||||||||
|
General
and administrative
|
632 | 398 | 591 | 422 | 167 | 5 | ||||||||||||||||||
|
Total
operating expenses
|
743 | 477 | 702 | 460 | 175 | 5 | ||||||||||||||||||
|
Income
from operations
|
7,441 | 5,479 | 7,933 | 1,705 | 86 | (5 | ) | |||||||||||||||||
|
Other
income (expenses)
|
||||||||||||||||||||||||
|
Interest
income
|
14 | 9 | 13 | 10 | 2 | - | ||||||||||||||||||
|
Other
income (expense), net
|
(53 | ) | (27 | ) | (39 | ) | (36 | ) | (26 | ) | - | |||||||||||||
|
Total
other income (expenses)
|
(39 | ) | (18 | ) | (26 | ) | (26 | ) | (24 | ) | - | |||||||||||||
|
Income
before income taxes
|
7,402 | 5,461 | 7,907 | 1,679 | 62 | (5 | ) | |||||||||||||||||
|
Income
taxes
|
(1,885 | ) | (1,354 | ) | (2,031 | ) | (441 | ) | (33 | ) | - | |||||||||||||
|
Net
income (loss)
|
$ | 5,517 | $ | 4,107 | $ | 5,876 | $ | 1,238 | $ | 29 | $ | (5 | ) | |||||||||||
33
Consolidated
Balance Sheets
|
As
of September 30,
|
As
of December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Total
Current Assets
|
$ | 9,254 | $ | 10,897 | $ | 4,373 | $ | 833 | $ | 476 | ||||||||||
|
Total
Assets
|
15,954 | 15,951 | 8,019 | 3,236 | 477 | |||||||||||||||
|
Total
Current Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
|
Total
Liabilities
|
3,083 | 8,769 | 6,146 | 2,662 | 416 | |||||||||||||||
|
Total
Stockholders’ Equity
|
$ | 12,871 | $ | 7,182 | $ | 1,873 | $ | 574 | $ | 61 | ||||||||||
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The purpose of this section is to
discuss the financial condition, changes in financial condition and results of
operations of the company. This includes discussion of (i) liquidity (ii)
capital resources (iii) results of operations and (iv)off-balance sheet
arrangements, plus any other information that would be necessary to an
understanding of the company’s financial condition, changes in financial
condition and results of operations. References in this section to “we”, “us”,
“our” or the “Company” are to the consolidated business of Weixin International
Co., Limited (“Weixin BVI”), Wei Xin Holding Group Limited (“Weixin HK”),
Guangzhou Kelida Intelligent Equipment Co., Ltd. (“Kelida”); and Zhaoqing Hua Su
Plastic Trading Company (“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd. (“Chuang Yi”), Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing
Li Jun Craftwork Co., Ltd. (“Li Jun”).
Forward
Looking Statements
The following discussion of our
financial condition and results of operations is based upon and should be read
in conjunction with our consolidated financial statements and their related
notes included in this report. This report contains forward-looking statements.
Generally, the words “believes,” “anticipates,” “may,” “will,” “should,”
“expect,” “intend,” “estimate,” “continue” and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements. You are cautioned not to place undue reliance on
these forward-looking statements because these forward-looking statements we
make are not guarantees of future performance and are subject to various
assumptions, risks, and other factors that could cause actual results to differ
materially from those suggested by these forward-looking statements. Thus, our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on our
operations and future prospects include, but are not limited to, changes in:
economic conditions generally and the automotive modified plastics market
specifically, legislative or regulatory changes that affect our business,
including changes in regulation, the availability of working capital, the
introduction of competing products, and other risk factors described herein.
These risks and uncertainties, together with the other risks described from
time-to-time in reports and documents that we filed with the SEC should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Indeed, it is likely that some of our
assumptions will prove to be incorrect. Our actual results and financial
position will vary from those projected or implied in the forward-looking
statements and the variances may be material. We expressly disclaim any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
law.
Overview
Our revenues are primarily derived from
the sales of recycled plastic grains, and the sale of further processed plastic
products, manufactured with our recycled plastic grains. We also derive a
substantial portion of our revenue from the sale of recycled plastic material.
We manufacture various kinds of recycled plastic material including high density
polyethylene (“HDPE”), low density polyethylene (“LDPE”), Polystyrene (“PS”),
acrylonitrile butadiene styrene (“ABS”) using imported raw material in the form
of plastic waste. We further process the recycled plastic grains and turn them
into household products such as plastic tables and chairs, and fruit boxes and
construction products such as clapboard.
A substantial portion of
our revenue is currently derived from the resale of recycled plastic materials,
including HDPE, LDPE, ABS and PS waste plastic materials. We currently
import recycled
plastic materials in an amount that exceeds our manufacturing
capabilities, but we are able to resell such materials at a premium to our cost
of acquiring the recycled plastic. The resale of our recycled plastic
materials shortens our inventory turn over period and, therefore, improves our
working capital position. We expect that resales of recycled plastics will
decrease as a percentage of revenues as we continue to expand our recycling
capabilities..
34
We also sell metal parts for various
home products, including door hardware and lock parts. The sale of
these parts is primarily to overseas customers and accounted for approximately
1%, 1% and 2%, of our total net sales for the nine months ended September 30,
2010 and the years ended December 31, 2009 and 2008, respectively. It
is expected that this portion of our business will be substantially eliminated
by the end of the fourth quarter of fiscal 2010 or the first quarter of fiscal
2011 as we continue to focus exclusively on our recycling business.
We primarily purchase recycled plastics
directly from overseas recyclers located in Australia and North America as well
as from domestic wholesalers in Hong Kong. Our cost of revenue consists mainly
of the purchase price of imported plastic waste. We have limited
influence on such costs. The prices of imported recycled plastic are determined
solely by suppliers and are dependent upon market conditions. The price of raw
material recycled plastic heavily depends upon changes in the price of oil,
which drives the price of virgin plastic and causes changes in the price of raw
material plastic wastes.
The purchase of raw material is
fundamental to the recycling business. In order to cut costs and increase profit
margins, we focus on developing relationships with new suppliers and increasing
the amount of raw material purchased directly from overseas recyclers, as
opposed to purchasing from domestic wholesalers. We have established two direct
sources in the United States which provide an estimated 20,000 tons of
post-industrial recycled materials annually and we are in negotiation with
another supplier to obtain a minimum of 26,000 tons of recycled plastic from
North American and Australia. The imported raw material is of a high quality,
allowing us to benefit from efficiencies in our manufacturing operations and
affording us the ability to offer quality plastic grains and compounds as well
as a comprehensive line of consumer and commercial products used in demanding
applications. We intend to continue to work on obtaining more
favorable terms and discounts by strengthening our relationships with suppliers
and placing more bulk orders.
Our funds are kept in financial
institutions located in the PRC, which do not provide insurance for amounts on
deposit. Moreover, we are subject to the regulations of the PRC,
which restrict the transfer of cash from the PRC, except under certain specific
circumstances. Accordingly, such funds may not be readily available
to us to satisfy obligations which have been incurred outside the
PRC.
We generally finance our operations
through operating profit and borrowings from our directors. As of the date of
this Current Report, we have not experienced any difficulties due to a shortage
of capital, we have not experienced any difficulty in raising funds through
loans from banks and financial institutions, and we have not experienced any
liquidity problems in settling our payables in the normal course of business and
repaying our loans when they come due. We are unaware of any trends, demands,
commitments events or uncertainties that will result or be likely to result in
material changes in our liquidity.
We believe that the level of financial
resources is a significant factor for our future development and accordingly, we
may determine from time to time to raise capital through private debt or equity
financing to strengthen our financial position, to expand our facilities and to
provide us with additional flexibility to take advantage of business
opportunities. No assurances can be given that we will be successful in raising
such additional capital on terms acceptable to us.
Recent
Events
Share Exchange
On November 23, 2010, we completed a
share exchange transaction pursuant to which we became the 100% parent company
of Weixin International Co., Limited, a company organized under the laws of the
British Virgin Islands (“Weixin BVI”); which is the 100% parent of Wei Xin
Holding Group Limited, a company organized under the laws of Hong Kong (“Weixin
HK”); which is the 100% parent of Gangzhou Kelida Intelligent Equipment Co.,
Ltd., a company organized under the laws of the People’s Republic of China
(“Kelida”); which is the 100% parent of Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”), each a company organized under the laws of the People’s
Republic of China. Pursuant to a Share Exchange Agreement, we issued an
aggregate of 7,865,556 shares of our common stock to the shareholders of Weixin
BVI (the “Weixin Shareholders”) in exchange for all of the issued and
outstanding securities of Weixin BVI (the “Share Exchange”).
Prior to the closing of the Share
Exchange and the initial closing of the Private Placement, as described below,
our stockholders canceled an aggregate of 6,679,899 shares held by them such
that there were 1,907,455 shares of common stock outstanding immediately prior
to the Share Exchange. Our stockholders prior to the Share Exchange
(the “SRKP 23 Stockholders”) also canceled warrants to purchase an aggregate of
7,804,803 shares of common stock such that they held warrants to purchase an
aggregate of 782,545 shares of common stock immediately prior to the Share
Exchange and initial closing of the Private Placement. In addition,
we paid a $140,000 success fee to WestPark Capital for services provided in
connection with the Share Exchange, including coordinating the share exchange
transaction process, interacting with the principals of the shell corporation
and negotiating the definitive purchase agreement for the shell, conducting a
financial analysis of Weixin BVI, conducting due diligence on Weixin BVI and its
subsidiaries and managing the interrelationship of legal and accounting
activities. Immediately after the closing of the Share Exchange and
initial closing of the Private Placement, we had 10,884,120 shares of common
stock, no shares of preferred stock, no options, and warrants to purchase
782,545 shares of common stock issued and outstanding.
35
Pursuant to the terms of the Share
Exchange, we entered into a Registration Rights Agreement with each of the SRKP
23 Stockholders pursuant to which we agreed to register all of the 1,907,455
shares of common stock and all of the 782,545 shares of common stock underlying
the warrants held by such stockholders. These shares will be included
in a subsequent registration statement (the “Subsequent Registration Statement”)
filed by us no later than the tenth (10th) day
after the end of the six (6) month period that immediately follows the date on
which we file the registration statement to register the shares issued in the
Private Placement (the “Required Filing Date”). We agreed to use
reasonable efforts to cause the Subsequent Registration Statement to become
effective within one hundred fifty (150) days after the Required Filing Date or
the actual filing date, whichever is earlier, or one hundred eighty (180) days
after the Required Filing Date or the actual filing date, whichever is earlier,
if such Subsequent Registration Statement is subject to a full review by the SEC
(the “Required Effectiveness Date”). If we fail to file the
Subsequent Registration Statement by the Required Filing Date or if it does not
become effective on or before the Required Effectiveness Date we are required to
issue, as liquidated damages, to each of the SRKP 23 Stockholders’ shares (the
“Penalty Shares”) equal to a total of 0.0333% of their respective shares for
each calendar day that the Subsequent Registration Statement has not been filed
or declared effective by the SEC (and until the Subsequent Registration
Statement is filed with or declared effective by the SEC), as
applicable. However, no Penalty Shares shall be due to the SRKP 23
Stockholders if we are using our best efforts to cause the Subsequent
Registration Statement to be filed and declared effective in a timely
manner.
The transactions contemplated by the
Share Exchange Agreement were intended to be a “tax-free” reorganization
pursuant to the provisions of Sections 351 and/or 368(a) of the Internal
Revenue Code of 1986, as amended.
The Private Placement
On November 23, 2010, concurrently with
the closing of the Share Exchange, we conducted an initial closing of a private
placement of shares of our Common Stock (the “Private
Placement”). The purpose of the Private Placement was to increase our
working capital and the net proceeds from the Private Placement will be used to
expand business operations, including developing direct sources and dealerships,
increasing production capacity, making permitted acquisitions, purchasing
manufacturing equipment, and for general corporate purposes. Pursuant
to subscription agreements entered into with the investors in the Private
Placement, we sold an aggregate of 1,111,099 shares of Common Stock at $2.25 per
share in the initial closing of the Private Placement, for gross proceeds of
approximately $2.5 million in the initial closing of the Private
Placement.
We agreed to file a registration
statement covering the shares of Common Stock sold in the Private Placement
within thirty (30) days of the final closing of the Private Placement pursuant
to the subscription agreement entered into with each investor and to cause such
registration statement to be declared effective by the SEC no later than one
hundred fifty (150) days from the date of filing or one hundred eighty (180)
days from the date of filing if the registration statement is subject to a full
review by the SEC. The SRKP 23 Stockholders and the investors in the
Private Placement also entered into lock-up agreements pursuant to which they
agreed that (i) if the proposed public offering that we expect to conduct
is for $5 million or more, then the investors and our stockholders prior to the
Share Exchange would not be able to sell or transfer their shares until at least
six (6) months after the public offering’s completion, and (ii) if the
offering is for less than $5 million, then one-tenth (1/10th) of
their shares would be released from the lock-up restrictions ninety (90) days
after the offering and there would be a pro rata release of the
shares thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, Inc., the placement agent for the Private
Placement (“WestPark Capital”), in its discretion, may also release some or all
the shares from the lock-up restrictions earlier, however, (i) no early
release shall be made with respect to SRKP 23 Stockholders prior to the release
in full of all such lock-up restrictions on the shares of Common Stock acquired
in the Private Placement and (ii) any such early release shall be made pro
rata with respect to all investors’ shares acquired in the Private
Placement.
Pursuant to a Placement Agency
Agreement with WestPark Capital, we paid WestPark Capital, Inc. a commission
equal to 10.0% with a non-accountable fee of 4.0% of the gross proceeds from the
Private Placement. We are also retaining WestPark Capital for a
period of six months following the initial closing of the Private Placement to
provide us with financial consulting services for which we will pay WestPark
Capital $4,000 per month. Out of the proceeds of the Private
Placement, we paid $250,000 to Keen Dragon Group Limited, a third party
unaffiliated with Weixin BVI, the Company, or WestPark Capital for services in
connection with arranging the reverse merger.
PRC
Regulations that May Affect our Results of Operations
Tax uncertainty. We
believe that our taxable income is calculated pursuant to the PRC tax laws and
regulations and is substantiated by our financial data. However, changes in PRC
tax laws and regulations may have an adverse and retroactive impact on our
financial position and results of operations. In addition, the local tax
authority at Guangzhou and Zhaoqing may change its interpretation and
enforcement of the PRC tax laws and regulations which could have an adverse and
retroactive impact on our financial position and results of operations. We
are not able to predict any such changes, and thus we cannot reasonably estimate
the amount of the potential impact.
36
Foreign Currency
Translation. Our financial statements are expressed in US
dollars, but the functional currency of our operating subsidiaries is RMB. Our
results of operations are translated at average exchange rates during the
relevant financial reporting periods, assets and liabilities are translated at
the unified exchange rate at the end of these periods and equity is translated
at historical exchange rates. Adjustments resulting from the process of
translating the local currency financial statements into US dollars are included
in determining comprehensive income.
Dividend
Distributions Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise
in China is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in
the event of liquidation. We do not plan to declare or pay any cash dividends on
our shares of common stock in the foreseeable future and currently intend to
retain any future earnings for funding growth. Any change in the laws
and regulations on the dividend distribution or any change in our decision to
pay cash dividends on our common stock will affect our financial condition and
operating results.
Critical
Accounting Policies, Estimates and Assumptions
Accounting Principles
Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements. These financial statements are prepared in accordance with
Generally Accepted Accounting Principles in the United States (“U.S. GAAP”),
which requires us to make estimates and assumptions that affect the reported
amounts of our assets, liabilities, revenues and expenditures, to disclose
contingent assets and liabilities on the date of the financial statements, and
to disclose the reported amounts of revenues and expenses incurred during the
financial reporting period. The most significant estimates and assumptions
include revenues recognition, valuation of inventories and provisions for income
taxes. We continue to evaluate these estimates and assumptions that we believe
to be reasonable under the circumstances. We rely on these evaluations as the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Since the use of estimates is
an integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We believe critical
accounting policies as disclosed in this report reflect the more significant
judgments and estimates used in preparation of our financial statements. We
believe there have been no material changes to our critical accounting policies
and estimates.
The following critical accounting
policies rely upon assumptions and estimates and were used in the preparation of
our consolidated financial statements:
Accounts
receivable
Accounts receivable are recognized and
carried at original invoiced amount less an allowance for uncollectible
accounts, as needed.
The allowance on uncollectible accounts
receivable reflects management’s best estimate of probable losses determined
principally on the basis of historical experience. The allowance for
uncollectible accounts receivable is determined primarily on the basis of
management’s best estimate of probable losses, including specific allowances for
known troubled accounts. All accounts or portions thereof deemed to be
uncollectible or to require an excessive collection cost are written off to the
allowance for uncollectible accounts receivable. When facts subsequently become
available to indicate that the amount provided as the allowance was incorrect,
an adjustment which is classified as a change in estimate is made.
Inventories
Inventories consist of finished goods,
work in progress, and raw materials. Inventories are valued at the lower of
cost, as determined on a weighted average basis, or market. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
writes down the inventories to market value if it is below cost. Management also
regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if valuation allowance is required. Costs
of raw material inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Finished goods
are comprised of direct materials, direct labor, and an appropriate proportion
of overhead.
37
Revenue
recognition
Hua Su, Chuang Yi, Xin Ye and Li Jun
(collectively, the “Subsidiaries Four”) are identical in their operations and
generate revenue from the sale of manufactured HDPE, LDPE, ABS and PS grains.
These companies recognize revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, as evidenced by an agreement with the
customer, delivery of the goods has occurred, customer acceptance has been
obtained, which means the significant risks and ownership have been transferred
to the customer, the price is fixed or determinable and collectability is
reasonably assured. Sales contracts, invoices and shipping documents are
utilized to facilitate the sales process. Revenue is recognized when customers
acknowledges the sale and delivery and the title of the goods is properly
transferred to the customers.
There are no shipping charges involved
as all of the manufactured goods are picked up by the customers at the Company's
warehouse. Customer acceptance is obtained at the point of delivery. No return
allowance is made as product returns are insignificant based on historical
experience. The Company does not provide warranties, rebates, price protection,
or similar privileges among customers. The prices of the products are
predetermined and fixed based on contractual agreements.
The Subsidiaries Four also generate
revenue from the sale of purchased recyclable plastic materials, which are
recognized on the same basis as the sales of manufactured HDPE, LDPE, ABS and PS
grains. The Company recognizes revenue from the sale of these materials on a
gross basis because it is responsible for fulfillment and takes title to the
materials before they are ordered by a customer and acts as the principal
obligor in the transaction. The revenue is recorded when delivery of the goods
has occurred, customer acceptance has been obtained, and the significant risks
and ownership have been transferred to the customer, the price is fixed or
determinable, and collectability is reasonably assured.
Weixin HK generates revenue from
selling lock parts. Weixin HK records revenue net of pass-through charges as the
Company believes the key indicators of the business suggest that the Company
generally acts as an agent on behalf of its customers.
Cost of goods
sold
Cost of goods sold consists primarily
of raw materials, utility and supply costs consumed in the manufacturing
process, manufacturing labor, depreciation expense and direct overhead expenses
necessary to manufacture finished goods as well as warehousing and distribution
costs such as inbound freight charges, shipping and handling costs, purchasing
and receiving costs.
Value added
taxes
We are subject to value added tax
(“VAT”). The applicable VAT rate is different based on the different structure
of business under Chinese tax law. Some of our transactions are levied at a VAT
tax rate of 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Some of transactions are
levied at a VAT tax rate of 7%, such as shipping services and other
transportation services.
Foreign currency
translation
Our reporting currency is the U.S.
dollar. Our functional currencies are local currencies, primarily the PRC
currency Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in
foreign currencies are translated into U.S. dollar at exchange rate in effect on
the date of the transactions. The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Exchange
gains or losses on transaction are included in earnings.
Recently issued accounting
pronouncements
In June 2009, the Financial
Accounting Standards Board (FASB) issued a standard that established the FASB
Accounting Standards Codification (ASC) and amended the hierarchy of generally
accepted accounting principles (ASC) and amended the hierarchy of generally
accepted accounting principles (GAAP) such that the ASC became the single source
of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S.
GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All previously existing accounting standard documents were superseded and
all other accounting literature not included in the ASC is considered
non-authoritative. New accounting standards issued subsequent to June 30,
2009 are communicated by the FASB through Accounting Standards Updates (ASUs).
The Company adopted the ASC on July 1, 2009. This standard did not have an
impact on the Company’s consolidated results of operations or financial
condition.
In April 2009, the FASB issued an
accounting standard which provides guidance on (1) estimating the fair
value of an asset or liability when the volume and level of activity for the
asset or liability have significantly declined and (2) identifying
transactions that are not orderly. The standard also amended certain disclosure
provisions for fair value measurements and disclosures in ASC 820 to require,
among other things, disclosures in interim periods of the inputs and valuation
techniques used to measure fair value as well as disclosure of the hierarchy of
the source of underlying fair value information on a disaggregated basis by
specific major category of investment. The standard was effective prospectively
beginning April 1, 2009. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
38
In May 2009, the FASB issued new
guidance on the treatment of subsequent events which is intended to establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Specifically, this new guidance sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that occurred for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions that occurred after the balance
sheet date in its financial statements, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. This new guidance was effective for fiscal years and interim periods ended
after June 15, 2009, and must be applied prospectively. We adopted and applied
the provisions of the new guidance in the third quarter of 2009.
In February 2010, subsequent to our
adoption of the new guidance discussed above, the FASB issued updated guidance
on subsequent events, amending the May 2009 guidance. This updated guidance
revised various terms and definitions within the guidance and requires us, as an
"SEC filer," to evaluate subsequent events through the date the financial
statements are issued, rather than through the date the financial statements are
available to be issued. Furthermore, we no longer are required to disclose the
date through which subsequent events have been evaluated. The updated guidance
was effective for us immediately upon issuance. As such, we adopted and applied
the provisions of the updated guidance in the first quarter of 2010. Our
adoption of both the new and updated guidance did not have an impact on our
consolidated financial position or results of operations.
In June 2009, the FASB issued an
accounting standard that revised the consolidation guidance for
variable-interest entities. The modifications include the elimination of the
exemption for qualifying special purpose entities, a new approach for
determining who should consolidate a variable-interest entity, and changes to
when it is necessary to reassess who should consolidate a variable-interest
entity. The standard is effective January 1, 2010. The adoption did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
In August 2009, the FASB issued
ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides
additional guidance on how companies should measure liabilities at fair value
under ASC 820. The ASU clarifies that the quoted price for an identical
liability should be used. However, if such information is not available, a
entity may use, the quoted price of an identical liability when traded as an
asset, quoted prices for similar liabilities or similar liabilities traded as
assets, or another valuation technique (such as the market or income approach).
The ASU also indicates that the fair value of a liability is not adjusted to
reflect the impact of contractual restrictions that prevent its transfer and
indicates circumstances in which quoted prices for an identical liability or
quoted price for an identical liability traded as an asset may be considered
level 1 fair value measurements. The ASU is effective October 1,
2009. The adoption of this standard did not have a material impact on the
Company’s consolidated results of operations or financial
condition.
In January 2010, the FASB issued ASU
No. 2010-6, Improving Disclosures About Fair Value Measurements, that amends
existing disclosure requirements under ASC 820 by adding required disclosures
about items transferring into and out of levels 1 and 2 in the fair value
hierarchy; adding separate disclosures about purchase, sales, issuances, and
settlements relative to level 3 measurements; and clarifying, among other
things, the existing fair value disclosures about the level of disaggregation.
This ASU is effective for the first quarter of 2010, except for the requirement
to provide level 3 activities of purchases, sales, issuances, and settlements on
a gross basis, which is effective beginning the first quarter of 2011. Since
this standard impacts disclosure requirements only, its adoption did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
Nine
Months Ended September 30, 2010 and 2009
The following table sets forth a
summary of certain key components of our results of operations for the periods
indicated, in dollars and as a percentage of revenues.
|
For
The Nine Months Ended September 30,
|
||||||||||||||||||||
|
2010
|
2009
|
Change
in %
|
||||||||||||||||||
|
Revenue
|
$ | 21,971,844 | 100 | % | $ | 18,427,828 | 100 | % | 19 | % | ||||||||||
|
Cost
of revenue
|
13,788,072 | 63 | % | 12,471,539 | 68 | % | 11 | % | ||||||||||||
|
Gross
profit
|
8,183,772 | 37 | % | 5,956,289 | 32 | % | 37 | % | ||||||||||||
|
Operating
expenses
|
743,188 | 3 | % | 477,744 | 3 | % | 56 | % | ||||||||||||
|
Operating
income
|
7,440,584 | 34 | % | 5,478,545 | 30 | % | 36 | % | ||||||||||||
|
Other
expenses
|
38,529 | * | 18,004 | * | 114 | % | ||||||||||||||
|
Income
taxes
|
1,885,457 | 9 | % | 1,353,887 | 7 | % | 39 | % | ||||||||||||
|
Net
income
|
$ | 5,516,598 | 25 | % | $ | 4,106,654 | 22 | % | 34 | % | ||||||||||
* less
than 1%.
39
Revenues
The following table sets forth the
revenue generated from different categories of products for the nine months
period, in dollars and as a percentage of revenues.
|
Revenues
|
||||||||||||||||||||
|
Nine
Months ended September 30,
|
||||||||||||||||||||
|
2010
|
2009
|
Change
in %
|
||||||||||||||||||
|
Plastic
grains
|
$ | 5,110,232 | 23 | % | $ | 4,124,506 | 22 | % | 24 | % | ||||||||||
|
Household
and construction products
|
5,960,199 | 27 | % | 3,394,596 | 18 | % | 76 | % | ||||||||||||
|
Recycled
plastic
|
10,775,136 | 49 | % | 10,777,181 | 58 | % | 0 | % | ||||||||||||
|
Sale
of metal parts
|
126,277 | 1 | % | 131,545 | 1 | % | (4 | )% | ||||||||||||
| 21,971,844 | 100 | % | 18,427,828 | 100 | % | 19 | % | |||||||||||||
For the nine months ended September 30,
2010 and 2009, total revenue was $22.0 million, and $18.4 million, respectively,
representing a 19% growth rate. The increase in total revenue was primarily due
to the increase in overall sales as well as our adjustment of our product mix
during the nine months ended September 30, 2010, which resulted in us
manufacturing more higher gross margin products, such as household and
construction products.
For the nine months ended September 30,
2010, revenue generated from the sale of recycled plastic grains increased to
$5.1 million, representing a 24% increase from $4.1 million generated in the
nine months ended September 30, 2009. The increase was mainly due to
an increase in the selling prices of our plastic grains and an increase in sales
volume of all of our products, which resulted from the global economy recovery.
The average selling price of our plastic grains for the nine months ended
September 30, 2010 was $1,040 per ton, which increased from $1,000 per ton for
the same period of 2009, an increase of 4%. Our sales volume for our plastic
grains increased from 4,100 to 4,900 tons, a 20% increase. Revenue generated
from the sale of household and construction products increased to $6.0 million,
representing a 76% increase from $3.4 million in the nine months ended September
30, 2009. The increase was due to the increase in sales volume of our household
and construction products in the nine months ended September 30, 2010, which
increased from 1.3 million units to 2.3 million units in the nine months ended
September 30, 2010, a 77% increase. The average selling price of such
products remained relatively flat. Sales of recycled plastic material
remained flat at $10.8 million in the nine months ended September 30, 2010 and
$10.8 million for the nine months ended September 30, 2009. For the nine months
period ended September 30, 2010, the sales volume of recycled plastic material
slightly decreased to 18,600 tons from 18,800 tons sold in the nine months ended
September 30, 2009. However, the selling price of recycled plastic
increased from $575 per ton in the nine months ended September 30, 2009 to $580
per ton in the nine months ended September 30, 2010.
Cost of Revenue
Our cost of revenue primarily consists
of the import costs of recycled plastics. In the nine months ended September 30,
2010 and 2009, the cost of revenue was $13.8 million and $12.5 million,
respectively, representing 63% and 68% of the nine months revenue, respectively.
The decrease as a percentage of revenues was due to a slight decrease in the
purchase price of the recycled plastic imported and purchased, which resulted
from management’s development of good relationships with our
suppliers. The prices of imported recycled plastic are determined
solely by suppliers and are dependent upon market conditions. In the nine months
ended September 30, 2010, cost of revenue increased in total dollars by 11% as
compared to the same period in 2009. This is primarily due to the increase in
sales volume of our plastic grains and our household and construction products
and an increase in the average sales price of our plastic grains.
In the nine months ended September 30,
2010, the amount of raw material purchased from our domestic wholesalers
decreased to 18% of our total raw material purchased, as compared to 46% in the
same period of 2009. Meanwhile, we continue to work on obtaining more favorable
terms and discounts by strengthening our relationship with suppliers and placing
more bulk orders.
40
Gross Profit
In the nine months ended September 30,
2010, our gross profit increased to $8.2 million, from $6.0 million in the nine
months ended September 30, 2009. During the same period, our gross profit margin
increased to 37%, up from 32% in the nine months ended September 30,
2009. This increase in
our gross profit margin is mainly due to a decrease in raw material costs and an
increase in the selling price of our plastic grains for the nine
months ended September 30,
2010. The average purchase price of our raw materials decreased 2%, from
$470 per ton in the nine months ended September 30, 2009 to $460 per ton in the
comparable period in 2010. The average selling price of our plastic
grains in the nine month period ended September 30, 2010 was $1,040 per ton, an
increase of 4% from $1,000 per ton for the same period of fiscal year 2009. The
increase in the selling price of our recycled plastic grains and our related
products from the prior fiscal period was because the prior fiscal period was
suffered from decreased selling prices as a result of the global financial
crisis.
Operating Expenses
|
For
The Nine Months Ended September 30,
|
||||||||||||||||||||
|
2010
|
2009
|
Change
in %
|
||||||||||||||||||
|
Operating
expenses
|
$ | $ | ||||||||||||||||||
|
Selling
and marketing
|
110,722 | 15 | % | 79,308 | 17 | % | 40 | % | ||||||||||||
|
General
and administrative
|
632,466 | 85 | % | 398,436 | 83 | % | 59 | % | ||||||||||||
|
Total
|
$ | 743,188 | 100 | % | $ | 477,744 | 100 | % | 56 | % | ||||||||||
For the nine months ended September 30,
2010, operating expenses increased 56% from $0.5 million for nine months ended
September 30, 2009 to $0.7 million for the comparable fiscal period in 2010. The
increase was primarily due to the increase of general and administrative
expenses.
Selling and marketing expenses include
sales remunerations and expenses directly related to marketing. The increase in
overall dollars to $0.1 million for the nine months ended September 30, 2010 was
primarily due to the increase in our sales, which resulted in an increase in
selling-related travel expenses for our sales personnel from approximately
$51,000 for the nine months ended September 30, 2009 to $80,200 for the nine
months ended September 30, 2010.
General and administrative expenses
primarily consist of management remuneration, depreciation and amortization,
professional fees, employee welfare costs, rent and lease expenses, and office
expenses. During the nine months ended September 30, 2010, general and
administrative expenses increased 59% to $0.6 million, as compared to $0.4
million in the nine months ended September 30, 2009. This increase was primarily
due to the legal and professional fees incurred in preparation for the Share
Exchange in November 2010 and legal and professional fees incurred in connection
with the Registrant’s compliance and reporting obligations as a public
company. We incurred legal fees of approximately $20,000, auditing
and accounting fees of $74,000 and consulting fees of $45,000 during the nine
months ended September 30, 2010 which were related to our preparation for the
Share Exchange. No such expenses were incurred in the comparable
period in 2009.
Operating Income
Our operating income increased from
$5.5 million in the nine months ended September 30, 2009 to $7.4 million in the
nine months ended September 30, 2010, representing an increase of
36%.
In order to achieve a higher gross
margin, we intend to enhance manufacturing techniques and labor efficiencies.
Meanwhile we plan to continue improving our gross margin by strengthening
relationships with our major suppliers to obtain more favorable
terms.
Net Income
For the nine months ended September 30,
2010, our net income increased to $5.5 million from $4.1 million for the nine
months ended September 30, 2009, representing an increase of 34%.
41
Year
Ended December 31, 2009 and 2008
The following table sets forth a
summary of certain key components of our results of operations for years
indicated, in dollars and as a percentage of revenues.
|
For
The Year Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Revenue
|
$ | 26,151,437 | 100 | % | $ | 8,686,922 | 100 | % | ||||||||
|
Cost
of Revenue
|
17,516,014 | 67 | % | 6,521,446 | 75 | % | ||||||||||
|
Gross
Profit
|
8,635,423 | 33 | % | 2,165,476 | 25 | % | ||||||||||
|
Operating
expenses
|
702,036 | 3 | % | 460,359 | 5 | % | ||||||||||
|
Operating
income
|
7,933,387 | 30 | % | 1,705,117 | 20 | % | ||||||||||
|
Other
expenses
|
26,306 | * | 25,890 | * | ||||||||||||
|
Income
taxes
|
2,030,996 | 8 | % | 441,337 | 5 | % | ||||||||||
|
Net
income
|
$ | 5,876,085 | 22 | % | $ | 1,237,890 | 14 | % | ||||||||
* less
than 1%
Revenues
The following table sets forth the
revenue generated from different categories of products for years indicated, in
dollars and as a percentage of revenues for fiscal year 2009 and
2008.
|
Revenues
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Plastic
grains
|
5,860,725 | 22 | % | 3,201,015 | 37 | % | ||||||||||
|
Household
and construction products
|
5,162,847 | 20 | % | 214,895 | 2 | % | ||||||||||
|
Recycled
plastic
|
14,955,227 | 57 | % | 5,116,483 | 59 | % | ||||||||||
|
Sale
of metal parts
|
172,638 | 1 | % | 154,529 | 2 | % | ||||||||||
| 26,151,437 | 100 | % | 8,686,922 | 100 | % | |||||||||||
For the years ended December 31, 2009
and 2008, total revenue was $26.2 million, and $8.7 million respectively,
representing a 201% growth rate. The increase in total revenue was primarily due
to our adjustment of our product mix in 2009, which resulted in the manufacture
of more higher gross margin products, such as household and construction
products. Our increase in revenue was affected by our receipt of an import quota
of 20,000 tons of recycled plastic in 2009, which significantly increased our
total manufacture and sales volume compared to 2008.
For fiscal 2009, revenue generated from
the sale of recycled plastic grains increased 83% to $5.8 million from $3.2
million for fiscal 2008. The increase was primarily due to greater demand for
our recycled products, resulting in an increase in sales volume. The total
plastic grains sold in 2009 increased to 5,840 tons from 2,850 tons in fiscal
2008 while, representing a 105% increase. The difference between the increase of
revenue and the increase in sale volume was due to a decrease in the selling
prices of our products as a result of the global financial crisis for fiscal
2009. The average selling price of our plastic grains for the year ended
December 31, 2009 was $1,000 per ton, which decreased from $1,120 per ton for
the same period of 2008, a decrease of 12%. Revenue generated from the sale of
household and construction products increased to $5.2 million from $0.2 million
for fiscal 2008. The increase was due to management’s adjustment of the
production structure in 2009, increasing the production volume of our higher
gross margin household and construction plastic products. Sales of our household
and construction products increased from 244,500 million units in the year ended
December 31, 2008 to 1.9 million units in the year ended December 31, 2009, a
677% increase. The average selling price of such products increased
from $0.88 per unit in the year ended December 31, 2008 to $2.72 per unit in the
year ended December 31, 2009, a 209% increase. We also increased our
direct sales of recycled plastic material by 192% to $15.0 million for fiscal
2009, as compared to $5.1 million for fiscal 2008. The increase of direct sales
of waste materials was due to the increase of the import quota in fiscal 2009,
whereby we were granted the right to import 20,000 tons of recycled
plastic.
42
Cost of Revenue
For fiscal 2009 and 2008, cost of
revenue was $17.5 million and $6.5 million, respectively, representing 67% and
75% of revenues, respectively. The decrease of cost of revenue as a percentage
of revenues was due to a decrease in the purchase prices of our raw
materials. The average purchase price for our raw materials decreased
from $590 per ton in 2008 to $460 per ton in 2009, a decrease of 20%, which
resulted from a decrease in the price of crude oil in 2009 from 2008. For fiscal
2009, cost of revenue increased by 169% as compared to fiscal
2008. This increase was primarily due to the increase in sales volume
of our plastic grains and our household and construction products.
Gross Profit
For fiscal 2009, our gross profit
increased to $8.6 million from $2.2 million for fiscal 2008. During the same
period, our gross profit margin increased to 33%, up from 25% in fiscal 2008.
This increase was mainly due to
the decrease in raw material costs in fiscal 2009 as compared to 2008, and the
increases in the average selling prices of our plastic grains and household and
construction products which resulted from the recovery of the global financial
crisis in 2009.
Operating Expenses
|
For
The Year Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Sales
and marketing
|
$ | 111,165 | 16 | % | $ | 38,076 | 8 | % | ||||||||
|
General
and administrative
|
590,871 | 84 | % | 422,283 | 92 | % | ||||||||||
|
Total
|
$ | 702,036 | 100 | % | $ | 460,359 | 100 | % | ||||||||
During fiscal 2009, operating expenses
increased 52% from $0.5 million in fiscal 2008 to $0.7 million in 2009. The
increase was primarily due to an increase in general and administrative
expenses. For fiscal 2009, sales and marketing expenses increased 192% to
$111,165, as compared to $38,076 for fiscal 2008. The increase in sales and
marketing expenses was primarily due to an increase of in our business
development activities. The increase in general and administrative
expenses was largely due to a 94% increase in travel-related expenses for our
sales and marketing personnel from $34,000 in 2008 to $66,000 in 2009. In
addition, expenses for entertainment and meals increased from $48,300 in the
year ended December 31, 2008 to $99,000 in the year ended December 31, 2009, an
increase of 100%.
During fiscal 2009, general and
administrative expenses increased 40% to $0.6 million, as compared to $0.4
million in fiscal 2008. This increase was primarily due to the increase in
personnel resulting in higher payroll and staff benefit expenses.
Operating Income
Our operating income
increased 365% from $1.7 million for fiscal 2008 to $7.9 million for fiscal
2009. This is primarily due to the substantial increase in
sales volume and revenue. Further, from the beginning of fiscal 2009,
particularly in the second quarter, revenue began increasing because the market
price of recycled plastic grains steadily increased.
Net Income
Our net income increased from $1.2
million for fiscal 2008 to $5.9 million for fiscal 2009, representing an
increase of 375%.
43
Year
Ended December 31, 2008 and 2007
The
following table sets forth a summary of certain key components of our results of
operations for years indicated, in dollars and as a percentage of
revenues.
|
For
The Year Ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Revenue
|
$ | 8,686,922 | 100 | % | $ | 909,575 | 100 | % | ||||||||
|
Cost
of Revenue
|
6,521,446 | 75 | % | 648,503 | 71 | % | ||||||||||
|
Gross
Profit
|
2,165,476 | 25 | % | 261,072 | 29 | % | ||||||||||
|
Operating
expenses
|
460,359 | 5 | % | 174,636 | 19 | % | ||||||||||
|
Operating
income
|
1,705,117 | 20 | % | 86,436 | 10 | % | ||||||||||
|
Other
expenses
|
25,890 | * | 24,602 | 3 | % | |||||||||||
|
Income
taxes
|
441,337 | 5 | % | 33,235 | 4 | % | ||||||||||
|
Net
income
|
$ | 1,237,890 | 14 | % | $ | 28,599 | 3 | % | ||||||||
* less
than 1%
Revenues
The following table sets forth the
revenue generated from different categories of products for years indicated, in
dollars and as a percentage of revenues for fiscal year 2008 and
2007.
|
Revenues
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Plastic
Grains
|
$ | 3,201,015 | 37 | % | $ | - | - | |||||||||
|
Household
& construction products
|
214,895 | 2 | % | - | - | |||||||||||
|
Recycled
plastic
|
5,116,483 | 59 | % | 788,400 | 87 | % | ||||||||||
|
Sale
of metal parts
|
154,529 | 2 | % | 121,175 | 13 | % | ||||||||||
| $ | 8,686,922 | 100 | % | $ | 909,575 | 100 | % | |||||||||
Total revenue for the year
ended December 31, 2008 was $8.7 million, an increase of 855%, compared to
revenue of $0.9 million for the year ended December 31, 2007. The
increase in total revenue was primarily due to an increase of sales volume of
our plastic grains and recycled plastic. In 2008, we sold 7,000 tons of recycled
plastic at an average price of $730 per ton, compared to 1,328 tons in 2007, an
increase of 427%, at an average price of $594 per ton. In 2008, we
sold 2,800 tons of plastic grains, compared to no sale of plastic grains in
2007. The production and sales of plastic grains commenced in 2008,
as our manufacturing facilities were fully set up in 2008, while in 2007, we
only sold recycled plastic materials through Hua Su and metal parts through
Weixin HK.
Cost
of Revenue
Our cost of revenue primarily consisted
of the import costs of recycled plastics. The cost of revenue increased from
$0.6 million in 2007 to $6.5 million in 2008, representing a 906%
increase. This is primarily due to the increase in sales volume of
our plastic grains. The average price of our purchased raw materials was $535
per ton in 2008 as compared to $590 per ton in 2007. The increase of
cost of revenue is 50% higher than that of revenue, which resulted from a surge
in oil prices in 2008.
Gross
Profit
In 2008, our gross profit increased to
$2.2 million from $0.3 million in 2007. During the same period, our gross profit
margin decreased from 29% to 25% in fiscal year 2008. This decrease is mainly due to an
increase in raw material costs in 2008 as compared to 2007.
44
Operating
Expenses
|
For
The Year Ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Sales
and marketing
|
$ | 38,076 | 8 | % | $ | 7,152 | 4 | % | ||||||||
|
General
and administrative
|
422,283 | 92 | % | 167,484 | 96 | % | ||||||||||
|
Total
|
$ | 460,359 | 100 | % | $ | 174,636 | 100 | % | ||||||||
Operating
expenses were $0.5 million in 2008, or 5% of revenues, as compared to $0.2
million in 2007, or 19% of revenues. The increase was primarily due to the
increase in general and administrative expenses, which include management salary
and benefits, traveling expenses, meals and entertainment, office supplies, rent
and utilities expenses, and other related expenses. Expenses related to staff
salaries increased from $110,000 in the year ended December 31, 2007 to $130,000
in the year ended December 31, 2008, an increase of 20%. Traveling expenses
increased from $9,000 in the year ended December 31, 2007 to $34,000 in the year
ended December 31, 2008, an increase of 280%. Entertainment and meals
expenses were $48,300 and $13,500 in the years ended December 31, 2008 and 2007,
respectively, an increase of 258%. The increase in operating expenses
was primarily due to an increase in our production capacity, which required more
production staff and sales personnel. We also expanded our efforts to
develop our relationships with our customers and our suppliers, which resulted
in the increase on our sales and marketing expenses.
Operating
Income
Our operating income
increased from $86,436 in 2007 to $1.7 million in 2008. This
is primarily due to the substantial increase in sales volume and revenue. Chuang
Yi, Xin Ye, and Li Jun were incorporated in 2007. They were all in
the development stage in 2007 and had no operations in 2007.
Net Income
Our net income increased from $28,599
in 2007 to $1.2 million, representing an increase of 4228%.
Liquidity
and Capital Resources
Liquidity and Capital
Resources
Our working capital as of September 30,
2010 was $6.2 million, as compared to working capital of $2.1 million as of
December 31, 2009, a working capital deficit of $1.8 million as of December 31,
2008 and 2007. We had cash and cash equivalents of approximately $2.91 million
as of September 30, 2010, approximately $4.48 million as of December 31, 2009
and approximately $1.72 million as of December 31, 2008. The improved
working capital is mainly due to the decrease in amounts due to directors,
accounts payable and accrued liabilities.
We generally finance our operations
through operating profit and borrowings from our directors. As of the date of
this report, we have not experienced any difficulties due to a shortage of
capital, we have not experienced any difficulty in raising funds through loans
from banks and financial institutions, and we have not experienced any liquidity
problems in settling our payables in the normal course of business and repaying
our loans when they come due. We are unaware of any trends, demands, commitments
events or uncertainties that will result or be likely to result in material
changes in our liquidity
We make
capital expenditures principally to fund manufacturing facilities, which
includes, among other things, construction in progress, acquire fixed assets and
land use right. Gross capital expenditures were $3.0 million and $0.8
million for the nine months ended September 30, 2010 and 2009, respectively. The
increase in gross capital expenditures during the nine months ended September
30, 2010 compared to the same period in 2009 was primarily attributable to the
acquisition of a land use right located in Guangzhou City, and expenditures
incurred for the construction of manufacturing facilities on the acquired
land. Gross capital expenditures were $0.9 million, $1.4 million and
$1.6 million for fiscal 2009, fiscal 2008 and fiscal 2007, respectively. The
decrease in gross capital expenditures during fiscal 2009 compared to fiscal
2008 was primarily attributable to expenses related to the construction of
manufacturing facilities incurred in fiscal year 2008. We plan to
continue to invest in our infrastructure, including expanding our manufacturing
facilities in 2010 and 2011. We expect capital expenditures to range between
$1.2 million and $2.0 million for fiscal 2010. Capital expenditures are funded
through cash provided by operating activities as well as cash and cash
equivalents.
We have spent approximately $3 million
through September 30, 2010 on our new facility in Guangzhou, which will house
our research and development operations, our new corporate headquarters and a
tooling and molding workshop. These costs mostly relate to fees related to the
purchase of the land use right on which the facility is to be constructed,
construction design fees, environmental evaluation fees, and other
pre-construction related costs. We anticipate that we will need an
additional $9 million of to complete our new facility. We anticipate
that the construction of the new facility will start in March 2011 and will be
completed in the fourth quarter of 2011 and that the additional $9 million will
be spent by the end of 2011.
Due to new environmental regulations
implemented by the Zhaoqing Environmental Protection Agency in 2010, we intend
to move our current manufacturing operations in 2011 to a new state-owned
industrial park located in Zhaoqing City. We anticipate that we
expend $4.0 million in 2011 to purchase a land use right in the industrial park
and to construct a new factory building on such land. In addition, we
anticipate that we will incur moving costs of approximately $100,000 for moving
of our factory equipment and operations to the new facility.
45
We also plan to purchase approximately
$10 million in new equipment during 2011, including a custom designed automatic
sorting machine, a custom designed automatic washing and cleaning line, an
automatic dispensing machine, automatic an drying machine, lab equipment,
plastic injection machines and tool making machines.
Further, we anticipate that we will
spend approximately $8.0 million in additional operation-related expenses for
our expansion plans related to research and development costs for new recycling
processes and products, increased labor and management costs, supply chain and
sales channel development and strengthening our enterprise resource planning and
information technology systems.
Expenses for the construction of our
new headquarters and research and development facility, expenses for our new
manufacturing facility in the industrial park, expenses for new equipment and
additional operation-related expenses for our expansion will be funded through
cash-on-hand generated from our operating activities and the proceeds from the
Private Placement, as well as proceeds from a public offering contemplated by
the Company in 2011. To the extent that cash-on-hand, cash from operations or
proceeds from our proposed public offering of equity securities is not
sufficient to fund such expenditures we may rely on bank loans to fund such
expenditures.
Anticipated cash flows from operations
and funds available from our credit facilities, together with cash on hand,
should provide sufficient funds to finance our operations for at least the next
12 months. Changes in our operating plans, lower than anticipated sales,
increased expenses, acquisitions or other events may require us to seek
additional debt or equity financing. There can be no guarantee that financing
will be available on acceptable terms or at all. Debt financing, if available,
could impose additional cash payment obligations and additional covenants and
operating restrictions.
The following table sets forth the
summary of our cash flows, in dollars, for the nine months ended September 30,
2010 and 2009 (unaudited) and the years ended December 31, 2009, 2008 and
2007:
|
Nine
Months Ended
September
30,
|
Year
Ended
December
31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 5,902,116 | $ | 1,900,429 | $ | 3,859,107 | $ | (42,267 | ) | $ | (795,718 | ) | ||||||||
|
Net
cash used in investing activities
|
(3,486,587 | ) | (770,460 | ) | (906,404 | ) | (1,371,101 | ) | (1,585,514 | ) | ||||||||||
|
Net
cash provided by (used in) financing activities
|
(4,068,923 | ) | (703,599 | ) | (154,447 | ) | 2,677,902 | 2,665,721 | ||||||||||||
|
Effect
of exchange rate changes on cash
|
82,079 | 3,491 | (39,192 | ) | 151,284 | 1,454 | ||||||||||||||
|
Cash
and cash equivalents, beginning of period
|
4,483,402 | 1,724,338 | 1,724,338 | 308,520 | 22,577 | |||||||||||||||
|
Cash
and cash equivalents, end of period
|
$ | 2,912,087 | $ | 2,154,199 | $ | 4,483,402 | $ | 1,724,338 | $ | 308,520 | ||||||||||
Operating activities
During the nine months ended September
30, 2010, we generated net cash from operating activities of $5.9 million, an
increase of 211% from $1.9 million in the nine months ended September 30, 2009.
The increase was primarily due to the increase in net income, inventories and
accounts receivable. Since the global economy is recovering from the financial
crisis, the selling prices and sales volume of our plastic grains and our
household and construction products has increased. Therefore, the
Company earned more net income during the nine months ended September 30, 2010
than September 30, 2009. Additionally, the Company improved its
inventory management system in 2010, which allowed it to maintain lower
inventory levels than in 2009, which increased cash provided by inventories by
$0.8 million. The Company also exercised more efficient credit
control policies in 2009, which improved the collectability of accounts
receivable and increased cash provided by investing activities by $3.3
million.
During the year ended December 31,
2009, we generated net cash from operating activities of $3.9 million, compared
to net cash used in operating activities of $42,267 during fiscal 2008 and $0.8
million of net cash used in operating activities during fiscal 2007. The
increase during fiscal 2009 was primarily due to a higher sales volume and net
income earned during fiscal 2009. In 2009, the Company’s production facility was
fully completed and, therefore, the Company’s manufacturing capacity and sales
volume increased significantly from 2008. In addition the global
economy began to recover from the global financial crisis and the demand for
plastic grains, recycled plastic and household and construction products
increased over 2008. In 2009, the Company earned net income of $5.9 million,
increase of $4.7 million from net income of $1.2 million in
2008. Accounts receivable increased to $4.2 million in fiscal 2009,
compared to $1.6 million in 2008 and $0.4 million in fiscal 2007. The increase
in accounts receivable was largely due to the increase in
sales. Accounts payable increased to $1.4 million in fiscal 2009, as
compared to $0.7 million in fiscal 2008, and $0.4 million in fiscal 2007. The
increase was due to the Company’s increased raw material
purchases.
46
Investing Activities
During the nine months ended September
30, 2010, net cash used in investing activities was $3.5 million compared to
$0.8 million of net cash used in investing activities in the nine months ended
September 30, 2009. The increase is primarily attributable to capital
expenditures of $1.0 million related to the acquisition of land use rights, and
$2.0 million for prepayments made in relation to the construction of plant and
office building for Kelida.
During the fiscal year ended December
31, 2009, net cash used in investing activities was $0.9 million, compared to
$1.4 million of net cash used in investing activities in fiscal 2008 and $1.6
million of net cash used in investing activities in fiscal 2007. The decrease in
net cash used in investing activities in fiscal 2009 as compared to fiscal 2008
is primarily attributable to a $0.2 million decrease in capital expenditures for
the purchase of new equipment and a $0.3 million decrease in capital
expenditures related to the construction of the Company’s production plant,
which were partially offset by the Company’s prepayment of $0.1 million for the
acquisition of the land use right by Kelida in 2009. The decrease in cash used
in investing activities in fiscal 2008 as compared to fiscal 2007 is largely
attributable to a $1.2 million decrease in payments for construction in progress
which was offset by a $1 million increase in costs related to the purchase of
property and equipment.
Financing Activities
Cash used for financing activities for
the nine months ended September 30, 2010 was $4.1 million, compared to $0.7
million net cash used for financing activities for the nine months ended
September 30, 2009. The increase is primarily due to repayment of
borrowings to our directors of $4.8 million, which was partially offset by $0.7
million in loan proceeds we received from a third party financing institute in
the nine months ended September 30, 2010. Borrowings from the
directors were non-interest bearing, unsecured and have no set repayment date.
The loans were obtained during the early stages of our operations and the
proceeds of the loans provided us with needed working capital. As our
revenue and cash flows have grown, we have begun repaying the
loans. In the future, we anticipate being able to finance our
operations through our net income and through external debt and equity
financings and bank borrowings. We do not anticipate any need for
additional related party financing for our on-going operations in future
periods.
Cash used for financing activities for
the fiscal year ended December 31, 2009 was $0.2 million, as compared to $2.7
million in net cash provided by financing activities in each of fiscal 2008 and
2007. The increase in cash used for financing activities for the year ended
December 31, 2009 as compared to the comparable period in 2008 and 2007 is
primarily due to a repayment of capital to a shareholder of $0.5 million in
fiscal 2009 and a decrease in the loans outstanding from related parties during
fiscal 2009 as compared to fiscal 2008 and 2007.
Inflation
We believe that inflation has had a
negligible effect on operations over the past two fiscal years. However, overall
commodity inflation is an ongoing concern for our business and has been a
considerable operational and financial focus for us. Further, as production
increases, commodity inflationary pressures may increase, both in the plastic
manufacturing industry and in the broader economy. We continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
Off-Balance
Sheet Arrangements
We do not have any outstanding
derivative financial instruments, off-balance sheet guarantees, interest rate
swap transactions of foreign currency forward contracts. Furthermore, we do not
have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in an unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or that
engages in leasing, hedging or research and development services with
us.
Quantitative
and Qualitative Disclosures about Market Risk
Interest Rates Risk
Our exposure to interest rate risk for
changes in interest rates relates primarily to the interest-bearing bank loans
and interest income generated by the bank deposits. We have not used any
derivative financial instruments in our investment portfolio or for cash
management purposes. Interest-earning instruments carry a degree of interest
rate risk. We have not been exposed nor do we anticipate being exposed to
material risks due to changes in interest rates. However, our future interest
expense or interest income may expect to be increased due to changes in interest
rates in the PRC.
Foreign Exchange Rates
Risk
We do not
hold any derivative instruments and do not engage in any hedging activities.
Because most of our purchases and sales are made in RMB, any exchange rate
change affecting the value of the RMB relative to the U.S. dollar could have an
effect on our financial results as reported in U.S. dollars. If the RMB were to
depreciate against the U.S. dollar, amounts reported in U.S. dollars would be
correspondingly reduced. If the RMB were to appreciate against the U.S. dollar,
amounts reported in U.S. dollars would be correspondingly
increased.
47
Country Risk
The
substantial portion of our assets and operations are located and conducted in
China. While the PRC economy has experienced significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese 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 may also have a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by government control over capital
investments or changes in tax regulations applicable to us. If there are any
changes in any policies by the Chinese government and our business is negatively
affected as a result, then our financial results, including our ability to
generate revenues and profits, will also be negatively affected.
Contractual
Obligations
The
following table describes our contractual commitments and obligations as of
September 30, 2010:
|
Payments
due by Period (in $)
|
||||||||||||||||||||
|
Less
Than
|
1-3
|
3-5
|
More
Than
|
|||||||||||||||||
|
Contractual
Obligations
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
|||||||||||||||
|
Operating
lease obligations
|
$ | 45,634 | $ | 18,930 | $ | 26,704 | $ | - | $ | - | ||||||||||
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations.
Quarterly
Information (unaudited)
The table
below presents selected (unaudited) results of operations for the quarters
indicated.
|
Quarter
Ended
|
||||||||||||||||
|
September
30,
|
June 30,
|
March
31,
|
||||||||||||||
|
2010
|
2010
|
2010
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Revenues
|
6,867,175 | 7,959,833 | 7,144,836 | 21,971,844 | ||||||||||||
|
Gross
Profit
|
2,425,986 | 3,085,996 | 2,671,790 | 8,183,772 | ||||||||||||
|
Net
Income
|
1,522,779 | 2,092,116 | 1,901,703 | 5,516,598 | ||||||||||||
|
Quarter
Ended
|
||||||||||||||||||||
|
December
31,
|
September 30,
|
June
30,
|
March
31,
|
|||||||||||||||||
|
2009
|
2009
|
2009
|
2009
|
Total
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Revenues
|
7,723,609 | 7,844,872 | 6,606,787 | 3,976,169 | 26,151,437 | |||||||||||||||
|
Gross
Profit
|
2,679,134 | 2,924,736 | 2,024,778 | 1,006,775 | 8,635,423 | |||||||||||||||
|
Net
Income
|
1,769,431 | 2,101,048 | 1,347,749 | 657,857 | 5,876,085 | |||||||||||||||
|
Quarter
Ended
|
||||||||||||||||||||
|
December
31,
|
September 30,
|
June
30,
|
March
31,
|
|||||||||||||||||
|
2008
|
2008
|
2008
|
2008
|
Total
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Revenues
|
1,642,658 | 3,234,694 | 2,592,031 | 1,217,539 | 8,686,922 | |||||||||||||||
|
Gross
Profit
|
282,709 | 846,052 | 736,059 | 300,656 | 2,165,476 | |||||||||||||||
|
Net
Income
|
118,537 | 523,896 | 450,560 | 144,897 | 1,237,890 | |||||||||||||||
48
|
ITEM
3.02
|
UNREGISTERED
SALES OF EQUITY SECURITIES.
|
On November 23, 2010, pursuant to the
terms of the Share Exchange Agreement, entered into by and between SRKP 23,
Weixin BVI, Weixin HK, Kelida, Hua Su, Chuang Yi, Xin Ye, Li Jun and the Weixin
Shareholders (as described in Item 2.01 above), SRKP 23 issued 7,865,556
shares of its common stock to the Weixin Shareholders in exchange for all of the
issued and outstanding securities of Weixin BVI. All of the
securities were offered and issued in reliance upon an exemption from
registration pursuant to Regulation S of the Securities Act. We
complied with the conditions of Rule 903 as promulgated under the Securities Act
including, but not limited to, the following: (i) each recipient of the
shares is a non-U.S. resident and has not offered or sold their shares in
accordance with the provisions of Regulation S; (ii) an appropriate legend
was affixed to the securities issued in accordance with Regulation S;
(iii) each recipient of the shares has represented that it was not
acquiring the securities for the account or benefit of a U.S. person; and
(iv) each recipient of the shares agreed to resell the securities only in
accordance with the provisions of Regulation S, pursuant to a registration
statement under the Securities Act, or pursuant to an available exemption from
registration. We will refuse to register any transfer of the shares
not made in accordance with Regulation S, after registration, or under an
exemption.
On November 23, 2010, we conducted an
initial closing of a Private Placement of shares of our Common
Stock. We received gross proceeds of approximately $2.5 million in
the initial closing of the Private Placement. Pursuant to
subscription agreements entered into with the investors, we sold an aggregate of
1,111,099 shares of our Common Stock at a price of $2.25 per
share. The securities were offered and sold to investors in reliance
upon exemptions from registration pursuant to Section 4(2) under the
Securities Act and Rule 506 promulgated thereunder. Each of the
persons and/or entities receiving our securities qualified as an accredited
investor (as defined by Rule 501 under the Securities Act).
We agreed to file a registration
statement covering the shares of Common Stock sold in the Private Placement
within thirty (30) days of the final closing of the Private Placement pursuant
to the subscription agreement entered into with each investor. All of
the SRKP 23 Stockholders and the investors in the Private Placement entered into
lock-up agreements pursuant to which they agreed that (i) if the proposed
public offering that we expect to conduct is for $5 million or more, then the
investors and the SRKP 23 Stockholders would not be able to sell or transfer
their shares until at least six (6) months after the public offering’s
completion, and (ii) if the offering is for less than $5 million, then
one-tenth (1/10th) of
their shares would be released from the lock-up restrictions ninety days after
the offering and there would be a pro rata release of the
shares thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, the placement agent for the Private
Placement, in its discretion, may also release some or all the shares from the
lock-up restrictions earlier, however, (i) no early release shall be made
with respect to SRKP 23 Stockholders prior to the release in full of all such
lock-up restrictions on shares of the Common Stock acquired in the Private
Placement and (ii) any such early release shall be made pro rata with
respect to all investors’ shares acquired in the Private Placement.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
DESCRIPTION
OF SECURITIES - POST-SHARE EXCHANGE
Common
Stock
We are authorized to issue 100,000,000
shares of common stock, $0.0001 par value per share. Prior to the
Share Exchange and Private Placement, the SRKP 23 Stockholders held an aggregate
of 8,587,354 shares, and an aggregate of 6,679,899 shares were cancelled in
conjunction with the closing of the Share Exchange. There are
currently 10,884,110 shares of common stock issued and
outstanding. Each outstanding share of common stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders.
Holders of our common
stock:
|
|
·
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our Board of
Directors;
|
|
|
·
|
are
entitled to share ratably in all of the Company’s assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up;
|
|
|
·
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
|
|
·
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
49
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
At the
completion of the Share Exchange and the initial closing of the Private
Placement, the Weixin Shareholders own approximately 72.3% of
the outstanding shares of our common stock. Accordingly, upon
the closing of the Share Exchange, these stockholders are in a position to
control all of our affairs.
Preferred
Stock
We may
issue up to 10,000,000 shares of our preferred stock, par value $0.0001 per
share, from time to time in one or more series. No shares of
preferred stock have been issued.
Our Board of Directors, without further
approval of our stockholders, is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any
series. Issuances of shares of preferred stock, while providing
flexibility in connection with possible financings, acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of our common stock and prior series of preferred stock then
outstanding.
Warrants
Prior to the Share Exchange and Private
Placement, the SRKP 23 Stockholders held warrants to purchase an aggregate of
8,587,349 shares of our common stock and warrants to purchase an aggregate of
7,804,803 shares of common stock were cancelled in conjunction with the
closing of the Share Exchange. Immediately after the closing of the
Share Exchange and initial closing of the Private Placement, the stockholders
held warrants to purchase an aggregate of 782,545 shares of common stock with an
exercise price of $0.0001. The warrants expire five (5) years from
the closing date of the Share Exchange.
MARKET
PRICE OF AND DIVIDENDS ON THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of our
common stock on the NYSE Amex or the NASDAQ Global Market. If and
when our common stock is listed or quoted for trading, the price of our common
stock will likely fluctuate in the future. The stock market in
general has experienced extreme stock price fluctuations in the past few
years. In some cases, these fluctuations have been unrelated to the
operating performance of the affected companies. Many companies have
experienced dramatic volatility in the market prices of their common
stock. We believe that a number of factors, both within and outside
our control, could cause the price of our common stock to fluctuate, perhaps
substantially. Factors such as the following could have a significant
adverse impact on the market price of our common stock:
|
|
·
|
Our
financial position and results of
operations;
|
|
|
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
|
·
|
Announcements
of innovations or new products by us or our
competitors;
|
|
|
·
|
Federal
and state regulatory actions and the impact of such requirements on our
business;
|
|
|
·
|
The
development of litigation against
us;
|
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
|
·
|
Competitive
developments, including announcements by competitors of new products or
significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
|
|
|
·
|
Period-to-period
fluctuations in our operating
results;
|
|
|
·
|
Investor
perceptions of us;
|
|
|
·
|
General
economic and other national conditions;
and
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50
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|
·
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Changes
in Chinese government regulations.
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Stockholders
of Record
As of November 29, 2010, there were 93
stockholders of record of our common stock.
Dividends
There were no dividends paid during the
nine months ended September 30, 2010 or years ended December 31, 2009, 2008
or 2007.
DELAWARE
ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
We are subject to Section 203 of
the Delaware General Corporation Law. This provision generally
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three (3) years following the date
the stockholder became an interested stockholder, unless:
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|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
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|
|
·
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upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
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|
|
·
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on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders, and not by written consent, by the affirmative vote of at
least 66% of the outstanding voting stock that is not owned by the
interested stockholder.
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Section 203 defines a business
combination to include:
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|
·
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any
merger or consolidation involving the corporation and the interested
stockholder;
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|
·
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any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
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|
·
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subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
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|
|
·
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any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
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|
|
·
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the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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In general, Section 203 defines an
“interested stockholder” as any entity or person beneficially owning 15% or more
of the outstanding voting stock of a corporation, or an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of a corporation at any time within three years prior to the time of
determination of interested stockholder status; and any entity or person
affiliated with or controlling or controlled by such entity or
person.
Our certificate of incorporation and
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of our company, including changes a stockholder might consider
favorable. In particular, our certificate of incorporation and
bylaws, as applicable, among other things, will:
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·
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provide
our board of directors with the ability to alter its bylaws without
stockholder approval;
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·
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provide
for an advance notice procedure with regard to the election of directors
and other business to be brought before a meeting of
stockholders;
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51
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|
·
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provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such provisions may have the effect of
discouraging a third-party from acquiring us, even if doing so would be
beneficial to our stockholders. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by them, and to discourage
some types of transactions that may involve an actual or threatened change in
control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage some
tactics that may be used in proxy fights. We believe that the
benefits of increased protection of its potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure our
company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing
changes in our management.
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ITEM
4.01
|
CHANGES
IN REGISTRANT’S CERTIFYING
ACCOUNTANT.
|
On November 23, 2010, China Wesen
Recycling Technology, Inc. (the "Company") dismissed AJ. Robbins, PC (“AJ.
Robbins”) as our independent registered public accounting firm following the
change in control of the Company on the closing of the Share
Exchange. The Company engaged AJ. Robbins to audit its financial
statements for the years ended December 31, 2009 and December 31,
2008. The decision to change accountants was approved and ratified by
our board of directors. The reports of AJ. Robbins on the financial
statements of the Company for the years ended December 31, 2009 and
December 31, 2008 did not contain any adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope, or accounting
principle, except for an explanatory paragraph relative to the Company’s ability
to continue as a going concern. Additionally, during the Company’s
two most recent fiscal years and any subsequent interim period through the date
of dismissal, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
While AJ. Robbins was engaged by the
Company, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the Company, which disagreements if not
resolved to the satisfaction of AJ. Robbins would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the Company’s financial statements for the fiscal year ended
December 31, 2009 or its report on the Company’s financial statements for
the fiscal year ended December 31, 2008.
The Company provided AJ. Robbins with a
copy of the disclosures to be included in Item 4.01 of this Current Report
on Form 8-K and requested that AJ. Robbins furnish the Company with a
letter addressed to the Commission stating whether or not AJ. Robbins agrees
with the foregoing statements. A copy of the letter from AJ. Robbins
to the Commission, dated February 1, 2011, is attached as Exhibit 16.1 to
this Current Report on Form 8-K.
The Company engaged MaloneBailey, LLP
(“MaloneBailey”) as the Company’s independent registered public accounting
firm as of November 23, 2010. MaloneBailey is and has been Weixin
BVI’s independent registered public accounting firm.
|
ITEM
5.01
|
CHANGES
IN CONTROL OF REGISTRANT.
|
OVERVIEW
SRKP 23 entered into a Share Exchange
Agreement dated as of November 12, 2010 with Weixin BVI, Weixin HK, Kelida, Hua
Su, Chuang Yi, Xin Ye, Li Jun and the Weixin Shareholders. Pursuant
to the Share Exchange Agreement, SRKP 23 issued 7,865,556 shares of its common
stock to the Weixin Shareholders in exchange for all of the issued and
outstanding securities of Weixin BVI. On November 23, 2010, the Share
Exchange closed. Upon the closing of the Share Exchange, SRKP 23
(i) became the 100% parent of Weixin BVI, (ii) assumed the operations
of Weixin BVI and its subsidiaries, and (iii) changed its name from “SRKP
23, Inc.” to “China Wesen Recycling Technology, Inc.”
On November 23, 2010, concurrently with
the close of the Share Exchange, we conducted an initial closing of a Private
Placement of shares of our Common Stock. We received gross proceeds
of approximately $2.5 million in the initial closing of the Private
Placement. Pursuant to subscription agreements entered into with the
investors, we sold an aggregate of 1,111,099 shares of our Common Stock at a
price of $2.25 per share.
52
We agreed to file a registration
statement covering the Common Stock sold in the Private Placement within thirty
(30) days of the final closing of the Share Exchange pursuant to the
subscription agreement entered into with each investor. All of the
SRKP 23 Stockholders and the investors in the Private Placement also entered
into a lock-up agreement pursuant to which they agreed that (i) if the
proposed public offering that we expect to conduct is for $5 million or more,
then the investors and the SRKP 23 Stockholders would not be able to sell or
transfer their shares until at least six (6) months after the public offering’s
completion, and (ii) if the offering is for less than $5 million, then
one-tenth (1/10th) of
their shares would be released from the lock-up restrictions ninety days after
the offering and there would be a pro rata release of the
shares thereafter every thirty (30) days over the following nine (9)
months. WestPark Capital, the placement agent for the Private
Placement, in its discretion, may also release some or all the shares from the
lock-up restrictions earlier, however, (i) no early release shall be made
with respect to SRKP 23 Stockholders prior to the release in full of all such
lock-up restrictions on shares of the Common Stock acquired in the Private
Placement and (ii) any such early release shall be made pro rata with
respect to all investors’ shares acquired in the Private Placement.
Immediately following the closing of
the Share Exchange and the initial closing of the Private Placement, the former
shareholders of Weixin BVI beneficially owned approximately 72.3% of our issued
and outstanding common stock, the SRKP 23 Stockholders owned approximately 23.1%
and investors in the Private Placement (described above) that closed
concurrently with the Share Exchange owned approximately 10.2%. Prior
to the closing of the Share Exchange and the initial closing of the Private
Placement, the SRKP 23 Stockholders agreed to the cancellation of an aggregate
of 6,679,899 shares held by them such that there were 1,907,455 shares of common
stock outstanding immediately prior to the Share Exchange and Private
Placement. We issued no fractional shares in connection with the
Share Exchange. SRKP 23 Stockholders also canceled an aggregate of
7,804,803 warrants such that the SRKP 23 Stockholders held an aggregate of
782,545 warrants immediately prior to the Share
Exchange. Immediately after the closing of the Share Exchange and
initial closing of the Private Placement, we had 10,884,110 outstanding
shares of common stock, no shares of Preferred Stock, no options, and warrants
to purchase 782,545 shares of common stock.
Pursuant to the terms of the Share
Exchange, we agreed to register all of the 1,907,455 shares of common stock and
all of the 782,545 shares of common stock underlying the warrants held by the
SRKP 23 Stockholders, all of which were outstanding immediately prior to the
closing of the Share Exchange. These shares, will be included in a
subsequent registration statement filed by us within ten (10) days after the end
of the six (6)-month period that immediately follows the date on which we file
the registration statement to register the shares issued in the Private
Placement.
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of its
common stock on the NYSE Amex or the NASDAQ Global Market.
The shares of our common stock issued
to Weixin BVI Shareholders in connection with the Share Exchange were not
registered under the Securities Act and, as a result, are “restricted
securities” that may not be offered or sold in the United States absent
registration or an applicable exemption from registration.
We intend to carry on the business of
Weixin BVI, including its wholly-owned subsidiaries, Weixin HK, Kelida, Hua Su,
Chuang Yi, Xin Ye and Li Jun. Our relocated executive offices are
located at Room 405, Floor 4, North Tower, 9 Shen Zhou Road, Guangzhou High-tech
Industrial Development Zone, Guangzhou, People’s Republic of China.
For accounting purposes, the Share
Exchange is being treated as a reverse acquisition because the Weixin
Shareholders own a majority of the issued and outstanding shares of common stock
of our company immediately following the Share Exchange. Due to the
issuance of the 7,865,556 shares of our common stock to the Weixin
Shareholders, a change in control of our company occurred on November 23,
2010.
At the consummation of the Share
Exchange, SRKP 23’s board of directors immediately prior to the Share Exchange,
which consisted of Richard A. Rappaport and Anthony C. Pintsopoulos,
appointed Xiao Liu, Hongbing Wan, Zongqi Li, Yuhong Hu and Xiaozhu Pang to the
board of directors of our company, with Hongbing Wan serving as
Chairman. The directors and officers of SRKP 23 prior to the Share
Exchange then resigned as officers and directors of our company upon the closing
of the Share Exchange. Zongqi Li subsequently resigned as a director
on November 26, 2010. In addition, concurrent with the closing of the
Share Exchange, our board appointed Xiao Liu as our Chief Executive Officer and
Hongbing Wan as our Chief Operating Officer. Because of the change in
the composition of our board of directors and the exchange of securities
pursuant to the Exchange Agreement, there was a change-of-control of our company
on the date the Share Exchange was completed.
The
execution of the Exchange Agreement was reported in a Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 12,
2010. A copy of the Share Exchange Agreement is filed as
Exhibit 2.1 to this Current Report on Form 8-K. The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” reorganization pursuant to the provisions of
Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as
amended.
EXECUTIVE
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Prior to the Share Exchange,
Richard A. Rappaport and Anthony C. Pintsopoulos served as directors
of SRKP 23 and Mr. Rappaport served as President and Mr. Pintsopoulos
served as Chief Financial Officer and Secretary of SRKP 23.
Upon closing of the Share Exchange, the
following individuals were named to the board of directors and executive
management of our company:
53
|
Name
|
Age
|
Position
|
||
|
Xiao
Liu
|
37
|
Chief
Executive Officer and Director
|
||
|
Hongbing
Wan
|
43
|
Chairman
of the Board and Chief Operating Officer
|
||
|
Xiaozhu
Pang
|
35
|
Director
|
||
|
Yuhong
Hu
|
43
|
Director
|
Xiao Liu
has served as the Chief Executive Officer and as a Director of the Company since
November 23, 2010. He has served as the Vice President and as a
director of Weixin BVI since its inception in December 2009, assisting the
company to switch from recycling to end-user product development and
manufacturing. Mr. Liu has also served as a director of Weixin HK
since December 2005. From April 2004 to December 2009, Mr. Liu served
as an engineering and sourcing consultant, assisting international companies to
find qualified suppliers and/or products in China, including plastic and metal
parts for small home appliances, computer cases, telecommunication boxes, ice
makers, and LCD frames. Mr. Liu received a Bachelor’s degree in
Mechanical Engineering from Beijing Industry and Commerce University 1994, a
Master of Science degree in Engineering Management from Northeastern University
in 2002 and an MBA from Renmin University of China in 2005. Mr. Liu’s
qualifications to sit on the board of directors of the Company include his
strong experience in business management and his years of experience in the
manufacturing industry, and his extensive knowledge of the operations of Weixin
BVI and its subsidiaries.
Hongbing
Wan has served as the Chairman of the Board and Chief Operating
Officer of the Company since November 23, 2010. He has served as the
President and General Manager and a director of Weixin BVI since its formation
in December 2009. He has also served as the General Manager and a
director of Weixin HK since December 2005. Mr. Wan has served
as the Chief Executive Officer and as a director of Kelida since September 2009
and of each of Hua Sa, Chuang Yi, Xin Ye and Li Jun since December
2009. From June 1988 to September 2002, Mr. Wan served in various positions
at Gangzhou Henasia Engineering Ltd., including Sales Representative, Sales
Manager and General Manager. Mr. Wan received a Bachelor’s degree in
Mechanical Engineering in 1988 from Guangdong Industry University and an MBA in
2002 from Guangzhou Yajiada Economics Management College. Mr. Wan’s
qualifications to sit on the board of directors of the Company include his over
15 years of experience in the recycling business, his extensive knowledge of the
recycling market, his knowledge of sales distribution channels and his extensive
knowledge of the operations of Weixin BVI and its subsidiaries.
Xiaozhu
Pang has served as a Director of the Company since November 23,
2010. She has served as a senior accountant at Chang Lee LLP since
November 2006. From May 2005 to March 2006, Ms. Pang was an
Accountant at Cooper, Murray Chartered Accountants. Ms. Pang received
a Bachelor’s degree in Accounting in 1998 and a Master’s degree in Accounting in
2001 from the Dongbei University of Finance and Economics. Ms. Pang’s
qualifications to serve on the board of directors of the Company include her
knowledge of knowledge of the rules and regulations regarding publicly trading
companies, her education in accounting and her understanding of US
GAAP.
Yuhong Hu
has served as a Director of the Company since November 23, 2010. She
has served as the Corporate Controller of Premier Diagnostics Health Services,
Inc. since October 2010. From October 2007 to January 2010, she
served as an Intermediate Accountant at IGC Entertainment
Corporation. From May 2006 to March 2007, she served as the Finance
Director of Pfizer Global Contract Manufacturing Asia. From February
2001 to May 2006, she served as the Finance Controller of Pfizer Global
Manufacturing China. Ms. Hu received a Bachelor’s degree in Business
Administration in 1989 from Liao Ning Engineering University, a Diploma in
Accounting in 1993 from North East Financial and Economic University and an MBA
in 2005 from China Europe International Business School. Ms. Hu’s
qualifications to serve on the board of directors of the Company include her
knowledge of knowledge of the rules and regulations regarding publicly trading
companies, her education in accounting and her understanding of US
GAAP.
On November 23, 2010, the board of
directors of the Company appointed Zongqi Li as a director of the
Company. Mr. Li resigned as a director on November 26, 2010 for
personal reasons and not due to any disagreement with the Company.
Family
Relationships
There are no family relationships among
any of the officers and directors.
Involvement
in Certain Legal Proceedings
There have been no events under any
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of the Company during the past ten
years.
The Company is not aware of any legal
proceedings in which any director, nominee, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company, or any associate of any such director,
nominee, officer, affiliate of the Company, or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
54
Board
of Directors and Committees
Our Board of Directors does not
maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are
performed by the Board of Directors as a whole. We are not required
to maintain such committees under the rules applicable to companies that do not
have securities listed or quoted on a national securities exchange or national
quotation system. We intend to create board committees, including an
independent audit committee, in the near future. If we are successful
in listing our common stock on the NYSE Amex or the NASDAQ Global Market, we
would be required to have, prior to listing, an independent audit committee
formed, in compliance with the requirements for listing on the NYSE Amex and
NASDAQ Global Market and in compliance with Rule 10A-3 of the Exchange
Act.
Director
Independence
Yu Hong Hu and Xiao Zhu Pang are
considered independent directors under Section 803A(2) of the NYSE Amex Company
Guide, even though such definition does not currently apply to us because we are
not listed on the NYSE Amex.
Financial
Experience of Management and Preparation of Financial Statements
We maintain our books and records in
accordance with Chinese GAAP on the accrual basis. Chinese GAAP is
similar to International Financial Reporting Standards. The basic accounting
principles and practice of Chinese GAAP are similar to U.S. GAAP. We
hire knowledge and reputable third-party consultants to covert our books and
records from Chinese GAAP to U.S. GAAP. We provide our books and
records to the consultants who make the appropriate adjustments in the working
papers prepared for the auditor. All adjustments are approved by
management and reviewed and/or audited by our auditor. Our accounting manager
reviews all the adjustments and conversions made by our
consultants. The accounting manager has over 10 years of accounting
experience with Chinese GAAP obtained from his prior work experience in the
accounting department of various companies in the manufacturing industry in
China, at which he served in various positions, including accountant, accounting
supervisor and accounting manager. He also obtained experience with
internal controls over financial reporting from his experience at these
companies. Our accounting manager reviewed the conversion of our
books and records to U.S. GAAP performed by our consultants as described below
with the assistance of other persons familiar with such conversion
procedures.
Our third-party consultants, who are
individual professional accountants, work closely with the Company’s accounting
department to prepare the financial statements. Each of the consultants hold
bachelor’s degrees in accounting, and some of them hold master’s degrees in
accounting. They take continuing professional development courses
each year to update their accounting knowledge as is required by the governing
accounting bodies, including the Chinese Institute of Certified Public
Accountants (CICPA) and the Association of Chartered Certified Accountants
(ACCA). They also subscribe to online courses where they learn updated U.S. GAAP
and SEC rules and regulations. Most of the consultants are
CICPAs. The manager of the consulting team has over 10 years of
experience working in an international firm and in auditing U.S.
companies. He formerly worked in an Association of Chartered
Certified Accountants (ACCA) firm in London where he accumulated valuable public
company auditing experience. He received his certification in the
United Kingdom. He also worked for a Big 10 accounting firm in the UK
and has extensive knowledge of International Financial Reporting Standards and
U.S. GAAP. Another of the senior consultants has over 15 years of
accounting and auditing experience. He obtained knowledge of U.S.
GAAP and SEC rules and regulations and experience with converting Chinese GAAP
to U.S. GAAP by serving as the accounting manager at the Chinese headquarters of
a U.S. public company for 4 years. He is currently pursuing a AICPA
certificate. We believe that our consultants are qualified to prepare
our financial statements based on their professional experience. They
spent about three to four weeks in 2010 assisting us in preparing our financial
statements and we paid them a total of RMB 300,000 (US$44,780), for their
services in 2010.
Our accounting department is in charge
of the preparation of our financial statements with the assistance of the third
party financial consultants. Our accounting manager has over twenty years’
accounting experience in the manufacturing sector. Our other two
senior accountants each have over 10 years of accounting experience. We also
employ five intermediate and junior accountants in our accounting department to
assist in the preparation of our financial statements.
We do not currently maintain an audit
committee or have an audit committee financial expert. We intend to
form an audit committee and appoint an audit committee financial expert prior to
our listing on the NYSE Amex or NASDAQ Global Market.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Compensation
Before the Share Exchange
Prior to
the closing of the Share Exchange on November 23, 2010, we were a “blank check”
shell company named SRKP 23, Inc. that was formed to investigate and acquire a
target company or business seeking the perceived advantages of being a publicly
held corporation. The only officers and directors of SRKP 23, Inc.,
Richard Rappaport and Anthony Pintsopoulos, SRKP 23’s President and Chief
Financial Officer, respectively, did not receive any compensation or other
perquisites for serving in such capacities. Messrs. Rappaport
and Pintsopoulos resigned from all of their executive and director positions
with SRKP 23 upon the closing of the Share Exchange and are no longer employed
by or affiliated with our company.
55
Prior to
the closing of the Share Exchange, our current named executive officers were
compensated by Weixin HK and its subsidiaries until the closing of the Share
Exchange, including for the year ended December 31, 2009 and the period
from January 1, 2010 to November 23, 2010. The Board of
Directors of Weixin BVI determined the compensation for the executive officers
of Weixin BVI that was earned in fiscal 2009 and the period from January 1,
2010 to November 23, 2010. From January 1, 2010 to November 23,
2010 and during the fiscal years of 2009, 2008 and 2007, the compensation for
Weixin BVI’s named executive officers consisted solely of each executive
officer’s salary. The Board of Directors of Weixin BVI believes that the
salaries paid to our executive officers during 2009 and the period from
January 1, 2010 to November 23, 2010 are indicative of the objectives of
its compensation program and reflect the fair value of the services provided to
Weixin BVI, as measured by the local market in China.
Compensation
After the Share Exchange
Upon the
closing of the Share Exchange, some of the executive officers of Weixin BVI were
appointed as our executive officers and we adopted the compensation policies of
Weixin BVI, as modified for a company publicly reporting in the United
States. Compensation for our current executive officers is determined
with the goal of attracting and retaining high quality executive officers and
encouraging them to work as effectively as possible on our
behalf. Compensation is designed to reward executive officers for
successfully meeting their individual functional objectives and for their
contributions to our overall development. For these reasons, the
elements of compensation of our executive officers are salary and
bonus. Salary is paid to cover an appropriate level of living
expenses for the executive officers and the bonus is paid to reward the
executive officer for individual and company achievement.
Salary is
designed to attract, as needed, individuals with the skills necessary for us to
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. When setting and
adjusting individual executive salary levels, we consider the relevant
established salary range, the named executive officer’s responsibilities,
experience, potential, individual performance and contribution. We
also consider other factors such as our overall corporate budget for annual
merit increases, unique skills, demand in the labor market and succession
planning.
We
determine the levels of salary as measured primarily by the local market in
China. We determine market rate by conducting a comparison with the
local geographic area averages and industry averages in China. In
determining market rate, we review statistical data collected and reported by
the Guangzhou Labor Bureau. The statistical data provides the high,
median, low and average compensation levels for various positions in various
industry sectors. In particular, we use the data for the
manufacturing sector as our benchmark to determine compensation levels because
we operate in Gangzhou as a manufacturer of recycled plastic
products. Our compensation levels are at roughly the 75th –
85th
percentile of the compensation spectrum for the manufacturing
sector.
If we
successfully complete our proposed listing of our common stock on the NYSE Amex
or NASDAQ Global Market, we may begin paying bonuses to management personnel if
corporate and individual performance goals are met. Corporate
performance goals include manufacturing and selling more recycled plastics
products. Additional key areas of corporate performance taken into
account in setting compensation policies and decisions are cost control,
profitability, and innovation. The key factors may vary depending on
which area of business a particular executive officer’s work is
focused. Individual performance goals include subjective evaluation,
based on an employee’s team-work, creativity and management capability, and
objective goals such as sales targets.
Our board of directors intends to
establish a compensation committee in 2011 comprised of non-employee
directors. The compensation committee will perform, at least
annually, a strategic review of the compensation program for our executive
officers to determine whether it provides adequate incentives and motivation to
our executive officers and whether it adequately compensates our executive
officers relative to comparable officers in other companies with which we
compete for executives. Those companies may or may not be public
companies or companies located in the PRC or even, in all cases, companies in a
similar business. Prior to the formation of the compensation
committee, our independent directors will determine the compensation for our
current executive officers. In 2011, our compensation committee will
determine compensation levels for our executive officers. We have
established a compensation program for executive officers for 2010 that is
designed to attract, as needed, individuals with the skills necessary for us to
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. If paid, bonuses for
executive officers in 2010 will be based on company and individual performance
factors, as described above.
If we successfully complete our
proposed listing on the NYSE Amex or NASDAQ Global Market in 2011, we intend to
adjust our compensation evaluations upwards in 2011, including through the
payment of bonuses. We believe that adopting higher compensation in
the future may be based on the increased amount of responsibilities and the
expansion of our business to be assumed by each of the executive officers after
we become a publicly listed company.
56
We also intend to expand the scope of
our compensation, such as the possibility of granting options to executive
officers and tying compensation to predetermined performance
goals. We intend to adopt an equity incentive plan in the near future
and issue stock-based awards under the plan to aid our company’s long-term
performance, which we believe will create an ownership culture among our named
executive officers that fosters beneficial, long-term performance by our
company. We do not currently have a general equity grant policy with
respect to the size and terms of grants that we intend to make in the future,
but we expect that our compensation committee will evaluate our achievements for
each fiscal year based on performance factors and results of operations such as
revenues generated, cost of revenues, and net income.
Summary
Compensation Table
The following table sets forth
information concerning the compensation for the three fiscal years ended
December 31, 2009 of the principal executive officer, principal financial
officer, in addition to our three most highly compensated officers whose annual
compensation exceeded $100,000, and up to two additional individuals, as
applicable, for whom disclosure would have been required but for the fact that
the individual was not serving as an executive officer of the registrant at the
end of the last fiscal year.
|
Name
and Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
|
Xiao
Liu
|
2009
|
$ | - | $ | - | $ | - | |||||||
|
Chief
Executive Officer
|
2008
|
- | - | - | ||||||||||
|
2007
|
- | - | - | |||||||||||
|
Hongbing
Wan
|
2009
|
$ | - | $ | - | $ | - | |||||||
|
Chief
Operating Officer
|
2008
|
- | - | - | ||||||||||
|
2007
|
- | - | - | |||||||||||
|
Richard
Rappaport (1)
|
2009
|
- | - | - | ||||||||||
|
Former
President
|
2008
|
- | - | - | ||||||||||
|
and
Former Director
|
2007
|
- | - | - | ||||||||||
|
Anthony
Pintsopoulos (1)
|
2009
|
- | - | - | ||||||||||
|
Former
Secretary, Former Chief
|
2008
|
- | - | - | ||||||||||
|
Financial
Officer, and Former Director
|
2007
|
- | - | - | ||||||||||
|
(1)
|
Upon
the close of the Share Exchange on November 23, 2010,
Messrs. Rappaport and Pintsopoulos resigned from all positions with
the Company, which they held from the Company’s inception on October 11,
2007.
|
Grants
of Plan-Based Awards in 2009
There
were no option grants in 2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There
were no outstanding equity awards in 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There
were no option exercises or stock vested in 2009.
Pension
Benefits
There
were no pension benefit plans in effect in 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There
were no nonqualified defined contribution or other nonqualified deferred
compensation plans in effect in 2009.
Employment
Agreements
We have
currently no employment agreements with any of our executive
officers.
57
Director
Compensation
The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2009 by members of our board of
directors.
|
Name
|
Fees Earned
or Paid in
Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
|
|||||||||||||||||||||
|
($)(1)
|
($)
|
|||||||||||||||||||||||||||
|
Xiao
Liu
|
15,385 | - | - | - | - | - | 15,385 | |||||||||||||||||||||
|
Hongbing
Wan
|
15,385 | - | - | - | - | - | 15,385 | |||||||||||||||||||||
|
Zongqi
Li (2)
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Xiaozhu
Pang
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Yuhong
Hu
|
- | - | - | - | - | - | - | |||||||||||||||||||||
(1) Includes
fees paid for service on the board of directors of Weixin BVI and its
subsidiaries.
(2) Mr.
Li resigned as a director on November 26, 2010.
We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Weixin
International Co., Limited and Subsidiaries
Weixin
BVI, Weixin HK, Kelida, Hua Su, Chuang Yi, Xin Ye and Li Jun, which are either
directly or indirectly wholly-owned subsidiaries of the Company, each have
interlocking executive and director positions with us and with each
other.
Share
Exchange
On
November 23, 2010, SRKP 23 completed the Share Exchange with Weixin BVI, Weixin
HK, Kelida, Hua Su, Chuang Yi, Xin Ye, Li Jun and the Weixin
Shareholders. At the closing of the Share Exchange, Weixin BVI became
a wholly-owned subsidiary of SRKP 23 and 100% of the issued and outstanding
securities of Weixin BVI were exchanged for securities of SRKP 23. An
aggregate of 7,865,556 shares of common stock were issued to the Weixin
Shareholders. As of the close of the Share Exchange, the Weixin
Shareholders owned approximately 72.3% of the issued and outstanding stock of
SRKP 23. Prior to the closing of the Share Exchange and the initial
closing of the Private Placement, the SRKP 23 Stockholders agreed to the
cancellation of an aggregate of 6,679,899 shares and warrants to purchase an
aggregate of 7,804,803 shares of common stock held by them such that there were
1,907,455 shares of common stock and warrants to purchase an aggregate of
782,545 shares of common stock owned by them immediately after the Share
Exchange and Private Placement.
The
stockholders of SRKP 23 did not receive any consideration for the cancellation
of the shares and warrants. The cancellation of the shares and
warrants was accounted for as a contribution to capital. The number
of shares and warrants cancelled was determined based on negotiations with the
securityholders of SRKP 23, Inc. and Weixin BVI. The number of shares
and warrants cancelled by SRKP 23, Inc. was not pro rata, but based on
discussions between the securityholders and SRKP 23, Inc. The
discussions regarding the relative amounts of share and warrant cancellations
were arms-length discussions between all of the securityholders of SRKP
23. All SRKP 23 securityholders unanimously agreed as to the share
and warrant allocations. No other criteria were involved nor was any additional
compensation or monies paid or concessions given to any SRKP secuityholder in
connection with the determination of the relative number of shares and warrants
cancelled by each securityholder.
As
indicated in the Share Exchange Agreement, the parties to the transaction
acknowledged that a conflict of interest existed with respect to the
negotiations for the terms of the Share Exchange due to, among other factors,
the fact that WestPark Capital, Inc. (“WestPark Capital”) was advising Weixin
BVI in the transaction. As further discussed below in “Certain Relationships And Related
Transactions —Private Placement,” certain of the controlling stockholders
and control persons of WestPark Capital were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of SRKP 23,
Inc. Under these circumstances, the shareholders of Weixin BVI and the
stockholders of SRKP 23 negotiated an estimated value of Weixin BVI and its
subsidiaries, an estimated value of the shell company (based on similar recent
transactions by WestPark Capital involving similar public shells), and the
mutually desired capitalization of the company resulting from the Share
Exchange.
58
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which we believe allowed us to raise capital at an
appropriate price per share and subsequently list our stock on a national
securities exchange. We believe that investors may have been
unwilling to invest in our company in the Private Placement (as that term is
defined below) on acceptable terms, if at all, in the absence of an investment
in a public reporting vehicle and thus required us to effect the Share Exchange
as a condition to the Private Placement. The services provided by
WestPark Capital were not a consideration in determining this aspect of the
transaction. Under these circumstances and based on these factors,
the shareholders of Weixin BVI and the stockholders of Weixin agreed upon the
amount of shares and warrants to be cancelled. Further to such
negotiations, we paid a $140,000 success fee to WestPark Capital for services
provided in connection with the Share Exchange, including coordinating the share
exchange transaction process, interacting with principals of the shell
corporation and negotiating the definitive purchase agreement for the shell,
conducting a financial analysis of Weixin BVI, conducting due diligence on
Weixin BVI and its subsidiaries and managing the interrelationships of legal and
accounting activities.
Our board
of directors resigned in full upon the closing of the Share Exchange and
appointed Xiao Liu, Hongbing Wan, Zongqi Li, Yu Hong Hu and Xiao Zhu Pang to the
board of directors of our company, with Hongbing Wan serving as Chairman of the
Board. The board of directors also appointed Xiao Liu as our Chief
Executive Officer and Hongbing Wan as our Chief Operating Officer. Xiao Liu and
Hongbing Wan were executives and/or directors of Weixin BVI and/or its
subsidiaries. Zongqi Li subsequently resigned as a director on
November 26, 2010.
Private
Placement
Richard Rappaport, the President of
SRKP 23 and one of its controlling stockholders prior to the Share Exchange,
indirectly holds a 100% interest in WestPark Capital, the placement agent for
the equity financing conducted by us on the close of the Share
Exchange.
Anthony C. Pintsopoulos, an
officer, director and significant stockholder of SRKP 23 prior to the Share
Exchange, is the President and Treasurer of WestPark Capital. Kevin
DePrimio and Jason Stern, each employees of WestPark Capital, are also
stockholders of SRKP 23. In addition, Richard Rappaport is the sole
owner of the membership interests of the parent company of WestPark
Capital. Each of Messrs. Rappaport and Pintsopoulos resigned
from all of their executive and director positions with the Company upon the
closing of the Share Exchange.
Pursuant to a Placement Agency
Agreement entered into with WestPark Capital, we paid WestPark Capital, Inc. a
commission equal to 10.0% with a non-accountable fee of 4.0% of the gross
proceeds from the Private Placement. We are also retaining WestPark
Capital for a period of six months following the initial closing of the Private
Placement to provide us with financial consulting services for which we will pay
WestPark Capital $4,000 per month. Out of the proceeds of the Private
Placement, we paid $250,000 to Keen Dragon Group Limited, a third party
unaffiliated with Weixin BVI, the Company, or WestPark Capital for services in
connection with arranging the Share Exchange and the Company’s listing of
securities in the United States.
Each of Messrs. Rappaport and
Pintsopoulos may be considered a promoter of our company prior to the Share
Exchange. In addition to the director and executive officer positions
that each held with our company prior to the Share Exchange, each currently
holds director and executive officer positions with SRKP 2, Inc., SRKP 3, Inc.,
SRKP 5, Inc., SRKP 10, Inc., SRKP 12, Inc., SRKP 14, Inc., SRKP 15, Inc., SRKP
16, Inc., SRKP 24, Inc., SRKP 26, Inc., SRKP 27, Inc., SRKP 28, Inc., SRKP 29,
Inc., WRASP 30, Inc., WRASP 31, Inc. and WRASP 32, Inc., all of which are
publicly-reporting, blank check and non-trading shell companies. None
of the other original stockholders of SRKP 23 may be considered a promoter of
our company because none of them were involved in founding or organizing the
business of SRKP 23 and each received their securities of the Company solely in
consideration for personal funds paid directly by such stockholders to the
Company.
Mr. Rappaport and Pintsopoulos did not
receive any benefits related to the transactions described above, except their
retention of shares in the Company upon the closing of the Share Exchange
described above in this section.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
Related
Party Loans
During 2008 and 2009, we obtained
certain related party loans from Hongbing Wan and Xiao Liu, two of the Company’s
directors. The loans were obtained during the early stages of the
Company’s operations and the proceeds of the loans provided us with needed
working capital. The amounts outstanding on the loans as of September
30, 2010 and December 31, 2009 and 2008 are as follows:
59
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Due
to Wan, Hongbing, Director
|
$ | 636,219 | $ | 4,231,403 | $ | 5,175,060 | ||||||
|
Due
to Liu, Xiao, Director
|
44,615 | 1,143,272 | - | |||||||||
| $ | 680,834 | $ | 5,374,675 | $ | 5,175,060 | |||||||
The loans are non-interest bearing and
have no maturity date. As our revenue and cash flows have grown, we
have begun repaying the loans. In the future, we anticipate being
able to finance our operations through our net income and through external debt
and equity financings. We do not anticipate any need for additional
related party financing for our on-going operations in future
periods.
Policy
for Approval of Related Party Transactions
We do not currently have a formal
related party approval policy for review and approval of transactions required
to be disclosed pursuant to Item 404 (a) of Regulation S-K. We
expect our board to adopt such a policy in the near future.
INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our Certificate of Incorporation provides for
the indemnification, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, of officers,
directors, employees and agents of the Company. We may, prior to the
final disposition of any proceeding, pay expenses incurred by an officer or
director upon receipt of an undertaking by or on behalf of that director or
executive officer to repay those amounts if it should be determined ultimately
that he or she is not entitled to be indemnified under the bylaws or
otherwise. We shall indemnify any officer, director, employee or
agent upon a determination that such individual has met the applicable standards
of conduct specified in Section 145. In the case of an officer or
director, the determination shall be made by (a) a majority vote of directors
who are not parties to such proceeding, even though less than a quorum; (b) a
committee of such directors designated by majority vote of such directors, even
though less than a quorum; (c) if there are no such directors, independent legal
counsel in a written opinion or (d) the stockholders.
Our
certificate of incorporation provides that, pursuant to Delaware law, our
directors shall not be liable for monetary damages for breach of the directors’
fiduciary duty of care to us and our stockholders. This provision in
the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of no monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a
director’s responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable. In the event a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by its
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
60
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT FOLLOWING THE SHARE
EXCHANGE
Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options and warrants held by that
person that are currently exercisable or become exercisable within sixty (60)
days of the closing of the Share Exchange on November 23, 2010 are deemed
outstanding even if they have not actually been exercised. Those
shares, however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
Immediately prior to the closing of the
Share Exchange and the initial closing of the Private Placement, we had issued
and outstanding 8,587,354 shares of common stock, no options and warrants to
purchase an aggregate of 8,587,348 shares of common
stock. Immediately after the closing of the Share Exchange and the
initial closing of the Private Placement, we had 10,884,120 shares of common
stock and warrants to purchase 782,545 shares of common stock issued and
outstanding.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock immediately after the closing of the Share
Exchange based on issued and outstanding shares of common stock,
by:
|
|
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
|
·
|
Each
named executive officer;
|
|
|
·
|
Each
director; and
|
|
|
·
|
All
of the executive officers and directors as a
group.
|
Unless otherwise indicated, the persons
and entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the stockholder’s name, subject to
community property laws, where applicable. Unless otherwise
indicated, the address of each stockholder listed in the table is c/o China
Wesen Recycling Technology, Inc., Room 405, Floor 4, North Tower, 9 Shen Zhou
Road, Guangzhou High-tech Industrial Development Zone, Guangzhou, People’s
Republic of China.
61
|
Name
and Address of Beneficial Owner
|
Title
|
Beneficially
Owned
Post-Share
Exchange
|
Percent
of Class
(1)
|
|||||||
|
Directors
and Executive Officers
|
||||||||||
|
Xiao
Liu
|
Chief
Executive Officer and Director
|
3,126,056 | (2) | 28.7 | % | |||||
|
Hongbing
Wan
|
Chairman
of the Board and Chief Operating Officer
|
- | - | |||||||
|
Yu
Hong Hu
|
Director
|
- | - | |||||||
|
Xiao
Zhu Pang
|
Director
|
- | - | |||||||
|
Officers
and Directors as a Group
(total
of 4 persons)
|
3,126,056 | (2) | 28.7 | % | ||||||
|
5%
Stockholders
|
||||||||||
|
Wesen
Environmental Technology Limited
|
3,126,056 | 28.7 | % | |||||||
|
Richard
A. Rappaport (3)
|
1,759,070 | 15.4 | % | |||||||
|
1900
Avenue of the Stars, Suite 310
|
||||||||||
|
Los
Angeles, CA 90067
|
||||||||||
|
WestPark
Capital Financial Services, LLC (4)
|
1,354,821 | 12.0 | % | |||||||
|
1900
Avenue of the Stars, Suite 310
|
||||||||||
|
Los
Angeles, CA 90067
|
||||||||||
|
HaiLan
Zhang
|
615,555 | (5) | 5.6 | % | ||||||
|
TianLai
17 Block, Zheng Zhong Golf
|
||||||||||
|
Long
Gong District, Shenzhen
|
||||||||||
|
People’s
Republic of China
|
||||||||||
|
(1)
|
Each
stockholder’s percentage of ownership in the above table is based upon
10,884,120 shares of the Company’s common stock outstanding as of November
23, 2010.
|
|
(2)
|
Consists
of shares owned by Wesen Environmental Technology Limited, a British
Virgin Islands company, of which Xiao Liu is a director and the sole
shareholder and may be deemed to have voting and investment control over
the shares owned by Wesen Environmental Technology
Limited.
|
|
(3)
|
Includes
181,350 shares of Common Stock and a warrant to purchase 74,399 shares of
Common Stock owned by Mr. Rappaport. Also includes 52,650
shares of Common Stock and warrants to purchase 21,600 shares of Common
Stock held by each of the Amanda Rappaport Trust and the Kailey Rappaport
Trust (together, the “Rappaport Trusts”) as well as 960,691 shares of
Common Stock and warrants to purchase 394,130 shares of Common Stock held
by WestPark Capital Financial Services LLC. Mr. Rappaport, as Trustee of
each of the Rappaport Trusts and Chief Executive Officer (“CEO”) and
Chairman of WestPark Capital Financial Services, LLC, may be deemed the
indirect beneficial owner of these securities since he has sole voting and
investment control over the
securities.
|
|
(4)
|
Includes
960,691 shares of Common Stock and a warrant to purchase 394,130 shares of
Common Stock.
|
|
(5)
|
Includes
581,939 shares of Common Stock and a warrant to purchase 33,616 shares of
common stock.
|
62
|
ITEM
5.02
|
DEPARTURE
OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
PRINCIPAL OFFICERS.
|
At the
consummation of the Share Exchange, SRKP 23’s board of directors immediately
prior to the Share Exchange, which consisted of Richard A. Rappaport and
Anthony C. Pintsopoulos, appointed Xiao Liu, Hongbing Wan, Zongqi Li, Yu
Hong Hu and Xiao Zhu Pang to the board of directors of our company, with
Hongbing Wan serving as Chairman of the Board. The directors and
officers of SRKP 23 prior to the Share Exchange then resigned as officers and
directors of our company upon the closing of the Share Exchange. In
addition, concurrent with the closing of the Share Exchange, our company’s board
of directors appointed Xiao Liu as our Chief Executive Officer and Hongbing Wan
as Chief Operating Officer. Zongqi Li subsequently resigned as a
director on November 26, 2010. For complete information regarding our
new officers and directors, refer to “Executive Officers, Directors and Key
Employees” under Item 5.01, above.
|
ITEM
5.03
|
AMENDMENTS
TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR.
|
Immediately after the closing of the
Share Exchange, SRKP 23 changed its corporate name from “SRKP 23, Inc.” to
“China Wesen Recycling Technology, Inc.” by filing the Certificate of Ownership
and Merger with the Delaware Secretary of State’s Office on November 24,
2010. SRKP 23 effected the name change to better reflect the nature
of its new business operations following the Share Exchange. The
Certificate of Ownership and Merger is attached hereto as
Exhibit 3.3. Holders of stock certificates bearing the name
“SRKP 23, Inc.” may continue to hold them and will not be required to exchange
them for new certificates or take any other action.
|
ITEM
5.06
|
CHANGE
IN SHELL COMPANY STATUS.
|
Prior to the closing of the Share
Exchange, SRKP 23 was a “shell company” as defined in Rule 405 of the
Securities Act and Rule 12b-2 of the Exchange Act. As described
in Item 2.01 above, which is incorporated by reference into this
Item 5.06, SRKP 23 ceased being a shell company upon completion of the
Share Exchange on November 23, 2010.
|
ITEM
9.01
|
FINANCIAL
STATEMENTS AND EXHIBITS.
|
|
(a)
|
Financial
Statements of Business Acquired.
|
We are providing financial and other
information for informational purposes only. It does not necessarily
represent or indicate what the financial position and results of operations of
our company will be now that the Share Exchange is concluded.
FINANCIAL
STATEMENTS OF WEIXIN INTERNATIONAL CO., LIMITED
The
financial statements of Weixin International Co., Limited, a company organized
under the laws of the British Virgin Islands, for the nine months ended
September 30, 2010 (unaudited) and years ended December 31, 2009, 2008 and
2007 are provided below. You are encouraged to review the financial
statements and related notes.
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Weixin
International Co., Limited
British
Virgin Islands
We have
audited the accompanying consolidated balance sheets of Weixin International
Co., Limited (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2009, 2008
and 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008 and the results of operations and cash flows for the years ended
December 31, 2009, 2008 and 2007 in conformity with accounting principles
generally accepted in the United States of America.
/s/
MALONEBAILEY, LLP
www.malonebailey.com
Houston,
Texas
November
30, 2010
64
Weixin
International Co., Limited
Consolidated
Balance Sheets
|
September 30,
|
December 31,
|
December 31,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Assets
|
||||||||||||
|
Current
Assets
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 2,912,087 | $ | 4,483,402 | $ | 1,724,338 | ||||||
|
Accounts
receivable, net
|
3,302,566 | 4,167,100 | 1,568,187 | |||||||||
|
Inventories
|
1,298,391 | 1,436,219 | 517,014 | |||||||||
|
Due
from related parties
|
- | 5,868 | 179,894 | |||||||||
|
Advances
for inventory purchase
|
1,108,268 | 743,184 | 351,062 | |||||||||
|
Note
receivable
|
526,570 | - | - | |||||||||
|
Other
current assets
|
106,578 | 61,272 | 32,169 | |||||||||
|
Total
Current Assets
|
9,254,460 | 10,897,045 | 4,372,664 | |||||||||
|
Property
and equipment, net
|
2,857,965 | 3,140,400 | 2,815,735 | |||||||||
|
Construction
in progress
|
1,970,319 | 28,926 | - | |||||||||
|
Other
assets
|
768,560 | 786,320 | 830,606 | |||||||||
|
Intangible
assets, net
|
1,103,518 | 1,097,836 | - | |||||||||
|
Total
Assets
|
$ | 15,954,822 | $ | 15,950,527 | $ | 8,019,005 | ||||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||
|
Current
Liabilities
|
||||||||||||
|
Accounts
payable - trade
|
$ | 1,075,420 | $ | 1,352,788 | $ | 739,124 | ||||||
|
Accrued
liabilities
|
57,063 | 1,177,261 | 142,114 | |||||||||
|
Taxes
payable
|
564,379 | 863,860 | 89,443 | |||||||||
|
Short
term debt
|
705,656 | - | - | |||||||||
|
Due
to related parties
|
680,834 | 5,374,675 | 5,175,060 | |||||||||
|
Total
Current Liabilities
|
3,083,352 | 8,768,584 | 6,145,741 | |||||||||
|
Stockholders'
Equity
|
||||||||||||
|
Common
stock, $1 par value, 50,000 shares authorized, 10,000 shares issued and
outstanding
|
10,000 | 10,000 | 10,000 | |||||||||
|
Additional
paid-in capital
|
519,283 | 519,283 | 519,283 | |||||||||
|
Statutory
reserves
|
719,169 | 719,169 | 127,996 | |||||||||
|
Retained
earnings
|
11,407,305 | 5,890,707 | 1,133,796 | |||||||||
|
Accumulated
other comprehensive income
|
215,713 | 42,784 | 82,189 | |||||||||
|
Total
Stockholders' Equity
|
12,871,470 | 7,181,943 | 1,873,264 | |||||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 15,954,822 | $ | 15,950,527 | $ | 8,019,005 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
65
Weixin
International Co., Limited
Statements
of Operations and Other Comprehensive Income
|
For the Nine Months Ended
|
For the Year Ended
|
|||||||||||||||||||
|
September 30,
|
December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
|
Revenue
|
$ | 21,971,844 | $ | 18,427,828 | $ | 26,151,437 | $ | 8,686,922 | $ | 909,575 | ||||||||||
|
Cost
of Revenue
|
13,788,072 | 12,471,539 | 17,516,014 | 6,521,446 | 648,503 | |||||||||||||||
|
Gross
Profit
|
8,183,772 | 5,956,289 | 8,635,423 | 2,165,476 | 261,072 | |||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||
|
Selling
expenses
|
110,722 | 79,308 | 111,165 | 38,076 | 7,152 | |||||||||||||||
|
General
and administrative
|
632,466 | 398,436 | 590,871 | 422,283 | 167,484 | |||||||||||||||
|
Total
operating expenses
|
743,188 | 477,744 | 702,036 | 460,359 | 174,636 | |||||||||||||||
|
Income
from Operations
|
7,440,584 | 5,478,545 | 7,933,387 | 1,705,117 | 86,436 | |||||||||||||||
|
Other
Income (Expenses):
|
||||||||||||||||||||
|
Interest
income
|
14,874 | 9,405 | 12,233 | 10,165 | 1,617 | |||||||||||||||
|
Other
income (expense), net
|
(53,403 | ) | (27,409 | ) | (38,539 | ) | (36,055 | ) | (26,219 | ) | ||||||||||
|
Total
Other Income (Expenses)
|
(38,529 | ) | (18,004 | ) | (26,306 | ) | (25,890 | ) | (24,602 | ) | ||||||||||
|
Income
before Income Taxes
|
7,402,055 | 5,460,541 | 7,907,081 | 1,679,227 | 61,834 | |||||||||||||||
|
Income
taxes
|
(1,885,457 | ) | (1,353,887 | ) | (2,030,996 | ) | (441,337 | ) | (33,235 | ) | ||||||||||
|
Net
Income
|
$ | 5,516,598 | $ | 4,106,654 | $ | 5,876,085 | $ | 1,237,890 | $ | 28,599 | ||||||||||
|
Other
Comprehensive Income
|
||||||||||||||||||||
|
Foreign
currency translation adjustment
|
172,929 | 3,231 | (39,405 | ) | 61,420 | 19,167 | ||||||||||||||
|
Comprehensive
Income
|
$ | 5,689,527 | $ | 4,109,885 | $ | 5,836,680 | $ | 1,299,310 | $ | 47,766 | ||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
66
Weixin
International Co., Limited
Consolidated
Statements of Changes in Stockholders’ Equity
For
the Nine Months Ended September 30, 2010 and the Years Ended December 31, 2009,
2008 and 2007
|
Additional
|
Accumulated
Other
|
Total
|
||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders'
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Income
|
Reserves
|
Earnings
|
Equity
|
||||||||||||||||||||||
|
Balance
at December 31, 2006
|
10,000 | $ | 10,000 | $ | 53,708 | $ | 1,602 | $ | - | $ | (4,697 | ) | $ | 60,613 | ||||||||||||||
|
Contribution
|
- | - | 465,575 | - | - | - | 465,575 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | 19,167 | - | - | 19,167 | |||||||||||||||||||||
|
Allocation
of statutory reserve
|
- | - | - | - | 4,904 | (4,904 | ) | - | ||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 28,599 | 28,599 | |||||||||||||||||||||
|
Balance
at December 31, 2007
|
10,000 | 10,000 | 519,283 | 20,769 | 4,904 | 18,998 | 573,954 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | 61,420 | - | - | 61,420 | |||||||||||||||||||||
|
Allocation
of statutory reserve
|
- | - | - | - | 123,092 | (123,092 | ) | - | ||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 1,237,890 | 1,237,890 | |||||||||||||||||||||
|
Balance
at December 31, 2008
|
10,000 | 10,000 | 519,283 | 82,189 | 127,996 | 1,133,796 | 1,873,264 | |||||||||||||||||||||
|
Distribution
|
- | - | - | - | - | (528,001 | ) | (528,001 | ) | |||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | (39,405 | ) | - | - | (39,405 | ) | |||||||||||||||||||
|
Allocation
of statutory reserve
|
- | - | - | - | 591,173 | (591,173 | ) | - | ||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 5,876,085 | 5,876,085 | |||||||||||||||||||||
|
Balance
at December 31, 2009
|
10,000 | 10,000 | 519,283 | 42,784 | 719,169 | 5,890,707 | 7,181,943 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | 172,929 | - | - | 172,929 | |||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 5,516,598 | 5,516,598 | |||||||||||||||||||||
|
Balance
at September 30, 2010 (Unaudited)
|
10,000 | $ | 10,000 | $ | 519,283 | $ | 215,713 | $ | 719,169 | $ | 11,407,305 | $ | 12,871,470 | |||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
67
Weixin
International Co., Limited
Consolidated
Statements of Cash Flows
|
For the Nine Months Ended
|
For the Year Ended
|
|||||||||||||||||||
|
September 30,
|
December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||||||||||
|
Net
Income
|
$ | 5,516,598 | $ | 4,106,654 | $ | 5,876,085 | $ | 1,237,890 | $ | 28,599 | ||||||||||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||||||||||
|
Depreciation
expense
|
345,267 | 330,900 | 445,515 | 247,944 | 356 | |||||||||||||||
|
Amortization
expense
|
49,887 | 33,203 | 47,944 | 43,514 | 9,945 | |||||||||||||||
|
Interest
expense on debt discount
|
9,386 | - | - | - | - | |||||||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
|
Accounts
receivable
|
935,798 | (2,348,904 | ) | (2,598,893 | ) | (1,109,076 | ) | (48,483 | ) | |||||||||||
|
Inventories
|
167,321 | (629,684 | ) | (919,197 | ) | (517,014 | ) | - | ||||||||||||
|
Advances
for inventory purchases
|
(349,823 | ) | (445,145 | ) | (392,116 | ) | (277,987 | ) | (68,298 | ) | ||||||||||
|
Other
current assets
|
(44,087 | ) | (32,428 | ) | (29,103 | ) | (30,276 | ) | - | |||||||||||
|
Other
assets
|
- | - | - | - | (828,067 | ) | ||||||||||||||
|
Accounts
payable
|
(281,874 | ) | 110,020 | 613,663 | 301,826 | 51,321 | ||||||||||||||
|
Accrued
liabilities
|
(129,378 | ) | 14,259 | 40,792 | 25,273 | 8,617 | ||||||||||||||
|
Taxes
payable
|
(316,979 | ) | 761,554 | 774,417 | 35,639 | 50,292 | ||||||||||||||
|
Net
cash provided by (used in) operating activities
|
5,902,116 | 1,900,429 | 3,859,107 | (42,267 | ) | (795,718 | ) | |||||||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||||||||||
|
Advance
on note receivable
|
(526,570 | ) | - | - | - | - | ||||||||||||||
|
Payments
on land use rights
|
(1,014,771 | ) | - | (107,082 | ) | - | - | |||||||||||||
|
Payments
on construction in progress
|
(1,940,799 | ) | - | (28,926 | ) | (365,789 | ) | (1,584,637 | ) | |||||||||||
|
Purchases
of property and equipment
|
(4,447 | ) | (770,460 | ) | (770,396 | ) | (1,005,312 | ) | (877 | ) | ||||||||||
|
Net
cash used in investing activities
|
(3,486,587 | ) | (770,460 | ) | (906,404 | ) | (1,371,101 | ) | (1,585,514 | ) | ||||||||||
|
Cash
Flows From Financing Activities
|
||||||||||||||||||||
|
Cash
proceeds from shareholder capital contribution
|
- | - | - | - | 479,840 | |||||||||||||||
|
Return
of capital to shareholder
|
- | - | (528,001 | ) | - | - | ||||||||||||||
|
Proceeds
on short term debt
|
696,105 | - | - | - | - | |||||||||||||||
|
Net
cash (payments)/proceeds on related parties debt
|
(4,765,028 | ) | (703,599 | ) | 373,554 | 2,677,902 | 2,185,881 | |||||||||||||
|
Net
cash provided by (used in) financing activities
|
(4,068,923 | ) | (703,599 | ) | (154,447 | ) | 2,677,902 | 2,665,721 | ||||||||||||
|
Effect
of exchange rate changes on cash
|
82,079 | 3,491 | (39,192 | ) | 151,284 | 1,454 | ||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(1,571,315 | ) | 429,861 | 2,759,064 | 1,415,818 | 285,943 | ||||||||||||||
|
Cash
and cash equivalents, beginning of period
|
4,483,402 | 1,724,338 | 1,724,338 | 308,520 | 22,577 | |||||||||||||||
|
Cash
and cash equivalents, end of period
|
$ | 2,912,087 | $ | 2,154,199 | $ | 4,483,402 | $ | 1,724,338 | $ | 308,520 | ||||||||||
|
Supplemental
disclosure information:
|
||||||||||||||||||||
|
Income
taxes paid
|
$ | 2,006,647 | $ | 747,408 | $ | 1,428,184 | $ | 405,426 | $ | 3,349 | ||||||||||
|
Interest
paid
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||||||||||
|
Construction
in progress purchase on credit
|
$ | - | $ | - | $ | - | $ | 103,063 | $ | - | ||||||||||
|
Land
use rights purchase on credit
|
$ | - | $ | - | $ | 994,353 | $ | - | $ | - | ||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
68
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
The
consolidated financial statements consist of the financial statements of Weixin
International Co., Limited (“Weixin BVI”, the “Company”), Wei Xin Holding Group
Limited (“Weixin HK”), Guangzhou Kelida Intelligent Equipment Co., Ltd.
(“Kelida”), Zhaoqing Hua Su Plastic Trading Company (“Hua Su”), Zhaoqing Chuang
Yi Resources Recycle Co., Ltd. (“Chuang Yi”), Zhaoqing Xin Ye Plastic Co., Ltd.
(“Xin Ye”), and Zhaoqing Lijun Craftwork Co., Ltd. (“Li Jun”).
Weixin
BVI was incorporated under the laws of British Virgin Islands on December 3,
2009 by Hongbing Wan, who was the original sole shareholder of Weixin BVI
holding 1 share. On August 9, 2010, Hongbing Wan transferred 100% of the
outstanding shares of Weixin BVI to Hongyu Zhang pursuant to an instrument of
transfer for consideration of $1.00. On October 28, 2010, Hongyu
Zhang transferred 100% of the shares of Weixin BVI to Wesen Environmental
Technology Limited pursuant to an instrument of transfer for consideration of
$1.00. On November 8, 2010, Weixin BVI issued 9,999 additional shares
to certain individuals and entities. The Company has 50,000 common
shares authorized with $1.00 par value each and 10,000 shares issued and
outstanding.
Weixin HK
was incorporated under the laws of Hong Kong, People’s Republic of China (“PRC”)
on December 30, 2005 by Hongbing Wan, who was Weixin HK’s sole shareholder upon
its incorporation. On August 10, 2010, Weixin BVI acquired all of the issued and
outstanding shares of Weixin HK from Hongbing Wan for 10,000 Hong Kong Dollars
and, as a result, Weixin HK became the wholly-owned subsidiary of Weixin
BVI. Weixin HK has 10,000 common shares authorized with HK$1.00 par
value each and 10,000 shares issued and outstanding.
Kelida is
located in Guangzhou, Guangdong Province, PRC and was incorporated under the
laws of the PRC on September 29, 2009 by Weixin HK, with Weixin HK as its sole
shareholder. Kelida has a registered capital of USD $14,300,000 and is a
wholly-owned subsidiary of Weixin HK.
Hua Su,
Chuang Yi, Xin Ye, and Li Jun (collectively, the “Subsidiaries Four”) are
located in Zhaoqing city, Guangdong Province, PRC and were incorporated under
the laws of the PRC. Hua Su was incorporated on July 20, 2006 with registered
capital of USD $132,00 (RMB 1,000,000), with the original registered
shareholders of Hua Su being Luo Jianhua (holding 75% of the registered capital)
and He Jixiong (holding 25% of the registered capital); Chuang Yi, Xin Ye, and
Li Jun were incorporated on September 27, 2007 with registered capital of USD
$132,000 (RMB 1,000,000) each. The original registered shareholders
of Chuang Yi were Peng Zhizhong and He Jixiong, with each holding 50% of the
registered capital. The original registered shareholders of Xin Ye
were Luo Zeming and Lu Jianzhong, with each holding 50% of the registered
capital. The original registered shareholders of Li Jun were Chen
Wenqing, holding 60% of the registered capital, and Qiu Yuji, holding 40% of the
registered capital. These original registered shareholders of Subsidiaries Four
were holding the interests of the companies on behalf of Hongbing Wan pursuant
to Ownership Entrustment Agreements entered by and among Hongbing Wan and each
shareholder upon the establishment of each of the four companies. In November
2009, the original shareholders of each of the Subsidiaries Four transferred all
interests in Subsidiaries Four to Kelida for consideration equal to the
respective registered capital of each of the Subsidiaries Four and, as a result,
the Subsidiaries Four became the wholly-owned subsidiaries of Kelida. Each of
the Subsidiaries Four completed the registration procedures to register Kelida
as its sole shareholder with the competent PRC government authority on February
1, 2010.
In
November 2009, the original shareholders of each of the Subsidiaries Four
transferred his interests in the Subsidiaries Four to Kelida for consideration
equal to the respective registered capital of each of the Subsidiaries Four and,
as a result, the Subsidiaries Four became wholly-owned subsidiaries of Kelida.
Each of the Subsidiaries Four completed the registration procedures to register
Kelida as its sole shareholder with the competent PR government authority on
February 1, 2010.
Since all
the entities are controlled by the same group of shareholders, the
reorganization has been accounted for as a transaction under common control and
a recapitalization. The financial statements have been prepared as if the
existing corporate structure had been in existence throughout all periods and
the reorganization had occurred as of the beginning of the earliest period
presented in the accompanying financial statements.
Since
their inception, the Subsidiaries Four have been principally engaged in the
manufacture and distribution of high density polyethylene (“HDPE”), low density
polyethylene (“LDPE”), Polystyrene (“PS”), acrylonitrile butadiene styrene
(“ABS”), and other recycled plastics products, using imported raw material in
the form of plastic waste. Weixin HK is a window for the group to handle the
business outside China, as at the quarter ended September 30, 2010, Weixin HK
sells lock parts to overseas clients.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
preparation
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States
of America. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
69
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
In the
opinion of the management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 2010, and the results
of operations and cash flows for the nine months ended September 30, 2010 and
2009. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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. Future results could be materially affected if actual results
were to differ from these estimates and assumptions.
Risk and
uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
foreign currency exchange rates and the volatility of public
markets.
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As of
September 30, 2010, December 31, 2009 and 2008, substantially all of the
Company’s cash were held by major financial institutions located in the PRC and
Hong Kong, which management believes are of high credit quality. Most of the
Company’s sales are credit sales which are primarily to customers whose ability
to pay is dependent on the industry economies prevailing in their respective
areas; however, concentration of credit risk with respect to trade accounts
receivable is limited due to generally short payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risks.
Fair value of financial
instruments
The
Company adopted ASC 820 “Fair Value Measurements,” which defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosure requirements for fair value measures.
Current assets and current liabilities qualified as financial instruments and
management believes their carrying amounts are a reasonable estimate of fair
value because of the short period of time between the origination of such
instruments and their expected realization and, if applicable, their current
interest rate is equivalent to interest rates currently
available. The three levels are defined as follow:
|
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand, bank deposits and highly liquid
investments with an original maturity of three months or less when
purchased.
Accounts
receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
70
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
The
allowance on uncollectible accounts receivable reflects management’s best
estimate of probable losses determined principally on the basis of historical
experience. The allowance for uncollectible accounts receivable is determined
primarily on the basis of management’s best estimate of probable losses,
including specific allowances for known troubled accounts. All accounts or
portions thereof deemed to be uncollectible or to require an excessive
collection cost are written off to the allowance for uncollectible accounts
receivable. When facts subsequently become available to indicate that the
amount provided as the allowance was incorrect, an adjustment which is
classified as a change in estimate is made.
Inventories
Inventories
consist of finished goods, work in progress, and raw materials. Inventories are
valued at the lower of cost, as determined on a weighted average basis, or
market. Market value is determined by reference to selling prices after the
balance sheet date or to management’s estimates based on prevailing market
conditions. Management writes down the inventories to market value if it is
below cost. Management also regularly evaluates the composition of its
inventories to identify slow-moving and obsolete inventories to determine if
valuation allowance is required. Costs of raw material inventories include
purchase and related costs incurred in bringing the products to their present
location and condition. Finished goods are comprised of direct materials, direct
labor, and an appropriate proportion of overhead.
Property and
equipment
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of property and equipment are capitalized.
These capitalized costs may include structural improvements, equipment and
fixtures. All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets:
|
Building
|
20
years
|
|
Machinery
and Equipment
|
5
years
|
|
Office
Equipment
|
5
years
|
Construction-in-progress
Construction-in-progress
consists of amounts expended for plant construction. Construction-in-progress is
not depreciated until such time as the assets are completed and put into
service. Once plant construction is completed, the cost accumulated in
construction-in-progress is transferred to property, plant, and
equipment.
Impairment of long-lived
assets
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
Intangible
assets
The
Company’s intangible assets consist of land use rights at September 30, 2010 and
December 31, 2009. According to the laws of China, the government owns all the
land in China. Companies or individuals are authorized to possess and use the
land only through land use rights granted by the Chinese government. Land use
rights are being amortized using the straight-line method over 50 years, the
lease term of the rights.
Comprehensive
income
The
Company has adopted ASC 220, Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. The Company’s accumulated other
comprehensive income represents the accumulated balance of foreign currency
translation adjustments.
71
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
Revenue
recognition
The four
companies of the Subsidiaries Four are identical in their operations and
generate revenue from the sale of manufactured HDPE, LDPE, ABS and PS grains.
These companies recognize revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, as evidenced by an agreement with the
customer, delivery of the goods has occurred, customer acceptance has been
obtained, which means the significant risks and ownership have been transferred
to the customer, the price is fixed or determinable and collectability is
reasonably assured. Sales contracts, invoices and shipping documents are
utilized to facilitate the sales process. Revenue is recognized when customers
acknowledges the sale and delivery and the title of the goods is properly
transferred to the customers.
There is
no shipping charge involved as all the manufactured goods are picked up by the
customers at the Company's warehouse. Customer acceptance is obtained at the
point of delivery. No return allowance is made as products returns are
insignificant based on historical experience. The Company does not provide
warranties, rebates, price protection, or similar privileges among customers.
The prices of the products are predetermined and fixed based on contractual
agreements.
The
Subsidiaries Four also generate revenue from the sale of purchased recyclable
plastic materials, which are recognized on the same basis as the sales of
manufactured HDPE, LDPE, ABS and PS grains. The Company recognizes revenue from
the sale of these materials on a gross basis because it is responsible for
fulfillment and takes title to the materials before they are ordered by a
customer and acts as the principal obligor in the transaction. The revenue is
recorded when delivery of the goods has occurred, customer acceptance has been
obtained, and the significant risks and ownership have been transferred to the
customer, the price is fixed or determinable, and collectability is reasonably
assured.
Weixin HK
generates revenue from selling lock parts. Weixin HK records revenue net of
pass-through charges as the Company believes the key indicators of the business
suggest that the Company generally acts as an agent on behalf of its
customers.
Cost of goods
sold
Cost of
goods sold consists primarily of raw materials, utility and supply costs
consumed in the manufacturing process, manufacturing labor, depreciation expense
and direct overhead expenses necessary to manufacture finished goods, as well as
warehousing and distribution costs such as inbound freight charges, shipping and
handling costs, purchasing and receiving costs.
Income
taxes
The
Company accounts for income and deferred tax under the provision of ASC 740
“Income Taxes”. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. ASC 740 also requires the recognition of the future
tax benefits of net operating loss carry forwards. A valuation allowance is
established when the deferred tax assets are not expected to be realized within
a reasonable period of time.
Value added
tax
The
Company is subject to value added tax (“VAT”). The applicable VAT rate is
different based on the different structure of business under PRC tax law. Some
of the Company’s transactions are levied at a VAT tax rate of 17% for products
sold in the PRC. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold (output
VAT) less VAT paid on purchases made with the relevant supporting invoices
(input VAT). Some of transactions are levied at a VAT tax rate of 7%,
such as shipping services and other transportation services.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company subsidiaries are local currencies, primarily the PRC currency
Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Exchange
gains or losses on transaction are included in earnings.
Earnings per
share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. At September 30,
2010 and December 31, 2009 and 2008, respectively, the Company had no common
stock equivalents that could potentially dilute future earnings per
share.
Related
parties
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
72
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
Segment
reporting
ASC 280,
“Disclosure about Segments of an Enterprise and Related Information”, requires
disclosure of reportable segments used by management for making operating
decisions and assessing performance. Reportable segments are categorized by
products and services, geography, legal structure, management structure, or any
other manner in which management disaggregates a company. ASC 280 has no effect
on the Company’s financial statements as substantially all of the Company’s
operations and management are conducted as a single operating
segment.
Recently issued accounting
pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In May
2009, the FASB issued new guidance on the treatment of subsequent events which
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this new guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that occurred for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions that
occurred after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This new guidance was effective for
fiscal years and interim periods ended after June 15, 2009 and must be applied
prospectively. We adopted and applied the provisions of the new guidance in the
third quarter of 2009.
In
February 2010, subsequent to our adoption of the new guidance discussed above,
the FASB issued updated guidance on subsequent events, amending the May 2009
guidance. This updated guidance revised various terms and definitions within the
guidance and requires us, as an "SEC filer," to evaluate subsequent events
through the date the financial statements are issued, rather than through the
date the financial statements are available to be issued. Furthermore, we no
longer are required to disclose the date through which subsequent events have
been evaluated. The updated guidance was effective for us immediately upon
issuance. As such, we adopted and applied the provisions of the updated guidance
in the first quarter of 2010. Our adoption of both the new and updated
guidance did not have an impact on our consolidated financial position or
results of operations.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
adoption did not have a material impact on the Company’s consolidated results of
operations or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at
Fair Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this standard did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
73
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activities of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption did not have a material impact on the Company’s consolidated
results of operations or financial condition.
NOTE
3 - ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Accounts
receivable
|
$ | 3,302,566 | $ | 4,167,100 | $ | 1,568,187 | ||||||
|
Allowance
for doubtful accounts
|
- | - | - | |||||||||
|
Accounts
receivable, net
|
$ | 3,302,566 | $ | 4,167,100 | $ | 1,568,187 | ||||||
NOTE
4 – INVENTORIES
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Raw
materials
|
$ | 1,187,245 | $ | 1,371,583 | $ | 471,064 | ||||||
|
Work
in progress
|
39,067 | 17,754 | 9,085 | |||||||||
|
Finished
goods
|
72,079 | 46,882 | 36,865 | |||||||||
|
Total
Inventory, net
|
$ | 1,298,391 | $ | 1,436,219 | $ | 517,014 | ||||||
NOTE
5 - ADVANCES FOR INVENTORY PURCHASE
Advances
for inventory purchases represent amounts prepaid for raw material purchases,
which consist of the following:
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Advances
for inventory purchase
|
$ | 1,108,268 | $ | 743,184 | $ | 351,062 | ||||||
At
September 30, 2010, two suppliers accounted for approximately 66% and 34% of
total advances for inventory purchase, respectively.
At
December 31, 2009, two suppliers accounted for approximately 96% and 4% of total
advances for inventory purchase, respectively.
At
December 31, 2008, one supplier accounted for approximately 100% of total
advances for inventory purchase.
74
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
6 – NOTE RECEIVABLE
The
Company advanced $526,570 to a third party in September 2010. The note
receivable carries a monthly interest at 5% and is due in two months. The loan
is unsecured and was paid off in November.
NOTE
7 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
|
(Unaudited)
|
|||||||||||
|
Building
|
$ | 2,103,614 | $ | 2,061,286 | $ | 2,061,253 | ||||||
|
Machinery
and equipment
|
1,801,803 | 1,765,548 | 995,444 | |||||||||
|
Office
equipment
|
16,935 | 12,237 | 11,928 | |||||||||
|
Total
at cost
|
3,922,352 | 3,839,071 | 3,068,625 | |||||||||
|
Less:
Accumulated depreciation
|
1,064,387 | 698,671 | 252,890 | |||||||||
|
Total
property and equipment, net
|
$ | 2,857,965 | $ | 3,140,400 | $ | 2,815,735 | ||||||
Depreciation
expense for the year ended December 31, 2009, 2008 and 2007 are $445,515 and
$247,944 and $356, respectively.
Depreciation
expense for the nine months ended September 30, 2010 and 2009 are $345,267 and
$330,900, respectively.
NOTE
8 – CONSTRUCTION IN PROGRESS
During
November, 2009, the Company started the construction to build a factory in
Guangzhou. Costs incurred as of September 30, 2010 and December 31, 2009 amount
to $1,970,319 and $28,926, respectively. The amounts mainly represent
installment payments and deposits paid to contractors.
NOTE
9 - OTHER ASSETS
Other
assets are the advances paid for the lease of the land located in Zhaoqing City
for Subsidiaries Four. The lease period is 20 years expiring October 2026. The
cost of the lease is being amortized over the lease term of 20 years.
Amortization expenses for the year 2009, 2008 and 2007 are $44,274, $43,514 and
$9,945, respectively. Amortization expenses for the nine months ended September
30, 2010 and 2009 is $33,318 and $33,203, respectively.
NOTE
10 - INTANGIBLE ASSETS
Intangible
assets consist of the following land use rights as of September 30, 2010 and
December 31, 2009:
|
September 30,
2010
|
December 31,
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Cost
of land use rights
|
1,124,128
|
1,101,506
|
||||||
|
Less:
accumulated amortization
|
20,610
|
3,670
|
||||||
|
Land
use rights, net
|
$
|
1,103,518
|
$
|
1,097,836
|
||||
Amortization
expense for the nine months ended September 30, 2010 was $16,569. Amortization
expense for the year ended December 31, 2009 is $3,670.
Amortization
expense for the next five years and thereafter is as follows:
|
2010
(for the remaining three months)
|
$
|
5,523
|
||
|
2011
|
22,092
|
|||
|
2012
|
22,092
|
|||
|
2013
|
22,092
|
|||
|
2014
|
22,092
|
|||
|
2015
|
22,092
|
|||
|
Thereafter
|
987,535
|
|||
|
Total
|
$
|
1,103,518
|
75
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
11 – SHORT TERM DEBT
In
September 2010, the Company entered into a 60-day debt agreement with a pawn
company. The principal amount of the debt is $748,500 (RMB 5,000,000). The debt
is collateralized by the Company’s land use rights and guaranteed by Wan,
Hongbin, shareholder, Zhang, Hongyu, former shareholder, and Liang, Yanfang,
accounting manager. Finance fee for the debt is at 3.5% per month. The short
term debt is amortized under the effective interest method and the principal
balance net of the unamortized discount at September 30, 2010 is $705,656. The
loan was paid off in November 2010.
NOTE
12 - RELATED PARTY TRANSACTIONS
Due from
related party consists of the following:
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Due
from Luo, Jianhua, Legal Representitive
|
$ | - | $ | 5,868 | $ | - | ||||||
|
Due
from Liu, Xiao, Director
|
$ | - | - | 179,894 | ||||||||
| - | $ | 5,868 | $ | 179,894 | ||||||||
Due to
related party consists of the following:
|
September 30,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Due
to Wan, Hongbing, Director
|
$ | 636,219 | $ | 4,231,403 | $ | 5,175,060 | ||||||
|
Due
to Liu, Xiao, Director
|
44,615 | 1,143,272 | $ | - | ||||||||
| $ | 680,834 | $ | 5,374,675 | 5,175,060 | ||||||||
Borrowings
from the directors were non-interest bearing, unsecured and have no set
repayment date.
NOTE
13 - SHAREHOLDERS’ EQUITY
As
stipulated by the relevant laws and regulations for enterprises operating in the
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company as decided by the
board of directors. The Company has allocated $591,173, $123,092, and $4,904
statutory reserve fund for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTE
14 - INCOME TAX
The
Company is incorporated in the BVI and conducts its primary business operations
through the Subsidiaries Four in the PRC. Under the current laws of the BVI, the
Company is not subject to tax on income or capital gains. Additionally, upon
payments of dividends by the Company to its shareholders, no BVI withholding tax
will be imposed.
Hong
Kong
Weixin HK
is incorporated in Hong Kong, China. Under the current Hong Kong Inland Revenue
Ordinance, the Company is subject to 16.5% income tax on its taxable income
generated from operations in Hong Kong. For the periods presented, provision for
Hong Kong tax has been made by the Company but insignificant as Weixin HK’s
operations have been limited since Weixin HK’s inception.
76
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
PRC
Companies
established in China are governed by the Income Tax Law of the PRC
concerning the private-run enterprises, which are generally subject to tax at a
statutory rate of 33% prior to January 1, 2008 and 25% afterwards on income
reported in the statutory financial statements after appropriate tax
adjustments.
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
The
provision for taxes on earnings consisted of:
|
September 30,
|
December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
Current
income taxes expenses:
|
||||||||||||||||||||
|
PRC
Enterprises Income Taxes
|
$ | 1,885,457 | $ | 1,353,887 | $ | 2,030,996 | $ | 441,337 | $ | 33,235 | ||||||||||
|
United
States Federal Income Taxes
|
-
|
- | - | - | - | |||||||||||||||
|
Total
|
$ | 1,885,457 | $ | 1,353,887 | $ | 2,030,996 | $ | 441,337 | $ | 33,235 | ||||||||||
There are
no significant permanent or temporary differences between book and tax
income.
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Company’s provision for income tax is as follows:
|
September 30,
|
December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
U.S.
statutory rate
|
34 | % | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||||
|
Foreign
income not recognized in the U.S.
|
-34 | % | -34 | % | -34 | % | -34 | % | -34 | % | ||||||||||
|
PRC
preferential enterprise income tax rate
|
25 | % | 25 | % | 25 | % | 25 | % | 33 | % | ||||||||||
|
Tax
holiday and relief granted to the Company
|
- | - | - | - | - | |||||||||||||||
|
Other
|
- | - | 1 | % | 1 | % | 21 | % | ||||||||||||
|
Provision
for income tax
|
25 | % | 25 | % | 26 | % | 26 | % | 54 | % | ||||||||||
Accounting for Uncertainty
in Income Taxes
The
Company accounts for uncertainty in income taxes in accordance with applicable
accounting standards, which prescribe a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. These accounting standards also
provide guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
77
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
15 - OPERATING LEASE
The
Company has entered into multiple rental agreements for the lease of office
premises. The Company’s commitments for minimum lease payments under these
non-cancelable operating leases for the next five years are as
follows:
|
Year
Ended December 31,
|
||||
|
2010
|
$ | 18,930 | ||
|
2011
|
13,026 | |||
|
2012
|
13,678 | |||
|
Total
|
$ | 45,634 | ||
Rent
expense was $16,124, $15,649, and $12,456 for the years ended December 31, 2009,
2008 and 2007, respectively. Rent expense was $14,405 and $13,213 for the nine
months ended September 30, 2010 and 2009, respectively.
NOTE
16 - OPERATING RISK
Country
risk
The
Company has significant operating risk in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Credit
risk
A
significant portion of the Company’s cash at September 30, 2010, December 31,
2009, 2008 and 2007 is maintained at various financial institutions in the PRC
which do not provide insurance for amounts on deposit. The Company
has not experienced any losses in such accounts and believes it is not exposed
to significant credit risk in this area.
Exchange
risk
The
Company cannot guarantee the Renminbi, and US dollar exchange rate will remain
steady. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
Concentration
risk
For the
nine months ended September 30, 2010, three customers had net sales exceeding
10% of the Company’s total sales for the year at 44%, 29%, and 12%,
respectively. For the year ended December 31, 2009, three customers had net
sales exceeding 10% of the Company’s total sales for the year at 42%, 31%, and
14%, respectively. For the year ended December 31, 2008, two customers had net
sales exceeding 10% of the Company’s total sales for the year at 63% and 29%,
respectively. For the
year ended December 31, 2007, one customer accounted for 100% of the sales of
the year.
For the
nine months ended September 30, 2010, three suppliers had net transactions
exceeding 10% of the Company’s total purchases for the year at 57%, 15% and 10%,
respectively. For the year ended December 31, 2009, four suppliers had net
transactions exceeding 10% of the Company’s total purchases for the year at 29%,
26%, 22%, and 21%, respectively. For the year ended December 31, 2008, two
suppliers had net transactions exceeding 10% of the Company’s total
purchases for the year at 53% and 40%, respectively. For the year ended
December 31, 2007, two suppliers had net transactions exceeding 10% of the
Company’s total purchases for the year at 89% and 11%,
respectively.
Lack of
Insurance
The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. As a result, the Company may incur uninsured liabilities and
losses as a result of the conduct of its business. There can be no guarantee
that the Company will be able to obtain additional insurance coverage in the
future, and even if it can obtain additional coverage, the Company may not carry
sufficient insurance coverage to satisfy potential claims. Should uninsured
losses occur, any purchasers of the Company’s common stock could lose their
entire investment.
78
Weixin
International Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 17 - SUBSEQUENT
EVENTS
On
November 12, 2010, the Company entered into a Share Exchange Agreement (the
“Exchange Agreement”) with SRKP 23, Inc. (“SRKP 23”), a Delaware corporation,
and the shareholders of Weixin BVI (“Weixin Shareholders”). Pursuant to the
Exchange Agreement, SRKP 23 agreed to issue an aggregate of 7,865,556 shares of
its common stock to the Weixin Shareholders in exchange for all of the issued
and outstanding securities of Weixin BVI (the “Share Exchange”). The
Share Exchange closed on November 23, 2010. Concurrently with the
closing of the Share Exchange, SRKP 23 consummated an initial closing of a
private placement of shares of SRKP23’s Common Stock (the “Private
Placement”). Pursuant to subscription agreements entered into with
the investors in the Private Placement, SRKP 23 sold an aggregate of 1,111,099
shares of Common Stock at $2.25 per share, for gross proceeds of approximately
$2.5 million. Prior to the closing of the Share Exchange and the initial closing
of the Private Placement, the stockholders of SRKP 23 agreed to cancel an
aggregate of 6,679,899 shares of common stock held by them. As a result of the
Share Exchange, the Company became SRKP 23’s wholly-owned subsidiary and the
former shareholders of the Company became controlling stockholders of SRKP
23. The transaction was accounted for as a reverse merger and
recapitalization whereby the Company is the accounting acquirer and SRKP 23 is
the acquired party.
79
(b)
Pro Forma Financial Statements.
Unaudited
Condensed Pro Forma Combined Financial Information
The
accompanying unaudited condensed pro forma combined financial information
consists of the combined balance sheets of China Wesen Recycling Technology,
Inc., formerly SRKP 23, Inc., a Delaware corporation (the “Company”) and Weixin
International Co., Ltd.. (“Weixin BVI”), which is formed under the laws of the
British Virgin Islands, as of September 30, 2010 and their combined statements
of operations for the nine months ended September 30, 2010 and for the year
ended December 31, 2009 as though the transactions therein described had
occurred on the balance sheet date and at the commencement of the periods
presented. The objective of this pro forma is to show what the significant
effects on historical financial information might have been had the herein
described transaction occurred at an earlier date.
On
November 12, 2010, the Company entered into a Share Exchange
Agreement with Weixin BVI, Wei Xin Holding Group Limited, a company
organized under the laws of Hong Kong and a wholly-owned subsidiary of Weixin
BVI (“Weixin HK”); Gangzhou Kelida Intelligent Equipment Co., Ltd., a company
organized under the laws of the People’s Republic of China and a wholly-owned
subsidiary of Weixin HK (“Kelida”); Zhaoqing Hua Su Plastic Trading Company
(“Hua Su”), Zhaoqing Chuang Yi Resources Recycle Co., Ltd. (“Chuang Yi”),
Zhaoqing Xin Ye Plastic Co., Ltd. (“Xin Ye”), and Zhaoqing Li Jun Craftwork Co.,
Ltd. (“Li Jun”), each a company organized under the laws of the People’s
Republic of China and a wholly-owned subsidiary of Kelida; and all of the
shareholders of Weixin BVI (collectively, the “Weixin
Shareholders”). Pursuant to the Share Exchange Agreement (the
“Agreement”), the Company agreed to issue 7,865,556 shares of its common stock
to the Weixin Shareholders and their designee, in exchange for all of the issued
and outstanding shares of Weixin BVI. In addition, the Company agreed
to cancel 6,679,899 shares of its common stock and warrants to purchase
7,804,803 shares of its common stock in connection with the transaction
contemplated byt the Agreement. The terms of the Agreement were consummated on
November 23, 2010.
The
condensed pro forma combined financial information presents historical financial
statements, pro forma adjustments and the pro forma results. The pro forma
statements of operations present continuing operations before nonrecurring
charges or credits directly attributable to the transaction contemplated
herein.
80
|
WEIXIN
INTERNATIONAL CO., LIMITED
|
|
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
|
|
SEPTEMBER
30, 2010
|
|
PRO - FORMA ADJUSTMENTS
|
||||||||||||||||||||||||
|
WEIXIN
INTERNATIONAL
CO., LIMITED
|
SRKP 23 INC.
|
SHARE ISSUANCE
AND CANCELLATION
|
RECAPITALIZATION
|
PRIVATE
PLACEMENT
|
PRO – FORMA
CONSOLIDATED
BALANCE SHEET
|
|||||||||||||||||||
|
|
Note
2 (a)
|
Note
2 (b)
|
Note
2 (c)
|
|||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 2,912,087 | $ | 19,776 | $ | 1,575 | $ | - | $ | 2,500,000 | $ | 5,433,438 | ||||||||||||
|
Accounts
receivable, net
|
3,302,566 | - | - | - | - | 3,302,566 | ||||||||||||||||||
|
Inventories
|
1,298,391 | - | - | - | - | 1,298,391 | ||||||||||||||||||
|
Advance
for inventory purchase
|
1,108,268 | - | - | - | - | 1,108,268 | ||||||||||||||||||
|
Note
receivable
|
526,570 | - | - | - | - | 526,570 | ||||||||||||||||||
|
Other
current assets
|
106,578 | - | - | - | - | 106,578 | ||||||||||||||||||
|
Total
current assets
|
9,254,460 | 19,776 | 1,575 | - | 2,500,000 | 11,775,811 | ||||||||||||||||||
|
Property
and equipment, net
|
2,857,965 | - | - | - | - | 2,857,965 | ||||||||||||||||||
|
Construction
in progress
|
1,970,319 | - | - | - | - | 1,970,319 | ||||||||||||||||||
|
Intangible
assets, net
|
1,103,518 | - | - | - | - | 1,103,518 | ||||||||||||||||||
|
Other
assets
|
768,560 | - | - | - | - | 768,560 | ||||||||||||||||||
|
Total
Assets
|
$ | 15,954,822 | $ | 19,776 | $ | 1,575 | $ | - | $ | 2,500,000 | $ | 18,476,173 | ||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||||||
|
Accounts
payable - trade
|
$ | 1,075,420 | $ | - | $ | - | $ | - | $ | - | $ | 1,075,420 | ||||||||||||
|
Accrued
liabilities
|
57,063 | - | - | - | - | 57,063 | ||||||||||||||||||
|
Taxes
payable
|
564,379 | - | - | - | - | 564,379 | ||||||||||||||||||
|
Short
term debt
|
705,656 | - | - | - | - | 705,656 | ||||||||||||||||||
|
Due
to related parties
|
680,834 | 122,500 | - | - | - | 803,334 | ||||||||||||||||||
|
Total
current liabilities
|
3,083,352 | 122,500 | - | - | - | 3,205,852 | ||||||||||||||||||
|
Stockholders'
equity
|
||||||||||||||||||||||||
|
Common
stock
|
10,000 | 710 | (519 | ) | (9,214 | ) | 111 | 1,088 | ||||||||||||||||
|
Additional
paid-in capital
|
519,283 | 6,790 | 2,094 | (101,010 | ) | 2,499,889 | 2,927,046 | |||||||||||||||||
|
Accumulated
other comprehensive income
|
215,713 | - | - | - | - | 215,713 | ||||||||||||||||||
|
Statutory
reserve
|
719,169 | - | - | - | - | 719,169 | ||||||||||||||||||
|
Retained
earnings
|
11,407,305 | (110,224 | ) | - | 110,224 | - | 11,407,305 | |||||||||||||||||
|
Total
stockholders' equity
|
12,871,470 | (102,724 | ) | 1,575 | - | 2,500,000 | 15,270,321 | |||||||||||||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 15,954,822 | $ | 19,776 | $ | 1,575 | $ | - | $ | 2,500,000 | $ | 18,476,173 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
81
|
WEIXIN
INTERNATIONAL CO., LIMITED
|
||||||||||||
|
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
||||||||||||
|
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010
|
|
WEIXIN
|
PRO-FORMA
|
|||||||||||||||
|
INTERNATIONAL
|
CONSOLIDATED
|
|||||||||||||||
|
CO.,
|
PRO-FORMA
|
STATEMENT OF
|
||||||||||||||
|
LIMITED
|
SRKP 23 INC.
|
ADJUSTMENTS
|
OPERATIONS
|
|||||||||||||
|
Revenue
|
$ | 21,971,844 | $ | - | $ | - | $ | 21,971,844 | ||||||||
|
Cost
of revenue
|
13,788,072 | - | - | 13,788,072 | ||||||||||||
|
Gross
profit
|
8,183,772 | - | - | 8,183,772 | ||||||||||||
|
Operating
expenses
|
743,188 | 26,540 | - | 769,728 | ||||||||||||
|
Income
from operations
|
7,440,584 | (26,540 | ) | - | 7,414,044 | |||||||||||
|
Other
income (expenses), net
|
(38,529 | ) | - | - | (38,529 | ) | ||||||||||
|
Income
before income taxes
|
7,402,055 | (26,540 | ) | - | 7,375,515 | |||||||||||
|
Income
taxes
|
1,885,457 | - | - | 1,885,457 | ||||||||||||
|
Net
income (loss)
|
$ | 5,516,598 | $ | (26,540 | ) | $ | - | $ | 5,490,058 | |||||||
|
Other
comprehensive income
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
172,929 | N/A | - | 172,929 | ||||||||||||
|
Comprehensive
income
|
$ | 5,689,527 | $ | N/A | $ | - | $ | 5,662,987 | ||||||||
|
Net
income (loss) per share – basic
|
$ | 551.66 | $ | (0.00 | ) | $ | - | $ | 0.50 | |||||||
|
Weighted
average shares outstanding – basic
|
10,000 | 7,096,390 | - | 10,884,110 | ||||||||||||
|
Net
income (loss) per share – diluted
|
$ | 551.66 | $ | (0.00 | ) | $ | - | $ | 0.47 | |||||||
|
Weighted
average shares outstanding – diluted
|
10,000 | 7,096,390 | - | 11,666,655 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
82
|
WEIXIN
INTERNATIONAL CO., LIMITED
|
||||||||||||
|
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
||||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31, 2009
|
|
WEIXIN
INTERNATIONAL
CO.,
|
PRO-FORMA
|
PRO-FORMA
CONSOLIDATED
STATEMENT OF
|
||||||||||||||
|
LIMITED
|
SRKP 23 INC.
|
ADJUSTMENTS
|
OPERATIONS
|
|||||||||||||
|
Revenue
|
$ | 26,151,437 | $ | - | $ | - | $ | 26,151,437 | ||||||||
|
Cost
of revenue
|
17,516,014 | - | - | 17,516,014 | ||||||||||||
|
Gross
profit
|
8,635,423 | - | - | 8,635,423 | ||||||||||||
|
Operating
expenses
|
702,036 | 32,273 | - | 734,309 | ||||||||||||
|
Income
from operations
|
7,933,387 | (32,273 | ) | - | 7,901,114 | |||||||||||
|
Other
income (expenses), net
|
(26,306 | ) | - | - | (26,306 | ) | ||||||||||
|
Income
before income taxes
|
7,907,081 | (32,273 | ) | - | 7,874,808 | |||||||||||
|
Income
taxes
|
2,030,996 | - | - | 2,030,996 | ||||||||||||
|
Net
income (loss)
|
$ | 5,876,085 | $ | (32,273 | ) | $ | - | $ | 5,843,812 | |||||||
|
Other
comprehensive income
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
(39,405 | ) | N/A | - | (39,405 | ) | ||||||||||
|
Comprehensive
income
|
$ | 5,836,680 | $ | N/A | $ | - | $ | 5,804,407 | ||||||||
|
Net
income (loss) per share – basic
|
$ | 587.61 | $ | (0.00 | ) | $ | - | $ | 0.54 | |||||||
|
Weighted
average shares outstanding – basic
|
10,000 | 7,096,390 | - | 10,884,110 | ||||||||||||
|
Net
income (loss) per share – diluted
|
$ | 587.61 | $ | (0.00 | ) | $ | - | $ | 0.50 | |||||||
|
Weighted
average shares outstanding – diluted
|
10,000 | 7,096,390 | - | 11,666,655 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
83
NOTES
TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 – BASIS OF PRESENTATION
On
November 12, 2010, Weixin International Co., Ltd. (the “Company”), completed a
reverse acquisition transaction through a share exchange with SRKP 23 Inc.
(“SRKP 23”), whereby SRKP 23 acquired 100% of the issued and outstanding capital
stock of the Company in exchange for 7,865,556 shares of Common Stock of SRKP
23. Concurrently with the closing of the Share Exchange, the Company closed a
private placement of shares of the Company’s Common Stock (the “Private
Placement”). Pursuant to subscription agreements entered into with
the investors in the Private Placement, the Company sold an aggregate of
1,111,099 shares of Common Stock at $2.25 per share, for gross proceeds of
approximately $2.5 million. Prior to the closing of the Share Exchange and the
closing of the Private Placement, the SRKP 23 Stockholders agreed to the
cancellation of an aggregate of 6,679,899 shares held by them. As a result of
the reverse acquisition, the Company became SRKP 23’s wholly-owned subsidiary
and the former shareholders of the Company became controlling stockholders of
SRKP 23. The share exchange transaction with SRKP 23 was treated as a
reverse acquisition, with the Company as the accounting acquirer and SRKP 23 as
the acquired party.
Consequently,
the assets and liabilities and the historical operations that will be reflected
in the consolidated financial statements for periods prior to the Share Exchange
Agreement will be those of the Company and will be recorded at the historical
cost basis. After the completion of the Share Exchange Agreement, the
Company’s consolidated financial statements will include the assets and
liabilities of the Company and SRKP 23, the historical operations of the Company
and the operations of SRKP 23 from the closing date of the Share Exchange
Agreement.
These pro
forma consolidated financial statements are prepared assuming the above
transaction occurred on September 30, 2010 (as to the balance sheet) and on
January 1, 2009 and 2010, respectively (as to the income
statements).
Audited
financial statements of the Company and SRKP 23 have been used in the
preparation of these pro forma consolidated financial statements. These pro
forma consolidated financial statements should be read in conjunction with the
historical financial statements of SRKP 23 and the Company.
Note
2 – PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
|
(a)
|
To
reflect the issuance of 1,490,964 Common Shares at $1,050, warrants to
purchase 1,490,958 Common Shares at $525 and the cancellation of 6,679,899
Common Shares prior to the Share
Exchange.
|
|
(b)
|
To
reflect the issuance of Common Shares per the Share Exchange Agreement and
to eliminate the equity of the accounting acquiree, SRKP 23, and to
reflect the recapitalization of the common stock and additional paid in
capital of the Company as a result of the reverse
merger.
|
|
(c)
|
To
reflect the issuance of 1,111,099 Common Shares, $0.0001 par value per
share, at $2.25 per share, for gross proceeds of approximately $2.5
million at the Private Placement.
|
84
|
(d)
|
Exhibits.
|
|
Exhibit
No.
|
Exhibit
Description
|
|
|
2.1
|
Share
Exchange Agreement dated November 12, 2010, by and among the Registrant,
Weixin International Co., Limited, Wei Xin Holding Group Limited, Gangzhou
Kelida Intelligent Equipment Co., Ltd., Zhaoqing Hua Su Plastic Trading
Company, Zhaoqing Chuang Yi Resources Recycle Co., Ltd., Zhaoqing Xin Ye
Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co., Ltd. and the
shareholders of Weixin International Co., Limited.
|
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53019) filed with
the Securities and Exchange Commission on January 16,
2008).
|
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53019) filed with the Securities and
Exchange Commission on January 16, 2008).
|
|
|
3.3*
|
Certificate
of Ownership and Merger effecting name change filed with the Office of
Secretary of State of Delaware on November 24, 2010.
|
|
|
4.1
|
Form of
Warrant (incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form 10-SB (File No. 000-53019) filed with the
Securities and Exchange Commission on January 16,
2008).
|
|
|
4.2
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Quarterly
Report on Form 10-Q (File No. 000-53019) filed with the Securities and
Exchange Commission on November 8, 2010).
|
|
|
10.1*
|
Share
and Warrant Cancellation Agreement dated November 12, 2010 entered into by
and between the Registrant and certain stockholders of the
Registrant.
|
|
|
10.2*
|
Registration
Rights Agreement dated November 23, 2010 entered into by and between the
Registrant, Weixin International Co., Limited and certain stockholders of
the Registrant.
|
|
|
10.3*
|
Land
Tenancy Contract executed September 25, 2007 by and among Dinghu District
Guicheng Office Longyi Residents’ Committee Team No. 15 and Zhaoqing Hua
Su Plastic Trading Company, Zhaoqing Chuang Yi Resources Recycle Co.,
Ltd., Zhaoqing Xin Ye Plastic Co., Ltd., Zhaoqing Li Jun Craftwork Co.,
Ltd. (translated to English).
|
|
|
10.4*
|
Transfer
Contract for State-Owned Construction Land Use Right dated November 12,
2007 by and between the Bureau of Land Resources and Housing Management
Guangzhou Municipality and Gangzhou Kelida Intelligent Equipment Co., Ltd.
(translated to English).
|
|
|
10.5
|
Sold
Note, Bought Note and Instrument of Transfer by and between Wan Hongbing
and Weixin International Co., Limited.
|
|
|
10.6
|
Form
of Share Transfer Contract by and between Gangzhou Kelida Intelligent
Equipment Co., Ltd. and the persons and the related companies listed on
Schedule A (translated to English).
|
|
|
10.7
|
Form
of Master Agreement by and between Canvas Valley LLC and the companies
listed on Schedule A.
|
|
|
10.8
|
Form
of Master Agreement by and between Global Green Lands LLC and the
companies listed on Schedule A.
|
|
|
10.9
|
Master
Agreement by and between Zhaoqing Hua Su Plastic Trading Company and
Tonghe Environmental Holdings Ltd. dated January 5,
2009.
|
|
| 10.10 |
Placement Agency Agreement dated
as of November 23, 2010 by and among the Company, Weixin
International Co., Limited and WestPark Capital,
Inc.
|
|
| 10.11 |
Form of Purchasing Contracts with
suppliers.
|
|
|
16.1
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated February 1,
2011.
|
|
|
21.1*
|
List
of Subsidiaries.
|
*
Previously filed.
85
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.
|
China
Wesen Recycling Technology, Inc.
|
||
|
Date:
January 31, 2011
|
||
|
By:
|
/s/ Xiao Liu
|
|
|
Name:
|
Xiao
Liu
|
|
|
Title:
|
Chief
Executive Officer
|
|
86