Attached files
file | filename |
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EX-5.1 - PERPETUAL TECHNOLOGIES, INC. | v212027_ex5-1.htm |
EX-23.2 - PERPETUAL TECHNOLOGIES, INC. | v212027_ex23-2.htm |
EX-23.3 - PERPETUAL TECHNOLOGIES, INC. | v212027_ex23-3.htm |
As
filed with the Securities and Exchange Commission on February 18,
2011
Registration No.
333-168028
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 6 TO
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
CHINA
SLP FILTRATION TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
6770
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84-1465393
|
||
(State or Other Jurisdiction of
|
(Primary Standard Industrial
|
(I.R.S.
Employer
|
||
Incorporation or Organization)
|
Classification Code Number)
|
Identification Number)
|
Shishan
Industrial Park
Nanhai
District
Foshan
City
Guangdong
Province, PRC
86-757-86683197
(Address,
including zip code, and telephone number including area code,
of
registrant’s principal executive offices)
Vcorp
Services, LLC
1811
Silverside Road
Wilmington,
Delaware 19801
(888)
528-2677
(Name,
address, including zip code, and telephone number including area
code, of
agent for service)
Copies
to:
Louis
A. Bevilacqua, Esq.
|
||
Darren
Ofsink, Esq.
|
Joseph
R. Tiano, Esq.
|
|
Guzov
Ofsink, LLC
|
Jing
Zhang, Esq.
|
|
900
Third Avenue, 5th Floor
|
Pillsbury
Winthrop Shaw
|
|
Pittman
LLP
|
||
New
York NY 10022
|
2300
N Street, NW
|
|
Tel:
(212) 371-8008
|
Washington,
DC 20037
|
|
Fax:
(212) 688-7273
|
Telephone
(202) 663-8000
|
|
Facsimile
(202) 663-8007
|
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company x
|
CALCULATION OF REGISTRATION FEE
|
||||||||
Title of Each Class of Securities to Be
Registered
|
Proposed Maximum
Aggregate
Offering Price(1)(2)(3)
|
Amount of
Registration
Fee
|
||||||
Common stock, $0.001
par value per share (4)
|
$ | 35,760,019 | (4) | $ | 2,550 | (5) | ||
Underwriter’s
warrants and underlying shares of common stock (6)
|
1,822,917 | (7) | 151 | (8) | ||||
Total
|
$ | 2,701 | (9) |
|
(1)
|
Estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(o). In accordance
with Rule 457(g) under the Securities Act, because the shares of our
common stock underlying the Underwriter’s Warrants (as defined below) are
registered hereby, no separate registration fee is required with respect
to the warrants registered
hereby.
|
|
(2)
|
In accordance with Rule 416(a),
the registrant is also registering hereunder an indeterminate number of
additional shares of common stock that may be issued and resold pursuant
to stock splits, stock dividends, anti-dilution provisions, including the
anti-dilution provisions under the Underwriter’s Warrants (as defined
below), and similar
transactions.
|
|
(3)
|
The registration fee for
securities to be offered by us is based on an estimate of the Proposed
Maximum Aggregate Offering Price of the securities, and such estimate is
solely for the purpose of calculating the registration fee pursuant to
Rule 457(o).
|
|
(4)
|
We
are registering the following shares of common stock: (i)
4,166,667 shares are being registered in connection with the firm
commitment offering; (ii) 625,000 shares are being registered for issuance
in connection with the underwriter’s over-allotment option and (iii)
369,725 shares being registered under a separate resale prospectus (the
“Resale Prospectus”) for resale by the selling stockholders named in the
Resale Prospectus.
|
The
proposed maximum aggregate offering price for these shares has been calculated
as follows:
4,166,667
X $7
|
(the
maximum offering price for these shares)
|
=
|
$29,166,669
|
625,000
X $7
|
(the
maximum offering price for these shares)
|
=
|
4,375,000
|
369,725
X $6
|
(the
fixed resale price for these shares)
|
=
|
2,218,350
|
Total
|
$35,760,019
|
|
(5)
|
The
amount of the registration fee for these shares was calculated by
multiplying $35,760,019 by .0000713 for an amount of
$2,550.
|
|
(6)
|
We have agreed to issue
warrants to the underwriters (the “Underwriter’s Warrants”) for
nominal consideration. The exercise price of the Underwriter’s
Warrants is equal to 125% of the price of the common stock offered
hereby. The resale of the Underwriter’s Warrants is registered
hereunder. The Underwriter’s Warrants will be exercisable for four years
commencing one year from the effective date of the registration statement
and will therefore cease to be exercisable five years after the effective
date of the registration statement. The shares of our common stock
underlying the Underwriter’s Warrants are deemed to have the same issuance
date as the warrants and are being registered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, as amended.
See
“Underwriting.”
|
|
(7)
|
The
proposed maximum aggregate offering price for the underwriter’s warrant is
$1,822,917, which equals 125% of $1,458,333. $1,458,333
represents 5% of $29,166,669 (which represents the offering of 4,166,667
shares of common stock at a proposed maximum offering price of $7 per
share).
|
|
(8)
|
We
have calculated the registration fee by multiplying $1,358,696 (the
maximum aggregate offering price included in the calculation of the
registration fee for our previous filing) by .0000713 which amount comes
to $97. The registration fee for the increase of $464,221
($1,822,917 less $1,358,696) in the proposed maximum aggregate price has
been multiplied by .0001161 for a total of $54. Accordingly,
the total comes to $151.
|
(9) | Previously paid. |
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
Explanatory
Note
This
Registration Statement includes two forms of prospectus as set forth
below:
|
·
|
Prospectus. The first prospectus
relates to an underwritten offering of shares of common stock by China SLP
Filtration Technology, Inc. through the underwriter named on the cover
page of the prospectus.
|
|
·
|
Resale
Prospectus. The
second prospectus relates to the resale of 369,725 shares of common stock
by the selling stockholders named therein. These shares will
be offered and sold at a fixed price of $6 until our common stock becomes
quoted on the Over-the-Counter Bulletin Board or listed on an
exchange.
|
None of
the underwriters named or referenced in the prospectus is participating or
acting as underwriter, dealer or broker in connection with the sale of the
shares to be sold pursuant to the resale prospectus.
The
resale prospectus and the prospectus are substantively identical, except for the
following principal differences:
|
·
|
each contains different outside
and inside front covers;
|
|
·
|
each contains different
“Offering” sections in the “Prospectus Summary” section beginning on page
1 for the prospectus and page A-1 for the resale
prospectus;
|
|
·
|
each contains different “Use
of Proceeds” sections on page 25 for the prospectus and Page A-26 for
the resale prospectus.
|
|
·
|
the “Capitalization” and
“Dilution” sections on pages 27 and 28, respectively, of the
prospectus are deleted from the resale
prospectus;
|
|
·
|
a “Selling Stockholder”
section is included in the resale prospectus beginning on page
A-27;
|
|
·
|
references to the prospectus will
be replaced in the resale prospectus with references to the resale
prospectus;
|
|
·
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the “Underwriting” section in
the prospectus beginning on page 98 is deleted from the resale
prospectus and a “Plan of Distribution” is inserted in its place on page
A-97.
|
|
·
|
the “Legal Matters” section in
the resale prospectus on page A-103 deletes the reference to counsel
for the underwriters; and
|
|
·
|
the outside back cover of the
prospectus is deleted from the resale
prospectus.
|
The
registrant has included in this registration statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
resale prospectus as compared to the prospectus.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject
to Completion, Dated February 18, 2011
4,166,667
Shares
CHINA SLP FILTRATION
TECHNOLOGY, INC.
Common
Stock
This
is our initial public offering. We are offering 4,166,667
shares of our common stock. No public market currently exists for our common
stock.
We currently
anticipate the public offering price of our common stock will be between $5.00
and $7.00 per share.
We have
applied to have our common stock listed on the NASDAQ Capital Market under the
symbol “SLPC.”
Investing
in our common stock involves a high degree of risk. See the section entitled
“Risk Factors” beginning on page 6.
|
Per Share
|
Total
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|||||
Public
offering price
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$
|
|
$
|
|
|||
Underwriting
discount
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$
|
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$
|
|
|||
Proceeds,
before expenses, to us
|
$
|
|
$
|
|
We have
granted the underwriters a 45-day option to purchase up to 625,000 additional
shares of common stock from us at the initial public offering price less the
underwriting discount and commission.
In
connection with this offering, we have agreed to issue to the underwriters a
warrant to purchase up to 5% of the shares sold pursuant to the offering
(excluding the over-allotment) at $ per share (125% of the price of the
shares sold in the offering), which may be exercised on the
first anniversary of the date of this prospectus and expiring four years
after such anniversary.
Under the
terms of a consulting agreement between us and United Best Investment
Limited, a Hong Kong company controlled by Li Jun, one of our directors, on the
closing of this offering United Best shall receive a fee of $
, which represents 3% of the gross proceeds of this offering.
Delivery
of our shares will be made on or about , 2011.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Brean
Murray, Carret & Co.
The
date of this prospectus is ,
2011
TABLE
OF CONTENTS
Prospectus
Summary
|
1
|
Risk
Factors
|
6
|
Caution
Regarding Forward Looking Statements and Other Information Contained in
this Prospectus
|
25
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Use
of Proceeds
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25
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Determination
of Offering Price
|
25
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Dividend
Policy
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26
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Exchange
Rate Information
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26
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Capitalization
|
27
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Dilution
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28
|
Market
Price of our Common Stock and Related Stockholder
Matters
|
29
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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31
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Our
Corporate History
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43
|
Business
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47
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Additional
Disclosure Regarding Conversion of Notes and Exercise of
Warrants
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63
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Management
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72 |
Shares
Eligible for Future Sale
|
78
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Executive
Compensation
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79
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Certain
Relationships and Related Transactions
|
83
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Security
Ownership of Certain Beneficial Owners and Management
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85 |
Description
of Securities
|
88
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Material
United States Federal Income Tax Considerations
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91
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Material
PRC Income Tax Considerations
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95
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Underwriting
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98
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Legal
Matters
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104
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Service
of Process and Enforcement of Judgments
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104
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Experts
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104
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Where
You Can Find More Information
|
104
|
Index
to Financial Statements
|
F-1
|
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with additional or different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted.
This
prospectus includes market size, market share and industry data that we have
obtained from market research, publicly available information and various
industry publications. The third party sources from which we have obtained
information generally state that the information contained therein has been
obtained from sources believed to be reliable. We have not independently
verified any of the data from third party sources nor have we verified the
underlying economic assumptions relied upon by those third parties. Similarly,
industry forecasts and market research, which we believe to be reliable based
upon management’s knowledge of the industry, have not been verified by any
independent sources.
PROSPECTUS
SUMMARY
This summary highlights selected
information contained elsewhere in this prospectus. This summary does not
contain all the information that you should consider before deciding to invest
in our common stock. You should read the entire prospectus carefully, including
“Risk Factors” beginning on page 6 and our consolidated financial
statements and notes to those consolidated financial statements, before making
an investment decision. Unless otherwise indicated, all share amounts and prices
described in this prospectus have been adjusted to reflect a 1-for-5
reverse stock split of our common stock effected on March 24,
2010.
References
in this prospectus to “China SLP Filtration,” “the Company,” “we,” “us” or “our”
refer to China SLP Filtration Technology, Inc. and its consolidated
subsidiaries, unless the context requires otherwise.
Our
Company
We are a
manufacturer of nonwoven fabrics in China. Nonwoven fabrics, or nonwovens,
are synthetic fabrics, such as felt and polyester, which are neither woven
nor knitted, but instead are made from long fibers, bonded together by
chemical, mechanical, heat or solvent treatment.
We
currently manufacture two types of PET nonwoven fabrics which are used in a wide
range of products, including filtration products, road construction materials,
home furnishings, automobile interior insulation and industrial packaging.
Our current PET products are sold primarily to PRC-based manufacturers
which use our products as raw material components for end-products they sell to
their customers operating in the heavy industrial, automotive, construction and
home furnishing industries.
We
recently developed a process to manufacture PPS nonwoven fabric, which is the
key product line around which our long-term growth strategy is centered.
We believe that this manufacturing process is proprietary and have applied for a
process patent in the PRC and intend to apply for a process patent in the U.S.
and Europe. PPS nonwoven fabric is a heat resistant, corrosion-proof and
flame retardant fabric, and can be used to manufacture dust filter bags for
pollutant dust removal and emissions controls in coal-fired power plants,
garbage incinerators and cement factories.
The PRC
government recently adopted stringent environmental regulations governing the
discharge of carbon and other emissions by coal-fired power plants and other
heavy industrial plants. Under these new regulations, which came into
effect on January 1, 2010, pollutant emissions cannot exceed 50 milligrams per
cubic meter. We believe, based on an article published in China Nonwoven & Industrial
Textile (CNIT) in 2010, that less than 10% of the coal-fired
boilers in China were equipped with dust removal filtration bags and less than
10% of the bag filters in use were made from PPS fiber.
Bag
filters can be used as a cost effective way of meeting the new emission and dust
pollutant standards in the PRC because the installation of bag filters
is significantly cheaper than installing costly pollutant dust removal
equipment, such as engineered scrubbing systems, which we believe could be cost
prohibitive for smaller plant operators.
Based on
lab tests which we conducted internally, we believe that our PPS nonwoven fabric
is superior to other currently available high temperature filtration material
because it is lighter, thicker, stronger, has higher air permeability and
filtration efficiency and is significantly cheaper to produce. Due to
the superior characteristics of our PPS product coupled with the demand created
by these new regulations, we believe that our PPS material will become a market
leader for high temperature filtration applications.
We intend
to continue to manufacture PET nonwovens, but we expect the sales of our PPS
nonwoven fabrics to ultimately eclipse the sales of our existing PET nonwoven
products and become our main product offering.
1
Our
Growth Strategy
Our
growth strategy is as follows:
|
·
|
We plan to commence production of
PPS nonwovens in the early part of 2011 for sale to PRC-based operators of
coal-fired power plants, garbage incinerators and other manufacturers that
are not in compliance with new PRC environmental
regulations;
|
|
·
|
We plan to expand our PPS
nonwoven manufacturing facilities and install three new production lines
to manufacture PPS nonwoven material, increasing our total annual
manufacturing capacity from 8,000 tons to 11,600 tons of nonwoven
material; and
|
|
·
|
We intend to capitalize on our
proprietary technology by developing and commercializing our nonwoven
products for use in numerous
applications.
|
Our
Competitive Strengths
We
believe our competitive strengths are as follows:
|
·
|
We offer high quality PET
products with lower production and operational costs than products offered
by our competitors;
|
|
·
|
Bag filters made of our PPS
material offer plant operators a cost effective alternative to meet new
emission and dust pollutant standards in the PRC because using PPS bag
filters is significantly cheaper than installing pollutant dust
removal equipment;
|
|
·
|
We believe, based on laboratory
tests which we conducted internally, that our PPS material is superior to
other high temperature filtration material currently available for use in
bag filters because it is lighter, thicker, stronger, has higher air
permeability and filtration efficiency, and is significantly cheaper
to produce;
|
|
·
|
We can offer our products at
attractive pricing points because our PPS fabric, which like alternative
products is priced according to weight, is lighter than alternative
products; and
|
|
·
|
We believe that our proprietary
manufacturing processes give us a competitive advantage over our
competitors and act as a barrier to
entry.
|
Risk
Factors
The
implementation of our growth strategy and our ability to grow based on our
competitive strengths remain subject to a variety of external and internal
challenges. Accordingly, investing in our common stock involves significant
risks. Some of the challenges and risks we face are listed below:
|
·
|
We need to raise capital to fully
commercialize our PPS manufacturing process and cannot grow and execute
our strategic plan if we fail to do
so.
|
|
·
|
We have a limited operating
history and no experience manufacturing PPS nonwoven fabric so it is
difficult to evaluate our future prospects and historical results of
operations.
|
|
·
|
Our success depends in part on
market acceptance of our PPS nonwoven fabric as a preferred material for
use in dust filter bags.
|
|
·
|
If we have miscalculated the
future demand for our products, we may wind up unnecessarily spending a
significant amount of funds on the expansion of our PPS manufacturing
facilities.
|
|
·
|
We are subject to risks of
conducting business in
China.
|
|
·
|
We have significant outstanding
short-term borrowings and we may not be able to obtain extensions when
this debt matures.
|
|
·
|
Enforcement against us or our
directors and officers may be difficult and investors could be unable to
collect amounts due in the event we or any of our directors or officers
violates applicable law.
|
2
|
·
|
Our executive officers and
directors beneficially own a significant portion of our common stock and
may take actions that are contrary to an investor's interests and could
reduce the value of our
stock.
|
|
·
|
We are a “controlled company” as
such term is defined under the Nasdaq Marketplace Rules and our board of
directors does not and will not have a majority of independent directors.
Accordingly, the Company will lack the checks and balances that an
independent Board can bring to management’s decision making
process.
|
You
should carefully consider the risks described in “Risk Factors” beginning on
page 6 before making a decision to invest in our common stock. If any of
these risks actually occurs, our business, financial condition or results of
operations would likely be materially adversely affected. In such case, the
trading price of our common stock would likely decline, and you may lose all or
part of your investment.
Our
Industry
The
nonwoven fabric industry in the PRC is large and growing, driven primarily by
China’s continued economic development. China has experienced rapid economic and
industrial growth in the past 30 years. China’s output of iron and steel,
cement, coal, fertilizer and power generation all currently rank as first or
second in the world (Source:
US Department of Commerce and US Department of the Interior). China’s
consumption of raw materials currently ranks second in the world (Source: Report from the EIA Energy
Information Administration). Due to outdated technology and equipment in
China’s chemical, raw materials and energy industries, China has encountered
problems of inefficient utilization of energy and resources, as well as heavy
pollution due to accelerated urbanization. Reducing emission pollution has been
a focus for the Chinese Central Government for several years and is expected to
remain a focus moving forward. As China’s government imposes stricter policies
on environmental protection, industrial gas and dust emission limits have become
stricter. We believe this creates a significant market opportunity for the
commercialization of our PPS nonwovens materials.
Corporate
Information
Our
executive offices are located at Shishan Industrial Park, Nanhai District,
Foshan City, Guangdong Province, People’s Republic of China, or PRC, and
our telephone number is +86-757-86683197. Our website address is www.silepu.com
and the information contained therein or connected thereto shall not be deemed
to be incorporated into this prospectus or the registration statement of which
it forms a part.
3
The
Offering
Common
stock offered by us
|
4,166,667 shares
(4,791,667 shares if the representative of the underwriters
exercises its over-allotment option in full).
|
|
Common
stock outstanding immediately after this offering
|
21,814,562 shares,
including (i) 15,265,714 shares of common stock currently outstanding,
(ii) 1,923,809 shares issuable on conversion of the notes in the aggregate
principal amount of $4,040,000, (iii) 4,166,667 shares to be issued in the
offering, and (iv) 193,186 shares to be issued to United Best and 265,186
shares to be issued to Primary Capital on the closing of the
offering.
|
|
Use
of proceeds
|
We
intend to use the net proceeds from this offering (i) to repay a
short term loan in the amount of $3.9 million which was used as part of
the purchase price of approximately $9.6 million for the build-out and
purchase of a new production line to manufacture PPS materials which is
currently being installed and is expected to be completed in February
2011; and (ii) to purchase two additional production lines to
manufacture PPS materials. The balance of the net proceeds is
expected to be used for working capital and general corporate
purposes. See “Use of Proceeds” on page 25 for more
information.
|
|
Over-allotment
option
|
We
have granted the underwriters an option, exercisable for 45 days after the
date of this prospectus, to purchase up to an additional 625,000 shares of
common stock to cover over-allotments.
|
|
Listing
|
We
have applied to have our common stock listed on the NASDAQ Capital
Market.
|
|
Lock-up
Agreement
|
We
and each of our directors, executive officers and certain principal
stockholders have agreed, subject to certain exceptions, not to, including
not to announce an intention to, for a period of 90 days from the
date of this prospectus, sell, transfer or otherwise dispose of any shares
of our common stock without the prior written consent of the underwriters’
representative. See “Underwriting.”
|
|
Risk
factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 6.
|
4
Summary
Consolidated Financial Information
In the
table below we provide you with historical consolidated financial data for the
fiscal years ended September 30, 2010 and 2009 and the three month periods ended
December 31, 2010 and 2009, derived from our audited and unaudited consolidated
financial statements included elsewhere in this prospectus. Historical
results are not necessarily indicative of the results that may be expected for
any future period. When you read this historical summary consolidated financial
data, it is important that you read it along with the appropriate historical
consolidated financial statements and related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included
elsewhere in this prospectus.
Three Months Ended
December 31,
(unaudited)
|
Fiscal Years Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Statement
of Operations Data:
|
||||||||||||||||
Net
sales
|
$ | 5,780,973 | $ | 5,224,961 | $ | 19,952,422 | $ | 11,849,712 | ||||||||
Cost
of sales
|
4,223,562 | 3,611,088 | 13,772,843 | 7,296,327 | ||||||||||||
Cost
of sales related party
|
- | - | - | 610,287 | ||||||||||||
Gross
profit
|
1,557,411 | 1,613,873 | 6,179,579 | 3,943,098 | ||||||||||||
Total
operating expenses
|
812,636 | 274,023 | 2,272,881 | 1,230,611 | ||||||||||||
Operating
income
|
744,775 | 1,339,850 | 3,906,698 | 2,712,487 | ||||||||||||
Total
other income (expenses)
|
(598,685 | ) | (58,791 | ) | (1,661,598 | ) | (266,835 | ) | ||||||||
Income
before income taxes
|
146,090 | 1,281,059 | 2,245,100 | 2,445,652 | ||||||||||||
Income tax provision | 88,618 | - | 24,023 | - | ||||||||||||
Net
income
|
$ | 57,472 | $ | 1,281,059 | $ | 2,221,077 | $ | 2,445,652 | ||||||||
Net
income per common share, basic
and diluted
|
$ | 0.00 | $ | 0.09 | $ | 0.15 | $ | 0.17 | ||||||||
Pro
forma net income (loss) per common share,
basic
and diluted
|
$ |
0.03
|
$ | 0.09 | * | $ | 0.02 | N/A | ||||||||
Basic
shares outstanding
|
15,265,714 | 14,510,204 | 14,979,390 | 14,510,204 | ||||||||||||
Diluted
shares outstanding
|
17,189,523 | 14,510,204 | 16,227,061 | 14,510,204 |
*The
pro forma net income (loss) per common share for the three months ended December
31, 2009 is the actual net income (loss) per common share as there was no
convertible notes transaction being recorded for the period.
Balance Sheet Data:
|
As of
December 31,
2010
(unaudited)
|
As of
December
31, 2010
Pro Forma
(unaudited) (1)
|
As of
December 31, 2010
Pro Forma
As adjusted
(unaudited)
(2)
|
|||||||||
Current
assets
|
$ | 12,315,773 | $ | 12,215,773 | $ | 30,315,773 | ||||||
Total
assets
|
29,161,692 | 29,061,692 | 47,161,692 | |||||||||
Current
liabilities
|
11,569,672 | 7,186,765 | 3,286,765 | |||||||||
Long-term
debt
|
- | - | - | |||||||||
Total
liabilities
|
11,569,672 | 7,186,765 | 3,286,765 | |||||||||
Total
stockholders’ equity
|
17,592,020 | 21,874,927 | 43,874,927 |
(1) Pro forma information assumes conversion of the convertible notes into common stock on December 31, 2010 and the repayment of the convertible notes in the aggregate principal amount of $100,000 of with cash.
(2) Pro
forma as adjusted amounts represent December 31, 2010 amounts
adjusted to reflect (i) the conversion of our outstanding convertible notes in
the aggregate principal amount of $4,040,000 (the portion of the outstanding
notes with respect to which the maturity date has been extended to June 30,
2011) into 1,923,809 shares of common stock (at a conversion price of
$2.10 (based on an assumed offering price of $6.00)), (ii) receipt of net
proceeds from the offering estimated to be approximately $22,000,000 (based on
the assumed initial public offering price of $6.00 per share), not including any
proceeds from the shares that may be offered pursuant to the underwriters’
over-allotment option, and (iii) repayment of short-term bank loans of $3.9
million.
5
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below together with all
other information contained in this prospectus, including the matters discussed
under “Caution Regarding Forward Looking Statements and Other Information
Contained in this Prospectus,” before you decide to invest in shares of our
common stock. You should pay particular attention to the fact that we are a
holding company with substantial operations in China and are subject to legal
and regulatory environments that in many respects differ from those of the
United States. If any of the following risks, or any other risks and
uncertainties that are not presently foreseeable to us, actually occur, our
business, financial condition, results of operations, liquidity and our future
growth prospects would be materially and adversely affected. You should also
consider all other information contained in this prospectus before deciding to
invest in shares of our common stock.
Risks
Related to Our Business
We
need to raise capital to fully commercialize our PPS manufacturing process and
may not be able to fully execute on our growth strategy if we fail to do
so.
Our core
growth strategy is to commence production of PPS fabric and bag filters using
our proprietary manufacturing process for sale initially to the numerous
coal-fired power plants and subsequently to operators of garbage incinerators
and other potential users in the PRC that are not in compliance
with environmental regulations. We intend to use the
net proceeds raised in this offering to purchase PPS manufacturing
equipment and to repay a short-term loan used to purchase manufacturing
equipment and may need to raise additional capital in the future through public
or private equity offerings or debt financings. We cannot be certain that
additional funding will be available on acceptable terms, if at all. As of the
date of this prospectus, we believe the U.S. capital markets are facing many
difficulties. Potential sources of additional financing may be unwilling or
unable to provide us with the additional financing we need to fully carry out
our expansion plans. To the extent that we raise additional funds by issuing
equity securities, our stockholders may experience significant dilution and the
price of our common stock could decrease. Any debt financing, if available,
would result in us incurring interest expenses and we may be required to pledge
assets as security for the debt and may be constrained by restrictive financial
or operational covenants. If we are unable to raise additional capital, when
required, or on acceptable terms, we may have to significantly delay, scale back
or discontinue the development or the commercialization of our PPS product,
which would harm our business and future growth prospects.
Management
recently identified a material weakness in our internal control over financial
reporting which required a restatement of our financial statements.
If our internal controls and disclosure controls and
procedures continue to be ineffective, there may be errors in our
financial statements that could require a future restatement, our filings may
not be timely filed and investors may lose confidence in our reported financial
information, which could lead to a decline in our stock price.
Our
management identified material weaknesses and concluded that our internal
controls over financial reporting and our disclosure controls and procedures
were not effective as of March 31, 2010, June 30, 2010, September 30, 2010 and
December 31, 2010, respectively.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal controls over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. Because our current accounting department is
relatively new to U.S. GAAP and the related internal control procedures required
of U.S. public companies, our management has determined that they require
additional training and assistance in U.S. GAAP matters. Management has
determined that our internal audit function is also deficient due to
insufficient qualified resources to perform internal audit
functions.
6
These
material weaknesses resulted in our inability to detect accounting errors where
we failed to record on our financial statements a liability of $75,000 owed to
each of United Best and Primary Capital ($150,000 in total) for advisory
services rendered in connection with our private placement of convertible notes,
which closed on February 12, 2010, as selling, general and administrative
expenses for the interim period ended March 31, 2010 and nine month period ended
June 30, 2010. We also noted that a grant of 30,000 restricted shares of
common stock in June 2010 to one of our directors was not reflected in the
originally issued financial statements for the interim period ended June 30,
2010.
The
identification of these errors resulted in the restatement of (i) our interim
financial statements for the three month and nine month periods ended June 30,
2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010 filed on August 16, 2010 and in this registration statement
previously filed on July 8, 2010, as amended on September 7, 2010 and October
15, 2010 and (ii) our interim financial statements for the three month and six
month periods ended March 31, 2010 and 2009, as set forth in the Quarterly
Report on Form 10-Q filed on May 24, 2010, as amended on May 26, 2010 and in
this registration statement previously filed on July 8, 2010, as amended on
September 7, 2010 and October 15, 2010. This error was not detected by our
internal control procedures.
We have
taken certain steps to resolve these material weaknesses,
including:
|
·
|
In August 2010, we hired
Eric Gan as our new chief financial
officer;
|
|
·
|
We are arranging necessary
training for our accounting department
staff;
|
|
·
|
We plan to engage external
professional accounting or consultancy firms to assist us in the
preparation of the U.S. GAAP accounts;
and
|
|
·
|
We have allocated financial and
human resources to strengthen the internal control structure and we have
been actively working with external consultants to assess our data
collection, financial reporting, and control procedures and to strengthen
our internal controls over financial
reporting.
|
We
believe that the foregoing steps will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate. However, there
is no guarantee that these improvements will be adequate or successful or that
such improvements will be carried out on a timely basis. A material weakness in
our internal controls and procedures may lead to further accounting errors,
which in turn may result in further restatements of our financial statements.
Any of these possible outcomes could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of
our reporting process, which could adversely affect the trading price of our
shares.
If
our PPS nonwoven fabric does not achieve wide market acceptance as a preferred
material for use in pollutant dust removal bag filters by operators of coal
fired power plants, incinerators, cement factories and other
potential users, anticipated profits will not materialize and our business will
suffer.
We
recently developed a manufacturing process to manufacture PPS nonwoven fabric.
We intend to commence commercial production of PPS material in the early part of
2011.
PPS
nonwoven fabric has many applications including high temperature filtration of
pollutant emissions and can be used as the material to manufacture high
temperature bag filters for coal-fired power plant emissions, garbage
incinerators and cement factories.
The PPS
material that we plan to produce is lighter, thicker, and stronger, has higher
air permeability and filtration efficiency and is significantly cheaper to
produce than other types of high temperature filtration materials currently
available in the market place.
Although
prototype bag filters made of our PPS product have been tested in laboratories,
they have not been tested on site by any potential end user and we do not expect
to develop prototype products for testing by any potential end user prior to
commence commercial production of PPS products. Our new PPS nonwoven fabric may
never achieve broad market acceptance, due to any number of factors, including
that the product may not be as effective as our initial testing indicates and
competitive material may be introduced which renders our PPS product too
expensive or obsolete.
7
If our
PPS material is not broadly accepted in the marketplace for its intended uses,
we may not achieve a competitive position in the market, anticipated profits
will not materialize and our business will suffer.
We
have a limited operating history and have no experience commercially
manufacturing PPS nonwoven fabric which is a key component of our growth
strategy which makes it difficult to evaluate our future prospects based on
historical results of operations.
Our
operating history is limited. We currently make two types of PET nonwoven
fabrics and we commenced production of one type of PET fabric in 2006 and a
second type of PET fabric in 2009. We have not yet begun to commercially
manufacture PPS nonwoven fabric. We plan to do so in the early part of 2011.
Accordingly, you should consider our future prospects and historical results in
light of the risks and uncertainties experienced by early-stage companies in
evolving markets such as our ability to:
|
·
|
develop and successfully
commercialize PPS nonwovens using our proprietary manufacturing
process;
|
|
·
|
achieve widespread market
acceptance of our PPS product for use in high temperature pollutant dust
removal bag filters;
|
|
·
|
increase awareness of our
products and continue to develop customer
loyalty;
|
|
·
|
respond to competitive market
conditions;
|
|
·
|
respond to changes in the
regulatory environment;
|
|
·
|
manage risks associated with
intellectual property
rights;
|
|
·
|
maintain effective control of our
costs and expenses;
|
|
·
|
raise sufficient capital to
sustain and expand our business;
and
|
|
·
|
attract, retain and motivate
qualified personnel.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
If
we cannot extend or renew our currently outstanding short-term loans or if our
convertible notes are not converted before their maturity date, we will have to
repay these loans with cash on hand or refinance them with another lender or
else face a default and potential foreclosure upon the collateral we
pledged.
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. In addition, our convertible notes in the
principal amount of $4,040,000 mature on June 30, 2011. In December
2010, we repaid our outstanding short-term bank loans totaling RMB 25.4 million
and we applied for and obtained official approval for a six month bank loan in
the amount of RMB 20 million from the Foshan branch of the Agricultural Bank of
China. On December 8, 2010, we obtained a 90 day term loan from
Standard Chartered Bank in amount of RMB 6,000,000 for a term of 90 days which
loans is due in March 2011. We plan to extend this loan for another 90
days. Although these short-term bank loans contain no specific renewal
terms, in China, it is customary practice for banks and borrowers to negotiate
roll-overs or renewals of short-term loans on an on-going basis shortly
before they mature. Although we have renewed our short-term loans in the past,
we cannot assure you that we will be able to renew these loans in the future as
they mature. If we cannot renew them we will have to repay them with cash from
operations. We cannot assure you that our business will generate sufficient cash
to do so.
We expect
that the convertible notes will be converted into our common stock at the
closing of this offering. If, however, the convertible notes are not converted
before their maturity date, we believe we will be able to obtain additional
loans from a bank or raise funds from private sources to pay off the principal
and interest due on the notes. We cannot assure you, however, that this
will be the case and if we are unable to do so and if our business fails to
generate sufficient cash flow from operations to repay these notes, we will be
in default.
8
If we
default on these loans and convertible notes, we will incur interest and
penalties. In addition, as the loans are secured by our buildings and land if we
fail to repay these loans, the lender could take possession of the
collateral.
If
we have miscalculated the future demand for our products, we may end up
unnecessarily spending a significant amount of funds on PPS manufacturing
equipment which ultimately we may not have needed and which we may not be able
to resell.
We are
currently installing a new production line to produce PPS materials and
intend to use the net proceeds of this offering to purchase and install two
additional production lines to manufacture PPS materials. This will
increase our total annual manufacturing capacity from 8,000 tons to 11,600 tons
of nonwoven material. The scope and timing of our expansion plans are based on
our internal projections and estimated demand for our PPS products. If our
projections are incorrect and the actual demand for our PPS products is less
than projected, we may expend a significant amount of capital on equipment
which ultimately may not have been needed.
If we are unable to adequately
protect our intellectual property, we could lose a significant competitive
advantage and
competitors could use our processes and manufacture and market similar products
using similar processes, which could harm our market share and lower our
profits.
We hold a
number of authorized process patents and have a patent application
pending in the PRC for our PPS manufacturing process. We believe that
among our competitive strengths are the proprietary manufacturing processes
which we have developed and believe act as a barrier to entry for our potential
competitors. Our success depends, in part, on our ability to protect these
unique processes against competitors and to defend our intellectual property
rights when they are violated. If our pending patent application for
our PPS manufacturing process is not granted or if we fail to adequately protect
our existing process patents, competitors could use our processes, and
manufacture and market similar products using similar processes, which could
harm our market share and results of operations. Our competitors may challenge,
invalidate or avoid the application of any existing or future patents,
trademarks, or other intellectual property rights that we receive or license. In
addition, patent rights may not prevent our competitors from developing their
own processes that produce products that are similar or functionally equivalent
to our products. If we lose the protection of our intellectual property our
business would suffer.
If
PRC environmental regulations change and our PPS product was unable to meet
those regulatory changes, our PPS product could become obsolete and this would
harm our business and prospects.
To reduce
air pollution in China, the Chinese government recently implemented a policy
which imposes stricter rules on carbon and other emissions by coal-fired power
plants and others. Under these rules which came into effect on January 1, 2010,
carbon and other emissions are required to be less than 50 milligrams per cubic
meter by the end of 2010. Already, some of the larger, more developed cities,
such as Beijing and Tianjin have adopted more stringent rules requiring that
emissions be less than 30 milligrams per cubic meter. (Source: Electric Power, May issue,
2008.) We believe, based on laboratory testing, that our PPS
material satisfies current PRC governmental requirements and the more stringent
local standards. If those regulations were to change and our PPS product
were unable to meet those regulatory changes, our PPS product could become
obsolete and this would harm our business and prospects.
The
introduction by a competitor and market acceptance of a high temperature
resistant pollutant emission filtration material which was superior to our PPS
material would harm our business.
If a
competitor successfully introduces a product which is superior to our PPS
products, and that product achieved wide market acceptance, our PPS product
could become obsolete and the demand for them would decrease
significantly.
9
As
a manufacturer of components our revenues will decrease if there is less demand
for the end products in which our products are incorporated.
Our
existing PET nonwoven products are sold, and we expect our PPS products will be
sold, principally to customers that manufacture a wide range of end-use
products, including filtration products, road construction materials, home
furnishings, automobile interior insulation, and industrial packaging.
Therefore, we are subject to the general changes in economic conditions
affecting those industry sectors. If customers that operate in these industry
sectors experience a downturn in their business or if they utilize substitutes
for our products in their products, demand for our products and our business
results will suffer.
Increases
in the price of raw materials could reduce our profit margins if we cannot pass
the increases on to our customers in the form of higher prices for our
products.
Polyester
is the primary raw material used by us to manufacture most of our products. The
price of polyester fluctuates based on manufacturing capacity, demand and
the price of crude oil, among other things. Our PPS product will be made from
high quality polyphenylene sulfide resin, which we intend to purchase in the
United States. Accordingly, the cost of this raw material will fluctuate with
the value of the RMB against the dollar. Even where we are able to pass along at
least a portion of raw material price increases to some of our customers, there
is often a delay between the time we are required to pay the increased raw
material price and the time we are able to pass the increase on to our
customers. To the extent we are not able to pass along all or a portion of such
increased prices of raw materials, our cost of sales would increase and our
operating income would correspondingly decrease. We cannot assure you that the
price of polyester will not increase in the future or that we will be able to
pass on any increases to our customers.
There are only a small number of
suppliers of the raw materials which are required to manufacture our new PPS
product all of whom are based in the United States or Asia. We have not
entered into any long term supply agreements with any of these suppliers.
High demand for this polyphenylene-sulfide resin may result in us being unable
to obtain sufficient quantities of this polyphenylene-sulfide resin to meet our
customers’ demands for our PPS products which would harm our business.
We
recently developed a manufacturing process to manufacture PPS nonwoven fabric,
which is the key product line around which our long-term growth strategy is
centered. PPS is made from a high quality polyphenylene sulfide
resin which is currently not available in China and we will be required to
import from the United States and Asia. We have identified less than 10
suppliers in the U.S. and Asian market that can provide us with this
high quality polyphenylene-sulfide resin. This exposes us to
volatility in the price and availability of these raw materials. We have
not entered into any long term supply agreement with any of these
potential suppliers so high demand for this polyphenylene-sulfide
resin may result in us being unable to obtain sufficient quantities of this
polyphenylene-sulfide resin to meet our customers’ demands for our PPS products
which would harm our business. Supply interruptions could also arise
from shortages labor disputes or weather conditions affecting suppliers’
production, transportation disruptions, or other reasons beyond our
control. Additionally, these suppliers could also increase pricing
of their products, which would negatively affect our operating results if we
were not able to pass these price increases through to our
customers.
Increases
in energy prices will increase our operating costs and impair our financial
results if we cannot pass cost increases on to our customers in the form of
higher prices for our products.
We use a
significant amount of electricity, gasoline and other energy sources to
manufacture and transport our nonwoven products. We do not hedge our exposure to
higher prices via energy futures contracts. A substantial increase in the price
of fuel and other energy sources would increase our operating costs
and could negatively impact our profitability and cash flows if we cannot
pass the increases on to our customers.
10
Our
manufacturing capacity is limited so a breakdown in our machinery or material
interruption of business could prevent or limit our ability to manufacture our
products and cause us to lose revenue and profits and impair our relationships
with our customers.
We
manufacture all of our existing products and plan to manufacture our new PPS
products at our existing facility. We currently have three production lines in
operation which manufacture PET products and are currently installing a new
production line to manufacture our new PPS products. We plan to purchase
and install two additional production lines with the proceeds from this
offering. Any breakdown or disruption of our machinery, or interruption of
business due to fires, explosion, adverse weather conditions or other
catastrophic event, would result in us being incapable of manufacturing
nonwovens to meet our production requirements. This may cause us to lose revenue
and impair our relationships with our customers. Without our existing production
facilities, we would have no other means of manufacturing products until we were
able to restore the manufacturing capability at the facility or identify an
acceptable contract manufacturer. We do not carry business interruption
insurance to cover lost revenue and profits. Furthermore, any interruption in
production capability may require us to make large capital expenditures to
remedy the situation, which could have a negative effect on our profitability
and cash flows.
Our
insurance is inadequate so we could be exposed to significant losses if any of
our products cause personal injury or illness or if our property is
damaged.
We do not
maintain product liability insurance and our property and equipment insurance
does not cover the full value of our property and equipment, so we could be
exposed to significant losses if any of our products cause personal injury or
illness or if our property is damaged. Any such loss could harm our
business.
Increases
in our environmental compliance costs and violations of environmental
regulations by us could require us to change business practices, increase our
operating costs and lower our profits.
We use a
variety of chemicals in our manufacturing operations. As a result, we are
subject to a broad range of environmental laws and regulations. We
regularly incur costs to comply with these environmental regulations, and those
costs could increase significantly with changes in environmental regulations or
their interpretation or enforcement which could further
increase our operating costs and lower our profits.
Although
we have not been subject to material environmental claims in the past, if we
fail to comply with any present or future environmental regulations, damages,
fines and criminal sanctions could be assessed against us and production could
be suspended and our operations could cease. New regulations could also require
us to acquire costly equipment or to incur other significant expenses which
would lower our profits.
We
rely on Mr. Jie Li, our chief executive officer, to manage our business, and if
we lose his services, our business and prospects could suffer.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Jie Li, our chief
executive officer, for the direction of our business. The loss of the services
of Mr. Li for any reason could harm our business and prospects. We cannot assure
you that Mr. Li will continue to be available to us, or that we will be able to
find a suitable replacement for Mr. Li. We have entered into an employment
contract with Mr. Li, but that agreement does not guarantee that Mr. Li will
continue to manage the Company. Although we plan to do so following the closing
of this offering, we do not currently have key man insurance on Mr. Li, and if
he were unable to continue as our chief executive officer due to death or
disability and we were unable to replace him for a prolonged period of time, we
could be unable to carry out our long-term business plan, and our future
prospects for growth, and our business, could be harmed.
11
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, and such difficulties could reduce the value of any
investment in our common stock.
The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, or modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in the PRC. We may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. These deficiencies
could impair our results of operations.
We
may have violated Section 402 of the Sarbanes-Oxley Act of 2002 and Section
13(k) of the Exchange Act and may be subject to sanctions for such
violations.
Section
13(k) of the Exchange Act provides that it is unlawful for a company such as
ours, which has a class of securities registered under Section 12(g) of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the Company. Issuers violating Section 13(k) of
the Exchange Act may be subject to civil sanctions, including injunctive
remedies and monetary penalties, as well as criminal sanctions. The imposition
of any of such sanctions on the Company may have a material adverse effect on
our financial position, results of operations or cash flows.
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui, a British Virgin Islands holding
company which was incorporated in the British Virgin Islands on January 6, 2010
and our direct, wholly-owned subsidiary. Under the terms of the share exchange
agreement we issued and delivered to the Hong Hui stockholders a total of
14,510,204 shares of our common stock in exchange for all of the outstanding
shares of Hong Hui. As a result of the share exchange, Hong Hui became our
wholly-owned subsidiary and Foshan S.L.P. Special Material Co., Ltd., a PRC
operating company, became our indirect wholly-owned subsidiary. At that time,
Jie Li, who became our Chief Executive Officer on that date, was indebted on
account of a previous loan in the amount of RMB 200,000 (approximately $29,474)
made by Foshan.
The
existence of indebtedness of Mr. Jie Li at the time the Company acquired Foshan
and the continuation of such indebtedness thereafter may constitute a violation
of Section 13(k) of the Exchange Act (Section 402(a) of Sarbanes-Oxley). As of
September 30, 2010, all loans had been repaid.
We
do not have a Majority of Independent Directors.
Our Board
of Directors comprises of six members, three of whom are “independent” within
the NASDAQ rules. Accordingly, we do not currently have, and following the
closing of this offering we will not have, a Board of Directors the majority of
whom are “independent” within the meaning of the NASDAQ rules and we will lack
the oversight of an independent board.
We
fall within the definition of a “controlled company” under the NASDAQ
Marketplace Rules which provide that a company is considered a "controlled
company" if greater than 50% of its voting power is held by an individual, a
group or another company. In order for a group to exist for purposes of
this rule, the stockholders forming the group are required to publicly file a
notice that they are acting as a group (e.g., Schedule 13D). On December
29, 2010, a group consisting of Bestyield Group Limited, Jie Li, Proudlead
Limited, Law Wawai, Pilot Link International Limited, Yang Wei, Li Shiyi, High
Swift Limited, Han Hung Yuk, China Investment Management, Inc., Song Huaying,
Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the
existence of a group with respect to their holdings in the Company. As a
“controlled company” we are not subject to the NASDAQ requirements (i) to have a
majority of independent board members; (ii) for independent director oversight
of executive officer compensation (as set forth in Section 5605(d) of the
NASDAQ Marketplace Rule); and (iii) for independent director oversight of
director nomination (as set forth in Section 5605(e) of the NASDAQ
Marketplace Rule).
12
Risks
Related to Doing Business in China
Our
business operations are conducted entirely in the PRC. Because China’s economy
and its laws, regulations and policies are different from those typically found
in the West and are continually changing, we will face risks including those
summarized below.
The
PRC may be more susceptible to political, economic, and social upheaval than
other nations; any such upheaval could cause us to temporarily or permanently
cease operations.
China has
experienced unprecedented growth economically in the past three decades.
Although the country has relaxed some restrictions on individual liberties, the
rule of law is still a relatively new concept. Thus the legal system may not be
equipped to handle complicated social and political problems accompanying the
country’s fast economic growth. China has an extremely large population,
significant levels of poverty, widening income gaps between rich and poor and
between urban and rural residents, large minority ethnic and religious
populations, and growing access to information about the different social,
economic, and political systems to be found in other countries. These conditions
make China unique and may make it susceptible to major structural changes. Such
changes could include a reversal of China’s movement to encourage private
economic activity, labor disruptions or other organized protests,
nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If
any of these events were to occur, it could damage China’s economy and impair
our business.
The
PRC environmental protection laws and regulations require PRC companies,
especially PRC manufacturing companies, to obtain environmental approvals for
the commencement and completion of production lines and pollution emission
permits. Failure to obtain the necessary environmental approvals and permits may
subject us to fines and, in some cases, may even result in the mandated
cessation of production, which may in turn impair our normal business operations
and expansion plans.
In order
to be in compliance with PRC environmental protection laws and regulations, we are required to obtain a
construction commencement approval and a completion examination approval for
each of our three finished production lines. We are also required to
obtain a construction commencement approval from the local environmental
protection bureau for one of our production lines that is currently under
construction. We have obtained the construction commencement approval and
completion examination approval for our three finished production
lines.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 120 days from
commencement (on or before March 10, 2011), but we cannot assure that
this will be the case. Once the environmental impact assessment is
completed, we intend to resubmit the application for the construction
commencement approval together with the environmental impact assessment to the
local environmental protection bureau. We anticipate that the construction
commencement approval will be issued within 60 days from the submission date but
we cannot assure that this will be the case.
In
addition, we are required a pollution emission permit for the disposal of waste
gases, waste water, waste dust and other waste materials. We do not
currently have a pollution emission permit but we are preparing the application
for this permit and intend to submit the application after the new production
line is completed. The process of obtaining this permit after the
application has been submitted can take up to 5 months.
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We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition.
We
are subject to comprehensive regulation by the PRC legal system, which is
uncertain. As a result, it may limit the legal protections available to us and
we may not be now, or remain in the future, in compliance with PRC laws and
regulations.
Foshan,
our operating company, is incorporated under and is governed by the laws of the
PRC, where all of our operations are conducted. The PRC government exercises
substantial control over virtually every sector of the PRC economy, including
the production, distribution and sale of nonwovens. In particular, we are
subject to regulations and administration by local and national branches of the
Ministry of Environmental Protection, the Ministry of Commerce, as well as the
General Administration of Quality Supervision, Inspection and Quarantine, the
State Administration of Foreign Exchange, General Administration of Customs, the
State Administration of Taxation and other regulatory bodies. In order to
operate under PRC law, we must have valid licenses, certificates and
permits, which must be renewed from time to time. If we were to fail to obtain
the necessary renewals for any reason, including sudden or unexplained changes
in local regulatory practice, we could be required to shut down all or part of
our operations temporarily or permanently.
Foshan is
subject to PRC accounting laws, which require that an annual audit be performed
in accordance with PRC accounting standards. The PRC foreign-invested enterprise
laws require that our subsidiary, Foshan, submit periodic fiscal reports and
statements to financial and tax authorities and maintain its books of account in
accordance with Chinese accounting laws. If PRC authorities were to determine
that we were in violation of these requirements, we could lose our business
license and be unable to continue operations temporarily or
permanently.
The legal
and judicial systems in the PRC are still rudimentary. The laws governing our
business operations are sometimes vague and uncertain and enforcement of
existing laws is inconsistent. Thus, we can offer no assurance that we are, or
will remain, in compliance with PRC laws and regulations. Because of the
vagaries of implementation, interpretation and enforcement of PRC laws, our
ability to enforce commercial claims or to resolve commercial disputes is
unpredictable.
We
could incur severe penalties if we fail to comply with the Foreign Corrupt
Practices Act which prohibits U.S. companies from engaging in bribery and
prohibits payments to foreign officials for the purpose of obtaining or
retaining business.
We are
required to comply with the United States Foreign Corrupt Practices Act, or
FCPA, which prohibits U.S. companies from engaging in bribery or making
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. The PRC also strictly prohibits bribery of
government officials. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in China. If our competitors engage
in these practices, they may receive preferential treatment from personnel of
some companies, giving our competitors an advantage in securing business or from
government officials who might give them priority in obtaining new licenses,
which would put us at a disadvantage. Our employees, agents, representatives and
consultants may not always be subject to our control. If any of them violates
FCPA or other anti-corruption law, we might be held responsible. We could suffer
severe penalties in that event. In addition, the U.S. government may seek to
hold us liable for successor liability FCPA violations committed by companies in
which we invest or which we acquire.
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The
RMB is not a freely convertible currency and governmental control of currency
conversions could limit our ability to distribute and/or obtain sufficient
foreign currency to support our business operations in the future, may affect
the value of our stock.
All of
our revenue is earned in RMB, and current and future restrictions on currency
conversions may limit our ability to use revenue generated in RMB to make
dividend or other payments in U.S. dollars. The PRC government imposes controls
on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currency out of the PRC. Although the PRC government introduced
regulations in 1996 to allow greater convertibility of the RMB for current
account transactions, significant restrictions still remain, including the
restriction that foreign-invested enterprises like us may buy, sell or remit
foreign currencies only after providing valid commercial documents at PRC banks
specifically authorized to conduct foreign-exchange business and register
foreign exchange transactions with the PRC government. This would impair our
ability to pay dividends and could reduce the value of our stock.
In
addition, conversion of foreign currencies for capital account items, including
direct investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign-exchange accounts
for capital account items. There is no guarantee that PRC regulatory authorities
will not impose additional restrictions on the convertibility. In addition,
failure to comply with any other PRC foreign exchange regulations may result in
difficulties in converting foreign currency funds raised offshore into RMB and
injecting such capital into our PRC operating company. These restrictions could
prevent us from distributing dividends and thereby reduce the value of our
stock.
Fluctuation
of the exchange rate of the RMB against the US dollar could result in foreign
currency losses.
In 2005,
the PRC government changed its decade-old policy of pegging the value of the RMB
to the United States dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an appreciation of the RMB
against the United States dollar of approximately 17.5% from July 1, 2005
through September 1, 2009. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the United States dollar.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into RMB, appreciation of the RMB
against the U.S. dollar could reduce the value in RMB of the proceeds of the
financing. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes, and the U.S. dollar appreciates against the RMB, the U.S. dollar
equivalent of our earnings from our business and dividends would be reduced. In
addition, the depreciation of significant U.S. dollar-denominated assets could
result in a charge to our income statement and a reduction in the value of these
assets.
Our
PRC stockholders are required to register with SAFE; their failure to do so
could cause us to lose our ability to remit profits out of the PRC as
dividends.
The State
Administration of Foreign Exchange, or SAFE, issued a public notice in October
2005, or the SAFE No. 75 Notice, requiring PRC residents, including both legal
persons and natural persons, to register with the applicable local SAFE
branch before establishing or controlling any company outside China, referred to
as an “offshore special purpose company” for the purpose of acquiring any assets
of or equity interest in PRC companies and raising funds from overseas. In
addition, any PRC resident that is the shareholder of an offshore special
purpose company is required to amend its SAFE registration with the local SAFE
branch with respect to that offshore special purpose company in connection with
any increase or decrease of capital, transfer of shares, merger, division,
equity investment or creation of any security interest over any asset located in
China. If any PRC shareholder of an offshore special purpose company fails to
make the required SAFE registration and amendment, the PRC subsidiaries of that
offshore special purpose company may be prohibited from distributing their
profits and remitting the proceeds from any reduction in capital, share transfer
or liquidation to the offshore special purpose company. Moreover, 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.
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Mr. Jie
Li, Mr. Li Jun, Mr. Li Shiyi, Ms. Wei Yang, and Ms. Song Huaying (collectively
the “Individual Founders”) are PRC residents and the ultimate shareholders of
Foshan. To the best of our knowledge, at the date hereof, the Individual
Founders are subject to the registration requirements of SAFE No. 75 Notice. We
are informed that Foshan has requested the Individual Founders to make the
necessary applications and filings as required under the SAFE No. 75 Notice. We
are informed by Foshan that the Individual Founders have liaised with the SAFE
branch in Guangdong province and upon its confirmation, they will apply for the
SAFE registration. However, we cannot assure you that the SAFE branch in
Guangdong province will accept the application or the Individual Founders can
obtain the SAFE registration. The failure or inability of the Individual
Founders to receive any required approvals or make any required registrations
may subject us and the Individual Founders to fines and legal sanctions,
restrict our overseas or cross-border investment activities, limit Foshan’s
ability to make distributions or pay dividends or affect the ownership
structure, as a result of which our business operations and Foshan’s ability to
distribute profits to us could be materially and adversely
affected.
PRC
regulation of loans to and direct investment by offshore holding companies in
PRC entities may delay or prevent us from making loans or additional capital
contributions to our PRC operating companies, which could materially and
adversely affect our liquidity and ability to fund and expand our
business.
As an
offshore holding company of a PRC operating Company, we may make loans or
additional capital contributions to our existing or future PRC operating
companies. Any loans to our PRC operating companies are subject to PRC
regulations. For example, loans to our operating companies in China to finance
their activities may not exceed statutory limits and must be registered with
SAFE. If we decide to make capital contributions to our operating entities in
the PRC, the PRC Ministry of Commerce, or MOFCOM, (or MOFCOM’s local
counterpart, depending on the amount involved) must approve these capital
contributions. We cannot assure you that we will be able to obtain these
government approvals or registrations on a timely basis, if at all, with respect
to any such capital contributions or shareholder loans. If we fail to receive
such approvals or registrations, our ability to use the proceeds of this
offering to capitalize our PRC operations may be negatively affected, which
could adversely affect our ability to fund and expand our business.
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 the foreign currency-denominated capital 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 unless specifically
provided for in its business scope. In addition, SAFE strengthened its oversight
of the flow and use of Renminbi funds converted from the foreign currency
denominated capital of a foreign-invested company. The use of such Renminbi may
not be changed without approval from SAFE, and may not be used to repay Renminbi
loans if the proceeds of such loans have not yet been used. Violations of
Circular 142 may result in severe penalties, including imposing substantial
fines on us. Therefore, Circular 142 may significantly limit our ability to
transfer the net proceeds from this offering to our subsidiary in the PRC, which
may adversely affect the business expansion of Foshan.
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The
new provisions of the PRC Labor Contract Law may substantially increase our
labor-related costs in the future.
The PRC
Labor Contract Law, which became effective as of January 1, 2008, contains many
provisions which are more favorable to employees than prior labor regulations in
effect in China. This may substantially increase our labor-related costs in our
future operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her employer for
certain causes, such as delay in payment of wages or social insurance
contribution or dissatisfactory labor protection, and under such circumstances
the employer is liable to pay compensation to the employee. The amount of such
compensation payment shall be one month's salary for each year that the employee
has served the employer. If the monthly wage of an employee is three times
greater than the average monthly wage in the previous year for employees as
announced by the people’s government at the municipal level directly under the
central government or at the city-with-district level where the employer is
located, the compensation paid must be three times the average monthly wage of
employees up to a maximum of not more than 12 years of work. We may also be
liable to compensate an employee if we decide to terminate an existing
employment contract before its expiration. Under the new 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. Furthermore, there can be no assurance that the
labor laws will not change further or that their interpretation and
implementation will vary, which may substantially increase our labor-related
costs in the future.
Our
operating subsidiary’s failure to comply with PRC regulations requiring it to
open and contribute to housing accounts for its employees could cause us
to have to pay unpaid housing funds and subject us to fines and employee claims
which would harm our business and reputation.
Under
applicable PRC regulations, PRC enterprises are required to open housing fund
accounts and contribute funds to those accounts for their employees. The monthly
contributions must be at least 5% of each employee’s average monthly income in
the prior year. Foshan has not opened the housing funds accounts since its
establishment. As of February 17, 2011, the accumulated unpaid amount was
approximately RMB 1.81 million (approximately $274,776). The local
housing funds administrative authority may require Foshan to pay the funds due
within a specified time period. If Foshan fails to do so within the specified
time period, the local housing authority may seek judicial enforcement
against Foshan to make such payment. Foshan could be also be subject to
fines imposed by the housing funds administrative authority of a minimum of
RMB10,000 (approximately $1,471) and maximum of RMB 50,000 (approximately
$7,353). Our current and former employees are also entitled to claim their
housing funds individually by arbitration or action. As of the date of this
prospectus, we are not subject to any claims from our employees in connection
with our failure to open or contribute to housing fund accounts. If any of our
employees brings such action against us and the arbitration award or court
judgment was made in their favor, we would have to pay the total amount of
housing funds due to the employee. Our payment to rectify our non-compliance
with employee’s housing provident funds regulations would require us to divert
our financial resources and thus will negatively impact our operations and our
liquidity.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular
698”) which was released in December 2009 with retroactive effect from January
1, 2008.
The
Chinese State Administration of Taxation (SAT) released Circular 698 on December
10, 2009 that addresses the transfer of shares 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. Circular 698, which provides parties with a short period of
time to comply with its requirements, indirectly taxes foreign companies on
gains derived from the indirect sale of a Chinese company. Where a foreign
investor indirectly transfers equity interests in a PRC enterprise by selling
the shares in an offshore holding company, and the latter is located in a
country or jurisdiction where the effective tax burden is less than 12.5% or
where the offshore income of his, her, or its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, 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.
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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 and quantify the effective tax in the
country or jurisdiction and the process of the disclosure to the tax authority
in charge of that Chinese resident enterprise. In addition, there are no formal
declarations with regard to how to interpret “abuse of form of organization” and
“reasonable commercial purpose,” to determine compliance with Circular 698. As a
result, 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.
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Enforcement against us or our
directors and officers may be difficult and you could be unable to collect amounts due to you in the
event that we or any officer or director violates applicable
law.
Our
operating company, Foshan, is located in the PRC and substantially all of our
assets are located in the PRC. Most of our current officers and directors are
residents of the PRC, and most of their assets are located in the PRC. As a
result, it could be difficult for investors to effect service of process on us
or those persons in the United States, or to enforce a judgment obtained in the
United States against us or any of these persons. In addition, it may be
difficult to bring an original action in a PRC court to enforce liabilities
based upon the U.S. federal securities laws against the above foreign persons.
Further, it is unclear if extradition treaties now in effect between the U.S.
and the PRC would permit effective enforcement against us or our officers and
directors of criminal penalties under the U.S. federal securities laws or
otherwise. See the section of this prospectus entitled “Service of Process and
Enforcement of Judgments” below.
If
we lose our land use rights we would be required to identify another site for
our operations and obtain the land use rights for that land. We would then have
to relocate and move our operations to the new site, which would interrupt our
business and would require us to incur relocation and build out costs at the new
site, all of which would have a negative effect on our financial condition and
results of operations.
We do not
own the land where our plant and facility is located, for in China, there is no
private ownership of land, and land is owned by the state or rural collective
economic organizations. In the case of land used for industrial purposes,
land use rights can be obtained from the government for a period of up to
50 years, and are typically renewable. Land use rights, however, can be revoked,
and land users can be forced to vacate at any time, if redevelopment of the land
is deemed to be in the public interest. The public interest rationale is
interpreted quite broadly and the process of land appropriation may be less than
transparent. We have incurred costs in building on the land on which our plant
and machinery are located. If we lost our land use rights (including as a result
of failure of the government to renew our land-use right certificate) we would
be required to relocate and move our operations to a new site, which would
interrupt our business and would require us to incur relocation and build out
costs at the new site, all of which would have a negative effect on our
financial condition and results of operations.
The
approval of the PRC Securities Regulatory Commission, or the CSRC, may be
required in connection with this offering under a recently adopted PRC
regulation; any requirement to obtain prior CSRC approval could delay this
offering and failure to obtain such approval, if required, could have a material
adverse effect on our business and could also create uncertainties for this
offering.
On
August 8, 2006, six PRC regulatory agencies, including the CSRC,
promulgated the “Provisions Regarding Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors,” or the M&A Rule, which took effect on
September 8, 2006 and was further amended on June 22, 2009, to more
effectively regulate foreign investment in PRC domestic enterprises. The M&A
Rule requires offshore special purpose vehicles, or SPVs, formed for the
purposes of overseas listing of equity interests in PRC companies and controlled
directly or indirectly by PRC companies or individuals obtain the approval of
the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on its
official website a notice specifying the documents and materials that SPVs are
required to submit when seeking the CSRC approval for their listings outside of
China. The interpretation and application of the M&A Rule is currently
unclear. However, our PRC counsel has advised us that based on its understanding
of the current PRC laws, rules and regulations and the M&A Rule, the M&A
Rule does not require us to obtain prior CSRC approval for this offering and was
not required for our reverse acquisition of Hong Hui Holdings Limited because
Foshan was established as a qualified foreign-invested enterprise before
September 8, 2006, the effective date of the M&A Rule.
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However,
if the CSRC or another PRC regulatory agency subsequently determines that prior
CSRC approval was required, we may face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies may
limit our operating privileges, delay or restrict the repatriation of the
proceeds from this offering into China or payment or distribution of dividends
by Foshan, 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. The CSRC or other
PRC regulatory agencies also may take actions requiring us, or making it
advisable for us, to halt this offering before settlement and delivery of our
common stock. Also, if the CSRC later requires that we obtain its approval, we
may be unable to meet or obtain a waiver of the CSRC approval requirements, if
and when procedures are established to obtain such a waiver. Any uncertainties
or negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our common stock.
We cannot
predict when the CSRC will promulgate additional implementing rules or other
guidance, if at all. If implementing rules or guidance is issued prior to the
completion of this offering and consequently we conclude we are required to
obtain CSRC approval, this offering will be delayed until we obtain CSRC
approval, which may take several months or longer. Furthermore, any delay in the
issuance of such implementing rules or guidance may create additional
uncertainties with respect to this offering. Moreover, implementing rules or
guidance, to the extent issued, may fail to resolve current ambiguities under
the M&A Rule. Uncertainties and/or negative publicity regarding the M&A
Rule could have a material adverse effect on the trading price of our common
stock.
The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
The
M&A Rule establishes additional procedures and requirements that could make
some acquisitions of Chinese companies by foreign investors more time-consuming
and complex than in the past. After the promulgation of the M&A Rule, the
PRC government can now exert more control over the acquisitions of Chinese
companies, including requirements in some instances that the Ministry of
Commerce be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a Chinese domestic enterprise. We may grow our
business in part by acquiring complementary businesses. Complying with the
requirements of the M&A Rule to complete such transactions could be
time-consuming, and any required approval processes, including obtaining
approval from the Ministry of Commerce, may delay or inhibit our ability to
complete such transactions, which could affect our ability to expand our
business or maintain our market share by share or asset acquisition of the PRC
companies.
The
discontinuation of any preferential tax treatment currently available to us in
the PRC or imposition of any additional PRC taxes on us could adversely affect
our financial condition and results of operations.
Before
January 1, 2008, pursuant to the then applicable enterprise income tax laws in
China, foreign-invested companies established in China were generally subject to
a state and local enterprise income tax, or EIT, at statutory rates of 30% and
3%, respectively, and could often be granted various preferential tax treatments
including preferential tax rates and tax holidays. Under the PRC
Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both
effective on January 1, 2008, a unified EIT rate of 25% and unified tax
deduction standard is applied equally to both domestic-invested enterprises and
foreign-invested enterprises, or FIEs. The New EIT Law provides a
five-year transitional period starting from its effective date for those
enterprises which were established before March 16, 2007, the promulgation date
of the New EIT Law. Enterprises established prior to March 16, 2007 are eligible
for certain prescribed preferential tax rate in accordance with the then
applicable income tax laws and administrative regulations and gradually become
subject to the new statutory EIT rate of 25% over a five-year transition period
starting from January 1, 2008. For enterprises granted qualified tax
holidays, such tax holidays continue until their expiration in accordance with
previous tax laws and regulations, but where the tax holiday has not yet started
because of a cumulative loss position, such tax holiday shall be deemed to
commence from 2008, the first effective year of the New EIT Law. Currently,
Foshan enjoys a 12.5% income tax preferential rate, which expires December 31,
2012. Thereafter, the expiration of Foshan’s preferential tax treatment will
reduce our profitability and affect our financial results.
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We
may be classified as a “resident enterprise” for PRC enterprise income tax
purposes; such classification could result in unfavorable tax consequences to us
and our non-PRC shareholders.
The New
EIT Law provides that enterprises established outside of China whose “de facto
management bodies” are located in China are considered PRC “tax resident
enterprises” and will generally be subject to the uniform 25% PRC EIT rate
on their global income. In addition, a tax circular issued by the State
Administration of Taxation on April 22, 2009 regarding the standards used to
classify certain Chinese-invested enterprises 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
enterprise shareholders. This recent circular also subjects such “resident
enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation rules to the New EIT Law, a “de facto management body”
is defined as a body that has material and overall management and control over
the manufacturing and business operations, personnel and human resources,
finances and other assets of an enterprise. In addition, the tax circular
mentioned above details that certain Chinese-invested enterprises will be
classified as “resident enterprises” if the following are located or resident in
China: senior management personnel and departments that are responsible for
daily production, operation and management; financial and personnel decision
making bodies; key properties, accounting books, company seal, and minutes of
board meetings and shareholders’ meetings; and half or more of the senior
management or directors having voting rights.
Currently,
there are no detailed rules or precedents governing the procedures and specific
criteria for determining “de facto management bodies” which are applicable to
our company or our overseas subsidiary. A substantial majority of the members of
our management team as well as the management team of some of our overseas
subsidiary are located in China. If our company or any of our overseas
subsidiaries is considered a PRC tax resident enterprise for PRC EIT purposes, a
number of unfavorable PRC tax consequences could follow. First, our company or
our overseas subsidiaries will be subject to the uniform 25% EIT rate as to our
global income as well as PRC EIT reporting obligations. Second, dividends
payable by us to our investors and gain on the sale of our shares may become
subject to PRC withholding tax as described below.
Dividends
payable by us to our foreign investors and gain on the sale of our shares may
become subject to taxes under PRC tax laws.
Under the
New EIT law and its implementation rules, if we are considered a “resident
enterprise”, income tax at the rate of 10% must be withheld on dividends
payable by us to investors that are “non-resident enterprises” if such investors
do not have an establishment or place of business in China or if, the relevant
income is not effectively connected with an establishment or place of business
in China. Similarly, any gain realized on the transfer of our common stock by
such investors is also subject to a 10% PRC withholding income tax if such gain
is regarded as income derived from sources within China and we are considered a
“resident enterprise” for PRC EIT purposes. It is possible that future guidance
issued with respect to the new “resident enterprise” classification could result
in a situation in which a withholding tax of 10% for our non-PRC enterprise
investors or a potential withholding tax of 20% for individual investors is
imposed on dividends we pay to them and with respect to gains realized by such
investors upon transfer of our common stock. In addition to the uncertainty
surrounding “resident enterprise” classification, it is also possible that the
rules may change in the future, possibly with retroactive effect. If we are
required under the New EIT law to withhold PRC income tax on our dividends
payable to our foreign shareholders, or if you are required to pay PRC income
tax on the transfer of our common stock under the circumstances mentioned above,
the value of your investment in our common stock may be materially and adversely
affected. It is unclear whether holders of our common stock would be able to
claim the benefit of income tax treaties or agreements entered into between
China and other countries or areas if we are considered a PRC “resident
enterprise”.
21
We
rely on dividends paid by Foshan for our cash needs, and any limitation on the
ability of Foshan to make payments to us could have a material adverse effect on
our ability to conduct our business.
As a
holding company, we conduct substantially all of our business through our
consolidated subsidiaries incorporated in China. We rely on dividends paid
by these PRC subsidiaries for our cash needs, including the funds necessary to
pay any dividends and other cash distributions to our shareholders, to service
any debt we may incur and to pay our operating expenses. The payment of
dividends by entities established in China is subject to limitations.
Regulations in China currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and
regulations in China. Foshan is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general
reserves or statutory capital reserve fund until the aggregate amount of such
reserves reaches 50% of its respective registered capital. As a result, Foshan’s
ability to transfer a portion of its net assets to us in the form of dividends,
loans or advances is limited. In addition, if Foshan incurs debt on its own
behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other distributions to us. Any limitations on
the ability of Foshan to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct
our business.
Further,
according to the Circular on Issues Concerning Outward Remittance of Profit,
Stock Dividends and Stock Bonuses Processed by Designated Foreign Exchange
Banks, or Circular 29, issued by the SAFE on September 22, 1998, and amended on
September 14, 1999, a foreign-invested enterprise whose registered capital has
not been fully paid as provided by the terms of its articles is not allowed to
remit its profits or dividends abroad unless a special approval by the SAFE is
granted. Circular 29 limits the ability of Foshan to remit funds to us, which
could materially and adversely limit our ability to expand our business, make
investments or acquisitions, pay dividends and otherwise fund and conduct our
business.
All
participants in our stock incentive plan who are PRC citizens may be
required to register with SAFE and failure to comply may subject us and such
participants to fines and legal sanctions. We may also face regulatory
uncertainties that could restrict our ability to adopt additional equity
compensation plans for our directors, employees and other parties under PRC
laws.
In
September 2010 we adopted a stock incentive plan under which we may make option
grants and other awards to our officers, key employees, directors and
consultants. All of our officers and directors, other than Chris Bickel and
Richard M. Cohen, are PRC citizens.
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.” We
believe that under Circular 78, PRC citizens and residents who are granted stock
or options under our stock incentive plans are required to register with SAFE or
its local counterparts and request us (or engage domestic agents) to handle
various foreign exchange matters associated with their stock incentive plans. In
addition, as the employer, we are (or a PRC agent is) required, on behalf of PRC
recipients of stock awards, to apply annually to SAFE 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 PRC persons from the sale of shares under our
stock incentive plan are required to be remitted to bank accounts in China
opened by their employers or PRC agents.
The
registration and approval requirements set forth in Circular 78 will be
burdensome and time consuming on us. If we fail to comply, our PRC
subsidiary (if deemed to a domestic agent as defined under Circular 78) and
participants of our stock incentive plan who are PRC citizens may be subject to
fines and legal sanctions and we may be prevented form granting equity
compensation to our officers, key employees, directors and consultants who are
PRC citizens, in which event we will have to find alternative methods (such as
addition salary and bonuses) to compensate such persons which would adversely
affect our cash flow and business operations.
22
Risks
Associated with This Offering
Approximately
92% of our common stock is beneficially owned by a group which includes some of
our executive officers and directors; this group may take actions that are
contrary to your interests and that could reduce the value of your
stock.
On
December 29, 2010, a group consisting of Bestyield Group Limited (a company
controlled by Jie Li, our chief executive officer), Jie Li, Proudlead Limited (a
company controlled by Law Wawai, our president of sales), Law
Wawai, Pilot Link International Limited, High Swift Limited, China
Investment Management Inc., Song Huaying, and Newise Holdings
Limited (a company controlled by Li Jun, one of our directors) and Li Jun
filed a Schedule 13D disclosing the existence of a group with respect to
their holdings in the Company. This Schedule 13D reported that the “group”
beneficially owned an aggregate of approximately 92% of our outstanding common
stock. Even assuming conversion of all of the outstanding convertible
notes and the exercise of all our warrants, the group will collectively own
a significant portion of our outstanding common stock. As a result, they
will be able to influence the outcome of stockholder votes on various matters,
including the election of directors and extraordinary corporate transactions
such as business combinations. In any such stockholder vote, their interests may
differ from that of other stockholders and they could cause us to take actions
that are contrary to your interests and that could reduce the value of your
stock.
We
do not intend to pay cash dividends in the foreseeable future which may
negatively affect the price of our stock.
We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. The payment of dividends by us will
depend on our future earnings, financial condition and such other business and
economic factors as our management may consider relevant. In addition, as
a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from Foshan, our
PRC-based operating company, which, from time to time, may be subject to
restrictions on its ability to make distributions to us, including as a result
of restrictions on the conversion of local currency into U.S. dollars or other
hard currency and other regulatory restrictions. See “Risks Related to Doing
Business in China” above.
There
is currently no trading market for our common stock and an active trading market
may not develop after the offering.
Our
shares are not currently traded on any exchange. We have applied to have
our common stock listed on the NASDAQ Capital Market. On the consummation
of the public offering, we believe that we will satisfy the listing requirements
and expect that our common stock will be listed. Such listing, however, is not
guaranteed. The underwriters are not obligated to make a market in our
securities and, even after making a market, can discontinue market making at any
time without notice. Neither we nor our underwriters can provide any assurance
that an active and liquid trading market in our securities will develop or, if
developed, that the market will continue.
Our
common stock may be delisted from the NASDAQ which could negatively impact the
price of our common stock and our ability to access the capital
markets.
The
listing standards of the NASDAQ Capital Market provide that a company, in order
to qualify for continued listing, must maintain a minimum stock price, satisfy
standards relative to minimum shareholders’ equity, minimum market value of
publicly held shares and various additional requirements. If, after listing, we
fail to comply with all listing standards applicable to issuers listed on the
NASDAQ Capital Market, our common stock may be delisted. If our common
stock is delisted, it could reduce the price of our common stock and the levels
of liquidity available to our shareholders. In addition, the delisting of our
common stock could hinder our access to the capital markets and any limitation
on liquidity or reduction in the price of our common stock could impair our
ability to raise capital. Delisting from the NASDAQ Capital Market could also
result in other negative consequences, including the potential loss of
confidence by suppliers, customers and employees, the loss of institutional
investor interest and fewer business development opportunities.
23
Future
sales or perceived sales of our shares of common stock could depress our stock
price.
All of
our executive officers and directors and certain of our shareholders have agreed
not to sell shares of common stock for a period of 90 days following this
offering. In addition, all of the selling stockholders listed in the
resale prospectus have agreed not to sell shares of their common stock for a
period of 90 days following this offering. See “Underwriting.” Shares
subject to these lock-up agreements will become eligible for sale in the public
market upon expiration of these lock-up agreements, subject to limitations
imposed by Rule 144 under the Securities Act of 1933, as amended. As we
are a former “shell” company (as that term is defined in Rule 12b-2 under
the Exchange Act), none of the shares held by our current shareholders are
freely tradable, however commencing on February 12, 2011 those shares are
eligible for resale under Rule 144 subject to the restrictions set forth in Rule
144. See “Shares Eligible for Future Sale.” If the holders of these
shares were to attempt to sell a substantial amount of their holdings at once,
the market price of our common stock could decline. Moreover, the perceived risk
of dilution from this offering or other potential sales could cause shareholders
to attempt to sell their shares and investors to short shares of our common
stock, a practice in which an investor sells shares that he or she does not own
at prevailing market prices, hoping to purchase shares later at a lower price to
cover the sale. As each of these events would cause the number of shares of our
common stock being offered for sale to increase, our common stock market price
would likely further decline. All of these events could combine to make it very
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.
You
will experience immediate and substantial dilution in your
investment.
The
offering price of our common stock is substantially higher than the net tangible
book value per share of our common stock, which was $1.12 as of December 31,
2010. Therefore, when you purchase our common stock in this offering at an
assumed public offering price of $6.00 per share, you will incur immediate
dilution of $4.88 per common share. Holders of the common stock will experience
further dilution if options, warrants or other rights to purchase our common
stock that are outstanding or that we may issue in the future are exercised or
converted, or if we issue additional shares of our common stock, at prices lower
than our net tangible book value at such time.
We
will retain broad discretion in using the net proceeds from this offering and
may spend a substantial portion in ways with which you do not
agree.
We
currently intend to use the net proceeds from the offering to repay a short
term loan in the amount of $3.9 million and purchase two additional
production lines to manufacture PPS materials. The balance of the net
proceeds is expected to be used for working capital and general corporate
purposes. Accordingly our management will retain broad discretion to
allocate the net proceeds we receive from this offering. The net proceeds
may be applied in ways with which you and other investors in the offering may
not agree, or which do not increase the value of your investment. Our management
might not be able to achieve a significant return, if any, on any investment of
these net proceeds.
24
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS
This
prospectus contains some forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Forward-looking
statements involve risks and uncertainties. Forward-looking statements include
statements regarding, among other things,
|
·
|
our projected sales,
profitability and cash
flows;
|
|
·
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our growth
strategies;
|
|
·
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anticipated trends in our
industry;
|
|
·
|
our future financing plans;
and
|
|
·
|
our anticipated needs for working
capital.
|
In some
cases they are identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the
negative of these words or other variations on these words or comparable
terminology. These statements may be found under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business,” as
well as in this prospectus generally. In particular, these include statements
relating to future actions, future performance, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial
results.
Any or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur and you
should not place undue reliance on these forward-looking
statements.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds of approximately
$
($ if the underwriters
exercise their over-allotment option) from the sale of 4,166,667 shares of
common stock offered hereby after deducting (i) $ million for
underwriting discounts and commissions, (ii) estimated expenses of the
offering of $ and (iii) the $ success fee
payable on closing to United Best, our foreign advisor, controlled by our
director, Mr. Li Jun.
We currently
anticipate that we will use the net proceeds we receive from the
offering substantially as follows: (i) up to $3.9 million will be used to
repay short term loans in the amount of $3.9 million which was used as part of
the purchase price of approximately $9.6 million for the build-out and purchase
of a new production line to manufacture PPS materials which is currently being
installed and is expected to be completed in February 2011; and (ii) up to
approximately $10 million will be used to purchase two additional
production lines to manufacture PPS materials. The balance of the net
proceeds, if any, is expected to be used for working capital and general
corporate purposes. The three new production lines are expected to
increase our annual output by 3,600 tons of nonwoven materials to 11,600 tons of
nonwoven material.
The
Company has a short-term loan of $3,029,247 (RMB 20,000,000) with
Agricultural Bank of China, Foshan Branch. This loan is due on June 21,
2011 and bears interest at a floating rate (currently at 6.21% per
annum).
The
Company has another short-term loan from Standard Chartered Bank in the amount
of $908,775 (RMB 6,000,000) for a term of 90 days. The loan carries an interest
rate of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as
guarantee. The loan is due on March 7, 2011. The Company plans
to extend this loan for an additional 90 days.
We
believe that the proceeds of this offering when added to our existing working
capital will be sufficient to fund our operations for the foreseeable
future.
DETERMINATION
OF OFFERING PRICE
The
public offering price of the common stock offered by this prospectus will be
determined by negotiations between us and the underwriters. Factors to be
considered in determining the public offering price include:
25
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·
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the information in this
prospectus and otherwise available to the
underwriters;
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·
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the history and the prospects for
the industry in which we
compete;
|
|
·
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our current financial condition
and the prospects for our future cash flows and
earnings;
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·
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the general condition of the
economy and the securities markets at the time of this
offering;
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·
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the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
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|
·
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the public demand for our
securities.
|
The
prices at which the common stock will sell in the public market after this
offering, however, may not equal or exceed the public offering
price.
DIVIDEND
POLICY
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future and we currently intend to retain future earnings, if any, to
finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant. In addition, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from Foshan, our PRC-based operating company, which, from time to time, may be
subject to restrictions on its ability to make distributions to us, including as
a result of restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions.
EXCHANGE RATE
INFORMATION
Our
business is primarily conducted in China and substantially all of our revenues
and expenses are denominated in Renminbi. This prospectus contains translations
of Renminbi amounts into U.S. dollars at specific rates solely for the
convenience of the reader. We make no representation that any Renminbi or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate, or at all. The PRC
government exercises control over its foreign currency reserves in part through
direct regulation of the conversion of Renminbi into foreign exchange and
through intervention in the foreign exchange market on foreign
trade.
The
following table sets forth information concerning exchange rates between
Renminbi and U.S. dollar for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that we
used in this prospectus or will use in the preparation of our periodic reports
or any other information to be provided to you.
Exchange Rate
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||||||||||||||||
Period
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Period End
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Average(1)
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Low
|
High
|
||||||||||||
(RMB
per US$1.00)
|
||||||||||||||||
2005
|
8.0702 | 8.1826 | 8.2765 | 8.0702 | ||||||||||||
2006
|
7.8041 | 7.9579 | 8.0702 | 7.8041 | ||||||||||||
2007
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7.2946 | 7.5806 | 7.8172 | 7.2946 | ||||||||||||
2008
|
6.8225 | 6.9193 | 7.2946 | 6.7800 | ||||||||||||
2009
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6.8259 | 6.8295 | 6.8470 | 6.8176 | ||||||||||||
2010
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||||||||||||||||
Nine-month
period ended September 30, 2010
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6.6905 | 6.7984 | 6.8330 | 6.6869 | ||||||||||||
August
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6.8069 | 6.7873 | 6.8069 | 6.7670 | ||||||||||||
September
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6.6905 | 6.7396 | 6.8102 | 6.6869 | ||||||||||||
October
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6.6707 | 6.6678 | 6.6912 | 6.6397 | ||||||||||||
November
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6.6670 | 6.6538 | 6.6892 | 6.6330 | ||||||||||||
December
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6.6000 | 6.6497 | 6.6745 | 6.6000 | ||||||||||||
2011
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||||||||||||||||
January
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6.6017 | 6.5964 | 6.6364 | 6.5809 | ||||||||||||
February
(through February 4)
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6.5560 | 6.5654 | 6.5937 | 6.5560 |
26
(1)
|
Annual
averages and averages for the nine-month period ended September 30,
2010 were calculated by using the average of the exchange rates on the
last day of each month during the relevant year. Monthly averages were
calculated by using the average of the daily rates during the relevant
month.
|
CAPITALIZATION
The
table set forth below depicts our capitalization and cash and cash equivalents
as of December 31, 2010, on an actual and pro forma basis, as
follows:
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·
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On an actual
basis;
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·
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On a pro forma basis to give
effect to the conversion of our issued and outstanding convertible notes
in the principal amount of $4,040,000 (representing the outstanding notes
with respect to which the maturity date has been extended to June 30,
2011) into 1,923,809 shares of common stock (assuming a public offering
price of $6 per share) immediately prior to the closing of this offering
(which notes are convertible into shares of common stock at $2.10 per
share which represents a 65% discount to the assumed $6 offering price);
and
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·
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On a pro forma basis as adjusted
to reflect (i) the sale of 4,166,667 shares of common stock in this
offering by us at an assumed public offering price of $6.00 per share,
after deducting estimated underwriting discounts and commissions and other
offering expenses (assuming the underwriters do not exercise their
over-allotment option) and (ii) the 193,186 and 265,186 shares issuable at
closing to United Best and Primary Capital,
respectively.
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Pro Forma
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|||||||||||
|
Actual
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Pro Forma
|
As Adjusted
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|||||||||
Cash
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$ | 5,273,088 | $ | 5,173,088 | (1) | $ | 23,273,088 | (2) | ||||
Cash
equivalents
|
- | - | - | |||||||||
Total
cash and cash equivalents
|
5,273,088 | 5,173,088 | 23,273,088 | (2) | ||||||||
Total
liabilities
|
11,569,672 | 7,186,765 | 3,286,765 | (2) | ||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 share issued and
outstanding; common stock, $0.001 par value; 200,000,000 shares
authorized; 15,265,714 shares issued and outstanding, actual; 17,189,523
shares issued and outstanding, pro forma; and 21,814,562 shares issued and
outstanding, pro forma as adjusted
|
15,266 | 17,190 | 21,815 | |||||||||
Additional
paid-in capital (3)
|
8,527,190 | 14,813,523 | 36,808,898 | |||||||||
Accumulated
other comprehensive income
|
2,270,483 | 2,270,483 | 2,270,483 | |||||||||
Retained
earnings
|
6,779,081 | 4,773,731 | 4,773,731 | |||||||||
Total
capitalization (3)
|
$ | 17,592,020 | $ | 21,874,927 | $ | 43,874,927 |
(1) Pro
forma cash reflects the repayment of a convertible note in the principal
amount of $100,000.
(2) Pro
forma as adjusted cash and cash equivalents each reflect the receipt of the
assumed net proceeds of $22,000,000 from this offering and the use of
$3,900,000 of the net proceeds to pay down the outstanding short term bank
loans. Pro forma as adjusted total liabilities reflects the repayment of
the short term bank loans of $3,900,000.
(3) The
increase of $22,000,000 in pro forma as adjusted total capitalization reflects
receipt of the assumed net proceeds of this offering of $22,000,000.
The increase of $21,995,375 in pro forma as adjusted additional
paid-capital reflects the assumed net proceeds of this offering of $22,000,000
less $4,167 (which represents the aggregate par value of the 4,166,667 share
being offered in this offering) and $458 (which represents the aggregate par
value of the 458,373 shares being issued to Primary Capital and United Best at
the closing.) A $1.00 increase (decrease) in the assumed public
offering price of $6.00 per share, would increase (decrease) each of the
additional paid-in capital and total capitalization by $3,750,000 and
($3,750,000) respectively, assuming the number of shares offered, as set forth
on the cover page of this prospectus, remains the same and after deducting the
additional underwriting discounts and commissions and fees payable to United
Best resulting from the increase (decrease) in the offering
price.
27
DILUTION
Purchasers
of shares of our common stock in the offering will suffer an immediate and
substantial dilution in net tangible book value per share. Dilution is the
amount by which the public offering price paid by purchasers of our common stock
exceeds the net tangible book value per share of common stock after the
offering.
Our
consolidated net tangible book value (i.e. consolidated tangible assets less
consolidated liabilities) as of December 31, 2010 was $17,052,550.
Our consolidated net tangible book value per share (i.e
consolidated net tangible book value divided by the aggregate number of shares
of common stock outstanding) as of December 31, 2010 was $1.12.
Our
pro forma consolidated net tangible book value as of December 31, 2010 was
$21,335,457, or $1.24 per share of common stock. Pro forma consolidated net
tangible book value per share represents our consolidated net tangible book
value ($21,335,457) divided by 17,189,523 (the aggregate number of shares of
common stock outstanding, assuming conversion of the convertible notes
immediately prior to the closing of this offering).
After
giving effect to the sale by us of (i) the 4,166,667 shares of common stock in
this offering (at an assumed public offering price of $6.00 per share), (ii) the
issuance of 193,186 shares to United Best and 265,186 shares to Primary Capital
and (iii) the receipt and the application of the estimated net proceeds of
$22,000,000 (after deducting the underwriting discounts and commissions,
the estimated offering expenses payable by us, and the fee payable to United
Best), our pro forma consolidated net tangible book value at December 31, 2010,
as adjusted, would have been $43,335,457 or $1.99 per share. This represents an
immediate increase in pro forma consolidated net tangible book value to existing
stockholders of $0.75 per share and an immediate dilution to new investors of
$4.01 per share. Dilution per share represents the difference between the
price per share to be paid by new investors for the shares of common stock sold
in this offering and the pro forma consolidated net tangible book value per
share immediately after this offering.
The
following table illustrates this per share dilution:
Consolidated
net tangible book value per share as of December 31,
2010
|
$ | 1.12 | ||
Assumed
public offering price
|
6.00 | |||
Pro
forma consolidated net tangible book value per share as of December
31, 2010
|
1.24 | |||
Increase
in pro forma net tangible book value per share attributable to existing
stockholders
|
0.12 | |||
Pro
forma consolidated net tangible book value per share, as adjusted for this
offering
|
1.99 | |||
Dilution
per share to new investors
|
$ | 4.01 |
Assuming
the number of shares offered, as set forth on the cover page of this prospectus,
remains the same and after deducting the underwriting discounts and commissions
and the fee payable to United Best:
|
·
|
a $1.00 increase in the
assumed public offering price of $6.00 per share would increase (i) our
pro forma consolidated net tangible book value after this offering by
$3,750,000 ($4,166,667 less underwriter’s commission of $291,667 and fee
to United Best of $125,000) and (ii) the dilution per share to new
investors to $4.84; and
|
|
·
|
a $1.00 decrease in the
assumed public offering price of $6.00 per share would decrease (i) our
pro forma consolidated net tangible book value after this offering by
$3,750,000 and (ii) the dilution per share to new investors to
$3.18.
|
The
following table sets forth the number of shares of common stock purchased, the
total consideration paid, or to be paid to us, and the average price per share
paid, or to be paid, by existing stockholders and by the new investors, at an
assumed public offering price of $6.00 per share, the midpoint of the range set
forth on the cover page of this prospectus, before deducting underwriting
discounts and commissions and estimated offering expenses payable by us and the
fee payable to United Best.
28
|
Shares Purchased
|
Total Consideration
|
Average
Price
|
|||||||||||||||||
|
Number
|
Percent
|
Amount
|
Percent
|
Per Share
|
|||||||||||||||
Existing
stockholders
|
15,265,714 | 71.5 | % | $ | 17,592,020 | 37 | % | $ | 1.15 | |||||||||||
Shares
issuable to noteholders immediately prior to closing of the
offering
|
1,923,809 | 9 | % | $ | 4,040,000 | 9 | % | 2.10 | ||||||||||||
New
investors in this offering
|
4,166,667 | 19.5 | % | 25,000,000 | 54 | % | 6.00 | |||||||||||||
Total
|
21,356,190 | 100 | % | $ | 46,114,157 | 100 | % |
If the
underwriters’ over-allotment option to purchase common stock is exercised in
full, the pro forma consolidated net tangible book value after giving effect to
this offering would be $2.08 per share, and the dilution in pro forma
consolidated net tangible book value per share to investors in this offering
would be $3.92 per share. Furthermore, the number of shares of common stock held
by existing stockholders would be 17,647,896, or 79% of the aggregate number of
shares of common stock outstanding after this offering, and the number of shares
of common stock held by new investors would be increased to 4,791,667, or 21% of
the aggregate number of shares of common stock outstanding after this
offering.
MARKET
PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock does not trade and is not quoted on any public market. We have
applied to have our common stock listed on the NASDAQ Capital Market. We expect
our listing to be effective prior to the date of this prospectus. No assurance
can be given that our listing application will be approved.
Holders
As of
the close of business on February 16, 2011, we had approximately 212
shareholders of record of our common stock. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of stockholders. Holders of the common stock have no preemptive rights and
no right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common
stock.
Securities
authorized for issuance under equity compensation plans
The
following table summarizes the equity compensation plans under which our
securities may be issued as of December 31, 2010:
Plan Category
|
Number of
securities to
be
issued upon
exercise of
outstanding
options,
warrants
and
rights
|
Weighted-
average exercise
price of
outstanding
options,
warrants
and rights
|
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans(excluding
securities
reflected in
column (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
- | — | — | |||||||||
Equity
compensation plan not approved by security holders
(1)
|
400,000 | $ | (2 | ) | 1,756,218 | |||||||
Total
|
29
(1) Our
Board of Directors adopted the China SLP Filtration Technology, Inc. 2010 Stock
Incentive Plan, or the 2010 Plan, on September 3, 2010. All our officers
and key employees, directors and consultants, including those of our
subsidiaries and affiliates, who are responsible for or contribute to the
management, growth and/or profitability of our business, are eligible for
participation in the 2010 Plan. Two Million One Hundred Eighty Six
Thousand Two Hundred Eighteen (2,186,218) shares of our common stock (or such
number of shares as shall equal ten percent of the shares of common outstanding
on a fully diluted basis after giving effect to the offering and the conversion
of the note) have been authorized and reserved for the 2010 Plan. We may issue
stock options, stock appreciation rights, restricted stock awards, restricted
stock units, performance awards and other stock-based awards under the 2010
Plan.
(2)
On September 3, 2010, under the 2010 Plan and in connection with his
appointment as Chief Financial Officer, the Board granted Eric Gan an option to
purchase 400,000 shares at an exercise price equal to the public offering price
of this offering. The option shall vest and be exercisable as follows;
160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares
will vest and become exercisable on July 31, 2012; 120,000 shares will vest and
become exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the Company
without cause, 160,000 shares shall be vested immediately on the termination
date.
30
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion together with our financial statements and
the related notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that are based on our current expectations,
estimates and projections about our business and operations. Our actual results
may differ materially from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including those
which we discuss under “Risk Factors” and elsewhere in this
prospectus.
Overview
This
section discusses and analyzes our results of operations and financial
condition, including the results and condition of our operating company, Foshan,
which have been consolidated with our own results for all periods presented.
This discussion is intended to help you understand our financial results and the
current facts and trends that may cause them to change, so that you may make
informed judgments about our likely financial results in the future and, insofar
as those results may affect our stock price and informed investment
decisions.
This
discussion should be read in conjunction with our audited financial statements
and accompanying notes as of September 30, 2010 and for the year then ended and
the unaudited consolidated interim financial statements for the three months
ended December 31, 2010.
References
to 2010 and 2009 refer to the fiscal years ended September 30, 2010 and 2009,
respectively.
General
We are a
PRC based manufacturer of nonwoven fabrics. We currently manufacture two types
of PET nonwoven fabrics which are used in a wide range of products, including
filtration products, road construction materials, home furnishings, automobile
interior insulation and industrial packaging.
Our
current PET products are sold primarily to PRC-based manufacturers which use our
products as raw material components for end-products they sell to their
customers. We recently developed a manufacturing process to manufacture
polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product
line around which our long-term growth strategy is centered.
Based on
lab tests which we conducted internally we believe that our PPS nonwoven fabric
is superior to other currently available high temperature filtration material
because it is lighter, thicker, stronger, has higher air permeability and
filtration efficiency and significantly cheaper to produce. Due to
the superior characteristics of our PPS product coupled with the demand created
by these new regulations, we believe that our PPS material will become a market
leader for high temperature filtration applications. We expect to sell our PPS
nonwoven products to operators of coal fired power plants, garbage incinerators
and other heavy industrial plants.
We intend
to continue to manufacture PET nonwovens but we expect that the sales of our PPS
nonwoven fabrics will ultimately eclipse the sales of our existing PET nonwoven
products and become our main product offering.
31
Our
manufacturing facility, which is located in Foshan City, Guangdong Province,
PRC, currently has three production lines for PET nonwovens with annual product
capacity of 8,000 tons. We plan to begin commercial production of our PPS
nonwoven fabric in early 2011 with the completion of our first PPS filament
production facilities. We also plan to add two more PPS production lines in the
latter part of 2011, which will bring our total overall production capacity to
11,600 tons per year.
Important
Factors Affecting our Results of Operations
The most
significant factors that could affect our financial condition, costs and results
of operations in the future are:
Fluctuations in price of
polyester: Polyester resin is the principal raw material used
in our productions and its price fluctuations affect our business operations.
For the year ended September 30, 2010, 98% of our raw materials consisted of
polyester, the cost of which increased with the price of crude oil. The increase
in the purchase price of our raw materials resulted in a reduction of gross
profit by $0.97 million for the fiscal year 2010.
Our ability to successfully
commercialize our PPS manufacturing process: Our future growth and
profitability will depend on our ability to successfully commercialize our PPS
manufacturing process. To date, we have not sold any PPS nonwoven products but
expect sales to commence after we commence production of PPS nonwoven material
in 2011.
The effectiveness and market
acceptance of our new product offerings. Market perception and
acceptance of our PPS nonwoven materials by coal-fired power plants and other
potential users as a filtration device for carbon and other emissions will
largely dictate the rate at which our company will grow if at
all.
Our ability to obtain additional
financing. To continue to grow in the future, we will need to
purchase more PPS production equipment which will require us to raise additional
financing. As of the date of this prospectus, we believe the U.S. capital
markets are facing many difficulties. Potential sources of additional financing
may be unwilling or unable to provide us with the additional financing we need
to fully carry out our expansion plans. If we are unable to obtain additional
financing, we will fund our expansion with operating cash flow which may be
inadequate to allow us to grow at our desired rate.
Degree of enforcement of new PRC
Environmental Regulations. The degree to which the PRC government
enforces its recently adopted regulations relating to carbon and other pollutant
emissions by coal fired power plant operators and other plant
operators that operate coal fired facilities that are not currently in
compliance with those regulations will have an impact on the demand for our PPS
bag filters.
Possible financial exposure
resulting from our failure to contribute housing provident fund:
Under PRC regulations we are required to open housing funds
accounts and make monthly contributions of at least 5% of each employee’s
average monthly income in the previous year. We have not contributed housing
funds for our employees because this practice has been permitted by local
authorities. The accumulated unpaid amount was approximately RMB 1.81 million
(approximately $274,776) as of February 17, 2011. If the local
authorities began to enforce these regulations and we are forced to contribute
to the funds, our net income for fiscal year 2010 would be reduced by $16,439
and retained earnings would be reduced by $231,648. The housing funds
administrative authorities are permitted to impose a fine of not less than
RMB10, 000 (approximately $1,471) and no more than RMB50,000 (approximately
$7,353) which would further reduce our net income by the amount of the
fine.
32
Tax uncertainty. We
believe that our taxable income and deductions were calculated pursuant to the
PRC tax laws, regulations and local tax authority enforcement practice. 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 Foshan 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. The Company is
not able to predict any such changes, and thus we cannot reasonably estimate the
amount of the potential impact.
Recent
Development
On
January 31, 2011, we entered into note extension agreements with each holder of
our outstanding convertible notes (except for Lumen Capital LP who previously
held a convertible note in the principal amount of $100,000) to extend the
maturity date of the notes from February 12, 2011 to June 30, 2011.
On February 11, 2011, we repaid the note held by Lumen Capital in the
principal amount of $100,000 (together with interest accrued
thereon).
Results of
Operations
Three
Months Ended December 31, 2010 Compared to Three Months Ended December 31,
2009
Three Months Ended December
31
|
||||||||||||||||
2010
(unaudited)
|
2009
(unaudited)
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Net
Sales
|
$ | 5,780,973 | 100 | % | $ | 5,224,961 | 100 | % | ||||||||
Cost
of Sales
|
4,223,562 | 73 | % | 3,611,088 | 69 | % | ||||||||||
Gross
Profit
|
1,557,411 | 27 | % | 1,613,873 | 31 | % | ||||||||||
Selling,
General and Administrative Expense
|
812,636 | 14 | % | 274,023 | 5 | % | ||||||||||
Operating
Income
|
744,775 | 13 | % | 1,339,850 | 26 | % | ||||||||||
Interest
Income
|
5,330 | - | % | 225 | 0 | % | ||||||||||
Interest
Expense
|
(777,697 | ) | -13 | % | (58,909 | ) | -1 | % | ||||||||
Loss
on disposition of fixed assets
|
(23,408 | ) | - | % | (107 | ) | - | % | ||||||||
Government
subsidy
|
6,090 | - | % | - | - | % | ||||||||||
Changes
in Fair Value of Warrants
|
191,000 | 3 | % | - | - | % | ||||||||||
Total
Other Income (expenses)
|
(598,685 | ) | -10 | % | (58,791 | ) | -1 | % | ||||||||
Income
before income taxes
|
146,090 | 3 | % | 1,281,059 | 25 | % | ||||||||||
Income
tax provision
|
88,618 | - | ||||||||||||||
Net
Income
|
$ | 57,472 | 1 | % | $ | 1,281,059 | 25 | % |
Net
Sales
Net
sales consisted of sales of needle punched PET non-woven fabric and thermal
calendared products. Our net sales for the three month period ended December 31,
2010 were $5,780,973, an increase of $556,012, or 11%, from $5,224,961 for the
same period of the prior year. Thermal calendared products contributed
approximately 10% of the increase in total revenue and needle-punched non-woven
fabric contributed approximately 1% to the increase in total revenue. The
increase in revenue was primarily attributable to the price increase on both our
thermal calendared products and needle-punched products sold to domestic
customers which price increases ranged from 3% to 22% and were put in place
in order to pass on the higher costs of raw materials in this period.
However, as a result of the price increase, domestic sales volume
declined by 6%. Demand for our products from overseas continued to rise
reflecting the global economic recovery. Our international sales during this
period increased 41% in volume and 42% in
sales, respectively.
For
the three month period ended December 31, 2010, sales of thermal calendared
products increased by $526,938, or 18%, from the same period of the prior
year. Domestic sales volume of thermal calendared products decreased by 4%
and international sales increased by 15%.
Sales
of needle-punched fabric increased by $29,085, or 0.6%. Domestic sales volume
decreased by 8% which decrease was offset by increased international sales. Our
price increase for our needle-punched fabric has had a negative impact on our
sales to smaller sized domestic customers which were less receptive to our price
increase.
Cost
of Sales
Cost
of sales principally consists of the cost of raw materials, labor and
manufacturing overhead expenses.
Our
cost of sales for the three month period ended December 31, 2010 was $4,223,562,
an increase of $612,474, or 17%, from $3,611,088 for the same period in 2009.
The primary reason for the increase in cost of sales was an increase in our raw
materials costs. Our raw material cost increased to 55% of net sales for
the three month period ended December 31, 2010, compared to 47% of net sales for
the same period of the prior year, reflecting a mix of more expensive raw
materials associated with sales. Approximately 98% percent of our raw
materials consist of polyester, the price of which fluctuates with the price of
oil. During the three month period ended December 31, 2010, the cost of raw
materials increased approximately 17% from the same period of the prior
year.
Labor
cost accounted for 1% of net sales for the three month period ended December 31,
2010, the same level as the same period in 2009.
Overhead
expenses were 19% of net sales for the three month period ended December 31,
2010, compared to 18% of net sales for the same period in 2009. As a percentage
of net sales, overhead expenses slightly increased due to lower capacity
utilization and sales volume, compared to the same period in
2009.
Gross
Profit
Our
gross profit for the three month period ended December 31, 2010 was $1,557,411,
a decrease of $56,462, or 4%, from $1,613,873 for the same period in the prior
year. As a percentage of net sales, gross profit was 27% for the three
month period ended December 31, 2010, compared to 31% for the same period of the
prior year. The decrease in our gross profit was due primarily to the increase
in cost of raw materials as a percentage of net sales.
Selling,
General and Administrative Expenses
Selling
expenses include salaries, advertising expenses, rent, and all expenses directly
related to selling product. General expenses include general
operating expenses that are directly related to the general operation
of the Company. Administrative expenses include executive salaries and
other expenses related to the overall administration of the
Company.
33
Selling,
general and administrative expenses for the three month period ended December
31, 2010 were $812,636, an increase of $538,613 or 197%, compared to $274,023
for the same period in 2009. The increase was primarily due to $246,149 in legal
and documentation fees related to the Company’s planned initial public offering,
investor relation consulting fees of $70,500, and fees paid to our auditors of
$57,984, $151,329 in stock-based employee compensation, and payroll
increases.
Other
Income and Expenses
Other
expenses primarily consisted of interest expense while other income was
primarily interest income and change in fair value of warrants.
Interest
expense for the three month period ended December 31, 2010 was $777,697 compared
to $58,909 for the same period in 2009. Interest expense as a percentage
of sales increased to 13% for the three month period ended December 31, 2010,
from 1% for the same period of the prior year. The increase in interest
expense was mainly attributed to adoption of derivative accounting rules under
FASB ASC 815-40 to record $4,140,000 of convertible loan notes. These
accounting rules require us to accrete interest expense, in the amount of
$609,900 for the period, based on the term of the notes and the note discount.
Excluding the derivative accounting driven interest expense, our interest
expense was $167,797 for this three month period, an increase of $108,888, or
185%, from the same period of the prior year, primarily due to interest paid to
the bridge-loan creditors.
At
December 31, 2010, under the requirements of FASB ASC 815, management
re-measured the fair value of the warrants issued in connection with the sale of
convertible notes to bridge loan creditors on February 12, 2010. This
re-measurement resulted in a decrease of the fair value of the warrants and
accordingly a decrease of the value of the warrants liabilities and reported as
other income in amount of $191,000.
Income
Tax
USA
The
Company and its subsidiary and branch divisions are subject to income taxes on
an entity basis on income arising in, or derived, from the tax jurisdiction in
which they operate. As the Company had no income generated in the United States,
there was no tax expense or tax liability due to the Internal Revenue Service of
the United States as of December 31, 2010 and September 30,
2010.
BVI
Hong
Hui is incorporated under the International Business Companies Act of the
British Virgin Islands and accordingly is exempt from payment of British Virgin
Island’s income taxes.
PRC
Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Foshan SLP. For 2008 and 2009, Foshan SLP enjoyed a tax free
holiday for two years. From January 2010 onwards, Foshan SLP is taxed at 25% of
net income except for the 2010 and 2011 years where there is a 50% discount on
income tax.
34
The
current year tax provision was $88,618 for the three months ended December 31,
2010. The Company has recorded zero deferred tax assets or liabilities as
of December 31, 2010 and September 30, 2010 net of tax allowance because all
other significant difference in tax basis and financial statement amounts are
permanent differences. Valuation allowance is applied to deferred tax assets
derived from immaterial temporary difference in tax and financial basis
financial statements.
Net
Income
Net
income for the three months ended December 31, 2010 was $57,472,
a decrease of $1,223,587, or 96%, from net income of $1,281,059 for
the same period in the prior year. The decrease was mainly attributed to
significant increases of general and administrative expenses related to the
Company’s planned initial public offering, an increase in finance costs, and
non-cash expenses associated with the adoption of FASB ASC 815 accounting rules
to treat the warrants issued in connection with privately placed bridge loan
notes.
Comparison
of Fiscal Years Ended September 30, 2010 and 2009
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in US dollars and as a percentage of net sales
(percentages may not add due to rounding). See the financial statements of the
Company and the related notes thereto and other financial information included
elsewhere in this prospectus.
|
Fiscal
Year Ended September 30,
|
|||||||||||||||
|
2010
|
2009
|
||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
Net
sales
|
$ | 19,952,422 | 100 | $ | 11,849,712 | 100 | ||||||||||
Cost
of sales
|
13,772,843 | 69 | 7,906,614 | 67 | ||||||||||||
Gross
profit
|
6,179,579 | 31 | 3,943,098 | 33 | ||||||||||||
SG&A
expense
|
2,272,881 | 11 | 1,219,114 | 10 | ||||||||||||
Bad
debt expense (recovery)
|
- | 11,497 | 0 | |||||||||||||
Operating
income
|
3,906,698 | 20 | 2,712,487 | 23 | ||||||||||||
Other
income (expenses)
|
(1,661,598 | ) | 8 | 266,835 | 2 | |||||||||||
Income
taxes
|
24,023 | - | ||||||||||||||
Net
income
|
$ | 2,221,077 | 11 | $ | 2,445,652 | 21 |
Net
Sales
Our
net sales for the year ended September 30, 2010 were $19,952,422, an increase of
$8,102,710, or 68%, from prior year’s net sales of $11,849,712. The increase in
net sales was largely attributable to higher sales volume of our newly launched
needle-punched nonwoven fabric products. Sales of needle-punched PET products
for 2010 were $8,618,407, an increase of $5,766,977, or 202%, compared to
$2,851,430 for 2009. In addition, sales of thermal calendared PET
materials for 2010 were $11,331,528, an increase of $2,543,161, or 29%, from
$8,788,367 for 2009, which was mainly due to higher sales
volume.
35
Cost
of Sales
Our cost
of sales for 2010 was $13,772,843, an increase of $5,866,229, or 74%, from
$7,906,614 for 2009. Cost of sales represented 69% of net sales for 2010
compared to 67% for 2009, reflecting the higher cost of our products sold in
2010 compared to 2009. Raw material cost increased to $10,937,772, an increase
of $5,501,011 from $5,436,761 in 2009 of which production volume increase
accounted for approximately 82%, or $4,525,506, and price increase contributed
approximately 18%, or $975,505.
As a
major component of our cost of sales, the price of raw materials increased in
2010 and contributed 18% of increased cost of sales. Improved demand for
end use products in 2010 increased the price of polyester resin which is the
principal raw material in our PET nonwoven fabric production. The rise in the
price of polyester was more obvious in the later part of 2009. Given the
recent rise of crude oil price and the fact that the global economy is
recovering, we believe the price of our raw materials will stay at relatively
high levels and will continue to adversely affect our PET product gross margin
since our ability to pass the increased material cost to customers is
limited.
Labor
cost accounted for approximately 2% and 3% of the total cost of sales for
2010 and 2009 respectively, reflecting the Company’s effective labor cost
control.
Manufacturing
overhead expenses were approximately 19% of total cost of sales for 2010,
compared to 27% of cost of sales for 2009 reflecting greater capacity
utilization rates with the addition of our new production line in February 2009.
Manufacturing overhead represented approximately 13% and 16% of the net sales
for 2010 and 2009, respectively.
Gross
Profit
Our gross
profit was $6,179,579 in 2010, an increase of $2,236,481, or 57%, from
$3,943,098 in 2009. The increase in gross profit resulted primarily from the
increase in our net sales. As a percentage of net sales, gross profit was
31% in 2010, compared to 33% in 2009. The lower gross profit margin was
primarily due to increase in raw material cost in 2010 from 2009, offset by
improved production efficiency.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $2,272,881 in 2010, an increase of
$1,053,767, or 87%, from $1,219,114 in 2009 primarily due to (i) increases of
$557,500 in legal and accounting fees; (ii) $310,840 in expenses incurred in our
efforts to raise capital in the United States; and (iii) $170,308 in stock-based
compensation expense.
Other
Income and Expenses
Other
income in 2010 includes interest income and income from revaluation of the fair
value of the Company’s derivative liabilities, while other income in 2009 solely
consists of interest income. Other expenses include primarily interest expense
of $1,988,832 in 2010, an increase of $1,718,983, or 637%, from $269,849 in
2009. Interest expense as a percentage of net sales increased to 10% in
2010 from 2.3% in 2009. The increase in interest expense was mainly
attributed to non-cash expenses recorded as a result of our adoption of
derivative accounting rules under FASB ASC 815-40 to record the $4,140,000 of
convertible loan notes. These accounting rules require us to record derivative
liabilities (warrants) issued in conjunction with the privately placed
bridge-loan notes which closed on February 12, 2010 and treat the expenses
directly related to the debt financing as discount so that interest is
periodically accreted from the discount to the gross amount of the notes issued
at its maturity date. This non-cash accretion of interest accounted for
$1,524,750, or 77%, of the total interest expense in 2010. Excluding accreted
interest, interest expense for 2010 represents approximately 2% of our net sales
in 2010.
36
Provisions
under FASB ASC 815 also require us to measure at each reporting period the fair
value of the warrants issuable in conjunction with the private placement of
convertible notes closed in February 2010. The effect of the revaluation of
warrants resulted in other income of $313,000 in 2010.
Income
Tax
The
tax provision for fiscal year was $24,023. The Company has recorded zero
deferred tax assets or liabilities as of September 30, 2010 and September 30,
2009, net of tax allowance, because all other significant difference in tax
basis and financial statement amounts are permanent
differences.
Net
Income
Net
income was $2,221,077 in 2010, a decrease of $224,575, or 9%, from net income of
$2,445,652 in 2009. The decrease was due to the non-cash interest expense
derived from the convertible notes financing transaction which closed in
February 2010. Excluding a $1,524,750 non-cash interest expense relating
to accretion of the discounted convertible notes and $313,000 in income from
revaluation of warrants issued in conjunction with the notes, net income
increased by $987,175, or 40% from 2009.
Foreign
Currency Translation Adjustments
Throughout
2010, the RMB rose steadily against the US dollar. As a result of the
appreciation of the RMB, we recognized a foreign currency translation gain of
$415,775. Given the uncertainty of exchange rate fluctuations, we cannot
estimate the effect of these fluctuations on our future business, product
pricing, results of operations or financial condition, but the fluctuation of
the Renminbi may materially and adversely affect your investment if the current
trend of appreciation of the RMB is reversed.
37
All of
our revenue was generated and expenses were incurred in the PRC and Hong Kong in
2010 and were denominated in Renminbi. Our income statement accounts in 2010
were translated at the annual average exchange rate of $1 to RMB 6.8118 and the
balance sheet items, except the equity accounts, were translated at the year-end
rate of $1 to RMB 6.6912. The equity accounts were stated at their historical
rate when the corresponding transactions occurred.
Net
foreign currency translation gain was $415,775, or 2% of net sales, in 2010 as
compared with the previous year’s net foreign currency translation losses of
$57,078, or 0.5 % of net sales.
Liquidity
and Capital Resources
The
following table sets forth a summary of our net cash flow information for the
periods indicated:
|
Three Months
Ended December 31, |
Years Ended September 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(Consolidated,
unaudited)
|
(Consolidated,
unaudited)
|
(Consolidated)
|
(Consolidated)
|
||||||||||||
Net
cash provided by operating activities
|
$ | 53,771 | $ | 1,397,186 | $ | 4,411,689 | $ | 2,700,162 | ||||||||
Net
cash (used in) provided by investing activities
|
$ | (548,325 | ) | $ | 160,223 | $ | (5,230,563 | ) | $ | (1,158,033 | ) | |||||
Net
cash provided by (used in) financing activities
|
$ | 385,571 | $ | (330,101 | ) | $ | 2,708,294 | $ | (600,498 | ) | ||||||
Effect
of currency exchange rate
|
86,770 | (269 | ) | 108,233 | (11,553 | ) | ||||||||||
Net
cash (outflow) inflow
|
$ | (22,213 | ) | $ | 1,227,039 | $ | 1,997,653 | $ | 930.078 |
We
finance our business with cash generated from operations and use short-term bank
loans to fund capital expenditures.
Working
capital consists mainly of cash, accounts receivable, advances to suppliers and
inventory. Cash, inventory and accounts receivable account for the majority of
our working capital.
Our
working capital requirements may be influenced by many factors, including cash
flow, competition, relationships with suppliers, and the availability of credit
facilities and financing alternatives, none of which can be predicted with
certainty.
Our
investment in new production facilities to manufacture PPS filtration products
consumed a large amount of the proceeds obtained from bank loans and the
issuance of convertible notes. This capital expenditure to a large extent
affected our liquidity. We will need additional capital in order to expand our
business.
At
December 31, 2010, we had outstanding bank loans in the total amount of $3.94
million (RMB26 million), namely, a loan in the amount of $3,029,247 (RMB20
million) with Agriculture Bank of China Foshan Branch, and a loan in the
amount of $908,775 (RMB6 million) with Standard Chartered Bank. The
loan with Agriculture Bank of China is due in June 2011 and the loan with
Standard Chartered Bank is due in March 2011. The Company plans to extend
the Standard Chartered loan for an additional 90 days.
38
On
February 12, 2010, we completed a financing transaction in which we received net
proceeds of $3,409,813 through a private placement of convertible notes and
warrants to certain accredited investors.
The
notes mature on February 11, 2011 and the principal amount of $4.14 million is
repayable on its maturity date if the note holders do not extend the maturity
date. On January 31, 2011, we entered into note extension agreements with
each holder (except for Lumen Capital LP who held a convertible note in the
principal amount of $100,000) of our outstanding convertible notes to extend the
maturity date of the notes from February 12, 2011 to June 30, 2011.
On February 11, 2011, we repaid the note held by Lumen
Capital.
Operating
Activities
Net
cash provided by operating activities for the three months ended December 31,
2010 was $53,771, compared to $1,397,186 for the same period of the prior year.
The decreased operating cash inflow resulted primarily from a decrease in net
income and an increase in advances to suppliers in the amount of $1.3 million,
which was offset by an increase in non-cash expenses.
For the
fiscal year ended September 30, 2010, net cash provided by operating activities
was $4,411,689, representing an increase of $1,711,527, or 63%, from $2,700,162
for the fiscal year ended September 30, 2009. The increase was due
primarily to an increase in net sales, improved collection of credit sales,
increase in clients’ deposits and reduction of advance made to
suppliers.
Investing
Activities
Net
cash used by investing activities for three months ended December 31, 2010 was
$548,325, compared to cash inflow from proceeds collected from related party
receivable of $160,223 for the same period of the prior year. The increased cash
used from investing activities during the three month period of the current year
was primarily attributed to capital expenditures on building up a new PPS
manufacturing facility.
During
the fiscal year ended September 30, 2010, net cash used in investing activities
was $5,230,563, an increase of $4,072,530 from $1,158,033 for 2009. The
greater investment costs of 2010 were due to our purchases of equipment and
expenditures related to outfitting our manufacturing facilities for new PPS
production line.
Financing
Activities
Net
cash provided by financing activities for the three month period ended December
31, 2010 was approximately $385,571, compared to $330,101 of net cash used in
financing activities for the same period of the prior year. The increase was
from the cash received from a related party loan.
For
the fiscal year ended September 30, 2010, net cash received in financing
activities was $2,708,294, an increase of $3,308,792 compared with net cash used
in financing activities of $600,498 for 2009. Cash received in 2010 represents
net proceeds received from private placement of convertible notes offset by
repayments of short term borrowings. Cash used in 2009 represents repayments of
short term borrowings.
Loans
and Credit Facilities
The
balance of our outstanding short-term bank loans as of December 31, 2010 was
$3.94 million, as compared with $4.25 million as of December 31, 2009.
39
Other
than as disclosed in the financial statements, we had no long term debt, capital
lease obligations, operating leases or any other long term obligations as of
December 31, 2010.
On
February 12, 2010, we entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants (which are exercisable only in
certain circumstances), with net proceeds for $3.4 million after finance costs.
The notes require quarterly interest payments at a rate of 10% per annum. The
notes are convertible into shares of common stock at a 65% discount to the
offering price upon consummation of a “qualified
financing.” This offering is expected to be a “qualified
financing.”
The
notes were originally scheduled to mature on February 12, 2011. As
discussed under “Recent Development” above, on January 31, 2011, we entered into
note extension agreements with each of the note holders (other than Lumen
Capital) to extend the maturity date of the notes to June 30, 2011. On
February 11, 2011, we repaid the note held by Lumen Capital in the principal
amount of $100,000 (together with interest accrued thereon).
Future
Cash Commitments
Our
planned expansion of our PPS manufacturing facilities in 2011 will require
significant investment capital. We intend to use the net proceeds of this
offering (i) to repay short term loans in the amount of $3.9 million which
were used as part of the purchase price of approximately $9.6 million for the
build-out and purchase of a new production line to manufacture PPS materials;
and (ii) to purchase two additional production lines to manufacture PPS
materials. The three new production lines are expected to increase our
annual output by 3,600 tons of nonwoven materials to 11,600 tons of nonwoven
material. The estimated cost of the build out and purchase of all three
production lines is approximately $20,000,000 in aggregate. In the future,
we may need to raise additional capital if the proceeds from the financings and
our operating cash flows are inadequate to continue our capital expansion
plans.
Restatement
of Previously Issued Financial Statements
In
connection with the review by the staff of the Division of Corporation Finance
of the Securities and Exchange Commission of the Public Offering Registration
Statement, an error in our interim financial statements was identified in that
we failed to record on our financial statements a liability of $75,000 owed to
each of United Best and Primary Capital ($150,000 in total) for advisory
services rendered in connection with our private placement of convertible notes
which closed on February 12, 2010. We also noted that a grant of 30,000
restricted shares of common stock in June 2010 to one of our directors was not
reflected in the financial statements originally issued.
Accordingly,
on November 24, 2010, immediately following the filing of the Current Report on
Form 8-K, we filed (i) an amendment on Form 10-Q/A for the period ended June 30,
2010 containing restated interim financial statements for the three and nine
month periods ended June 30, 2010 and (ii) an amendment on Form 10-Q/A for the
period ended March 31, 2010, containing restated interim financial statements
for the three and six month periods ended March 31, 2010.
The
principal effects of the restatements are as follows:
|
·
|
As of June 30, 2010, accrued
liabilities increased by $150,000 and stockholders’ equity decreased by
$150,000. Of this decrease, $150,000 is due to the recording of the
$150,000 liability to United Best and Primary
Capital.
|
|
·
|
As of March 31, 2010, accrued
liabilities increased by $150,000 and stockholders’ equity decreased by
$150,000.
|
40
|
·
|
We restated our selling, general
and administrative expenses to reflect the fee of $150,000, which resulted
in a reduction of income from operations, income before taxes, net income,
and earnings per share for both the three months and six months ended
March 31, 2010.
|
|
·
|
We restated our selling, general
and administrative expenses to reflect the fee of $150,000 and stock-based
compensation of $5,000, which resulted in a $5,000 and $155,000 reduction
of income from operations, income before taxes, net income, and earnings
per share for three and nine months ended June 30, 2010,
respectively.
|
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. Our
financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” We believe that the following paragraphs
reflect the more critical accounting policies that currently affect our
financial condition and results of operations:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method accounting for
financial reporting purposes. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States and have been
consistently applied in the presentation of financial statements, which are
compiled on the accrual basis of accounting.
Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Management makes these estimates using the best information available
at the time the estimates are made; however actual results could differ
materially from those estimates.
Economic
and political risks
Our
operations are conducted in the PRC. Accordingly, our business, financial
condition and results of operations may be influenced by the political, economic
and legal environment in the PRC, and by the general state of the PRC
economy.
Our
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. Our results may be
adversely affected by changes in political and social conditions in the PRC and
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
41
Revenue
recognition
Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, and the seller’s price to the buyer is fixed or
determinable and collectible.
Land
use rights
Land use
rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method. The
estimated useful life is 50 years.
Property,
plant and equipment
Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of plant and equipment are as follows:
Building
and plant
|
20
years
|
Machinery
|
10
years
|
Office
equipment and computers
|
5
years
|
Vehicles
|
10
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
Accounting
for the Impairment of Long-Lived Assets
The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the
assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Quantitative
and Qualitative Disclosures About Market Risk
Increases
in the price of crude oil have a negative impact on the cost of our raw
materials. Given the recent rise in the price of crude oil and the
fact that the global economy is recovering, we expect that the price of our
raw materials will stay at relatively high levels due to the relatively
high price of crude oil which may adversely affect our gross
margin for our PET products as our ability to pass on the increased material
costs to customers is limited. During 2010, all of our raw materials
were purchased in the PRC. Because the raw materials for our new PPS
products are expected to be sourced from the United States and Japan,
we anticipate that, beginning in 2011, over 50% of our raw materials will be
purchased from suppliers in the United States and Japan. Accordingly,
changes in the value of the RMB relative to the dollar and yen will affect our
production costs and gross profit in 2011. However, we believe the RMB will
continue to appreciate against the dollar based on the increasing pressure from
the US government and so the impact of foreign currency conversion will be
favorable to us. In addition, any increase in the dollar cost of oil
would be offset by what we believe will be an appreciation of the RMB against
the dollar.
42
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonable likely to
have a current or future effect on our financial condition.
OUR
CORPORATE HISTORY
Perpetual
Technologies was organized as Molokai Enterprises, Inc., on November 27, 1996
under the laws of the State of Colorado. From 1996 to 2006, Molokai Enterprises
had no active business operations. Molokai changed its domicile from Colorado to
Delaware in April 2007 by merging with and into Perpetual Technologies, Inc., a
Delaware corporation organized for that purpose on March 15, 2007. From March
15, 2007 until the February 12, 2010 share exchange transaction described below,
Perpetual had no operations or substantial assets and was deemed to be a "blank
check" or shell company.
On
February 12, 2010, our company entered into two related and contemporaneous
transactions pursuant to which the ownership of our company
changed.
The first
transaction involved the surrender and cancellation of 12,640,000 shares of
common stock held by a number of our shareholders in exchange for $40,000 in
cash paid by Joseph Nemelka, who was a director of our company at that
time.
The
second transaction involved a share exchange transaction between our company,
Hong Hui Holdings Limited, or Hong Hui, and the shareholders of Hong Hui. At the
time of the share exchange, Hong Hui owned, and currently still owns, all of the
stock of Technic International Limited, or Technic, a Hong Kong holding company
which, in turn, owns 100% of the stock of Foshan, the PRC operating company that
conducts our current, active business operations. In the share exchange
transaction, we acquired direct control of Hong Hui by issuing to the Hong Hui
stockholders an aggregate of 14,510,204 shares of our common stock in exchange
for all of the outstanding capital stock of Hong Hui. As a result of the share
exchange transaction, we became the indirect, 100% shareholder of Technic and
its wholly owned subsidiary, Foshan.
In
connection with these transactions, our two former directors, Joseph Nemelka and
Seth Winterton resigned and Li Jie and Chris Bickel, were appointed as our new
directors. Our management was also replaced with Foshan’s
management.
On
February 12, 2010, our new board of directors approved (i) a one-for-five
reverse split of our issued and outstanding common stock and (ii) the change of
our name from Perpetual Technologies to China SLP Filtration Technology, Inc.
Stockholders holding shares representing a majority of the votes entitled to be
cast at a shareholders’ meeting consented in writing to these actions. The
reverse split reduced the issued and outstanding shares of common stock from
75,818,571 to 15,235,714 shares. The reverse split and name change were
effective on March 24, 2010.
Our
current structure, after the reverse merger, is set forth in the diagram
below:
43
Private
Placement
On
February 12, 2010, we completed a financing transaction in which we raised gross
proceeds of $4,140,000 through a private placement of convertible notes and
warrants to certain accredited investors.
The
material agreements through which the private placement transactions were
carried out, the transactions themselves, and the notes and warrants are
described below. Full copies of the transaction documents for this private
placement have been filed as exhibits to our Form 8-K dated February 12, 2010 on
the SEC’s EDGAR database and the summary below is qualified in full by reference
to such exhibits. In connection with the private placement, we engaged a
placement agent and a financial advisor which received separate cash and
equity-based compensation for their services. The financial advisor and
placement agent are related parties. See sections entitled “Additional
Disclosure Regarding Conversion of Notes and Exercise of Warrants” beginning on
page 63 and “Certain Relationships and Related Transactions” beginning on
page 83 for additional information regarding compensation to the placement agent
and financial advisor.
Note
Purchase Agreement
On
February 12, 2010, immediately following the closing of a share exchange
transaction, we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes, in the aggregate principal amount
of $4,140,000, and warrants (which are exercisable only in certain events and
will become void if this offering is consummated). The closing of the sale
of the notes and warrants occurred on February 12, 2010. The terms of
the notes and warrants are set forth below. The note purchase agreement contains
representations, warranties and covenants which are customary for transactions
of this nature.
44
Terms
of the Notes
The notes
have the following material terms:
Maturity: The
notes were originally scheduled to mature on February 12, 2011. On January 31,
2011 we entered into note extension agreements with each of the note holders
(other than Lumen Capital) to extend the maturity date of the notes to June 30,
2011. If principal is not paid on maturity then 150% of the
principal amount is payable. On February 11, 2011 we repaid the note
held by Lumen Capital in the principal amount of $100,000 (together with
interest accrued thereon).
Interest: 10% per
annum payable quarterly increasing to 15% if there is a default. $204,464 out of
the closing proceeds was placed in escrow to cover most of the interest due in
the first six months.
Conversion: In the
event of the closing of this offering (or any other equity or series of related
financings resulting in aggregate gross proceeds to the Company of at least
$20,000,000 (or such lesser amount as shall be approved in writing by the
holder(s) of notes evidencing at least 50% of the principal amount of the notes
then outstanding)), prior to the maturity
date of the notes, the principal amount of
the notes converts automatically into the securities sold in that financing at a
65% discount to the offering price of such securities. At an assumed
offering price of $6.00 per share, the notes will have a conversion price of
$2.10 per share. The interest on the notes is payable in cash and
does not convert into shares of common stock.
Terms
of the Warrants
Set forth
below are the material terms of the warrants issued at the closing:
Exercisable: The
warrants become void if this offering is consummated. In the event
that this offering is not consummated, the warrants are exercisable at any time
during a five-year period commencing on the closing of a “financing,” which
means the first sale (or series of related sales) by us of stock (or debt or
equity securities convertible into stock), in a capital raising transaction,
occurring after the maturity date (or the date the notes become due pursuant to
a default, if earlier) with aggregate gross proceeds of at least
$2,000,000. The warrants cannot be exercised if no “financing” is
consummated prior to February 12, 2015.
Number of Shares: The
warrants represent the right to purchase 8% of the total shares of common stock
outstanding (on a fully-diluted basis) immediately after the closing of the
financing.
Exercise Price: The warrants
are exercisable at the price for which the shares of common stock (or common
stock equivalent if derivative securities are sold) are sold in the financing.
If the financing includes more than one type of security, the exercise price
shall equal the lowest price per share of common stock or common stock
equivalent included in the financing.
Limited
Recourse Guaranty and Pledge Agreement
Our
obligations under the note are guaranteed by Bestyield Group Limited, a BVI
company controlled by Mr. Li, our chief executive officer, and Proudlead
Limited, a BVI company controlled by Mr. Law, our President of Sales and a
member of our Board of Directors, or the “management shareholders,” under a
limited recourse guaranty which is secured by a pledge by the management
shareholders of the 8,706,122 shares of our common stock received by the
management shareholders in the reverse merger.
Registration
Rights Agreement
Under the
registration rights agreement, we agreed that if we file a registration
statement in connection with a “qualified financing,” we will include in that
registration statement for resale the securities issuable on conversion of the
notes or the warrants, as the case may be, for an offering to be made on a
continuous basis pursuant to Rule 415.
45
Accordingly,
we are including 369,725 of the 1,923,809 shares underlying the notes in the
aggregate principal amount of $4,040,000 (assuming a public offering price
of $6.00 per share) in our resale prospectus.
In the
event the SEC pursuant to Rule 415, does not permit us to register all of the
applicable registrable securities in the registration statement, we will use our
best efforts to register the registrable securities that were not registered in
the initial registration statement, as soon as the SEC permits us to do
so. In the case of an underwritten public offering, if the managing
underwriter(s) or underwriter(s) reasonably objects to the inclusion of the
registrable securities in any registration statement, then if we, after
consultation with the managing underwriter, determine that the inclusion of such
registrable securities would significantly harm the offering contemplated in
such registration statement, and recommend inclusion in such registration
statement of fewer or none of the registrable securities, then (x) the number of
registrable securities included in the registration statement shall be reduced
pro-rata among such holders (based upon the number of registrable securities
requested to be included in the registration), or (y) none of the registrable
securities shall be included in the registration statement. If securities are
being offered for the account of other persons as well as us then the reduction
shall not represent a greater fraction of the number of registrable securities
than the fraction of similar reductions imposed on such other persons (other
than the Company).
If (a) we
fail to file a registration statement within 30 days of a demand notice, the
“demand file date” or (b) the registration statement is not effective within 180
days after filing (or, in the case of subsequent registration statements filed
under Rule 415, 90 days after filing or 120 days in the event that registration
statement receives a full review), we have agreed to pay the investors two
percent (2%) of the aggregate principal amount of the notes for each month (or
part thereof) that it is late (capped at 10%). No liquidated damages are payable
with respect to any shares required to be omitted as a result of the operation
of Rule 415.
46
BUSINESS
Overview
We are a
manufacturer of nonwoven fabric in the PRC. Nonwovens are synthetic
fabrics, such as felt or polyester, which are neither woven nor knitted,
but instead made from long fibers, bonded together by chemical, mechanical, heat
or solvent treatment.
We
currently manufacture two types of PET nonwoven fabrics. Our PET
nonwoven fabrics are used in a wide range of products, including filtration
products, road construction materials, home furnishings, automobile interior
insulation and industrial packaging.
We sell
our nonwoven fabrics primarily to PRC-based manufacturers that incorporate our
fabric products into end products which are sold to customers operating in the
heavy industrial, automotive, construction and home furnishing industries. Given
the broad range of applications for our products, we are not dependent on
any single industry sector or customer to generate revenues. We have many active
customers and our two largest clients in 2010, were Dalian Jier Linke Geotextile
Material Co., Ltd. and Chendu Sanya Building Material Co., Ltd. which accounted
for approximately 19% of our revenues. Our two largest customers in 2009,
Chengdu Sanya and Xiantao Ruixin, accounted only for approximately 18% of our
revenues in 2009.
Although
we intend to continue to generate revenues from the sale of PET nonwovens, the
key component to our growth strategy is the successful commercialization and
sale of polyphenylene-sulfide fiber, or PPS, nonwoven fabric. PPS nonwoven
fabric is a heat resistant, corrosion-proof and flame retardant nonwoven fabric
and can be used in many different applications, including as the material for
dust filter bags for pollutant dust removal in smoke stacks in coal-fired power
plants, garbage incinerators and cement factories. We recently developed a
manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS
nonwoven fabric, which is the key product line around which our long-term growth
strategy is centered. We believe that this manufacturing process is
proprietary and have applied for a process patent in the PRC and intend to apply
for a process patent in the US and Europe.
We
believe that although PPS filtration materials have been used since 1979 in bag
filters that are attached to smoke stacks in many of the coal-fired boilers
operating in Europe and the United States, less than 10% of the coal fired
power plants operating in the PRC are equipped with dust removal filtration bags
and less than 10% of the filtration bags in use were made from PPS fiber.
(Source “China Power
Industry”, issue 4, 2006, page 36.)
Under
recently adopted PRC environmental regulations that are being imposed on
operators of coal-fired power plants, garbage incinerators and cement factories,
which came into effect in January 1, 2010, carbon and other emissions are
required to be less than 50 milligrams per cubic meter by the end of
2010. Some of the larger, more developed cities for example
Beijing and Tianjin, have adopted even more stringent rules requiring that
emissions be less than 30 milligrams per cubic meter. (Source "Electric Power," May,
2008.)
We
believe, based on an article published in China Nonwoven & Industrial
Textile (CNIT) in 2010, that less than 10% of the coal-boilers in China were
equipped with dust removal filtration bags and less than 10% of the filtration
bags in use are made from PPS fiber.
Filtration
bags offer these and other plant operators a cost effective way of meeting these
new emission and dust pollutant standards in the PRC because the installation of
bag filters is a significantly cheaper method of achieving compliance with these
regulations than installing costly pollutant dust removal equipment such as
engineered scrubbing systems, the installation of which would we believe be cost
prohibitive for many of these smaller coal fired power plants and other
polluters.
47
Based on
laboratory tests which we conducted internally we believe that our PPS nonwoven
fabric is superior to other high temperature filtration materials currently
available because it is lighter, thicker, stronger, has higher air permeability
and filtration efficiency and is significantly cheaper to
produce. As nonwovens are sold by weight our product will also
be cheaper as it is lighter. Due to the superior
characteristics of our PPS product coupled with the demand created by these new
regulations we believe that our PPS material will ultimately replace other high
temperature filtration materials currently available in the market place, such
as PTFE (or Teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole
fiber), PMIA and PSA and the demand for our PPS nonwovens will be
significant.
Comparison-Our PPS Product to Other Filtration Materials
|
Our PPS
Product
|
PPS
needle
punching
felting
|
Metamax
needle
punching
felting
|
P84
needle
punching
felting
|
PTFE
needle
punching
felting
|
||||||||||||||||
Gram
weight(g/m2)(1)
|
450 | 500 | 500 | 500 | 800 | ||||||||||||||||
Thickness
(mm) (2)
|
2.2 | 1.8 | 2 | 2 | 2.5 | ||||||||||||||||
Air
permeability (L/m2/s) (3)
|
300~400
|
200~300
|
200~400
|
200~300
|
200~300
|
||||||||||||||||
Break
strength (N/5cm)(4)
|
Vertical
|
1400 | 1250 | 1300 | 1100 | 3260 | |||||||||||||||
Horizontal
|
1250 | 1350 | 1460 | 1200 | 3300 | ||||||||||||||||
Break
elongate(%)
(5)
|
Vertical
|
25 | 40 | 50 | 25 | 10 | |||||||||||||||
Horizontal
|
30 | 60 | 55 | 35 | 15 | ||||||||||||||||
Working
temperature (6)
|
Continuous
|
190 | 190 | 204 | 260 | 260 | |||||||||||||||
Moment
|
220 | 220 | 240 | 280 | 300 | ||||||||||||||||
Price
of fiber (in K USD$) (7)
|
$ | 14.68 | $ | 20.56 | $ | 22.03 | $ | 55.80 | $ | 41.12 | |||||||||||
Materials
saved (%) (8)
|
0.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | 43.8 | % | |||||||||||
Filtration
Efficiency (mg/cbm) (9)
|
<30
|
50~100
|
50~100
|
50~100
|
50~100
|
(1) Gram
weight: (g/m2) means grams per meter squared. The higher the gram per
meter squared weight, the heavier the fabric/material.
(2)
Thickness (mm): the higher the millimeter figure, the thicker
the material.
(3) Air
permeability: (L/m2/s) means liters per meter squared per
second. The more liters that pass per second, the higher the
permeability of the fabric/material.
(4) Break
strength: (N/5cm) is a unit of measure to demonstrate breakage
strength. 1 N ≈ 0.1 KG so that N/5cm = .02. So, a 1400
value = 28. The higher the value the stronger the
material.
(5) Break
elongate (%) refers to the amount of stretching of a fabric/material before
breakage expressed as a percentage. So, a 25% value indicates the
material can be stretched 25% prior to breakage.
(6)
Working temperature means the continuous operating temperature that a
fabric/material can operate in.
(7) Price
of fiber (in K USD$) = Price of the fabric/material expressed as K USD$ ($1,000)
per metric ton.
(8) Materials
saved (%) = Referencing the SLP PPS Product as the denominator, the amount of
material that can be saved by utilizing the more efficient PPS material as
compared to the other materials.
(9) Filtration
Efficiency (mg/cbm) = milligrams per cubic meter. The ability of the
fabric/material to eliminate airborne particles. This figure is the
minimum size of particles.
48
We plan
to begin commercial production of our PPS nonwoven fabric using our patent
pending process in the early part of 2011 with the addition of a high-tech
production line with an annual output capacity of 1,200 tons. We plan
to use the proceeds from this offering to purchase two
additional production lines with additional annual output capacity of
2,400 tons. Although prototype bag filters made of our PPS product
have been tested in laboratories, they have not been tested on site by any
potential end user and we do not expect to develop prototypes for testing by any
end user prior to beginning commercial production.
Our
manufacturing facility, which uses manufacturing equipment imported from
Germany, is located in Foshan City, Guangdong Province, PRC and occupies more
than 10,000 square meters. We currently have three production lines for PET
nonwovens with total annual capacity of 8,000 tons of nonwoven
fabric.
Our
Industry
We
operate in the nonwoven segment of the technical textiles industry which is one
of the fastest growing sectors of the textile industry worldwide.
Since
1985, the global market size of the technical textiles sector has grown at an
average growth rate of 3.8% per year. Total consumption of technical textiles in
2008 reached 19.6 million tons and has been projected to reach 33.8 million tons
in 2010 on a worldwide basis. (Source: Textile
Lead).
The
nonwoven fabric industry in the PRC is large and growing, driven primarily by
China’s continued economic development. China has experienced rapid economic and
industrial growth in the past 30 years. China’s output of iron and steel,
cement, coal, fertilizer and power generation all currently rank as first or
second in the world (Source:
US Department of Commerce and US Department of the Interior). China’s
consumption of raw materials currently ranks second in the world (Source: Report from the EIA Energy
Information Administration). Due to outdated technology and equipment in
China’s chemical, raw materials and energy industries, China has encountered
problems of inefficient utilization of energy and resources, as well as heavy
pollution due to accelerated urbanization. Reducing emission pollution has been
a focus for the Chinese Central Government for several years and is expected to
remain a focus moving forward. As China’s government imposes stricter policies
on environmental protection, industrial gas and dust emission limits have become
stricter. We believe this creates a significant market opportunity for the
commercialization of our PPS nonwovens materials.
China now
manufactures about 20% of the world’s nonwovens and this market share is
expected to reach 25% by 2015 according to statistics released by INDA (Association of the Nonwoven
Fabrics Industry) in North America and EDANA (European Disposables and Nonwovens
Association) in Europe.
Currently
in the PRC, there are estimated to be 500-600 nonwovens manufacturers producing
nonwovens on an estimated 1,000 to 1,500 lines. (Source: Chinese Technical Textiles
and Nonwovens Industry, 2009).
We
believe that there is a significant gap between the nonwovens industry in China
and the nonwovens industry in Europe and the United States in terms of technical
level, quality level, and competitiveness. China’s nonwovens market is still
emerging and we believe has a large capacity to develop and expand and we
believe that the following factors will contribute to growth in the nonwovens
industry in China and our ability to grow as a company:
|
·
|
Lack
of market segments: Nonwoven
products are used in a variety of applications. Existing markets are
expanding and new markets are emerging. China’s nonwoven
industry production capacity is still concentrated on normal traditional
products, such as polyester wadding, interlining, geo-textile, hygiene,
packaging materials and normal filtration materials. Many companies lack
clear market focus and are competing in the same market segments which
have caused capacity concentration and fierce
competition.
|
|
·
|
Strength
for market and product development is not substantial: In
China, market demand for higher technology based PET spun-bond
product is currently over 40 million cubic meters. These products are
currently all imported, mainly from Freudenberg
(Taiwan). Some of the domestic Chinese companies have
been trying to develop these products but, to date no such products have
been launched. If these products are developed at a lower cost
in the domestic market, then the Chinese domestic market for highly
technical nonwovens will
expand.
|
49
Our
Growth Strategy
Our
growth strategy centers around the following strategic initiatives:
|
·
|
Commence
production of our PPS nonwoven fabric product. We plan to commence
production of PPS nonwoven fabric using our patent pending manufacturing
process in the early part of 2011 for sale to PRC-based operators of
coal-fired power plants, garbage incinerators and other manufacturers that
need to comply with recently adopted PRC environmental
regulations.
|
|
·
|
Expand
our manufacturing facilities. In order to commence
production of PPS nonwoven fabric, we plan to significantly expand our
manufacturing facilities and are currently installing a new production
line to manufacture PPS nonwoven materials. We plan to acquire two new
production lines with the proceeds of this offering. These
three new production lines are expected to increase our total annual
manufacturing capacity from 8,000 tons to 11,600 tons of nonwoven
materials.
|
|
·
|
Develop,
protect and commercialize our proprietary technology. We hold
a number of authorized patents and have a patent application
currently pending in the PRC for our PPS nonwoven manufacturing
process which we believe is entitled to patent protection. We
intend to apply for a process patent for this process in North America and
Europe. We intend to capitalize on our proprietary
technology by developing and commercializing our products for numerous
applications and believe our proprietary technology gives us a competitive
advantage and acts as a barrier to entry for our
competitors.
|
|
·
|
Commence
marketing and sale of our PPS products to coal fired power plants.
To capitalize on
China’s “green movement” we plan to focus our sales efforts for our PPS
nonwoven material on coal-fired power plants as we believe it is currently
the most suitable and largest market for PPS filtration materials. The
sales to the coal-fired power plants will be made directly using our
existing sales team. We also expect to double the size of our
outside sales force to cover the PPS products and
market.
|
Our
Competitive Strengths
We
believe our competitive strengths are as follows:
|
·
|
We
offer high quality products with low production costs. We manufacture our products
using what we believe to be proprietary, low cost manufacturing processes
with quality manufacturing equipment which allows us to offer PET and PPS
nonwoven products which have lower operational and production costs than
our competitors’ products.
|
|
·
|
We
believe our PPS material is a superior product. We believe, based on
laboratory tests which we conducted internally, that our PPS nonwoven
fabric is superior to other currently available types of PPS fabric
because it is lighter, thicker, stronger, has higher air permeability and
filtration efficiency and significantly cheaper to produce and will
ultimately replace other high temperature filter materials, such as PTFE
(or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber),
PMIA and PSA. Similar to most new product offerings, widespread market
acceptance of our PPS products for use in dust bag filters by coal fired
power plants and other intended users is uncertain before a product is
launched.
|
50
|
·
|
Our
proprietary manufacturing processes present a significant barrier to entry
for our potential competitors. We hold a number
of authorized patents and have a patent application currently
pending in the PRC, including a process patent for the manufacture of
PPS nonwovens, and we intend to apply for a process patent in North
America and Europe for our PPS nonwoven manufacturing process.
Additionally, we have made significant investments in research and
development and we believe these proprietary processes could give us a
competitive advantage over our competitors and act as a barrier to
entry.
|
|
·
|
We
have efficient production and operations management. As a result of our manufacturing
equipment and proprietary manufacturing processes, we believe that we
exceed industry standards in productivity, reduction of variability and
delivery lead time for our existing products. This results in fewer
product warranty claims and greater customer
satisfaction.
|
Our
Products and Market
We
currently manufacture two types of polyester, or PET, nonwoven fabrics: (i) PET
continuous filament spun-bond thermal calendared nonwoven fabric, which we began
manufacturing in 2006; and (ii) PET filament spun-bond needle-punched
geo-membrane and waterproof fabrics, which we began manufacturing in
2009.
In our
operations and in this prospectus, we use a variety of technical terms to
describe our products based on the manufacturing process used or raw material
included in our products. Some of these terms are described below:
“Continuous
filament” refers to strands of polymer (plastic) that are continuous as opposed
to chopped or cut to certain length.
“Spun
Bond” refers to a process of melting polymer pellets melted producing continuous
filaments that are cooled and stretched. The filaments are then cut and laid on
a moving belt to form a web.
“Thermal
Calendered” refers to a process for using heat to bond nonwoven
fabric. A calendar is a machine consisting of cylinders or rolls that
are stacked and heated to precise temperature. The nonwoven material
is passed through (pressed) the cylinders and the polymer based material is
bonded using heat and the partial melting of the polymer (plastic).
“Needlepunched”
refers to a process where precision cut fibers are distributed onto and across a
mesh substrate that is moving. The fibers are then needled (bound together
mechanically) by an oscillating needle board (the needle board consists of
thousands of evenly spaced needles). The fibers are mechanically bonded by
barbed needles entangling the fibers. The density of the fabric is controlled by
the number of needle boards used.
“Geo-membranes”
refers to types of nonwoven fabric that are permeable fabrics which are designed
and applied to be permeable in one direction only. Geo membranes
provide a waterproof barrier that allows moisture to penetrate (drain) from one
direction while limiting or eliminating the penetration (drainage) from the
opposite direction.
Polyester
(PET) filament spun-bond thermal calendared nonwoven fabrics.
Our
polyester (PET) filament spun-bond thermal calendared nonwoven fabric is made
from polyester and performs effectively in high temperatures. It is
anti-corrosive, has a long lifespan (between 1 to 2 years for filtration, 5 to
10 years for automotive applications, and 5 years for other applications) and
maintains its shape and penetration. This nonwoven is used for filtration and
water-drainage, packing and automobile interior decoration and
insulation.
Polyester (PET)
filament spun-bond needle-punched geo-membrane and waterproof
materials.
Geo-membranes
are used in engineering, heavy construction, building and pavement construction,
hydrogeology and environmental engineering. Geo-membranes are permeable fabrics
which have the ability to separate, filter, reinforce, protect and/or drain.
These products have a wide range of applications and are currently used in many
civil engineering applications including the construction of roads, airfields,
railroads, embankments, retaining structures, reservoirs, canals, dams, soil
bank protection and coastal engineering.
51
Our
geo-membrane products are made from polyester and are primarily used in the
construction industry to improve soil strength and for roof waterproofing.
Geo-membranes can be used as a cost-effective alternative to improve soil
strength instead of the conventional manner of soil nailing which is a technique
for stabilizing slopes and for constructing retaining walls from the top down.
With the use of geo-membrane, steep slopes can be planted with vegetation to
enhance the aesthetic value. In addition, our geo-membrane product line is used
for roof waterproofing based on its excellent water resistant qualities and
performance.
In
February 2009, we installed a production line with annual capacity of 4,000 tons
for the production of polyester (PET) filament, needle-punched, geo-membrane and
waterproof materials
PPS
nonwoven fabric product
Our
growth strategy centers around the production and commercialization of our PPS
nonwoven products which are manufactured using a proprietary continuous
filament, spun-bond, needle-punched manufacturing process which we recently
developed.
Although
PPS filtration materials have been used since 1979 in bag filters that are
attached to smoke stacks in nearly 80% of the coal-fired boilers operating in
Europe and the United States, the use of bag filters made from PPS fabric is not
currently widespread in China. (Source “China Power Industry”,
issue 4, 2006, page 36 and
http://www.resinda.com/product2.asp?brand_id=10&series_id=57)
Our
proprietary PPS manufacturing process involves a PPS slice purification
technique designed to get sufficiently pure raw materials to produce PPS
filtration materials. As part of this process we have developed web
formation techniques so that filaments can be used to increase strength and
short fibers are no longer necessary. PPS nonwovens made from
filaments are stronger than PPS nonwovens made from short fibers.
Our PPS
material is produced by the filament spun-bond needle-punched
method. Our product can bear temperatures of up to 230 degrees
Celsius and is resistant to degradation caused by exposure to acid, alkali
or oxidization. In comparison to other high temperature
filtration materials, our product has a longer life (3 years at 190 - 230
degrees Celsius), is stronger (because we use filaments rather than short
fibers), and has lower operation and production costs.
Market
Demand for PPS Products
Under PRC
environmental regulations that became effective on January 1, 2010 and which are
being imposed on operators of coal-fired power plants, garbage incinerators and
cement factories, carbon and other emissions are required to be less than 50
milligrams per cubic meter by the end of 2010. Some of the larger,
more developed cities, for example Beijing and Tianjin, have adopted even more
stringent rules requiring that emissions be less than 30 milligrams per cubic
meter. (Source: "Electric Power”
May, 2008).
We
believe, based on an article published in China Nonwoven & Industrial
Textile (CNIT) in 2001, that less than 10% of the coal-boilers in China were
equipped with dust removal filtration bags and of the filtration bags in use
less than 10% are made from PPS fiber.
Initially,
we intend to market our PPS nonwovens to the coal-fired power plants in the PRC
as we believe that this is the largest and most immediately accessible market
for our PPS filtration materials. After we have established a foothold in that
market, we intend to begin marketing our PPS nonwovens to cement factories and
waste incinerators.
52
PTFE (or
teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and
PSA are other materials that are also used to make needle-punched felt that is
suitable for high temperature applications such as in bag filters for coal-fired
power plants. In comparison to these other high temperature filter
materials, we believe, based on laboratory testing, that our PPS nonwoven fabric
is stronger, has lower production and operating costs, and has higher filtration
efficiency.
Due to
the characteristics of our PPS product coupled with the demand created by these
new regulations, we believe that our PPS material will ultimately replace other
high temperature filtration materials currently available in the market place,
such as PTFE (or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole
fiber), PMIA and PSA and become a widely used filtration material
for use in high temperature environments such as coal-fired power plants,
garbage incinerators and cement factories.
Although
prototype bag filters made of our PPS product have been tested in laboratories,
they have not been tested on site by any potential end user and we do not expect
to develop prototypes for testing by any end user prior to beginning commercial
production.
We have
been supported by the Chinese SEPA (State Environmental Protection Agency) in
the development and application of our PPS fabric for the coal fired power
plants. Our PPS fabric utilized in the bag filter application is the
recommended solution to the carbon emissions standard by SEPA. Mr. Su Lei,
one of our directors, is a government official within SEPA and has direct
responsibility for implementing the recently introduced carbon emission
standards at coal fired power plants. With the support of Mr. Su, we
have introduced our material as the solution to the carbon emissions control
problem to dozens of coal fired power plants in China. All of these
meetings resulted in interest in our PPS fabric and the majority of the coal
fired power plants we have met with have given us indications of specific
purchasing interests as soon as we produce the PPS fabric material in our new
facility.
Our
Manufacturing Facility and Production Lines
Our
manufacturing facility is located in Foshan City, Guangdong Province, PRC and
has over 10,000 square meters of operating space on 33,074 square meters of
land. Our land use rights for this facility expire in October 2052. We use
manufacturing equipment imported from Germany.
We
currently operate three spun-bond production lines. Two of these production
lines are thermal calendared lines with annual capacity of 4,000 tons of
polyester filament, thermal calendared, nonwoven fabric. The third spun-bond
line is a needle-punched production line which commenced operation in February
2009. This production line has an annual capacity of 4,000 tons of polyester
filament, needle-punched, geo-membrane and waterproofing material. Currently we
have total annual production capacity of 8,000 tons.
We are
adding capacity to our existing manufacturing facility with a construction
project to increase the factory size, which will house our new PPS lines. A new
production line is currently being installed and is expected to be completed
in February 2011. We plan to order and install two additional
PPS lines using the proceeds of this offering. These three production
lines will have an annual output capacity of 3,600 tons of PPS nonwoven
material. We have obtained approval from the local foreign trade and
economic cooperation bureau to install these three new production lines for this
total output capacity. To comply with PRC environmental regulations, we are
required to obtain a construction commencement approval from the local
environmental protection bureau for the installation of a new production line
currently under construction before we begin installation.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 120 days from
commencement (on or before March 10, 2011), but we cannot assure that
this will be the case. Once the environmental impact assessment is
completed, we intend to resubmit the application for the construction
commencement approval together with the environmental impact assessment to the
local environmental protection bureau. We anticipate that the construction
commencement approval will be issued within 60 days from the submission date but
we cannot assure that this will be the case.
53
In
addition, we are required a pollution emission permit for the disposal of waste
gases, waste water, waste dust and other waste materials. We do not
currently have a pollution emission permit but we are preparing the application
for this permit and intend to submit the application after the new production
line is completed. The process of obtaining this permit after the
application has been submitted can take up to 5 months.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition. See “—
Environmental Matters.”
Quality
Control
We
received the ISO9001-9002 Quality Management System Certification in 2003 and
again in 2009. We adopted what we believe to be the highest quality standards in
the industry and maintain quality control and product quality at high levels. We
have strictly embraced the ISO9001 Management System Standards in order to
integrate our quality management process and enhance the management system and
manufacturing process. We closely inspect our products to guarantee quality
according to Q/NHJL1-2008 Enterprise Quality Standards and strictly control the
manufacturing process and quality control before any products leave our
factory.
Our
Customers
We sell
our existing products to over 200 customers primarily in the PRC, and
also internationally, to manufacturers and converters, which incorporate
our products into their finished goods.
In fiscal
year 2010, approximately 84 of our net sales were to entities in the PRC and
approximately 7% and approximately 9% were made to customers in North America
and Europe and other regions, respectively. In fiscal year 2009,
approximately 81% of our net sales were to entities in the PRC and approximately
6% and approximately 7% were made to customers in North America and Europe,
respectively.
Dalian
Geolink Geotextile Material Co., Ltd., our largest customer, accounted for
approximately 10.3% of our 2010 net sales. In fiscal year 2009, net sales to
this customer accounted for 4.92% of our net sales.
Sales to
our top 20 customers represented approximately 65% of our total fiscal year 2010
net sales.
The
following chart shows our top ten customers in fiscal year 2010:
Name
|
Location
|
Product
Type
|
Application
|
Revenue
(USD$)
|
Percentage
of Sales
|
|||||||||
Geolink Geotextile Material
Co., Ltd
|
Dalian
|
Geotextile
|
Construction
|
2,054,787
|
10.30
|
%
|
||||||||
Chendu
Sanya Building Material Co., Ltd.
|
Chengdu
|
Geotextile
|
Construction
|
1,816,293
|
9.10
|
%
|
||||||||
WuJiang
Jing shan Fabric
|
Suzhou
|
PET
|
Filtration
|
1,731,611
|
8.68
|
%
|
||||||||
Pentair
Water Pool & Spa Inc.
|
USA
|
PET
|
Filtration
|
1,322,095
|
6.63
|
%
|
||||||||
Zhuzhou
Shidai
|
Shanghai
|
PET
|
Construction
|
1,047,566
|
5.25
|
%
|
||||||||
Shanghai
Rundong Nonwoven Fabric Co., Ltd.
|
Shanghai
|
PET
|
Filtration
|
856,147
|
4.29
|
%
|
||||||||
Xiantao
Ruixin
|
Hubei
|
Geotextile
|
Construction
|
760,395
|
3.81
|
%
|
||||||||
Guangzhou
Baiyun Meihao Filter Cleaner Factory
|
Guangzhou
|
PET
|
Filtration
|
560,284
|
2.81
|
%
|
||||||||
Nordic
Air Filtration A/S
|
Denmark
|
PET
|
Filtration
|
486,086
|
2.44
|
%
|
||||||||
Nan
Hai Ying Sheng Trading Ltd.
|
Guangdong
|
PET
|
Filtration
|
452,243
|
2
|
%
|
54
In fiscal
year 2009, approximately 81% of our net sales were to entities in the PRC and
approximately 6% and approximately 7% were made to customers in North America
and Europe, respectively.
Chengdu
Sanya, our largest customer, accounted for approximately 9% of our fiscal year
2009 net sales.
Sales to
our top 20 customers represented approximately 49% of our total fiscal year 2009
net sales.
The
following chart shows our top ten customers in fiscal year 2009:
Name
|
Location
|
Product
Type
|
Application
|
Revenue
(USD$)
|
Percentage of
Sales
|
|||||||||
Chendu
Sanya building Material Co., Ltd.
|
Chengdu
|
Geotextile
|
Construction
|
1,068,438
|
9.01
|
%
|
||||||||
Xiantao
Ruixin
|
Xiantao
|
Geotextile
|
Construction
|
1,037,883
|
8.75
|
%
|
||||||||
Sichuan
Tianqiang
|
Sichuan
|
Geotextile
|
Construction
|
706,286
|
5.95
|
%
|
||||||||
Geolink
|
Dalian
|
Geotextile
|
Construction
|
583,192
|
4.92
|
%
|
||||||||
Shenzhen
Yaming Civil Engineering Equipment Co.,
|
Shenzhen
|
PET
|
Filtration
|
570,567
|
4.81
|
%
|
||||||||
Pentair
Water
|
USA
|
PET
|
Filtration
|
517,467
|
4.36
|
%
|
||||||||
Guangzhou
Baiyun Meihao Filter Cleaner Factory
|
Guangzhou
|
PET
|
Filtration
|
435,380
|
3.67
|
%
|
||||||||
Shanghai
Rundong Nonwoven Fabric Co., Ltd.
|
Shanghai
|
PET
|
Filtration
|
422,559
|
3.56
|
%
|
||||||||
Foshan
Nanhai Yingsheng Trading Co., Ltd.
|
Foshan
|
PET
|
Trading
|
257,546
|
2.17
|
%
|
||||||||
Guangzhou
Groundsill Basis Engineering Co., Ltd.
|
Guangzhou
|
PET
|
Filtration
|
227,259
|
1.92
|
%
|
Raw
Materials
The
primary raw material that we use to manufacture most of our products is
polyester resin. The price of polyester resin fluctuates based on capacity,
demand and the price of crude oil.
Our major
suppliers of raw materials are Foshan Chemical Fibers Co., Ltd., Kaiping Chunhui
Co., Ltd., and Zhuhai Yuhua Polyester Co., Ltd. We believe that the
loss of any one or more of our suppliers would not have a long-term material
adverse effect on our business because other manufacturers with whom we conduct
business would be able to fulfill our requirements. We do not have long term
supply contracts with any of our suppliers of raw materials.
During
fiscal years 2010 and 2009, we paid approximately$10.9 million and $5.6 million,
respectively, for the purchase of raw materials.
Our PPS
product will be made from high quality polyphenylene sulfide resin, which we
intend to purchase in the United States. Accordingly, the cost of this raw
material will fluctuate with the value of the RMB against the
dollar.
55
Sales
and Marketing
Our
nonwoven products are distributed in 20 provinces in the PRC. In
2003, we began selling our products in Europe, North America and South East
Asia.
In fiscal
year 2010, approximately 84% and 16% of our net sales were generated from sales
made in the PRC and internationally, respectively, compared to approximately 81%
and 19%, respectively, in fiscal year 2009.
As of
September 30, 2010, we employed 11 direct sales representatives, 8 of whom are
engineers who have advanced technical knowledge of our products and the
applications for which they are used. 7 of these sales representatives are
responsible for national sales and 4 are responsible for international sales. We
plan to double the size of our sales force for the PPS product line in the
next year to take advantages of anticipated market for our products.
Representatives receive a salary plus commission of the revenues they
generate.
Our sales
process consists of identifying potential customers through cold calls,
responses to marketing efforts, and customer referrals. Once a potential
customer is identified, our sales people aid in identifying the prospect’s
technical requirements and help the customer’s engineers to produce drawings of
the finished products desired. Armed with this technical information, our sales
personnel then quote pricing, production quantities, and lead times. Most of our
customers are repeat customers and the sales force is also responsible for
after-sale support, including quality assurances, dispute resolution, and
relationship-building.
We
promote our products primarily through exhibitions, internet advertising and
marketing, and referrals from existing customers as well as
suppliers.
We intend
to capitalize on China’s “green” movement. We will focus our sales
efforts for our PPS nonwoven fabric material on operators of coal- fired power
plants as this is currently the most suitable and largest market for PPS
filtration materials. The sales to the coal-fired power plants will be made
directly using our existing sales team and sales process described
above.
Research
and Development
Our
research and development department has what we believe to be one of the
strongest research and development capabilities in the development of products,
processes and equipment in the nonwovens industry in China.
As of
September 30, 2010, our research and development staff consisted of 20
scientists, professional, engineering and technical personnel. Our research and
development team is lead by Mr. Yao Mu, a senior engineer in the industry and
the former president of Northwestern Polytechnical University.
We spent
approximately $200,000 for each of the last two fiscal years on research and
development activities.
In
addition, we believe that each of our senior managers possesses a
comprehensive technical background. Mr. Li Jie, our chief executive officer and
a senior engineer is a certified chemical engineer, the Associate President of
the China Industrial Textile Association and is considered an expert in his
field. His independent research has been funded by the Central Government. Mr.
Ye Xi-Ping, Vice President of Production, is a senior engineer and certified
automation engineer.
56
Intellectual
Property
We have
three utility model patents and one patent application:
Name
|
|
Applicant
|
|
Patent
Application
Date
|
|
Patent
Application
Number
|
|
Basis for
patent
|
|
Status
|
Polyphenylene
sulfide nonwoven spunbond needle production method and
device
|
Foshan
SLP Special Materials Company
|
January 26, 2010
|
2010101026602
|
Invention
|
Pending
|
|||||
Tube-type
air distraction apparatus
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011528.3
|
Utility
model
|
Authorized
|
|||||
New
spinning box structure
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
12, 2009
|
200920011529.8
|
Utility
model
|
Authorized
|
|||||
Lapper
|
Dalian
Huayang Chemical Fiber Engineering technology Co., Ltd
|
March
19, 2009
|
200920012058.2
|
Utility
model
|
Authorized
|
The three
utility model patents were applied for and were originally owned by Dalian
Huayang Chemical Fiber Engineering Technology Co., Ltd., or Dalian. Dalian has
taken steps to transfer the three utility patents to Foshan and the State
Intellectual Property in the PRC approved the transfer of these three utility
patents from Dalian to Foshan on March 29, 2010.
The
duration of utility model rights in the PRC is 10 years from the application
date and the duration of invention rights in the PRC is 20 years from the
application date.
Our
patent application for our process invention is currently pending. No
significant patents are expected to expire in the next five years. We expect
that additional patent applications will be filed as more processes are
developed and specific applications are identified.
We have
the following registered trademark in the PRC:
Trademark
|
|
Registration
Number
|
|
Term of Validity
|
Jinglong
Nonwoven
|
3571234
|
October 21, 2005 to
October 20, 2015
|
||
Si
Le Pu
|
7161478
|
September
28, 2010 to September 27, 2020
|
||
Graphic
|
7162185
|
October
14, 2010 to October 13, 2020
|
We have
the following additional trademark application:
Trademark
Application
|
|
Application
Number
|
|
Application Date
|
S.L.P
|
7161477
|
January
12, 2009
|
To
safeguard our proprietary knowledge, trade secrets, and technology, we rely
heavily on trade secret protection and non-disclosure/confidentiality agreements
with our employees, consultants and third party collaboration partners with
access to our confidential information.
57
Competition
We
primarily face domestic competition in our industry. Our main competitors in the
PRC are Jiangxi Guoqiao Industrial Corporation Limited and Shaoxing Yaolong
Spunbonded Nonwoven Technology Co., Ltd. We compete based on our reputation for
quality, product innovation, performance, service and technical support.
Competitors in
PPS nonwoven fabric industry will be other manufacturers of PPS material
and other materials that are suitable to make bag filters in coal-fired power
plants, garbage incinerators and cement plants and other potential end
users.
Environmental
Matters
As a
manufacturer we are subject to a broad range of national, provincial and local
laws and regulations relating to the pollution and protection of the
environment. Among the many environmental laws applicable to us are laws
relating to air emissions, wastewater discharges and the handling, disposal and
release of solid and hazardous substances and wastes.
In
addition, we are required to obtain a construction commencement approval and a
completion examination approval for each of our three new production lines. We
are adding capacity to our existing manufacturing facility with a construction
project to increase the factory size, which will house our new PPS line(s).
A new production line is currently being installed. The
installation is expected to be completed in February 2011. We plan to
order and install two additional PPS lines using the proceeds of this offering.
We have obtained approval from the local foreign trade and economic
cooperation bureau to install these three new production lines for this total
output capacity. To comply with PRC environmental regulations, we are required
to obtain a construction commencement approval from the local environmental
protection bureau for the installation of a new production line currently under
construction before we begin installation.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 120 days from
commencement (on or before March 10, 2011), but we cannot assure that
this will be the case. Once the environmental impact assessment is
completed, we intend to resubmit the application for the construction
commencement approval together with the environmental impact assessment to the
local environmental protection bureau. We anticipate that the construction
commencement approval will be issued within 60 days from the submission date but
we cannot assure that this will be the case.
In
addition, we are required a pollution emission permit for the disposal of waste
gases, waste water, waste dust and other waste materials. We do not
currently have a pollution emission permit but we are preparing the application
for this permit and intend to submit the application after the new production
line is completed. The process of obtaining this permit after the
application has been submitted can take up to 5 months.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition. As of
December 31, 2010, no such penalties had been imposed on us.
58
Insurance
We
maintain worker's insurance and social welfare insurance for our employees. Our
operating subsidiary, Foshan, has not purchased social insurance for all of its
employees, as of February 17, 2011, the accumulated unpaid amount was
approximately RMB 1.51 million (approximately $229,135). If the
local labor authority orders us to pay unpaid insurance premiums, we may become
obligated to do so thereby increasing our labor costs. We provide life insurance
to our executive officers and D & O insurance for two of our independent
directors. We do not presently maintain product liability insurance. We maintain
property and equipment insurance, however, it does not cover the full value of
our property and equipment, which leaves us exposed in the event of loss or
damage to our properties or claims filed against us. Other than the above
mentioned, we do not maintain any other business or liability
insurance.
Employees
As of
December 31, 2010, we had a total of 176 employees, including over 20 engineers.
The following chart shows the number of our employees involved in the various
aspects of our business:
Category
|
Number of Employees
|
|||
Manufacturing
|
109
|
|||
Sales
and Marketing
|
11
|
|||
Research
and Development
|
5
|
|||
Administrative
|
11
|
|||
Finance
|
4
|
|||
Quality
Control
|
8
|
|||
Equipment
|
15
|
|||
Logistics
|
13
|
Employee
compensation is composed of a salary plus subsidies based on position, education
level, length of service and performance.
PRC
Government Regulations
Business
license
A company
that conducts business in the PRC must have a business license that usually
prescribes a scope of business likely to be conducted. Our business license
covers our present business to manufacture and sell nonwoven fabrics overseas
and domestically. Prior to expanding our business beyond the scope of our
business license, we are required to apply for and receive approval from the PRC
government.
Employment
laws
On
June 29, 2007, the Standing Committee of the National People’s Congress of
the PRC promulgated the Labor Contract Law of
PRC, or the Labor Contract Law, which became effective as of January 1,
2008. On September 18, 2008, the PRC State Council issued the
Implementing Rules for the PRC Labor Contract Law, which became effective as of
the date of issuance. The Labor Contract Law and its implementing rules
impose requirements concerning, among others, the types of contracts to be
executed between an employer and its employees and establish time limits for
probationary periods and for how long an employee can be placed in a fixed-term
labor contract. The Labor Contract Law and its implementation rules also
impose greater liabilities on employers, require certain terminations to be
based upon seniority rather than merit and significantly affect the cost of an
employer’s decision to reduce its workforce. In addition, according to the Labor
Contract Law and its implementing rules, if an employer intends to enforce the
non-compete provision with its employees in the labor contracts or
confidentiality agreements, it has to compensate its employees on a monthly
basis during the term of the restriction period after the termination or ending
of the labor contract. The Labor Contract Law also requires employers in
most cases to provide a severance payment to their employees after their
employment relationships are terminated. Due to the limited period
of effectiveness of the Labor Contract Law and its implementing rules and the
lack of clarity with respect to their implementation and potential penalties and
fines, it is uncertain how it will impact our current employment policies and
practices.
59
Environmental
regulations
We are
subject to various national and local environmental laws and regulations,
including those governing the use, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing process. The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Environmental Impact Assessment Law, the PRC Regulation
on the Administration of Construction Project Environmental Protection, the PRC
Law on the Prevention and Control of Water Pollution and its Implementation
Rules, the PRC Law on the Prevention and Control of Air Pollution and its
Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste
Pollution, and the PRC Law on the Prevention and Control of Noise
Pollution.
In
accordance with the PRC Environmental Impact Assessment Law and the PRC
Regulation on the Administration of Construction Project Environmental
Protection, we are required to obtain a construction commencement
approval and a completion examination approval for each of our three
finished production lines and we are also required to obtain a construction
commencement approval from the local environmental protection bureau for one of
our production lines that is currently under
construction. We have received construction commencement
approval and the completion examination approval for our three finished
production lines. However, we have not obtained the construction
commencement approval for the new production line under construction and the
pollution emission permits from the local environmental protection
bureau.
On
November 9, 2010, we submitted the application for the construction commencement
approval for the new production line under construction to the local
environmental protection bureau and on November 10, 2010, we received comments
from them requesting us to complete the environment impact assessment of the new
production line before submitting the application for the construction
commencement approval. The environmental impact assessment is currently
being conducted by a third party authorized by the local environmental
bureau. We anticipate that it will be completed within 120 days from
commencement (on or before March 10, 2011), but we cannot assure
you that this will be the case. Once the environmental impact assessment
is completed, we intend to resubmit the application for the construction
commencement approval together with the environmental impact assessment to the
local environmental protection bureau. We anticipate that the
construction commencement approval will be issued within 60 days from the
submission date but we cannot assure that this will be the case.
In
addition, we are required a pollution emission permit for the disposal of waste
gases, waste water, waste dust and other waste materials. We do not
currently have a pollution emission permit but we are preparing the application
for this permit and intend to submit the application after the new production
line is completed. The process of obtaining this permit after the
application has been submitted can take up to 5 months.
We cannot
assure you that we will be able to obtain the construction commencement approval
or the pollution emission permit in a timely manner or at all. Failure to
obtain this approval and permit may subject us to fines or disrupt our
operations and construction, which may materially and adversely affect our
business, results of operations and financial condition.
Patent
protection in China
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets.
The PRC
is also a signatory to most of the world’s major intellectual property
conventions, including:
60
|
—
|
Convention establishing the World
Intellectual Property Organization (WIPO Convention) (June 4,
1980);
|
|
—
|
Paris Convention for the
Protection of Industrial Property (March 19,
1985);
|
|
—
|
Patent Cooperation Treaty
(January 1, 1994); and
|
|
—
|
The Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs) (December 11,
2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of
the China Patent Law and its Implementing Regulations came into effect in 2008
and 2010, respectively.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents, namely, patents for inventions,
utility models and designs. The Chinese patent system adopts the principle of
first to file. Therefore, where more than one person files a patent application
for the same invention, a patent can only be granted to the person who first
filed the application. Consistent with international practice, the PRC
only allows the patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical applicability. For a
design to be patentable, it cannot be identical with or similar to any design
which, before the date of filing, has been publicly disclosed in publications in
the country or abroad or has been publicly used in the country, and should not
be in conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must enter
into a written licensing contract with the patent holder and pay the patent
holder a fee. One broad exception to this rule, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. The patent holder may appeal such decision within three months from
receiving notification by filing a suit in a people’s court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. Patent holders who believe their patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. A preliminary injunction may be issued by the
People’s Court upon the patentee’s or the interested parties’ request before
instituting any legal proceedings or during the proceedings. Damages in
the case of patent infringement is calculated as either the loss suffered
by the patent holder arising from the infringement or the benefit gained by the
infringer from the infringement. If it is difficult to ascertain damages in this
manner, damages may be reasonably determined in an amount ranging from one or
more times the license fee under a contractual license. The infringing party may
be also fined by the Administration of Patent Management in an amount of up to
four times the unlawful income earned by such infringing party. If there is no
unlawful income so earned, the infringing party may be fined in an amount of up
to RMB200,000, or approximately $29,500.
Value
added tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. When exporting goods, the exporter is entitled to a portion or
all of the refund of VAT that it has already paid or borne. We are subject to
the foresaid rules, and currently we are required to pay VAT at a rate of 17% in
our sale or importation of goods while we are entitled to VAT refund at the rate
of 16% for our exported goods. We do not enjoy any VAT deduction or
exemption treatment.
61
Foreign
currency exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, securities investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the National
Development and Reform Commission. We currently do not hedge
our exposure to fluctuations in currency exchange rates.
Mandatory
statutory reserve and 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 10.0% of
its after-tax profit based on PRC accounting standards each year for its general
reserves until the cumulative amount of such reserves reaches 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Properties
Our
manufacturing facility is located in Foshan City, Guangdong Province, PRC and
has over 10,000 square meters of operating space on 33,074 square meters of
land. Our land use right was granted by Nanhai State-Owned Land Resource
Bureau in 2002 and expires in October 2052. If we want to continue to use
the land after the expiration date, we must apply for an extension at least one
year prior to the expiration of the granted land use right.
All land
in the PRC is owned by the state or rural collective economic organizations and
cannot be sold to any individual or entity. Instead, the government grants
or allocates land users a “state-owned land use right.”
Granted
land use rights are provided by the government in exchange for a grant fee, and
carry the rights to pledge, mortgage, lease, and transfer within the term of the
grant. Land is granted for a fixed term, generally 70 years for residential use,
50 years for industrial use, and 40 years for commercial and other use. The term
is renewable in theory. Unlike the typical case in Western nations, granted land
must be used for the specific purpose for which it was granted.
Allocated
land use rights are generally provided by the government for an indefinite
period (usually to state-owned entities) and cannot be pledged, mortgaged,
leased, or transferred by the user. Allocated land can be reclaimed by the
government at any time. Allocated land use rights may be converted into granted
land use rights upon the payment of a grant fee to the government.
62
Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings in the
ordinary course of our business. We are currently not aware of any legal
proceedings in which the ultimate outcome, in our judgment based on information
currently available, would have a material adverse affect on our business,
financial condition or operating results.
ADDITIONAL
DISCLOSURE REGARDING CONVERSION OF NOTES AND EXERCISE OF WARRANTS
As
disclosed in more detail under “Our Corporate History-Private Placement” above,
we issued convertible notes and warrants to certain accredited investors in a
private placement which closed on February 12, 2010. The tables below
present some additional information regarding the notes and warrants and their
impact on this offering.
If
this offering is completed, the notes will convert into shares of our common
stock at a 65% discount to the public offering price. In the event this offering
is not completed and the notes do not convert into common stock, we intend to
repay the notes at maturity. The notes were originally
scheduled to mature on February 12, 2011; however, all noteholders (other than
Lumen Capital which was the holder of a note in the principal amount of
$100,000) agreed to extend the maturity date to June 30, 2011. We paid the
interest due on the notes for quarters ended March 31, June 30, September 30,
2010 and December 31, 2010. On February 11, 2011, we repaid the note held
by Lumen Capital in the principal amount of $100,000 (together with interest
accrued thereon).
We
believe that we will be able to obtain a credit line sufficient to pay off the
principal and interest due on the notes at maturity. We cannot, however,
assure you that this will be the case. See the risk factor entitled
“If we cannot extend or renew our currently outstanding short-term loans or if
our convertible notes are not converted before their maturity date, we will have
to repay these loans with cash on hand or refinance them with another lender or
else face a default and potential foreclosure upon the collateral we
pledged.”
Table 1
The
following is a table disclosing the total dollar value of the common stock
underlying the convertible notes (using the number of underlying securities and
the value for those securities on February 12, 2010, the date of the sale of the
convertible notes).
Value
of common stock per share on February 12, 2010 (1)
|
2.45
|
|||
Conversion
price per share of common stock underlying the convertible
notes (2)
|
$
|
0.86
|
||
Total
number of shares of common stock issuable at conversion price of $0.86 on
conversion of convertible notes in the aggregate principal amount of
$4,040,000.
|
4,697,674
|
|||
Gross
value of 4,697,674 shares underlying the notes on February 12, 2010
at value of $2.45 per share
|
$
|
11,509,301
|
||
Net
value of 4,697,674 shares underlying the notes (3)
|
$
|
8,026,046
|
(1)
|
This value per share was
determined by the Company after consultation with its financial advisors
and is based on a valuation determined as
follows:
|
As of
January 31, 2010, the Company, with the assistance of its financial advisors,
determined a valuation based on the Company’s net profits for the current year
and those projected for the next 12 months. The Company made a comparable
company analysis of 9 mid-cap publicly traded companies which had an average
price earnings ratio of 24 times current year and one year of projected
earnings. After discussions with potential underwriters,
bearing in mind the nature of the Company’s business, in
particular the fact that the Company had not yet commenced production
of PPS products, the Company accepted that it might to be able to complete
a public offering in the current market based on a multiple of approximately 5
times current and projected earnings. Primary Capital then approached
potential investors to determine the multiple at which they might be willing to
invest in the Company in a bridge financing prior to a contemplated
public offering based on a multiple of approximately 5 times current and
projected earnings. Primary Capital advised the Company, that after
discussions with potential investors, investors stated that in view
of the liquidity risk, they might be willing to invest in a bridge
financing at a 65% discount to the proposed 5 times earnings
valuation.
63
Given
the fact that as of the date of this valuation, the Company was privately
issuing convertible notes, the investors and the Company agreed that, as of
January 31, 2010, a pre-money (i.e. pre- bridge financing) multiple of 1.78
times current and projected net earnings was appropriate for a company that had
not raised any capital in a public offering. Since this valuation
was agreed to by the Company and the investors, management viewed the
convertible note financing as an “arms-length” transaction and treated the $2.45
per share pre-money valuation as the stock’s fair value in calculation of the
fair value of the Company’s warrants. Detailed computation is as
below:
Current
and projected net profits
|
$
|
20,000,000
|
||
Multiple
|
1.78
|
|||
Pre-bridge
money valuation
|
$
|
35,560,000
|
||
Common
stock shares outstanding (pre-bridge and pre public
offering)
|
14,510,204
|
|||
Valuation
per share
|
$
|
2.45
|
(2)
|
The notes convert into common
stock at a 65% discount to the public offering price. However, for
purposes of determining the value of the discount on February 12, 2010 we
are using the value of the common stock on February 12, 2010 which was
$2.45. Based on this the conversion price would be $0.86 per
share.
|
(3)
|
The 4,697,674 shares issuable on
conversion of the notes in the aggregate principal amount of
$4,040,000 had a gross value on February 12, 2010 of $11,509,301. This
represents a net value, after deducting cost basis of $3,483,255 (or
$4,040,000 less $556,745 of interest payable on convertible notes in
aggregate principal amount of $4,040,000) of
$8,026,046.
|
Table 2
The
following table discloses the dollar amount of each payment (including the value
of any payment that we have made or will be made in common stock) in connection
with the private placement entered into on February 12, 2010 and the
proposed public offering, to any selling stockholder (or any affiliate of a
selling stockholder or any person with whom
any selling shareholder has a contractual relationship) and to each finder or
placement agent regarding the transaction (including any interest
payments, liquidated damages, payments made to "finders" or "placement agents,"
and any other payments or potential payments).
Fees
to Primary Capital as placement agent
|
$ | 397,000 | (1) | |
Shares
issued to Primary Capital
|
$ | 1,362,055 | (1) | |
Warrant
to Primary Capital
|
$ | 152,942 | (1) | |
Fees
to United Best
|
$ | 1,027,000 | (2) | |
Shares
issued to United Best
|
$ | 1,362,055 | (2) | |
Warrant
to United Best
|
$ | 152,942 | (2) | |
Liquidated
Damages payable under Registration Rights Agreement
|
$ | 404,000 | (3) | |
Interest
payable to Noteholders
|
556,745 | (4) | ||
Shares
issued to Noteholders
|
$ | 8,026,046 | (5) | |
Total
Payments made or which may be required to be made by the Company to
Selling Stockholders and other persons set forth
above:
|
$ | 13,440,785 |
(1)
|
Under the terms of a financial
services agreement between Primary Capital and the Company, Primary
Capital was paid a commission of $202,000 at the closing and is also owed
an additional $75,000 for services rendered in connection with the private
placement. Primary Capital also entitled to be paid a $15,000 upon
completion of this offering and $15,000 for the next succeeding
seven calendar quarters for an aggregate amount of
$120,000.
|
64
At the
closing of the financing, Primary Capital received 290,755 shares of our common
stock. Primary is also entitled to receive 265,186 shares on closing of
the offering. Using a valuation equal of $2.45 (which equals the value of
the shares of common stock on February 12, 2010) these 555,941 shares have a
value of $1,362,055.
Primary
Capital is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which shall occur upon
consummation of this offering), a five-year warrant to purchase 96,190 shares of
common stock (which number represents 5% of the 1,923,809 shares of common
stock issuable to the noteholders on conversion (assuming a public offering
price of $6.00 per share)). However, for purposes of this table we have
valued the 96,190 warrants using their “intrinsic value” of $1.59 per share
(i.e. the difference between the value of the common stock as of February 12,
2010 of $2.45 less the strike price of $.86 (a 65% discount to the $2.45 value)
which amounts to $152,942.
If the
note conversion does not occur, Primary Capital will receive a five-year warrant
to purchase that number of shares of common stock equal to 5% of the common
stock underlying the warrants issued to the investors in the private financing
exercisable at the same price at which those investor warrants are
exercisable. We have not assigned any value to any future
transaction.
Under
the terms of the financial services agreement, if any additional transaction is
completed between the Company and the investors prior to November 2011, Primary
Capital is entitled to receive an additional fee equal to between three to four
percent of the aggregate consideration paid by the investors depending on the
size of the financing. We have not assigned any value to any such
future transaction.
(2)
|
Under the terms of
a consulting agreement between United Best and the Company, United
Best was paid a commission of $202,000 at the closing of the
financing. United Best is also owed an additional $75,000 for
services rendered in connection with the financing. Under the
consulting agreement, as amended, United Best is entitled to be paid on
completion of this offering a success fee of $750,000 (which represents 3%
of the assumed $25,000,000 in gross proceeds to be received by us in
connection with this underwritten
offering).
|
At the
closing of the transaction, United Best received 362,755 shares of our common
stock for their services. United Best is also entitled to receive 193,186
shares on closing of the offering. Using a valuation equal to $2.45 these
555,941 shares have a value of $1,362,055.
In
addition, United Best is entitled to receive, on conversion of the notes issued
to the investors in the February 2010 private placement (which shall occur upon
consummation of this offering), a five-year warrant to purchase 96,190 shares of
common stock (which represents 5% of the 1,923,809 shares of common stock
issuable to the noteholders on conversion (assuming a public offering price of
$6.00 per share)). For purposes of this table we have valued the 96,190
warrants using their “intrinsic value” of $1.59 per share (i.e. the difference
between the value of the common stock as of February 12, 2010 of
$2.45 less the strike price of $.86 (a 65% discount to the $2.45 value) which
amounts to $152,942.
If the
note conversion does not occur, United Best will receive a five-year warrant to
purchase that number of shares of common stock equal to 5% of the common stock
underlying the warrants issued to the investors in the private financing
exercisable at the same price at which those investor warrants are
exercisable. We have not assigned any value to any future
transaction.
65
(3)
|
Under the registration rights
agreement dated February 12, 2010 between the Company and the noteholders,
we are required, subject to the operation of Rule 415, to include in
this registration statement for resale the shares underlying the
notes. Accordingly, we are registering in a resale prospectus
simultaneously herewith 369,725 of the 1,923,809 shares issuable
on conversion of the convertible notes in the aggregate principal
amount of $4,040,000. If the registration statement is not
effective within 180 days after filing we have agreed to pay the
investors two percent (2%) of the aggregate principal amount of the notes
for each month (or part thereof) that it is late (capped at 10% or
$404,000). No liquidated damages are payable with respect to any shares
required to be omitted as a result of the operation of Rule 415. For
purposes of this table we are using the maximum amount payable. We
have no way of knowing whether we will be required to pay some or any of
this amount.
|
(4)
|
Interest is payable quarterly
at the rate of 10% per annum (increasing to 15% if there is a default). As
more fully described in table 4 below, a total of $566,745.20 is payable
with respect to the notes. Interest of $10,000 payable with respect to the
note in the principal amount of $100,000 previously held by Lumen Capital
which was repaid on February 11, 2011 is not included on this
table.
|
(5)
|
The notes are convertible into
shares of common stock at a discount of 65% of the public offering
price. However, for purposes of this table we are valuing the shares
underlying the common stock as of February 12, 2010 at a price of $2.45
per share. Accordingly, the $4,040,000 aggregate principal amount of
the notes is convertible into 4,697,674 shares which have a gross value on
February 12, 2010 of $11,509,301. This represents a net value, after
deducting cost basis of $3,483,255 (or $4,040,000 less $556,745 of
interest), of $8,026,046.
|
Table 3
The
following table sets forth the gross proceeds from the issuance of the notes to
the selling stockholders and net proceeds received by us.
Gross
proceeds from sale of the convertible notes (1):
|
$
|
4,040,000
|
||
Payments
in connection with the transaction that we made:
|
||||
Placement
agent and advisory fees payable in connection with the closing of the
financing (2)
|
$
|
554,000
|
||
Legal
fees for the financing (3)
|
$
|
326,187
|
||
Documentation
Fees
|
$
|
5,000
|
||
Total
Payments by us:
|
$
|
885,187
|
||
Balance
(net of above expenses) (4)
|
$
|
3,154,813
|
||
Total payments
made or which may be required to be made by the Company to Selling
Stockholders and other persons as set forth in
Table 2
|
$
|
13,440,785
|
||
Net
loss to company from transaction (5)
|
$
|
(9,731,972
|
)
|
(1)
Excludes the note in the principal amount of $100,000 issued to one of the
investors which was repaid on February 11, 2011 and so will not convert into
shares of common stock.
(2) Represents
fees of $202,000 paid to each of Primary Capital and United Best
as placement agent fees. Each of them is entitled to receive an additional
$75,000 for their services. Primary Capital is also entitled to be paid a
$15,000 upon completion of this offering and $15,000 for the next succeeding
seven calendar quarters for an aggregate amount of $120,000 which
number is not included in the $554,000. (United Best is also entitled to be paid
a success fee of $750,000 or 3% of the gross proceeds received by the Company on
closing of the public offering.)
(3) This
amount includes the payment of legal fees for services rendered in connection
with the financing.
(4) $204,464
was held in escrow to pay the interest due on the notes during the first 6
months.
(5) Represents
$3,154,813 less $13,440,785 (but adding back placement agent and advisory fees
payable in connection with the closing of the financing of $554,000 which are
included in the $13,440,785).
Table
4
The
following is a table disclosing the interest payments required to be made to the
note holders during the life of the convertible notes.
66
Interest
is payable quarterly at the rate of 10% per annum increasing to 15% if there is
a default.
Date
|
Interest
Payment
Amounts
|
|||
3/31/2010
|
$
|
53,309.60
|
||
6/30/2010
|
$
|
103,216.44
|
||
9/30/2010
|
$
|
104,350.68
|
||
12/31/2010
|
$
|
104,350.68
|
||
2/12/2011
|
$
|
1,178.08
|
||
3/31/2011
|
99,616.44
|
|||
6/30/2011
|
100,723.29
|
|||
Total:
|
$
|
566,745.20
|
(1)
|
(1)
|
This amount includes $10,000
of interest on the $100,000 note held by Lumen Capital which
was repaid on February 11,
2011.
|
Quarterly
interest payments payable with respect to the quarters ended March 31, 2010,
June 30, 2010 September 30, 2010, and December 31, 2010 have been
made.
Table
5
The
following table sets forth the total possible profit the selling shareholders
could realize as a result of any conversion discount for the common stock
underlying the convertible notes, with the following information disclosed
separately.
The
value per share of the common stock on February 12, 2010, the date of the
sale of the convertible notes
|
2.45
|
(1)
|
||
The
conversion price per share of common stock on February 12, 2010, the date
of the sale of the convertible notes
|
$
|
0.86
|
(2)
|
|
The
total shares underlying the convertible notes with an aggregate principal
amount of $4,040,000
|
4,697,674
|
(3)
|
||
The
combined gross value of the 4,697,674 shares underlying the convertible
note, calculated by using $2.45 the value per share on the date of the
sale of the convertible note
|
11,509,301
|
(1)
|
||
The
total possible discount to the value as of February 12, 2010 (the date of
the sale of the convertible note), calculated by subtracting $3,483,255
(the total conversion price on the date of the sale of the convertible
note ($4,040,000) less $556,745 of interest paid or payable) from
$11,509,301 (the combined value of the 4,697,674 shares of common stock
underlying the convertible notes on February 12, 2010)
|
$
|
8,026,046
|
(1)
|
For purposes of this calculation
we have used a valuation of $2.45 per
share.
|
(2)
|
The notes are convertible at a
65% discount to the proposed public offering price. For purposes of this
table we are using a conversion price of $.86 which represents a 65%
discount to the $2.45 per share value as of February 12,
2010.
|
(3)
|
Based on a conversion price of
$0.86 the notes convert into 4,697,674 shares. The interest payable
on the notes does not convert into shares of common
stock.
|
Table
6
The
following is a table disclosing (i) the gross proceeds paid to us by the selling
stockholders in connection with the financing transaction on February
12, 2010, (ii) the payments made by us in that transaction, (iii) the net loss
to us from the transaction and (iv) the aggregate potential profit realizable by
the selling stockholders in that transaction as a result of a 65% discount
price relating to the conversion price of the notes and the discounted exercise
price of the warrants issued to the placement agent and financial advisor in
connection with the financing transaction:
67
|
Amount
|
|||
Gross
proceeds paid to us:
|
$
|
4,040,000
|
(1)
|
|
All
payments that have been made by or that may be required to
be made by us as set forth in Table 2:
|
$
|
13,440,785
|
||
Net
loss to company from the transaction:
|
$
|
(9,731,974
|
)
|
|
Total
possible profit assuming conversion of the notes at $0.86 and resale of
the 4,697,674 shares underlying the notes at price of $2.45 per
share.
|
$
|
8,026,046
|
||
Total
possible profit by United Best assuming exercise of the 240,698 warrants
at $.86 and resale of the 240,698 shares underlying the warrants at $2.45
per share.
|
$
|
382,710
|
||
Total
possible profit by United Best from the sale of the 555,941 shares at the
price of $2.45 per share.
|
$
|
1,362,055
|
||
Total
possible profit by Primary Capital assuming exercise of the warrants
issued to at $.86 and resale of the 240,698 shares underlying the warrants
at $2.45.
|
$
|
382,710
|
||
Total
possible profit by Primary Capital from the sale of the 555,941 shares at
the assumed offering price of $2.45 per share.
|
$
|
1,362,055
|
||
Combined
total possible profit
|
$
|
11,515,576
|
||
Percentage
of (x) $21,466,831 ((i) the total amount of all possible payments
($13,440,785) and (ii) the total possible discount to the value of the
common stock underlying the convertible notes at the time of sale on
February 12, 2010 ($8,026,046)) divided by (y) the cash proceeds to the
Company from the sale of the convertible notes after payment of cash
expenses ($3,154,813).
|
680
|
%
|
(1)
Excludes the note in the principal amount of $100,000 issued to one of the
investors which was repaid on February 11, 2011 and will not convert into shares
of common stock.
Table
7
The
following is a table disclosing the value on February 12, 2010 of the warrants
issued to the placement agent and the financial advisor. The
warrants are exercisable for shares of common stock at a discount of 65% of the
public offering price. However for purposes of this calculation we are
using the $2.45 valuation for the common stock and calculating the exercise
price at $.86 per share.
Value
on February 12, 2010 of common stock underlying warrants
|
$
|
2.45
|
||
Exercise
price per share of common stock underlying the warrants (65%
discount)
|
$
|
.86
|
||
Total
number of shares of common stock issuable on conversion of notes (with an
aggregate principal amount of $4,040,000) at a conversion price
of $.86
|
4,697,674
|
|||
Number
of shares underlying warrants issued to placement agent and financial
advisor (10%) (assumes conversion of notes with an aggregate principal
amount of $4,040,000)
|
469,767
|
|||
Total
market price of the 469,767 shares underlying the warrants (using $2.45
value per share)
|
$
|
1,150,929
|
||
Total
exercise price of 469,767 shares underlying the warrants
|
$
|
404,000
|
||
Total
value the 469,767 shares underlying the warrants
|
$
|
746,929
|
Table
8
The following is a table comparing
(i) the number of shares of common stock currently outstanding, (ii) the
number of shares of common stock currently outstanding held by persons other than the
selling stockholders,
affiliates of the Company and affiliates of the selling stockholders, (iii)
the number of shares
registered by the selling stockholders (or their affiliates) in prior
registration statements , (iv) the number of shares underlying the notes being
registered for resale in this Registration Statement (assuming a public offering
price of $6.00 per share; (v) the number of shares issued to the placement agent
and financial advisor for services rendered in connection with the private
placement that are being registered in the resale prospectus;
(vi) the number of shares underlying warrants issued to
the placement agent and financial advisor for services rendered in connection
with the private placement that are being registered in the resale prospectus;
and (vii) the number of other shares being registered by the
selling stockholders.
68
The
number of shares of common stock currently outstanding prior to the public
offering
|
15,265,714
|
|||
The
number of shares of common stock currently outstanding held by
persons other than the
selling stockholders, affiliates of the Company and affiliates of the
selling stockholders
|
1,136,633
|
|||
The
number of shares registered by the selling stockholders (or their
affiliates) in prior registration statements
|
0
|
|||
The
number of shares underlying the notes being registered for resale in the
resale prospectus (assuming a public offering price of $6.00 per share and
a conversion price of $2.10 per share) (1)
|
369,725
|
|||
The
number of shares issued to the placement agent and financial advisor for
services rendered in connection with the private placement that are being
registered in the resale prospectus (1)
|
0
|
|||
The
number of other shares being registered by the
selling stockholders in the resale prospectus
(1)
|
0
|
|||
The number
of shares underlying warrants issued to the placement agent and financial
advisor for services rendered in connection with the private placement
that are being registered in the resale prospectus (1) .
|
0
|
(1) The
resale prospectus relates to the sale by the selling stockholders identified in
that prospectus of up to 369,725 shares of our common stock comprising
369,725 of the 1,923,809 shares issuable on conversion of the outstanding
convertible notes in the aggregate principal amount of
$4,040,000 issued in February 2010. A convertible note in
the principal amount of $100,000 was repaid on February 11, 2011 and so will not
be converted into common stock. The note purchase agreement dated
February 12, 2010, pursuant to which the noteholders acquired the convertible
notes, is filed as exhibit 10.2 to this registration statement. Under the
registration rights agreement dated February 12, 2010 between the Company and
the noteholders, we are required, subject to the operation of Rule 415, to
include in this registration statement for resale the shares underlying the
notes.
In the
share exchange or “reverse merger” transaction, we acquired control of Hong Hui
which owns all of the stock of Technic, which in turn owns of all of the stock
of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204
shares our of common stock in exchange for all of the outstanding capital stock
of Hong Hui. One of the Hong Hui stockholders with whom we completed
the share exchange was Newise Holdings Limited, a British Virgin Islands
company, which received 2,321,633 of our shares. Newise Holdings
Limited is controlled by Li Jun, one of our directors. In February
2010, 673,877 of these 2,321,633 shares were sold to Primary Capital and 100,000
were sold to Mr. Ming Liu.
Except as
set forth above other than the issuance and sale of the notes and the warrants
to the noteholders, and the cash and equity based compensation paid to the
placement agent and financial advisor, we have not in the past three years
engaged in any securities transaction with any of the selling stockholders, any
affiliates of the selling stockholders, or, after due inquiry and investigation,
to the knowledge of the our management, any person with whom any selling
stockholder has a contractual relationship regarding the transaction (or any
predecessors of those persons).
In
addition, other than in connection with the contractual obligations set forth in
(i) the note purchase agreements and related agreement entered into
by us, on the one hand and each of the selling stockholders on the other hand,
(ii) the notes and the warrants and (iii) the security documents entered into in
connection with the financing transaction, we do not have any agreement or
arrangement with the selling stockholders with respect to the performance of any
current or future obligations.
Investors’
Warrants
At the closing of the private placement of the notes, the note investors were issued warrants which become exercisable only in certain events. The warrants will be void and of no force and effect if the notes convert into common stock, which would occur automatically at the closing of the offering contemplated by this prospectus.
The warrants are exercisable only if a “financing” is consummated after February 12, 2011 (or the date the notes become due pursuant to a default, if earlier) and prior to February 12, 2015. A “financing” means the first sale of stock (or securities convertible into stock) in a capital raising transaction with gross proceeds of at least $2,000,000.
69
The
warrants will be exercisable to purchase 8% of the total shares of common stock
outstanding (on a fully-diluted basis) immediately after the closing of the
“financing.” The warrants are exercisable at the price at which the
shares of common stock (or common stock equivalent if derivative securities are
sold) are sold in the financing. Accordingly, because we cannot determine
at this point whether the warrants will become exercisable, the exercise price,
the number of shares for which the warrants will be exercisable, or what the
market price for the common stock at the time of any possible sale, we cannot
calculate the possible profits that the investors would achieve on exercise and
sale of the warrants.
Financial
Services Agreements and Related Warrants
United
Best
United
Best, our foreign advisor controlled by Mr. Li Jun, one of our directors,
provided financial services in connection with our reverse merger with Hong Hui
completed on February 12, 2010. These services included advising the
Company on structuring the reverse merger, assisting the Company in retaining
service providers such as accountants, PRC and US attorneys to effect the
reverse merger and working with those service providers to facilitate the
completion of the reverse merger. Additionally, United Best will assist the
Company with on-going communications and coordinating the relationships with
service providers during the NASDAQ listing process.
Under the
terms of a consulting agreement between United Best and the
company United Best was paid a commission of $202,000 at the closing of the
convertible notes financing. United Best is also owed an additional $75,000 for
services rendered in connection with that transaction. Additionally, under
the consulting agreement, as amended, United Best is entitled to be paid on
completion of this offering a success fee of $750,000 (which represents 3% of
the $25,000,000 gross proceeds to be received by us in connection with the
underwritten offering (assuming a public offering of $6.00 per
share).
At the
closing of the convertible notes financing, United Best received 362,755 shares
of our common stock for its services. United Best is also entitled to
receive an additional 193,186 shares of closing of this offering.
In
addition, as partial consideration for providing these consulting services,
United Best is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which occurs upon consummation
of this offering), a five-year warrant to purchase 96,190 shares of
common stock (which represents 5% of the 1,923,809 shares of common stock
issued to the note holders on conversion (assuming a public offering of $6.00
per share)), exercisable at the price of $2.10 per
share (i.e. the price at which the notes convert assuming a public
offering of $6.00 per share). Unlike the investor warrants, these warrants will
not terminate but instead become exercisable on conversion of the notes and
consummation of this offering. If the note conversion does not occur,
United Best will receive a five-year warrant to purchase that number of shares
of common stock equal to 5% of the common stock underlying the warrants issued
to the investors in the private financing exercisable at the same price at which
those investor warrants are exercisable.
Primary
Capital
Primary
Capital provided financial services in connection with the private placement and
reverse merger which closed on February 12, 2010. The services provided
and to be provided by Primary Capital include the following:
|
·
|
assisting the Company in
preparing a detailed business plan, financial model and power point
presentation;
|
|
·
|
negotiating and structuring the
reverse merger;
|
70
|
·
|
acting as placement agent for the
February 12, 2010 note
financing;
|
|
·
|
recommending to the Company a
qualified auditor, securities attorney and investor relations firm, and
assisting the company with negotiating the terms of their respective
engagements;
|
|
·
|
advising the Company on
strategies to increase shareholder
value;
|
|
·
|
assisting the Company and its
investor relations firm in organizing, and participating with the Company
in, investor road shows and investor conference
calls;
|
|
·
|
recommending investor
conferences in the US and Europe to be attended by the Company and
a representative of Primary
Capital;
|
|
·
|
identifying strategic
relationships and joint venture
partners;
|
|
·
|
identifying and recommending
persons to serve on the Company’s Board of
Directors;
|
|
·
|
identifying and rendering advice
regarding potential acquisitions, including the valuation of the
acquisition and financing for the
acquisition;
|
|
·
|
assisting the Company in
connection with its listing on a U.S. stock
exchange;
|
|
·
|
reviewing and commenting on
the Company’s SEC filings associated with the company’s transactions;
and
|
|
·
|
advising Company regarding its
obligations as a U.S. public
company.
|
Under
the terms of a financial services agreement between Primary Capital and the
Company, at the closing of the February 2010 financing Primary Capital was paid
a commission of $202,000. Primary Capital is also owed an additional
$75,000 for services rendered in connection with the private placement.
Primary Capital is also entitled to receive $15,000 on completion of the
offering and $15,000 for the next succeeding seven calendar
quarters for an aggregate amount of $120,000.
At the
closing of the financing, Primary Capital received 290,755 shares of our common
stock. Primary is also entitled to receive 265,186 shares of common stock
on the closing of this offering.
In
addition, for providing these financial services Primary Capital is
entitled to receive, on conversion of the notes issued to the investors in the
February 2010 private placement (which occurs upon consummation of this
offering), a five-year warrant to purchase 96,190 shares of common stock
(which number is equal to 5% of the 1,923,809 number of shares of common
stock being issued to the noteholders on conversion), exercisable at $2.10
(which equals the price at which the notes convert assuming a public offering
of $6.00 per share). Unlike the investor warrants, these
warrants will not terminate but instead become exercisable upon conversion of
the notes and consummation of this offering. If the note conversion does
not occur, Primary Capital will receive a five-year warrant to purchase that
number of shares of common stock equal to 5% of the common stock underlying the
warrants issued to the investors in the private financing exercisable at the
same price at which those investor warrants are exercisable.
Shares
being registered in Resale Prospectus
The
resale prospectus relates to the sale by the selling stockholders identified in
the prospectus of up to 369,725 shares of our common stock comprising
369,725 of the 1,923,809 shares issuable on conversion of the convertible notes
in the aggregate amount of $4,040,000 issued in February 2010. A
convertible note in the principal amount of $100,000 was repaid on February 11,
2011 and so will not be converted into shares of common stock. The note purchase
agreement dated February 12, 2010, pursuant to which the noteholders acquired
the convertible notes, is filed as exhibit 10.2 to this registration
statement. A form of note extension agreement, dated January 31,
2011, which extended the maturity date of the outstanding convertible notes in
the principal amount of $4,040,000 from February 12, 2011 to June 30, 2011, is
filed as exhibit 10.21 to this registration statement. Under the registration
rights agreement dated February 12, 2010 between the Company and the
noteholders, we are required, subject to the operation of Rule 415, to
include in this registration statement for resale the shares underlying the
notes.
71
MANAGEMENT
Executive
Officers and Directors
The
following table sets forth information concerning our current directors and
executive officers:
Directors and Executive
Officers
|
|
Position/Title
|
|
Age
|
Li
Jie
|
Chief
Executive Officer and a Director
|
56
|
||
Law
Wawai
|
President
of Sales and a Director
|
45
|
||
Eric
Gan
|
Chief
Financial Officer
|
48
|
||
Chris
Bickel
|
Director
|
48
|
||
Li
Jun
|
Director
|
48
|
||
Richard
M. Cohen
|
Director
|
60
|
||
Su
Lei
|
Director
|
46
|
Except
for Messrs. Chris Bickel, Richard M. Cohen and Eric Gan, all of our officers and
directors are residents of the PRC. In addition, substantially all of our assets
are located in the PRC. As a result, it may be difficult or impossible for you
to effect service of process within the United States on our company or any of
them or to enforce court judgments obtained against them in the United States
courts. We have been advised by our PRC counsel that there is uncertainty as to
whether the courts of the PRC would (1) recognize or enforce judgments of U.S.
courts obtained against our officers or directors or the experts named in this
prospectus based on the civil liability provisions of the securities laws of the
U.S. or any state in the U.S., or (2) entertain original actions brought in the
PRC against our officers or directors or the experts named in this prospectus
based on the securities laws of the U.S. or any state in the U.S.
The
following is a summary of the biographical information of our
directors and officers:
Li Jie was
elected director and appointed as our Chief Executive Officer on February 12,
2010. Mr. Li has served as Chief Executive Officer and Managing Director of
Foshan SLP Special Materials Co., Ltd. since its inception in 2000. He also
serves as Director General of the China Industrial Textile Committee. From 1980
to 2000, he served as R&D director of Dalian Synthetic Fiber Research
Institute. We believe that Mr. Li’s knowledge of all aspects of our
business and his in-depth understanding of our operations, combined with his
years of experience in the nonwovens industry, position him well to serve as our
Chairman and Chief Executive Officer. Mr. Li received a bachelor’s degree
in Engineering for Chemical Fiber Technique at Dalian Light Industrial
School. He received a Masters degree from Chinese Academy of Social
Sciences where he studied economic management. Mr. Li is not, and has not been
within the last five years, a director of any other publicly traded
company.
Law Wawai
was elected as a director and appointed as President of Sales on February
12, 2010. From 1997 to February 2010, Mr. Law served as director and
general manager of Nanhai Wanzhi Trading Co. From 1987 to 1997, he was
sales manger Nanhai Polyester Factor. We believe that Mr. Law’s
knowledge of all aspects of the nonwovens business and his in-depth
understanding of its operations position him well to serve as a
director. Mr. Law received his bachelor’s degree in business management
from Nanhai Television University. Mr. Law is not, and has not been within
the last five years, a director of any other publicly traded
company.
72
Eric Gan
was appointed as our Chief Financial Officer in August 2010. From July
1999 to August 2010 Mr. Gan was a Senior Financial Consultant at The Goetzman
Group, a company which provides staffing solutions in all areas of finance and
accounting. His assignments while at The Goetzman Group included (i) acting as
interim chief financial officer for Rino International Inc. Inc. from January
2007 to September 2007; (ii) acting as interim general accounting manager for
Physicals Formula from March 2008 to September 2008; and (iii) overseeing the
Sarbanes- Oxley compliance project for Smart & Final from January 2005 to
May 2005. Mr. Gan received his Master of Arts from Fudan University, Shanghai in
June 1989 and received his Masters in Accounting from the University of Southern
California in December 1995.
Chris Bickel
was elected as a director on February 12, 2010. Since October 2009, Mr.
Bickel has served as President of Primary Capital and is responsible for
business development in China. Primary Capital acted as placement agent for the
Company’s February 2010 private placement. From 2005 to October 2009, Mr. Bickel
was an investment banker at Rosewood Capital Group, LLC (previously an affiliate
of Primary Capital and now a branch office ) during which time his investment
banking team provided a full range of investment banking, due diligence and
business advisory services to private China based companies interested in
accessing the U.S. capital markets and being listed in the U.S., as well as
advisory services to US based investment banking firms interested in identifying
investment banking clients in China. Mr. Bickel was instrumental in originating
and financing of a number of PRC companies that are listed on the NASDAQ or
whose shares are quoted on the OTCBB. From 2001 through 2004, Mr. Bickel served
as Chairman and CEO of Sino UJE Ltd., a Hong Kong based company which is a
distributor of medical and industrial instrumentation and technology products.
Mr. Bickel was also employed by Spectris Inc. from 1983 to 1996. As an employee
of Spectris, Mr. Bickel was involved with and managed the nonwoven sector of its
business. Spectris was engaged in providing engineered products for use in
nonwovens production. We believe that Mr. Bickel’s extensive past experience in
providing business advisory services to private China based companies interested
in accessing the U.S. capital markets, including Rino International Corp. and
Sino Gas International Holdings, Inc., and helping those companies become
successfully listed as well as his over ten years’ experience in the nonwoven
market and knowledge with manufacturing practice and the overall market make him
a suitable candidate to serve on our board of directors.
Li Jun was
elected as a director in February 2010. Mr. Li is the owner and manager of
Shanghai Primary Capital Management Co., Ltd., a business advisory firm
incorporated in Shanghai China, which he started in 2010. (Shanghai Primary
Capital Management Co., Ltd. is not affiliated with Primary Capital.) He
provides advisory services to China business owners seeking capital and advisory
services related to listing their company on United States stock exchanges. He
has over twenty years of experience working in China in various fields and in
various capacities. Mr. Li founded Shanghai Rosewood Investment Consulting Co.,
Ltd in 2005 and participated in four listing and financing transactions in which
China based companies received funding from U.S. based investors and listed on
in the U.S. From 2001 through 2008, Mr. Li has been the Managing Director of
SINO UJE, Ltd., a Hong Kong based company which is a distributor of medical and
industrial instrumentation and technology products throughout Asia. From 1994
through 2000, Mr. Li was employed by Nanchang Minerals Machinery Imp and Exp
Co., Ltd initially as a salesman, followed by promotions to department director
and vice president. From 1987 through 1994, Mr. Li served as an instructor at
the University of Military Science and Technology and he retired as a Major from
the Chinese People’s Liberation Army. Although he has not been previously
engaged in the nonwovens business, we believe that Mr. Li’s business acumen and
his extensive past experience in providing business advisory services to private
China based companies interested in accessing the U.S. capital markets and
helping those companies become successfully listed make him an eminently
suitable candidate to serve on our board of directors. Mr. Li received his
Bachelor’s and his Master’s degree of Science from Shanghai Jiaotong University.
Mr. Li is not, and has not been within the last five years, a director of any
other publicly traded company.
73
Richard M. Cohen
was elected as a director in June, 2010. Since 1996, Mr. Cohen has
been the President of Richard M. Cohen Consultants, a financial services
consulting company that accepts engagements from public and private companies to
assist with their corporate governance and corporate finance needs. From
1984 through 1992, Mr. Cohen was an investment banker at both Henry Ansbacher
and Furman Selz, where he specialized in mergers & acquisitions, public
equity offerings, and restructurings. From 1980 through 1983, Mr. Cohen
was a Vice President of corporate development at Macmillan, Inc. Mr. Cohen
is a Certified Public Accountant (New York State) and began his career at Arthur
Andersen. He received a B.S. from The University of Pennsylvania (Wharton) in
1973 and an M.B.A. from Stanford University in 1975. Although he has not
been previously engaged in the nonwovens business we believe that Mr. Cohen’s
business acumen and his experience in providing business advisory services to
private companies to assist with their corporate governance and corporate
finance needs coupled with his experience serving as a director of a number of
publicly traded companies make him an eminently suitable candidate to serve on
our board of directors. Mr. Cohen currently serves as a director of
Helix BioMedix (OTCBB:HXBM), Rodman and Renshaw (NASDQ:RODM), CorMedix
(OTCBB:CRMD), Dune Energy, Inc. (AMEX: DNE), for which he served as Chief
Financial Officer from November 2003 to April 2005.
Su Lei was
elected as a director in August 2010. Mr. Su currently serves as the
Associate Director of Information of the State Environmental Protection Agency
in China, a position he has held since 2001. Mr. Su has successively
acted as Principal Staff Member, Associated Director and Director of China
Environmental Protection Industrial Association since September 2001. He
also currently serves as the Director of the Working Committee of China Green
Star, a position he has held since 2002. China Green Star is a
non-profit organization under China's Environmental Protection Association which
focuses on promoting the interests of the environmental protection
industry. We believe that Mr. Su’s position and experience with the
State Environmental Protection Agency and his understanding of public policy
matters make him well suited to serve on our board of directors. Mr. Su
received a bachelor’s degree in the Electronic Engineering from China Air Force
Missile Institute, and he is now a senior engineer in Environment
Management.
All of
our directors serve on the board until our next annual meeting of the
stockholders, and until their successors have been elected and qualified or
until their earlier resignation or removal.
Our
executive officers serve at the discretion of the board of directors, subject to
the terms of any employment agreement they have with the Company. Mr.
Bickel is serving on the Board as a designee of Primary Capital. Under the
terms of its financial services agreement with the Company Primary Capital is
entitled to designate one board member and one observer until February 11,
2012.
Family
Relationships
There are
no family relationships among our directors and executive officers, except the
Eric Gan, our chief financial officer, is the brother in law of Li Jun, one of
our directors. There is no arrangement or understanding between or
among our executive officers and directors pursuant to which any director or
officer was or is to be selected as a director or officer, and there is no
arrangement, plan or understanding as to whether non-management shareholders
will exercise their voting rights to continue to elect the current board of
directors.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
|
·
|
been convicted in a criminal
proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor
offences);
|
|
·
|
had any bankruptcy petition filed
by or against the business or property of the person, or of any
partnership, corporation or business association of which he was a general
partner or executive officer, either at the time of the bankruptcy filing
or within two years prior to that
time;
|
|
·
|
been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or federal or state authority,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting, his involvement in any type of business, securities, futures,
commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such
activity;
|
74
|
·
|
been found by a court of
competent jurisdiction in a civil action or by the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended, or
vacated;
|
|
·
|
been the subject of, or a party
to, any federal or state judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or vacated (not
including any settlement of a civil proceeding among private litigants),
relating to an alleged violation of any federal or state securities or
commodities law or regulation, any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a
temporary or permanent injunction, order of disgorgement or restitution,
civil money penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order, or any law or regulation prohibiting mail or
wire fraud or fraud in connection with any business entity;
or
|
|
·
|
been the subject of, or a party
to, any sanction or order, not subsequently reversed, suspended or
vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered
entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7
U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Board
Independence
In order
to be listed on NASDAQ, a company is required to meet certain corporate
governance requirements, including, with certain exceptions, the requirement to
have a board of directors the majority of whose members are “independent” within
the meaning of NASDAQ rules.
As a
“controlled company” we are exempt from the requirements of the NASDAQ
Marketplace Rules (i) to have a majority of independent board
members; (ii) for independent director oversight of executive officer
compensation and (iii) for independent director oversight of director
nomination. As a controlled company, we remain subject to the NASDAQ audit
committee requirements and the requirement that independent directors regularly
meet in executive session.
Under
NASDAQ Marketplace Rules a company is considered a "controlled company" if
greater than 50% of its voting power is held by an individual, a group or
another company. In order for a group to exist for purposes of this rule,
the stockholders forming the group are required to publicly file a notice that
they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a
group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai,
Pilot Link International Limited, High Swift Limited, China Investment
Management Inc., Song Huaying, and Newise Holdings Limited and Li Jun
filed a Schedule 13D disclosing the existence of a group with respect to
their holdings in the Company.
The
Company has disclosed its status as a “controlled company” in its annual report
on Form 10-K for the fiscal year ended September 30, 2010 filed on January 3,
2011 and the basis for determining that it is a controlled company.
The Board
has determined that three of its six current members, namely Messrs. Chris
Bickel, Su Lie and Richard M. Cohen, are “independent” within the meaning of
NASDAQ listing standards.
Director
Contracts
In May
2010, we entered into a director’s agreement with Richard M. Cohen, which
agreement was effective with his election to the Board. Under the terms of
that agreement, effective on closing of the offering, Mr. Cohen will
be paid an annual retainer of $24,000 for serving as a director (with
$2,000 payable at the beginning of each month). In addition, pursuant to
the Company’s equity incentive plan, Mr. Cohen was awarded 30,000 shares of
restricted two thirds of which are subject to restrictions on transfer and are
subject to forfeiture with the restrictions lapsing as to one-third of the
shares on the first anniversary of the date of grant and as to one- third on the
second anniversary of the date of grant in the event Mr. Cohen continues to be a
director on those dates. In addition, the Company will reimburse the
director for pre-approved reasonable business-related expenses incurred in good
faith in the performance of the director’s duties for the
Company.
75
Committees
The Board
currently has three standing committees: Audit Committee, Compensation Committee
and Nominating Committee. Each member of these committees is “independent”
as defined by NASDAQ and SEC rules and each of these committees has a written
charter approved by the Board. Committee members are appointed by the
Board based on the recommendation of the Nominating Committee, except that
members of the Nominating Committee are appointed by the independent members of
the Board. The current members of the committees are as
follows:
Director
|
|
Audit
|
|
Compensation
|
|
Nominating
|
Jie
Li
|
||||||
Law
Wawai
|
||||||
Li
Jun
|
||||||
Chris
Bickel
|
ü
|
ü
|
ü
|
|||
Richard
M. Cohen
|
ü
|
ü
|
ü
|
|||
Su
Lei
|
ü
|
Audit
Committee; Audit Committee Financial Expert
The Audit
Committee, established in September 2010, currently consists of three members,
Su Lei, Chris Bickel, and Richard M. Cohen, its Chairman. The Board has
determined that each of them is independent within the meaning of the NASDAQ
listing standards and applicable SEC regulations, and that each member has the
financial literacy required by the NASDAQ listing standards.
The Board
also has determined that Mr. Cohen is qualified as an "audit committee financial
expert" within the meaning of applicable SEC regulations and has the accounting
and related financial sophistication required by NASDAQ listing
standards.
The
function of the Audit Committee, as more fully set forth in its charter, is to
(i) oversee our financial statements, our financial reporting process and our
system of internal control over financial reporting; (ii) recommend the
selection of our registered public accounting firm; (iii) review the extent
of non-audit services to be performed by the auditors; and (iv) review the
disclosures made in our periodic financial reports.
Compensation
Committee
The
Compensation Committee, established in September 2010, consists of two members
Chris Bickel and Richard M. Cohen. The Board has determined that each of
them is independent within the meaning of the NASDAQ listing standards.
The functions of the Compensation Committee, as more fully set forth in its
charter, are to oversee our compensation policies generally, evaluate senior
executive performance, oversee and determine compensation for senior executives
and review and recommend to the Board actions regarding director
compensation.
Nominating
Committee
The
Nominating Committee, established in September 2010, currently consists of two
members, Chris Bickel and Richard M. Cohen. The Board has determined that
each of Messrs. Bickel and Cohen is independent within the meaning of the NASDAQ
listing standards.
As more
fully set forth in its charter, the primary responsibilities of the Nominating
Committee are to: (i) develop and recommend to the Board criteria for selecting
qualified director candidates; (ii) identify, review and evaluate individuals
qualified to become Board members; (iii) consider committee member
qualifications, appointment and removal; and (iv) assist the Board in its annual
reviews of the performance of the Board, each committee and management.
The Committee has the exclusive authority to make recommendations to the
Board for approval for the election of new members to the
Board.
76
To
fulfill its responsibilities and duties the Nominating Committee is required to,
among other things (i) evaluate the current composition of the Board of
Directors and its committees, and determine future requirements for director
candidates; (ii) determine the Board’s criteria for selecting new directors,
including desired board skills and attributes, and actively seek prospective
individuals qualified to become board members; (iii) adopt and maintain a policy
concerning the director nomination process; (iv) adopt a policy concerning the
consideration of director candidates recommended by stockholders and consider
stockholder nominees for election to the Board; (v) evaluate and propose
nominations for election to the Board; and (vi) review and make recommendations
to the Board concerning membership of Board committees.
The
Committee does not assign specific weights to particular criteria. Rather, the
Nominating Committee believes that the backgrounds and qualifications of the
directors, considered as a group, should provide a significant composite mix of
experience, knowledge and abilities that will allow the Board to fulfill its
responsibilities.
The
Nominating Committee will consider director nominees recommended for
consideration by the stockholders. To have a person considered by the Nominating
Committee for recommendation to the Board as a director nominee a stockholder
should write to the Corporate Secretary, specifying the nominee's name and
qualifications for Board membership and providing confirmation of the nominee's
consent to serve as a director. Following verification that the person
submitting the recommendation is a stockholder of the Company, all properly
submitted recommendations will be brought to the attention of the Nominating
Committee at a regularly scheduled Committee meeting.
If a
stockholder properly recommends a director nominee, the Nominating Committee
will give due consideration to that nominee and will use the same criteria used
for evaluating other director nominees, in addition to considering the
information relating to the director nominee provided by the
stockholder.
Stockholders
also may nominate directors for election at our annual meeting of stockholders
by following the provisions set forth in our bylaws. The deadline for
stockholder nominations is set forth in our by laws. Stockholders and other
parties interested in communicating directly with the Board of Directors may do
so by writing to: China SLP Filtration Technology, Inc., Attention: Board of
Directors, Shishan Industrial Park, Nanhai District, Foshan City, Guangdong
Province PRC. Pursuant to a process approved by the Board, the Corporate
Secretary reviews all correspondence received by us and addressed to members of
the Board and regularly forwards to the Board a summary of such correspondence
and copies of all correspondence that, in the opinion of the Corporate
Secretary, deals with the functions of the Board or Board committees or
otherwise requires the Board's attention. Directors may at any time review a log
of all correspondence received by us that is addressed to members of the Board
and request copies of any such correspondence.
Concerns
relating to accounting, internal controls or auditing matters are immediately
brought to the attention of our internal audit department and handled in
accordance with procedures established by the Audit Committee to address such
matters.
Compensation
Committee Interlocks and Insider Participation
All
current members of the Compensation Committee are independent directors. None of
the past or present members of our Compensation Committee are present or past
employees or officers of ours or any of our subsidiaries. No member of the
Compensation Committee has had any relationship with us requiring disclosure
under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as
amended. None of our executive officers serves on the board of directors or
compensation committee of a company that has an executive officer that serves on
our Board or Compensation Committee.
77
Code
of Ethics
We strive
to foster a culture of honesty, integrity and accountability.
We
have a code of ethics applicable to all employees, including all officers, and
including our independent directors, who are not employees of the Company, with
regard to their company -related activities. The code incorporates our
guidelines designed to deter wrongdoing and to promote honest and ethical
conduct and compliance with applicable laws and regulations. The code also
incorporates our expectations of our employees that enable us to provide
accurate and timely disclosure in our filings with the SEC and other public
communications. In addition, the code incorporates guidelines pertaining to
topics such as complying with applicable laws, rules, and regulations; reporting
code violations; and maintaining accountability for adherence to the
code.
Waivers
of the Code for executive officers and directors may be granted only by the
Board. Amendments to the Code must be approved by the Board. We intend to
provide disclosure of any such amendments or waivers on our website (www.silepu.com) within four
business days of any such amendment or waiver.
SHARES
ELIGIBLE FOR FUTURE SALE
This
is an offering of 4,166,667 shares of our common stock. As of
February 16, 2011, there were (i) 15,265,714 shares of common stock issued and
outstanding and (ii) convertible notes in the aggregate principal amount of
$4,040,000 convertible into 1,923,809 shares of common stock (assuming a public
offering price of $6.00 per share and the repayment of a note in the
principal amount of $100,000 on February 11, 2011) and (iii) warrants to
purchase 192,380 shares of our common stock to be issued to the placement agent
and financial advisor at the closing of this offering. Following this
offering (giving effect to (i) the conversion of all of the convertible notes on
the closing of this offering and (ii) the issuance at the closing of this
offering of 193,186 shares to United Best and 265,186 shares to Primary Capital,
but excluding any shares issuable pursuant to the exercise of the over-allotment
option), there will be 21,814,562 shares of common stock outstanding. Of
these 369,725 shares are being registered simultaneously herewith in a resale
prospectus. None of our outstanding shares will be eligible for resale
under Rule 144 until February 12, 2011.
Lock-Up
Agreements
In
June 2010, we entered into lock-up agreements with officers and
directors and beneficial owners of more than 5% of our common stock.
See “Underwriting – Lock-up Agreements.”
In
addition, in June 2010, we entered into lock-up agreements with the selling
stockholders listed in the resale prospectus dated as of the date hereof
pursuant to which the selling stockholders have agreed not to sell any of the
shares of common stock for a period of 90 days following the date of the public
offering.
Rule
144
Under
Rule 144, a person who has beneficially owned restricted shares of our common
stock or warrants for at least six months is entitled to sell his, her or
its securities provided that (1) such person is not deemed to have
been one of our affiliates at the time of, or at any time during the three
months preceding, a sale, (2) we are subject to the Exchange Act reporting
requirements for at least 90 days before the sale and (3) if the sale occurs
prior to satisfaction of a one-year holding period, we provide current
information at the time of sale.
Persons
who have beneficially owned restricted shares of our common stock or warrants
for at least six months but who are our affiliates at the time of, or at any
time during the three months preceding, a sale, would be subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the greater
of:
|
·
|
1% of the total number of
securities of the same class then outstanding, which will equal
approximately 214,038 shares immediately after this offering;
or
|
|
·
|
the average weekly trading volume
of such securities during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such
sale.
|
provided, in each case, that
we are subject to the Exchange Act periodic reporting requirements for at least
three months before the sale.
Sales by
affiliates must also comply with the manner of sale, current public information
and notice provisions of Rule 144. The selling stockholders will not be
governed by the foregoing restrictions when selling their shares pursuant to the
resale prospectus.
As we are
a former “shell” company, persons who wish to sell our securities have also
to satisfy the additional requirements of Rule 144(i) which
provides that those securities may be sold, subject to the other requirements of
Rule 144, after one year has elapsed from the date that the issuer filed "Form
10 information" with the Commission (in our case February 12, 2011) provided
that we have filed all reports and other materials required to be filed by
section 13 of the Exchange Act during the preceding 12 months.
Registration
Rights
Other
than the registration rights set forth in (i) the registration rights
agreement entered into on February 12, 2010 with the investors in the private
placement under which we are obligated, subject to the operation of Rule
415, to register for resale all of shares issued on conversion of the
notes, and (ii) the registration rights side agreement entered into on February
12, 2010 with certain stockholders who had acquired their shares prior to the
reverse merger, under which we are obligated, subject to the operation of Rule
415, to register for resale 52,001 shares (however, in the event of a Rule 415
comment, these shares would be cut back first), (iii) the agreements
entered into with Primary Capital and United Best, under which we are obligated,
subject to the operation of Rule 415, to register for resale the
653,510 shares received by Primary Capital and United Best under such
agreements, (iv) oral agreements entered into with Li Jun and Ming
Liu, we have no other obligation to register under the Securities Act
any of our shares of common stock.
78
EXECUTIVE
COMPENSATION
The
following is a summary of the compensation we paid to each of our
“named executive officers” (as such term is defined in Item 402 of Regulation
S-K) for each of the last two fiscal years ended September 30, 2010 and
2009. No executive officer received compensation in excess of $100,000 for
any of those two years.
Name and
Principal
Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
||||
Li
Jie
|
|
2010
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
|||||||||||||
(CEO(1)
|
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||
Seth
Winterton
|
2010
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||||
(former
CEO)(2)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||||
Eric
Gan (3)
|
2010
|
18,000
|
-0-
|
-0-
|
90,310
|
-0-
|
-0-
|
-0-
|
108,310
|
||||||||||||||
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1)
|
Jie Li was appointed Chief
Executive Officer in February
2010.
|
(2)
|
Seth Winterton served as Chief
Executive Officer of Perpetual Technologies from December 29, 2008 until
February 12, 2010.
|
(3)
|
Eric Gan was appointed Chief
Financial Officer on August 4, 2010. Mr. Gan is paid
an annual salary of $120,000. In addition, on September 3,
2010, Mr. Gan was granted an option to purchase up to 400,000 shares of
common stock at an exercise price equal to the initial public offering
price. The option shall vest and be exercisable as follows; 160,000
shares will vest and become exercisable on July 31, 2011; 120,000 shares
will vest and become exercisable on July 31, 2012; 120,000 shares will
vest and become exercisable on July 31, 2013. In the event that the
employment is terminated within 12 months from the employment agreement
date by the Company without cause, 160,000 shares shall be vested
immediately on the termination date. This amount of the option
award set forth in the table represents the grant date fair
value computed in accordance with Accounting Standards Codification, or
ASC, Topic 718, and does not reflect whether our named executive officer
has actually realized a financial benefit from the award. For
information on the assumptions used to calculate the value of the awards,
we refer you to Note 14 “Equity and stock based compensation” to our
consolidated financial statements for the fiscal year ended September 30,
2010 included elsewhere in this prospectus. In accordance with
SEC rules, the amount shown excludes the impact of estimated forfeitures
related to service-based vesting
conditions.
|
The
following is a summary of the compensation paid by our operating subsidiary
Foshan to Li Jie, its President and Chief Executive Officer, for the last two
fiscal years ended September 30, 2010 and 2009, respectively.
No executive officer of Foshan received compensation in excess of $100,000
for any of these two years.
Name and
Principal
Position
|
Fiscal
Year
|
|
Salary
($)(1)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|||||||||
Li
Jie
|
||||||||||||||||||||||||||||||||||
(President
and Chief
|
2010
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
|||||||||||||||||||||||||
Executive
Officer )
|
2009
|
44,117
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
44,117
|
(1)
The relevant exchange rates for fiscal years ended September 2010 and 2009 are
$1 to RMB 6.8 and RMB 6.8, respectively.
79
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|||||||||||||||||||||||||||||||||||
OPTION AWARDS
|
STOCK AWARDS
|
|||||||||||||||||||||||||||||||||||
Name
(a)
|
Number
of
Securities
Underlying
Unexercised
and Earned
options
(#) (b)
|
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(c)
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
|
Option
Exercise
Price
($)
(e)
|
Option
Expiration
Date
($)
(f)
|
Number
of
Shares
or
Units of
Stock
that
have
not
Vested
(#)
(g)
|
Market
Value
of
Shares
of
Units of
Stock
that
Have
not
Vested
($)
(h)
|
Number
of
Unearned
Shares,
Units or
Other
Rights
that
have not
Vested
(#)
(i)
|
Market or
Payout
Value
of
Unearned
Shares,
Units
or other
Rights
that
have not
Vested
($) (j)
|
|||||||||||||||||||||||||||
Li
Jie
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||||||||
Seth
Winterton
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||||||||||
Eric
Gan
|
-0-
|
-0-
|
400,000
|
(1
|
)
|
(2
|
)
|
-0-
|
-0-
|
-0-
|
-0-
|
(1)
|
On September 3, 2010, Eric Gan
was granted an option to purchase up to 400,000 shares of common stock at
an exercise price equal to the initial public offering price. The
option vests and is exercisable as follows; 160,000 shares will vest and
become exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become
exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the
Company without cause, 160,000 shares vests immediately on the termination
date.
|
(2)
|
The option will expire on
September 3, 2015.
|
Employment
Agreement
On
November 20, 2008, Mr. Li entered into an employment agreement with Foshan to
serve as our President and Chief Executive Officer. Under the agreement, Mr. Li
is to be paid a salary of $15,000 per month beginning on the closing date of the
public offering. The agreement can be terminated by either party by giving 30
days notice.
On
January 1, 2010, Mr. Law entered into an employment agreement with Foshan
to serve as our President of Sales. Under the agreement, Mr. Law is to be
paid a salary of $5,000 per month beginning on the closing date of the public
offering. The agreement can be terminated by either party by giving 30 day
notice.
Effective
August 5, 2010, Mr. Gan entered into an employment agreement with the
Company to serve as Chief Financial Officer. The term is for three years
unless sooner terminated as provided in the agreement. Under the agreement
Mr. Gan has agreed to perform such duties as shall be consistent with the
position of Chief Financial Officer subject to the supervision and direction of
the Board. Under the agreement Mr. Gan will receive an annual salary of
$120,000 payable in 12 equal payment payable on the 15th day of each month
beginning on August 15, 2010). However, prior to the completion of the
offering contemplated by this prospectus, Mr. Gan will receive a salary of
$6,000 per month (receiving $10,000 for the month during which the Company
completes its initial public offering and thereafter). In addition to his
annual salary, Mr. Gan will be reimbursed for all reasonable expenses including
travel expense between United States and China and will be provided with housing
expense during the term of his employment. In addition, on September 3,
2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common
stock at an exercise price equal to the initial public offering price. The
option shall vest and be exercisable as follows; 160,000 shares will vest and
become exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on
July 31, 2013. In the event that the employment is terminated within 12
months from the employment agreement date by the Company without cause, 160,000
shares shall be vested immediately on the termination
date.
80
2010
Stock Incentive Plan
On
September 3, 2010, we adopted the 2010 Plan. All officers and key
employees, directors of, and consultants to the Company and its subsidiaries and
affiliates, who are responsible for or contribute to the management, growth
and/or profitability of the business of the Company and/or its subsidiaries and
affiliates are eligible for participation in the 2010 Plan. Two Million
One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) (or such number
as shall be equal to 10% of the outstanding shares on a fully diluted basis
after the offering and the conversion of the notes) shares of common stock have
been authorized and reserved for the 2010 Plan and any shares that may become
available for issuance under awards under the 2010 Plan as a result of
expiration or forfeiture. Under the 2010 Plan, the Company may issue stock
options, stock appreciation rights, restricted stock awards, restricted stock
units, performance awards and other stock-based awards. The 2010 Plan is
administered by our Compensation Committee.
The
purpose of the 2010 Plan is to enhance the profitability and value of the
Company for the benefit of its stockholders by enabling the Company to offer
eligible participants stock-based incentives in the Company to attract, retain
and reward such individuals and strengthen the mutuality of interests between
such individuals and the Company’s stockholders.
The
Compensation Committee does not currently have a set formula for determining who
will receive awards and what the amounts of the awards will be and when such
awards will be made. The Compensation Committee can make an award in its
discretion at any time as consistent with the terms of the 2010 Plan. Long-term
equity incentives are intended to reward and will be awarded to eligible
participants who help achieve our overall corporate goals and meet their
individual employee objectives.
Outstanding
Equity Awards
On
September 3, 2010, as required by the terms of his agreement with the Company
entered into in May 2010, the Board awarded Richard Cohen 30,000 shares of
restricted stock two-thirds of which are subject to restrictions on transfer and
are subject to forfeiture, with the restrictions lapsing as to one-third of the
shares on the first anniversary of the date of grant, and as to one-third on the
second anniversary of the date of grant in the event Mr. Cohen continues to be a
director on those dates.
On
September 3, 2010, under the 2010 Plan and in connection with his appointment as
Chief Financial Officer, the Board granted Eric Gan an option to purchase
400,000 shares at an exercise price equal to the public offering price of this
offering. The option vests and is exercisable as follows; 160,000 shares
will vest and become exercisable on July 31, 2011; 120,000 shares will vest and
become exercisable on July 31, 2012; 120,000 shares will vest and become
exercisable on July 31, 2013. In the event that the employment is
terminated within 12 months from the employment agreement date by the Company
without cause, 160,000 shares shall be vested immediately on the termination
date.
Except
for the foregoing there are no option exercises, options outstanding or
restricted stock grants as of the date of this prospectus.
81
Compensation
of Directors
The table
below sets forth the compensation of the directors during the last completed
fiscal year:
DIRECTOR COMPENSATION
Name
(a)
|
Fees
Earned
or
Paid in
Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-Equity
Incentive
Plan
Compensation
($)
(e)
|
Nonqualified
Deferred
Compensation
Earnings
($)
(f)
|
All
Other
Compensation
($)
(g)
|
Total
($)
(h)
|
|||||||||||||||||||||
Law Wawai
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||
Chris
Bickel
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||
Li
Jun
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||
Richard
M. Cohen (1)
|
-0- | 180,000 | -0- | -0- | -0- | -0- | 180,000 | |||||||||||||||||||||
Su
Lei
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- |
(1) In
May 2010, we entered into a director’s agreement with Richard M. Cohen, which
agreement was effective with his election to the Board. Under the terms of
that agreement Mr. Cohen is required to be paid an annual retainer of $24,000
for serving as a director (with $2,000 payable at the beginning of each
month). Under an oral agreement Mr. Cohen has agreed with us that the
payment of the monthly retainer will commence on closing of this
offering. We have not made any payments of this retainer as of the
date of this prospectus. In addition, pursuant to the 2010
Plan, on September 3, 2010, Mr. Cohen was granted 30,000 restricted
shares, two-thirds of which are subject to restrictions on transfer and to
forfeiture, with the restrictions lapsing as to one-third of the shares, on the
first anniversary of the date of grant, and as to one-third, on the second
anniversary of the date of grant in the event Mr. Cohen continues to be a
director on those dates. In addition, the Company will reimburse Mr. Cohen
for pre-approved reasonable business-related expenses incurred in good faith in
the performance of the director’s duties for the Company. The
amount set forth in the table above under “Option Awards” represents the grant
date fair value of the award computed in accordance with ASC Topic
718.
Except as
set forth above as of the date of this prospectus, we have no formal or informal
arrangements or agreements to compensate our directors for services they provide
as directors. We plan to implement a compensation program for our
independent directors, as and when they are appointed, which we anticipate will
include such elements as an annual retainer, meeting attendance fees and stock
options. The details of that compensation program will be negotiated with each
independent director.
None of
the directors of Foshan, our PRC-based operating company, are presently being
compensated for their service as directors.
Li
Jun, our director, is an officer and controlling stockholder of United Best, our
foreign advisor. See section entitled “Certain Relationships and Related
Transactions” beginning on page 83.
Additional
Narrative Disclosure
We have
no plans that provide for the payment of retirement benefits, or benefits that
will be paid primarily following retirement, including, but not limited to, tax
qualified defined benefit plans, supplemental executive retirement plans, tax
qualified defined contribution plans and non-qualified defined contribution
plans.
There
are no contracts agreements, plans or arrangements, whether written or oral,
that provide for payment to a named executive officer at, following, or in
connection with the resignation, retirement or other termination of a named
executive officer or a change in control or the Company or a change in the
executive officers responsibilities following a change in control, with respect
to each named executive officer.
82
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Except as
set forth below, since October 1, 2008, the Company was not a party to
any transaction (where the amount involved exceeded the lesser of $120,000 or 1%
of the average of our assets for the last two fiscal years) in which an
director, executive officer, holder of more than five percent of our common
stock, or any member of the immediate family of any such person have or will
have a direct or indirect material interest and no such transactions are
currently proposed.
On
December 20, 2010, we borrowed $920,148 from Mr. Jie Li ,
our chief executive officer. This loan is non-interest
bearing and is repayable on demand.
Primary
Capital is a beneficial owner of more than 5% of our common stock.
Mr. Bickel is also the President of Primary Capital. Chris Bickel is
a director of our company serving as a designee of Primary
Capital.
Primary
Capital provided financial services in connection with the private placement and
reverse merger which closed on February 12, 2010. The services provided
and to be provided by Primary Capital include the following:
|
·
|
assisting the Company in
preparing a detailed business plan, financial model and power point
presentation;
|
|
·
|
negotiating and structuring the
reverse merger;
|
|
·
|
acting as placement agent for the
February 12, 2010 note
financing;
|
|
·
|
recommending to the Company a
qualified auditor, securities attorney and investor relations firm, and
assisting the Company with negotiating the terms of their respective
engagements;
|
|
·
|
advising the Company on
strategies to increase shareholder
value;
|
|
·
|
assisting the Company and its
investor relations firm in organizing, and participating with the Company
in, investor road shows and investor conference
calls;
|
|
·
|
recommending investor conferences
in the US and Europe to be attended by the Company and
a representative of Primary
Capital;
|
|
·
|
identifying strategic
relationships and joint venture
partners;
|
|
·
|
identifying and recommending
persons to serve on the Company’s Board of
Directors;
|
|
·
|
identifying and rendering advice
regarding potential acquisitions, including the valuation of the
acquisition and financing for the
acquisition;
|
|
·
|
assisting the Company in
connection with its listing on a U.S. stock
exchange;
|
|
·
|
reviewing and commenting on the
Company’s SEC filings associated with the Company’s transactions;
and
|
|
·
|
advising Company regarding its
obligations as a U.S. public
company.
|
United
Best, our foreign advisor controlled by Mr. Li Jun, one of our directors,
provided financial services in connection with our reverse merger with Hong Hui
completed on February 12, 2010. These services included advising the
Company on structuring the reverse merger, assisting the Company in retaining
service providers such as accountants, PRC and US attorneys to effect the
reverse merger and working with those service providers to facilitate the
completion of the reverse merger. Additionally, United Best will assist the
Company with on-going communications and coordinating the relationships with
service providers during the NASDAQ listing process.
Under
the terms of a financial services agreement between Primary Capital and the
Company, Primary Capital was paid a commission of $202,000 at the closing of the
February 2010 private financing. Primary Capital is also owed an additional
$75,000 for services rendered in connection with the private placement.
Primary Capital is also entitled to receive $15,000 on completion of the
offering and $15,000 for the next succeeding seven calendar quarters for an
aggregate amount of $120,000.
At the
closing of the private financing, Primary Capital received 290,755 shares of our
common stock. Primary is also entitled to receive 265,186 shares of common
stock on the closing of this offering.
83
In
addition, for providing these financial services Primary Capital is
entitled to receive, on conversion of the notes issued to the investors in the
February 2010 private placement (which occurs upon consummation of this
offering), a five-year warrant to purchase 96,190 shares of common stock
(which number is equal to 5% of the 1,923,809 shares of common stock issued to
the noteholders on conversion), exercisable at $2.10 (which equals the price at
which the notes converted and assumes an initial public offering price of $6.00
per share). Unlike the investor warrants, these warrants will not
terminate but instead become exercisable upon conversion of the notes and
consummation of this offering. If the note conversion does not occur,
Primary Capital will receive a five-year warrant to purchase that number of
shares of common stock equal to 5% of the common stock underlying the warrants
issued to the investors in the private financing exercisable at the same price
at which those investor warrants are exercisable.
Li Jun is
a director and is a beneficial owner of more than 5% of our common stock.
Mr. Li is an officer and controlling stockholder of United Best, our foreign
advisor, provided financial services in connection with the private
financing.
Under
the terms of a consulting agreement between United Best and the Company,
United Best was paid a commission of $202,000 at the closing of the financing.
United Best is also owed an additional $75,000 for services rendered in
connection with the financing. Additionally, under the consulting
agreement, as amended, United Best is entitled to be paid fee on completion of
this offering a success of $750,000 (which represents 3% of the $25,000,000 in
gross proceeds received by us in connection with the underwritten offering,
assuming an initial public offering price of $6.00 per share).
At the
closing of the private financing, United Best received 362,755 shares of our
common stock for their services. United Best is also entitled to receive
an additional 193,186 shares on closing of this offering.
In
addition, as partial consideration for providing these financial services,
United Best is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which occurs upon consummation
of this offering), a five-year warrant to purchase 96,190 shares of
common stock (which represents 5% of the number of shares of common
stock issued to the note holders on conversion), exercisable at the price
of $2.10 per share (i.e. the price at which the notes
converted based on the assumed initial public offering price of $6.00 per
share). Unlike the investor warrants, these warrants will not terminate but
instead become exercisable on conversion of the notes and consummation of this
offering. If the note conversion does not occur, United Best will receive
a five-year warrant to purchase that number of shares of common stock equal to
5% of the common stock underlying the warrants issued to the investors in the
private financing exercisable at the same price at which those investor warrants
are exercisable.
For
additional information about the nature of the services provided to the Company
by each of Primary Capital and United Best under their respective
agreements, reference is make to “Additional Disclosure Regarding Conversion of
Notes and Exercise of Warrants - Financial Services Agreements and Related
Warrants” beginning on page 63.
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of the share
exchange agreement we issued and delivered to the Hong Hui stockholders a total
of 14,510,204 shares of our common stock in exchange for all of the outstanding
shares of Hong Hui. As shareholders of Hong Hui, (i) Bestyield Group, a
company controlled by Mr. Li, our chief executive officer, received 4,353,061
shares, (ii) Proudlead, a company controlled by Mr. Law,
our president of sales and a director, received 4,353,061 shares
and (iii) Newise Holdings Limited, a company controlled by Mr. Li Jun
one of our directors received 2,321,633 shares.
Under
a limited recourse guaranty agreement dated as of February 12, 2010, Bestyield
Group and Proudlead agreed to guaranty the Company’s obligations under the notes
issued in the February 2010 private placement. That guaranty is secured by
a pledge of the 8,706,122 shares of common stock received by them in the reverse
merger
In
each of June 2007 and in February 2008 and May 2008, Joseph Nemelka, a former
officer and director, advanced funds to the Company in the total aggregate
amount of $15,000. The advances were due on demand and bore interest at 8%
per annum. This indebtedness was forgiven in February 2010 prior to the
reverse merger. In addition, Mr. Nemelka purchased a convertible promissory note
in the aggregate principal amount of $100,000 in the February private
placement.
84
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be reported
under applicable SEC rules. We have not adopted other procedures for review, or
standards for approval, of such transactions, but instead review them on a
case-by-case basis.
Except
for the foregoing, no executive officer, director or any member of these
individuals’ immediate families, any corporation or organization with whom any
of these individuals is an affiliate or any trust or estate in which any of
these individuals serve as a trustee or in a similar capacity or has a
substantial beneficial interest in is or has been indebted to the Company at any
time since the beginning of the Company’s last fiscal year.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of the close of business on February 16, 2011,
certain information with respect to the beneficial ownership of our common
stock, by (i) each stockholder whom we know to own beneficially more than 5% of
our common stock, (ii) each director, (iii) our chief executive officer and each
other executive officer whose cash compensation for the most recent fiscal year
exceeded $100,000 and (iv) all executive officers and directors as a
group. The table reflects the ownership of our equity securities by the
foregoing parties after the 1-for-5 reverse stock split which occurred on March
24, 2010.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose of or direct the disposition of) with respect to
the security through any contract, arrangement, understanding, relationship or
otherwise, subject to community property laws where applicable. Except as
indicated below, and subject to applicable community property laws, the persons
named in the table below have sole voting and investment power with respect to
our common stock shown as beneficially owned by them. A shareholder is also
deemed to be, as of any date, the beneficial owner of all securities that such
shareholder has the right to acquire within 60 days after that date through (1)
the exercise of any option, warrant or right, (2) the conversion of a security,
(3) the power to revoke a trust, discretionary account or similar arrangement,
or (4) the automatic termination of a trust, discretionary account or similar
arrangement.
Unless
otherwise indicated, the address for each listed stockholder is: c/o China SLP
Filtration Technology, Inc., Shishan Industrial Park, Nanhai District, Foshan
City, Guangdong Province PRC.
Name and
Address of
|
Amount and
Nature of
Beneficial
Ownership
|
Percent of
Class (1) (2)
|
Amount and
Nature
of Beneficial
Ownership
|
Percent of
Class (1) (2)(3)
|
||||||||||||
Shareholder
|
Before Offering
|
Before Offering
|
Post Offering
|
Post Offering
|
||||||||||||
Owners
of More Than 5% Of Class
|
||||||||||||||||
Bestyield
Group Limited (4)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Proudlead
Limited (5)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Li
Jun (6)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Newise
Holdings Limited (6)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Pilot
Link International Limited (7)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
High
Swift Limited (8)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
China
Investment Management, Inc (9).
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Primary
Capital, LLC (10)
|
1,326,008
|
8.6
|
%
|
1,326,008
|
6
|
%
|
||||||||||
Directors
and Executive Officers
|
||||||||||||||||
Li
Jie (Chief Executive Officer and a Director) (4)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Law
Wawai (President of Sales and a Director) (5)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Eric
Gan (Chief Financial Officer) (13)
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||
Li
Jun (Director) (6)
|
14,099,081
|
92.4
|
%
|
14,099,081
|
64.6
|
%
|
||||||||||
Richard
M. Cohen (Director) (12)
|
30,000
|
*
|
30,000
|
*
|
%
|
|||||||||||
Chris
Bickel (Director) (11)
|
-
|
-
|
-
|
-
|
%
|
|||||||||||
Su
Lie (Director)
|
-
|
-
|
-
|
-
|
%
|
|||||||||||
Directors
and executive officers as a group (7 persons)
|
14,129,081
|
14,129,081
|
%
|
*
|
Less than
1%.
|
85
(1) As
of the close of business on February 16, 2011, there were 15,265,714 shares of
our common stock outstanding. Following the closing of this offering there will
be 21,814,562 shares of common stock issued and outstanding.
(2)
In determining beneficial ownership of the common stock, the number of shares
shown includes shares which the beneficial owner may acquire within 60 days of
February 16, 2011 upon exercise of convertible securities, warrants or options.
In accordance with Rule 13d-3 in determining the percentage of common stock
owned by a person on February 16, 2011 (a) the numerator is the number of shares
of the class beneficially owned by such person, including shares which the
beneficial owner may acquire within 60 days upon conversion or exercise of the
warrants and other convertible securities, and (b) the denominator is the sum of
(i) the total shares of that class outstanding on February 16, 2011, and (ii)
the total number of shares that the beneficial owner may acquire upon conversion
or exercise of other securities. Unless otherwise stated, each beneficial owner
has sole power to vote and dispose of the shares.
(3)
Following completion of the offering there will a total of 21,814,562 shares of
common stock outstanding, including (i) 15,265,714 shares of common stock
currently outstanding, (ii) 1,923,809 shares issuable on conversion of the
notes, (iii) 4,166,667 shares to be issued in the offering, and (iv) and 193,186
shares to be issued to United Best and 265,186 shares to be issued to Primary
Capital on closing of the offering.
(4)
Bestyield Group is a BVI company controlled by Mr. Li Jie, our chief executive
officer. Its address is PO Box 957 Offshore Incorporations Center, Road Town,
Tortola, British Virgin Islands. On December 29, 2010, a group
consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot
Link International Limited, High Swift Limited, China Investment Management,
Inc., Song Huaying, Newise Holdings Limited and Li Jun filed a
Schedule 13D disclosing the existence of a “group” and the beneficial ownership
by the group of 14,099,081 shares of common stock. The
beneficial ownership by the “group” disclosed in the Schedule 13D includes
4,353,061 shares held by Bestyield Group. Mr. Li has shared
voting power with respect to the shares held by the group. Bestyield
has guaranteed our obligations to the investors under our outstanding
convertible notes issued in February 2010. All of these shares have been pledged
to secure the performance of that guaranty.
(5) Proudlead
is a BVI company controlled by Law Wawai, our president of sales and a
director. Its address is PO Box 957 Offshore Incorporations Center, Road
Town, Tortola, British Virgin Islands. The beneficial ownership by the
“group” disclosed in the Schedule 13D includes 4,353,061 shares held by
Proudlead. Mr. Law has shared voting power with respect to the shares
held by the group. Proudlead has guaranteed our obligations to the
investors under our outstanding convertible notes issued in February 2010. All
of these shares have been pledged to secure the performance of that
guaranty.
(6)
Newise Holdings Limited is a BVI company controlled by Li Jun, one of our
directors. Its address is PO Box 957 Offshore Incorporations Center,
Road Town, Tortola, British Virgin Islands. The beneficial
ownership by the “group” disclosed in the Schedule 13D includes 1,547,756 shares
held by Newise Holdings Limited as well as 362,755 shares beneficially
owned by United Best. Mr. Li has shared voting and dispositive power
with respect to the shares held by the group. On closing of
this offering United Best is also entitled to receive an additional 193,186
shares of common stock and a warrant to purchase 96,190 shares at an exercise
price of $2.10 per share (based on an assumed public offering price of
$6.00).
(7) Pilot
Link International is a BVI company controlled by Li Shiyi and Wei Yang, PRC
residents. Its address is PO Box 957 Offshore Incorporations Center, Road
Town, Tortola, British Virgin Islands. The beneficial ownership by the
“group” disclosed in the Schedule 13D includes 1,668,673 shares held directly by
Pilot Link. Li Shiyi and Wei Yang have shared voting and dispositive
power with respect to the shares held by the group.
86
(8) High
Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC resident.
Its address is PO Box 957 Offshore Incorporations Center, Road Town,
Tortola, British Virgin Islands. The beneficial ownership by
the “group” disclosed in the Schedule 13D includes 1,088,265 shares held
directly by High Swift. Han Hung Yuk has shared voting and
dispositive power with respect to the shares held by the group.
(9) China
Investment Management, Inc. is a BVI company controlled by Song Huaying, a PRC
resident. Its address is PO Box 957 Offshore Incorporations Center,
Road Town, Tortola, British Virgin Islands. The beneficial
ownership by the “group” disclosed in the Schedule 13D includes 725,510 shares
held directly by China Investment Management, Inc. Song Huaying has shared
voting and dispositive power with respect to the shares held by
group.
(10) Primary
Capital received, at the closing of the share exchange
agreement, 290,755 shares of common stock and in February 2010 Primary
Capital purchased 673,877 shares from Newise Holdings Limited. John
Leo has sole voting and dispositive power with respect to the shares held by
Primary Capital. Primary Capital’s address is 80 Wall Street, 5th Floor,
New York, New York 10005. On closing of this offering, Primary Capital is
also entitled to receive an additional 265,186 shares of common stock and a
warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based
on an assumed public offering price of $6.00).
(11) Chris
Bickel is President of Primary Capital. Mr. Bickel does not have voting or
dispositive power over the shares held by Primary Capital. Mr. Bickel’s business
address is 80 Wall Street, 5th Floor, New York, New York 10005.
(12) Richard
M. Cohen is our director, and his business address is 3 Park Avenue, 16th Floor,
New York, New York 10016. In May 2010, we entered into a
director’s agreement with Richard M. Cohen, which agreement was effective with
his election to the Board. Under the terms of that agreement Mr. Cohen on
September 3, 2010 was granted 30,000 shares of restricted stock, two-thirds of
which are subject to restrictions on transfer and are subject to forfeiture,
with the restrictions lapsing as to one-third of the shares on the first
anniversary of the date of grant, and as to one-third on the second anniversary
of the date of grant, in the event Mr. Cohen continues to be a director on those
dates.
(13) On
September 3, 2010, Mr. Gan was granted an option to purchase 400,000 shares
of common stock at an exercise price equal to the public offering price.
The option vests and is exercisable as follows; 160,000 shares will vest and
become exercisable on July 31, 2011; 120,000 shares will vest and become
exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on
July 31, 2013. In the event that the employment is terminated within
12 months from the employment agreement date by the Company without cause,
160,000 shares shall be vested immediately on the termination date. As the
option is not currently exercisable, none of the shares underlying the option
are included in the table.
87
DESCRIPTION
OF SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to this prospectus. The following discussion is qualified in its
entirety by reference to such exhibits.
General
We are
authorized to issue 200,000,000 shares of common stock, par value $.001 per
share, and 10,000,000 shares of blank-check preferred stock, par value $.001 per
share.
Immediately
following the closing of this offering, 21,814,562 shares of common stock will
be issued and outstanding (excluding shares issuable upon exercise of the
over-allotment option). In addition, 192,380 shares may be purchased
upon the exercise of placement agent warrants, 208,333 shares may be
purchased upon the exercise of underwriter’s warrants and 400,000 shares are
issuable on exercise of outstanding options.
Common
Stock
Each
share of our common stock has one vote on all matters including election of
directors, without provision for cumulative voting. The common stock is not
redeemable and has no conversion or preemptive rights. In the event we are
liquidated, the holders of common stock will share equally in any balance of our
assets available for distribution to them after satisfaction of creditors and
preferred shareholders. The holders of our common stock are entitled to equal
dividends and distributions per share with respect to the common stock when, as,
and if declared by the board of directors from funds legally
available.
Preferred
Stock
In
addition to the 200,000,000 shares of common stock, we are authorized to issue
10,000,000 shares of preferred stock. Shares of our preferred stock may be
issued from time to time in one or more classes or series, each of which class
or series shall have such distinctive designation or title as shall be fixed by
the board of directors prior to the issuance of any shares thereof.
The
issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For instance, the issuance of a series of preferred stock might impede a
business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
common stock. Although the board of directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of our stockholders, the board of directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock. The board of directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized preferred
stock, unless otherwise required by law.
88
Notes
and Warrants
On
February 12, 2010, immediately following the closing of the share exchange
agreement, we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes, in the aggregate principal amount
of $4,140,000, and warrants (which are exercisable only in certain
events). The closing of the sale of the notes and warrants occurred
on February 12, 2010. The terms of the notes, as amended, and
warrants is set forth below. The note purchase agreement contains
representations, warranties and covenants which are customary for transactions
of this nature.
The notes
have the following material terms:
Maturity: The
notes were originally scheduled to mature on February 12, 2011. On
January 31, 2011 we entered into note extension agreements with each of the
holders of the notes (other than Lumen Capital) to extend the maturity date to
June 30, 2011. If the principal is not paid on maturity then
150% of the principal amount shall be payable. On February 11, 2011
we repaid the note held by Lumen Capital in the principal amount of $100,000
(together with interest accrued thereon).
Interest: 10%
per annum payable quarterly increasing to 15% if there is a default.
Conversion: In
the event of the closing of this offering, the $4,040,000 aggregate
principal amount of the notes then outstanding shall convert automatically into
1,923,809 shares of common stock at a conversion price of $2.10 per share
(which represents a 65% discount to the assumed offering price of $6.00 per
share).
The
warrants have the following material terms:
Exercisable: The
warrants will become void if the notes automatically convert into common stock
(which will be the case if the offering contemplated by this prospectus
closes). The warrants are exercisable at any time during a five-year
period commencing on the closing of a “financing,” which means the first sale
(or series of related sales) by us of stock (or debt or equity securities
convertible into stock), in a capital raising transaction, occurring after the
maturity date (or the date the notes become due pursuant to a default, if
earlier) with aggregate gross proceeds of at least $2,000,000. The
warrants cannot be exercised if no financing is consummated within a five-year
period after the issue date.
Number of
Shares: The warrants represent the right to purchase 8% of the
total number of shares of common stock outstanding (on a fully-diluted basis)
immediately after the closing of the “financing.”
Exercise
Price: The warrants are exercisable at the price for
which the shares of common stock (or common stock equivalent if derivative
securities are sold) are sold in the financing. If the financing includes
more than one type of security, the exercise price shall equal the lowest price
per share of common stock or common stock equivalent included in the
financing.
Underwriter’s
Warrants
We have
also agreed to issue to Brean Murray, Carret & Co., LLC, and/or its
designees, a warrant to purchase a number of shares of common stock equal to an
aggregate of 5% of the shares of common stock sold in the offering, excluding
over-allotments, if any. The warrant will have an exercise price equal to
125% of the offering price of the shares of common stock sold in this offering
and be exercisable for four years commencing one year after the effective date
of the registration statement. Pursuant to the rules of the Financial
Industry Regulatory, Inc., or FINRA (formerly the NASD), and in particular Rule
5110(g)(1), the warrant (and underlying shares) issued to Brean Murray,
Carret & Co., LLC, shall not be sold during the offering, or sold,
transferred, assigned, pledged, or hypothecated, or be the subject of any
hedging, short sale, derivative, put or call transaction that would result in
the effective economic disposition of the securities by any person for a period
of 180 days immediately following the date of effectiveness or commencement of
sales of the public offering, except as provided in Rule 5110(g)(2).
89
Financials Advisor Warrants
For a
description of the warrants issued to the financials advisors in connection with
the private placement, see the section above entitled “Certain Relationships and
Related Transactions,” beginning on page 83.
Exchange
Listing
We have
applied for listing of our common stock on the NASDAQ Capital Market under the
symbol “SLPC.”
Recent
Stockholder Actions
On
February 12, 2010, immediately prior to the closing of the share exchange
agreement, shareholders holding 2,528,000 of the 2,600,000 shares of our then
outstanding common stock agreed to surrender their shares for
cancellation in payment by Joe Nemelka of an aggregate amount
of $40,000, pursuant to stock purchase agreements entered
into between Joe Nemelka and each such holder. Under the share exchange
agreement we issued an aggregate of 14,510,204 shares of common stock to the
stockholders of Hong Hui. In addition, immediately following the closing
of the share exchange agreement we issued 362,755 and 290,755 shares of our
common stock to United Best and Primary Capital, respectively, as a transaction
fee in connection with the closing of the private financing.
In addition there are 72,000 shares held by 210 round lot
shareholders. Accordingly, as of February 12, 2010 following the closing
of all of these transactions, there were 15,235,714 shares of common stock
issued and outstanding.
As
more fully described in an Information Statement on Schedule 14C (which was
mailed to our stockholders on March 3, 2010), on February 12, 2010, the board of
directors and the holders of majority of our outstanding shares entitled to vote
thereon approved the change the name of the Company to China Filtration
Technology, Inc. and 1-for-5 reverse stock split of our shares of common stock.
These
corporate actions became effective on the filing with the Secretary of State of
Delaware of a certificate of amendment to our certificate of incorporation which
was filed on March 24, 2010.
On June
1, 2010 the corporate name was changed to China SLP Filtration Technology,
Inc.
90
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The
following is a general summary of certain material U.S. federal income tax
consequences to an investor of the acquisition, ownership and disposition of our
common stock purchased by an investor pursuant to this offering. As used in this
discussion, “we”, “our” and “us” refers to China SLP Filtration Technology, Inc.
This discussion applies only to investors that will hold each share of our
common stock issued and purchased pursuant to this offering as a “capital asset”
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does
not address all aspects of U.S. federal income taxation that may be relevant to
an investor in light of that investor’s particular circumstances. In addition,
this discussion does not address (a) U.S. federal non-income tax laws, such as
estate or gift tax laws, (b) state, local or non-U.S. tax consequences, or (c)
the special tax rules that may apply to certain investors, including, without
limitation, banks, insurance companies, financial institutions, broker-dealers,
taxpayers that have elected mark-to-market accounting, taxpayers subject to the
alternative minimum tax provisions of the Code, tax-exempt entities, governments
or agencies or instrumentalities thereof, regulated investment companies, real
estate investment trusts, U.S. persons whose functional currency is not the U.S.
dollar, certain former U.S. citizens or long-term residents of the United
States, or investors that acquire, hold, or dispose of our common stock as part
of a straddle, hedge, wash sale, constructive sale or conversion transaction or
other integrated transaction. Additionally, this discussion does not consider
the tax treatment of entities treated as partnerships or other pass-through
entities for U.S. federal income tax purposes or of persons who hold our common
stock through such entities. The tax treatment of a partnership and each partner
thereof will generally depend upon the status and activities of the partnership
and such partner. Thus, partnerships, other pass-through entities (and partners
in such partnerships or owners of such other pass-through entities) should
consult their own tax advisors.
This
discussion is based on current provisions of the Code, its legislative history,
U.S. Treasury regulations promulgated under the Code, judicial opinions, and
published rulings and procedures of the U.S. Internal Revenue Service (“IRS”),
all as in effect on the date of this prospectus. These authorities are subject
to differing interpretations or to change, possibly with retroactive effect. We
have not sought, and will not seek, any ruling from the IRS or any opinion of
counsel with respect to the tax consequences discussed below, and there can be
no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained.
As used
in this discussion, the term “U.S. person” means a person that is, for U.S.
federal income tax purposes, (i) an individual citizen or resident of the United
States, (ii) a corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized (or treated as created or
organized) in or under the laws of the United States or of any state thereof or
the District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust if (A) a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (B) it has in effect a valid
election to be treated as a U.S. person under applicable U.S. Treasury
regulations. As used in this discussion, the term “U.S. holder” means a
beneficial owner of our common stock that is a U.S. person, and the term
“non-U.S. holder” means a beneficial owner of our common stock (other than an
entity that is treated as a partnership or other pass-through entity for U.S.
federal income tax purposes) that is not a U.S. person.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.
IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX
LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX
TREATY.
91
U.S.
Holders
Taxation
of Distributions
A U.S.
holder will be required to include in gross income as ordinary income the amount
of any dividend paid on the shares of our common stock. A distribution on such
shares will be treated as a dividend for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. Distributions in excess of current and
accumulated earnings and profits will constitute a return of capital that will
be applied against and reduce (but not below zero) the U.S. holder’s adjusted
tax basis in our common stock. Any remaining excess will be treated as gain from
the sale or other taxable disposition of the common stock and will be treated as
described under “Gain or Loss on Sale, Taxable Exchange or Other Taxable
Disposition of Common Stock” below.
Any
dividends we pay to a U.S. holder that is treated as a taxable corporation for
U.S. federal income tax purposes generally will qualify for the
dividends-received deduction if the applicable holding period and other
requirements are satisfied. With certain exceptions, if the applicable holding
period and other requirements are satisfied, dividends we pay to a non-corporate
U.S. holder will constitute “qualified dividends” that will be subject to tax at
the maximum tax rate accorded to long-term capital gains for tax years beginning
on or before December 31, 2010, after which the tax rate applicable to dividends
is scheduled to return to the tax rate applicable to ordinary
income.
If PRC
taxes apply to any dividends paid to a U.S. holder on our common stock, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and such
U.S. holder may be entitled to certain benefits under the income tax treaty
between the United States and the PRC. U.S. holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
In
general, a U.S. holder must treat any gain or loss recognized upon a sale,
taxable exchange, or other taxable disposition of our common stock as capital
gain or loss. Any such capital gain or loss will be long-term capital gain or
loss if the U.S. holder’s holding period for the common stock so disposed of
exceeds one year, and otherwise as short-term capital gain or loss. In general,
a U.S. holder will recognize gain or loss in an amount equal to the difference
between (i) the sum of the amount of cash and the fair market value of any
property received in such disposition and (ii) the U.S. holder’s adjusted tax
basis in the common stock so disposed of. Long-term capital gain recognized by a
non-corporate U.S. holder will generally be subject to a maximum tax rate of 15
percent for tax years beginning on or before December 31, 2010, after which the
maximum long-term capital gains tax rate is scheduled to increase to 20 percent.
The deduction of capital losses is subject to various limitations.
If PRC
taxes apply to any gain from the disposition of our common stock by a U.S.
holder, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and such U.S. holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.
92
New
Legislation Regarding Medicare Tax
For
taxable years beginning after December 31, 2012, certain U.S. holders that are
individuals, estates or trusts will be subject to a 3.8% tax on all or a portion
of their "net investment income," which may include all or a portion of their
dividends and net gains from the sale or other disposition of our common stock.
If you are a U.S. holder that is an individual, estate or trust, you should
consult your tax advisor regarding the applicability of the Medicare tax to your
income and gains in respect of your investment in our common stock.
Non-U.S.
Holders
Taxation
of Distributions
In
general, any distribution we make to a non-U.S. holder, to the extent paid out
of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles), will constitute a dividend for U.S. federal
income tax purposes. Unless we are treated as an “80/20 company” for U.S.
federal income tax purposes, as described below, any dividend paid to a non-U.S.
holder with respect to shares of our common stock that is not effectively
connected with the non-U.S. holder’s conduct of a trade or business within the
United States, as described below, generally will be subject to U.S. federal
withholding tax at a rate of 30 percent of the gross amount of the dividend,
unless such non-U.S. holder is eligible for a reduced rate of withholding tax
under an applicable income tax treaty and provides proper certification of its
eligibility for such reduced rate (usually on an IRS Form W-8BEN). Any
distribution not constituting a dividend will be treated first as reducing the
non-U.S. holder’s adjusted tax basis in its shares of our common stock (but not
below zero) and, to the extent such distribution exceeds the non-U.S. holder’s
adjusted tax basis, as gain from the sale or other taxable disposition of the
common stock, which will be treated as described under “Gain on Sale, Taxable
Exchange or Other Taxable Disposition of Common Stock” below.
There is
a possibility that we may qualify as an “80/20 company” for U.S. federal income
tax purposes. In general, a U.S. corporation is an 80/20 company if at least 80
percent of its gross income earned directly or from subsidiaries during an
applicable testing period is “active foreign business income.” The 80 percent
test is applied on a periodic basis. If we qualify as an 80/20 company, a
percentage of any dividend paid by us generally will not be subject to U.S.
federal withholding tax. You should consult with your own tax advisors regarding
the amount of any such dividend subject to withholding tax in this
circumstance. It should also be noted that there are currently legislative
proposals to amend the rules pertaining to 80/20 companies.
Dividends
we pay to a non-U.S. holder that are effectively connected with such non-U.S.
holder’s conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a U.S. permanent
establishment or fixed base maintained by the non-U.S. holder) generally will
not be subject to U.S. withholding tax, provided such non-U.S. holder complies
with certain certification and disclosure requirements (usually by providing an
IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S.
federal income tax, net of certain deductions, at the same graduated individual
or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a
corporation, dividends that are effectively connected income may also be subject
to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be
specified by an applicable income tax treaty).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
A
non-U.S. holder generally will not be subject to U.S. federal income tax in
respect of gain recognized on a sale, exchange or other disposition of common
stock, unless:
|
·
|
the gain is effectively connected
with the conduct of a trade or business by the non-U.S. holder within the
United States (and, under certain income tax treaties, is attributable to
a U.S. permanent establishment or fixed base maintained by the non-U.S.
holder);
|
|
·
|
the non-U.S. holder is an
individual who is present in the United States for 183 days or more in the
taxable year of disposition and certain other conditions are met, and is
not eligible for relief under an applicable income tax treaty;
or
|
93
|
·
|
we are or have been a “United
States real property holding corporation” (“USRPHC”) for U.S. federal
income tax purposes at any time during the shorter of the five year period
ending on the date of disposition or the non-U.S. holder’s holding period
for the common stock disposed of, and, generally, in the case where our
common stock is regularly traded on an established securities market, the
non-U.S. holder has owned, directly or indirectly, more than 5 percent of
the common stock disposed of, at any time during the shorter of the five
year period ending on the date of disposition or the non-U.S. holder’s
holding period for the common stock disposed
of.
|
There can
be no assurance that our common stock will be treated as regularly traded on an
established securities market for this purpose.
Unless an
applicable tax treaty provides otherwise, gain described in the first and third
bullet points above generally will be subject to U.S. federal income tax, net of
certain deductions, at the same graduated tax rates applicable to U.S. persons.
Any gains described in the first bullet point above of a non-U.S. holder that is
a foreign corporation may also be subject to an additional “branch profits tax”
at a 30 percent rate (or a lower applicable tax treaty rate). Any U.S. source
capital gain of a non-U.S. holder described in the second bullet point above
(which may be offset by U.S. source capital losses during the taxable year of
the disposition) generally will be subject to a flat 30 percent U.S. federal
income tax (or a lower applicable tax treaty rate).
In
connection with the third bullet point above, we generally will be classified as
a USRPHC if the fair market value of our “United States real property interests”
equals or exceeds 50 percent of the sum of the fair market value of our
worldwide real property interests plus our other assets used or held for use in
a trade or business, as determined for U.S. federal income tax purposes. We
believe that we currently are not a USRPHC, and we do not anticipate becoming a
USRPHC (although no assurance can be given that we will not become a USRPHC in
the future).
Information
Reporting and Backup Withholding
Other
than with respect to U.S. holders who are “exempt recipients,” we generally must
report annually to the IRS and to each holder the amount of dividends and
certain other distributions we pay to such holder on our common stock and the
amount of tax, if any, withheld with respect to those distributions. In the case
of a non-U.S. holder, copies of the information returns reporting those
distributions and withholding may also be made available to the tax authorities
in the country in which the non-U.S. holder is a resident under the provisions
of an applicable income tax treaty or agreement. Information reporting is also
generally required with respect to proceeds from the sales and other
dispositions of our common stock to or through the U.S. office (and in certain
cases, the foreign office) of a broker.
In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28 percent, generally will apply to distributions made on our common stock to,
and the proceeds from sales and other dispositions of our common stock by, a
non-corporate U.S. holder who:
|
·
|
fails to provide an accurate
taxpayer identification
number;
|
|
·
|
is notified by the IRS that
backup withholding is required;
or
|
|
·
|
in certain circumstances, fails
to comply with applicable certification
requirements.
|
A
non-U.S. holder generally may eliminate the requirement for information
reporting (other than with respect to distributions, as described above) and
backup withholding by providing certification of its foreign status, under
penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise
establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. holder’s or a non-U.S.
holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular
circumstances.
94
Recently
Enacted Legislation Relating to Foreign Accounts
On March
18, 2010, the President signed the Hiring Incentives to Restore Employment Act
into law. Effective for payments made after December 31, 2012, this law imposes
a 30% U.S. federal withholding tax on distributions and the gross proceeds of
sale in respect of our shares of common stock to a foreign financial institution
or non-financial foreign entity, unless (i) in the case of a foreign financial
institution, such institution enters into an agreement with the U.S. government
to withhold on certain payments and to collect and provide to the U.S. tax
authorities substantial information regarding U.S. account holders of such
institution (which includes certain equity and debt holders of such institution,
as well as certain account holders that are foreign entities with U.S. owners)
and to withhold on certain payments and (ii) in the case of a non-financial
foreign entity, such entity provides the withholding agent with a certification
identifying the direct and indirect U.S. owners of the entity. Under certain
circumstances, a non-U.S. shareholder might be eligible for refunds or credits
of such taxes. Prospective investors should consult with their own tax advisor
regarding the possible implications of this recently enacted legislation on the
ownership and disposition of our common stock.
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The
following discussion summarizes the material PRC income tax considerations
relating to the ownership of our common stock following the consummation of this
offering.
Resident
Enterprise Treatment
Under
Enterprise Income Tax Law of the PRC (“EIT Law”) that became effective on
January 1, 2008, enterprises are classified as “resident enterprises” and
“non-resident enterprises.” Enterprises established outside of
China whose “de facto management bodies” are located in China are considered PRC
“tax resident enterprises” and will generally be subject to the uniform 25% PRC
enterprise income tax rate on their global income. In addition, a tax
circular issued by the State Administration of Taxation on April 22, 2009
regarding the standards used to classify certain Chinese-invested enterprises
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 enterprise shareholders. This recent circular also
subjects such “resident enterprises” to various reporting requirements with the
PRC tax authorities. Under the implementation rules to the Enterprise Income Tax
Law, a “de facto management body” is defined as a body that has material and
overall management and control over the manufacturing and business operations,
personnel and human resources, finances and other assets of an enterprise. In
addition, the tax circular mentioned above details that certain Chinese-invested
enterprises will be classified as “resident enterprises” if the following are
located or resident in China: senior management personnel and departments that
are responsible for daily production, operation and management; financial and
personnel decision making bodies; key properties, accounting books, company
seal, and minutes of board meetings and shareholders’ meetings; and half or more
of the senior management or directors having voting rights.
Given the
short history of the EIT Law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the PRC tax resident
treatment of a non-PRC company such as us. Our management is
substantially based in the PRC and expected to be based in the PRC in the
future, although two of our executive officers and one of our directors are not
PRC nationals. If the PRC tax authorities determine that we are a
“resident enterprise” for PRC enterprise income tax purposes, a number of
unfavorable tax consequences could follow. First, we could be subject to the
enterprise income tax at a rate of 25% on our global taxable income, as well as
PRC enterprise tax reporting obligations. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiary would
qualify as “tax-exempted income”, we cannot assure you that such dividends will
not be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC EIT purposes. Finally, it is possible
that future guidance issued with respect to the new “resident enterprise”
classification could result in a situation in which a withholding tax of 10% for
our non-PRC enterprise shareholders or a potential withholding tax of 20% for
non-PRC individual shareholders is imposed on dividends we pay to them and with
respect to gains derived by our non-PRC shareholders from transferring our
shares. In addition to the uncertainty in how the new “resident enterprise”
classification could apply, it is also possible that the rules may change in the
future, possibly with retroactive effect. We are actively monitoring the
“resident enterprise” classification rules and are evaluating appropriate
organization changes to avoid this treatment, to the extent
possible.
95
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us. However, since
it is not anticipated that we would receive dividends or generate other income
in the near future, we are not expected to have any income that would be subject
to the 25% enterprise income tax on global income in the near future. We will
consult with the PRC tax authorities and make any necessary tax payment if we
(based on future clarifying guidance issued by the PRC), or the PRC tax
authorities, determine that we are a resident enterprise under the EIT Law, and
if we were to have income in the future.
Dividends
From PRC Operating Companies
If we are
not treated as resident enterprises under the EIT Law, then dividends that we
receive may be subject to PRC withholding tax. The EIT Law and the implementing
rules of the EIT Law provide that (A) an income tax rate of 25% will normally be
applicable to investors that are “non-resident enterprises,” or non-resident
investors, which (i) have establishments or premises of business inside the PRC,
and (ii) the income in connection with their establishment or premises of
business is sourced from the PRC or the income is earned outside the PRC but has
actual connection with their establishments or places of business inside the
PRC, and (B) an income tax rate of 10% will normally be applicable to dividends
payable to investors that are “non-resident enterprises,” or non-resident
investors, which (i) do not have an establishment or place of business in the
PRC or (ii) have an establishment or place of business in the PRC, but the
relevant income is not effectively connected with the establishment or place of
business, to the extent such dividends are derived from sources within the
PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, on a
case-by-case basis. We are a holding company and substantially all of our income
may be derived from dividends. Thus, if we are considered as a “non-resident
enterprise” under the EIT Law and the dividends paid to us are considered income
sourced within the PRC, such dividends received may be subject to the income tax
described in the foregoing paragraph.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us. As indicated
above, however, we are not expected to be paid any dividends in the near future.
We will consult with the PRC tax authorities and make any necessary tax
withholding if, in the future, we were to be paid any dividends and we (based on
future clarifying guidance issued by the PRC), or the PRC tax authorities,
determine that we are a non-resident enterprise under the EIT Law.
Dividends
that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of
Our Common Stock
If
dividends payable to (or gains recognized by) our non-resident investors are
treated as income derived from sources within the PRC, then the dividends that
non-resident investors receive from us and any such gain on the sale or transfer
of our common stock, may be subject to taxes under PRC tax laws.
Under the
EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of
10% is applicable to dividends payable to investors that are “non-resident
enterprises,” or non-resident investors, which (i) do not have an establishment
or place of business in the PRC or (ii) have an establishment or place of
business in the PRC but the relevant income is not effectively connected with
the establishment or place of business, to the extent that such dividends have
their sources within the PRC. Similarly, any gain realized on the transfer of
common stock by such investors is also subject to 10% PRC income tax if such
gain is regarded as income derived from sources within the PRC.
96
The
dividends paid by us to non-resident investors with respect to our common stock,
or gain non-resident investors may realize from sale or the transfer of our
common stock, may be treated as PRC-sourced income and, as a result, may be
subject to PRC tax at a rate of 10%. In such event, we also may be required to
withhold a 10% PRC tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our common stock may be responsible for
paying PRC tax at a rate of 10% on any gain realized from the sale or transfer
of our common stock after the consummation of the offering if such non-resident
investors and the gain satisfy the requirements under the EIT Law and its
implementing rules. However, under the EIT Law and its implementing rules, we
would not have an obligation to withhold income tax in respect of the gains that
non-resident investors (including U.S. investors) may realize from the sale or
transfer of our common stock from and after the consummation of this
offering.
If we
were to pay any dividends in the future, we would again consult with the PRC tax
authorities and if we (based on future clarifying guidance issued by the PRC),
or the PRC tax authorities, determine that we must withhold PRC tax on any
dividends payable by us under the EIT Law, we will make any necessary tax
withholding on dividends payable to our non-resident investors. If non-resident
investors as described under the EIT Law (including U.S. investors) realized any
gain from the sale or transfer of our common stock and if such gain were
considered as PRC-sourced income, such non-resident investors would be
responsible for paying 10% PRC income tax on the gain from the sale or transfer
of our common stock. As indicated above, under the EIT Law and its implementing
rules, we would not have an obligation to withhold PRC income tax in respect of
the gains that non-resident investors (including U.S. investors) may realize
from the sale or transfer of our common stock from and after the consummation of
this offering.
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of our common stock after the
consummation of this offering if such non-resident investors and the gain
satisfy the requirements under the EIT Law and its implementing rules, as
described above.
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by
non-resident investors from the sale or transfer of our common stock is subject
to any income tax in the PRC, and such non-resident investors fail to file any
tax return or pay tax in this regard pursuant to the Tax Related Laws, they may
be subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit and may
impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging
from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax
return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from 50%
to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor
fails to file a tax return or pay the tax within the prescribed time limit
according to the order by the PRC tax authorities, the PRC tax authorities may
collect and check information about the income items of the non-resident
investor in the PRC and other payers (the “Other Payers”) who will pay amounts
to such non-resident investor, and send a “Notice of Tax Issues” to the Other
Payers to collect and recover the tax payable and impose overdue fines on such
non-resident investor from the amounts otherwise payable to such non-resident
investor by the Other Payers; (4) if a non-resident investor fails to pay the
tax payable within the prescribed time limit as ordered by the PRC tax
authorities, a fine may be imposed on the non-resident investor ranging from 50%
to 500% of the unpaid tax payable; and the PRC tax authorities may, upon
approval by the director of the tax bureau (or sub-bureau) of, or higher than,
the county level, take the following compulsory measures: (i) notify in writing
the non-resident investor’s bank or other financial institution to withhold from
the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s
commodities, goods or other property in a value equivalent to the amount of tax
payable; or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable or surcharge for overdue tax payment, and can not provide
a guarantee to the tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or their legal representative
from leaving the PRC.
97
UNDERWRITING
Subject
to the terms and conditions in the underwriting agreement,
dated ,
2011, by and between us, Brean Murray, Carret & Co., LLC,
who is acting as the book-running management and representative
of underwriters of this offering, each underwriter has agreed to
purchase from us and we have severally agreed to sell, on a firm commitment
basis, the number of shares of common stock set forth below, at the public
offering price, less the underwriting discount set forth on the cover page of
this prospectus.
Underwriter
|
Number of
Common Stock
|
|||
Brean
Murray, Carret & Co., LLC
|
||||
Total
|
4,166,667
|
The
underwriters have agreed to purchase all shares of common stock offered by this
prospectus (other than those covered by the over-allotment option described
below), if any are purchased. The underwriting agreement provides that the
obligations of the underwriters to pay for and accept delivery of the common
stock are subject to the passing upon certain legal matters by counsel and
certain conditions such as confirmation of the accuracy of representations and
warranties by us about our financial condition and operations and other
matters.
Commissions
and Discounts
The
following table shows the underwriting fees to be paid to the underwriters in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the over-allotment option.
|
No
Exercise
|
Full
Exercise
|
||||||
Per
share
|
$ | $ | ||||||
Total
|
$ | $ |
We have
also agreed to reimburse Brean Murray, Carret & Co., LLC up to $70,000 for
legal services provided by outside counsel and up to $55,000 for other
reasonable and customary out-of-pocket expenses incurred by Brean Murray, Carret
& Co., LLC.
United
Best, our foreign advisor, will receive a fee of
$ ($ if
the over-allotment option is exercised in full), which is in addition to the
underwriting discounts and commissions in the above table. We estimate
that the total fees and expenses payable by us, excluding underwriting discounts
and commissions, and the fee payable to United Best will be approximately
million.
Pricing
of Securities
The
underwriters have advised us that they propose to offer the shares to the public
at $ per
share. The underwriters propose to offer the shares to certain dealers at the
same price less a concession of not more than
$ per
share. The underwriters may allow, and the dealers may reallow, a concession of
not more than
$ per
share on sales to certain other brokers and dealers. After this offering, these
figures may be changed by the underwriters.
98
The
initial public offering price for shares of our common stock offered by this
prospectus was negotiated by us and the underwriters. The factors considered in
determining the initial public offering price include the history of and the
prospects for the industry in which we compete, our past and present operations,
our historical results of operations, our prospectus for future earnings, the
recent market prices of securities of generally comparable companies and the
general condition of the securities markets at the time of this offering and
other relevant factors. There can be no assurance that the initial public
offering price of shares of our common stock will correspond to the price at
which our shares will trade in the public market subsequent to this offering or
that an active public market for our common stock will develop and continue
after this offering.
Over-allotment
Option
We
have granted the underwriters an over-allotment option. This option, which
is exercisable for up to 45 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 625,000 additional shares of common stock
from us to cover over-allotments. If the underwriters exercise all or part
of this option, they will purchase shares of common stock covered by the option
at the public offering price that appears on the cover page of this prospectus,
less the same underwriting discount as set forth above. The underwriters
have severally agreed that to the extent the over-allotment option is
exercised they will each purchase a number of additional shares of common stock
proportionate to the underwriter's initial amount reflected in the table
above.
Underwriter’s
Warrants
We have
also agreed to issue to Brean Murray, Carret & Co., LLC, and/or
its designees as warrant to purchase a number of shares of common stock equal to
an aggregate of 5% of the shares of common stock sold in the offering, excluding
over-allotments, if any. The warrant will have an exercise price equal to 125%
of the offering price of the shares of common stock sold in this offering. The
warrant will be exercisable for four years commencing one year after the
effective date of the registration statement, and will therefore cease to be
exercisable five years after the effective date of the registration statement.
Pursuant to the rules of the Financial Industry Regulatory Authority, Inc., or
FINRA (formerly the NASD), and in particular Rule 5110 (g)(1), the warrant (and
underlying shares) issued to Brean Murray, Carret & Co., LLC, may not
be sold, transferred, assigned, pledged, or hypothecated, or be the subject of
any hedging, short sale, derivative, put or call transaction that would result
in the effective economic disposition of such warrant by any person
for a period of 180 days immediately following the effective date of the
registration statement, except as provided in FINRA Rule 5110 (g)(2).
Lock-Up
Agreements
We and
each of our directors, executive officers, 5% shareholders and other existing
stockholders are subject to lock-up agreements that, subject to certain
exceptions, prohibit us and them from, (1) offering, pledging, announcing
the intention to sell, selling, contracting to sell, selling any option or
contract to purchase, purchasing any option or contract to sell, granting any
option, right or warrant to purchase, making any short sale or otherwise
transferring or disposing of, directly or indirectly, any shares of our common
stock or any securities convertible into, exercisable or exchangeable for or
that represent the right to receive our shares of common stock, whether now
owned or hereafter acquired, or (2) entering into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of our shares of common stock, whether any such transaction
described in clause (1) or (2) foregoing is to be settled by delivery
of shares of common stock or such other securities, in cash or otherwise, for a
period of at least 90 days following the effective date of the registration
statement without the prior written consent of the underwriters'
representative.
99
The
lock-up period in all of the lock-up agreements is subject to extension if
(1) during the last 17 days of the lock-up period, we release earnings
results or material news or a material event relating to us occurs, or
(2) prior to the expiration of the lock-up period, we announce that we will
release earnings results during the 16-day period beginning on the last day of
the lock-up period, in which cases the restrictions imposed in these lock-up
agreements shall continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the occurrence of the
material news or material event, unless the underwriters’ representative waives
the extension in writing.
Other
Terms
We have
agreed to indemnify the underwriters against certain liabilities, including
civil liabilities under the Securities Act, or to contribute to payments that
the underwriters may be required to make in respect of those
liabilities.
We have
agreed that, upon successful completion of this offering, for a period of twelve
(12) months from the closing of this offering, we will grant Brean Murray,
Carret & Co., LLC the right of participation to act as, in our discretion,
lead underwriter or minimally as a co-manager with at least 50.0% of the
economics, or, in the case of a three-underwriter or -placement agent
transaction, 33.0% of the economics, for each and every future public and
private equity and public debt offering of the Company (or any successor to or
subsidiary of the Company) during such twelve (12) month period.
Price
Stabilization, Short Positions, Passive Market-Making
In
connection with this offering, the underwriters may engage in activities that
stabilize, maintain, or otherwise affect the price of our shares of common
stock, including:
|
·
|
stabilizing
transactions;
|
|
·
|
short
sales;
|
|
·
|
purchases to cover positions
created by short sales;
|
|
·
|
imposition of penalty
bids;
|
|
·
|
covering transactions;
and
|
|
·
|
passive
market-making.
|
Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of our shares of common stock while this
offering is in progress. These transactions may also include making short sales
of our shares of common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required to
purchase in this offering. Short sales may be “covered short sales,” which are
short positions in an amount not greater than the underwriters’ over-allotment
option referred to above, or may be “naked short sales,” which are short
positions in excess of that amount. The effect of these transactions may be to
stabilize or maintain the market price of our securities at a level above that
which might otherwise prevail in the open market.
The
underwriters may close out any covered short position either by exercising their
over-allotment option, in whole or in part, or by purchasing shares in the open
market. In making this determination, the underwriters will consider, among
other things, the price of shares available for purchase in the open market
compared to the price at which they may purchase shares through the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market that could
adversely affect investors who purchased in this offering.
The
underwriters also may impose a penalty bid, which occurs when a particular
underwriter repays to the underwriters’ representative a portion of
the underwriting discount received by it because the underwriter’s has
repurchased shares sold by or for the account of that underwriter in
stabilizing or short-covering transactions.
100
As a
result of these activities, the price of our common stock may be higher than the
price that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued by the underwriters at any time. The
underwriters may carry out these transactions on NASDAQ Capital Market, in the
over-the-counter market, or otherwise.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our
securities.
Other
Matters
A
prospectus in electronic format may be made available on a website maintained by
the representative of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree to allocate
a number of shares for sale to its online brokerage account holders. Internet
distributions will be allocated by the representative of the underwriters
to underwriters that may make Internet distributions on the same basis
as other allocations. In connection with the offering, the underwriters or
syndicate members may distribute prospectuses electronically. No forms of
electronic prospectus other than prospectuses that are printable as Adobe® PDF will
be used in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of
common stock offered by this prospectus to accounts over which they exercise
discretionary authority.
Selling
Restrictions
General
No action
has been or will be taken by us or by any underwriter in any jurisdiction
except in the United States that would permit a public offering of our common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to us and our common stock in any country or
jurisdiction where action for that purpose is required. Accordingly, our common
stock may not be offered or sold, directly or indirectly, and neither this
prospectus nor any other material or advertisements in connection with this
offering may be distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations of any such
country or jurisdiction. The foregoing restrictions do not apply to
stabilization transactions.
United
Kingdom
In the
United Kingdom, the common stock offered by this prospectus are directed to and
will only be available for purchase to a person who is an exempt person as
referred to at paragraph (c) below and who warrants, represents and agrees that:
(a) it has not offered or sold, will not offer or sell, any common stock offered
by this prospectus to any person in the United Kingdom except in circumstances
which do not constitute an offer to the public in the United Kingdom for the
purposes of the section 85 of the Financial Services and Markets Act 2000 (as
amended) (“FSMA”); and (b) it has complied and will comply with all applicable
provisions of FSMA and the regulations made thereunder in respect of anything
done by it in relation to the common stock offered by this prospectus in, from
or otherwise involving the United Kingdom; and (c) it is a person who falls
within the exemptions to Section 21 of the FSMA as set out in The Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Order”),
being either an investment professional as described under Article 19 or any
body corporate (which itself has or a group undertaking has a called up share
capital or net assets of not less than £500,000 (if more than 20 members) or
otherwise £5 million) or an unincorporated association or partnership (with net
assets of not less than £5 million) or is a trustee of a high value trust or any
person acting in the capacity of director, officer or employee of such entities
as defined under Article 49(2)(a) to (d) of the Order, or a person to whom the
invitation or inducement may otherwise lawfully be communicated or cause to be
communicated. The investment activity to which this document relates will only
be available to and engaged in only with exempt persons referred to above.
Persons who are not investment professionals and do not have professional
experience in matters relating to investments or are not an exempt person as
described above, should not review nor rely or act upon this document and should
return this document immediately. It should be noted that this document is not a
prospectus in the United Kingdom as defined in the Prospectus Regulations 2005
and has not been approved by the Financial Services Authority or any competent
authority in the United Kingdom.
101
European
Economic Area
In
relation to each member state of the European Economic Area which has
implemented the Prospectus Directive (each, a “Relevant Member State”), with
effect from and including the date on which the Prospectus Directive is
implemented in that Relevant Member State, no offer of our common stock has been
made or will be made to the public in that Relevant Member State, except that,
with effect from and including such date, an offer of our common stock may be
made to the public in the Relevant Member State at any time:
|
·
|
to legal entities which are
authorized or regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to invest in
securities;
|
|
·
|
to any legal entity which has two
or more of (1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than €43,000,000
and (3) an annual net turnover of more than €50,000,000, as shown in
its last annual or consolidated
accounts;
|
|
·
|
to fewer than 100 natural or
legal persons (other than qualified investors as defined in the Prospectus
Directive); or
|
|
·
|
in any other circumstances which
do not require the publication by us of a prospectus pursuant to Article 3
of the Prospectus Directive.
|
For the
purposes of this provision, the expression an “offer of our common stock to the
public” in relation to any common stock in any Relevant Member State means the
communication in any form and by any means of sufficient information on the
terms of the offer and any common stock to be offered so as to enable an
investor to decide to purchase any common stock, as the same may be varied in
that Relevant Member State by any measure implementing the Prospectus Directive
in that Relevant Member State and the expression “Prospectus Directive” means
Directive 2003/71/EC and includes any relevant implementing measure in each
Relevant Member State.
Switzerland
This
document does not constitute a prospectus within the meaning of Art. 652a of the
Swiss Code of Obligations. Our common stock may not be sold directly or
indirectly in or into Switzerland except in a manner which will not result in a
public offering within the meaning of the Swiss Code of Obligations. Neither
this document nor any other offering materials relating to our common stock may
be distributed, published or otherwise made available in Switzerland except in a
manner which will not constitute a public offer of our common stock in
Switzerland.
Hong
Kong
Our
common stock may not be offered or sold by means of any document other than: (i)
in circumstances which do not constitute an offer to the public within the
meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), (ii) to
“professional investors” as defined in the Securities and Futures Ordinance
(Cap. 571, Laws of Hong Kong) and any rules thereunder, or (iii) in other
circumstances which do not result in the document being a “prospectus” within
the meaning of the Companies Ordinance. No advertisement, invitation or other
document relating our common stock may be issued, whether in Hong Kong or
elsewhere, where such document is directed at, or the contents are likely to be
accessed or read by, the public of Hong Kong (except if permitted to do so under
the laws of Hong Kong), other than with respect to such common stock that are
intended to be disposed of only to persons outside of Hong Kong or only to
“professional investors” as defined in the Securities and Futures Ordinance and
any rules thereunder.
102
People’s
Republic of China
This
prospectus may not be circulated or distributed in the PRC and the shares may
not be offered or sold, and will not offer or sell to any person for re-offering
or resale directly or indirectly to any resident of the PRC except pursuant to
applicable laws and regulations of the PRC. For the purpose of this paragraph,
PRC does not include Taiwan and the special administrative regions of Hong Kong
and Macau.
Singapore
This
prospectus has not been registered as a prospectus with the Monetary Authority
of Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of our common stock may not be circulated or distributed, nor may our common
stock be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to persons in
Singapore other than (i) to an institutional investor under Section 274 of the
Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a
relevant person, or any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other applicable
provision of the SFA.
Where the
shares of common stock are subscribed or purchased under Section 275 by a
relevant person which is:
|
·
|
a corporation (which is not an
accredited investor) the sole business of which is to hold investments and
the entire share capital of which is owned by one or more individuals,
each of whom is an accredited investor;
or
|
|
·
|
a trust (where the trustee is not
an accredited investor) whose sole purpose is to hold investments and each
beneficiary is an accredited investor, shares, debentures and units of
shares and debentures of that corporation or the beneficiaries’ rights and
interest in that trust shall not be transferable for six months after that
corporation or that trust has acquired the common stock under Section 275
except: (i) to an institutional investor or to a relevant person, or to
any person pursuant to an offer that is made on terms that such rights or
interest are acquired at a consideration of not less than $200,000 (or its
equivalent in a foreign currency) for each transaction, whether such
amount is to be paid for in cash or by exchange of securities or other
assets; (ii)where no consideration is given for the transfer; or (iii) by
operation of law.
|
Israel
The
common stock offered by this prospectus have not been approved or disapproved by
the Israeli Securities Authority (ISA). The common stock may not be offered or
sold, directly or indirectly, to the public in Israel. The ISA has not issued
permits, approvals or licenses in connection with the offering of the common
stock or publishing the prospectus; nor has it authenticated the details
included herein, confirmed their reliability or completeness, or rendered an
opinion as to the quality of the securities being offered. Any resale, directly
or indirectly, to the public of the common stock offered by this prospectus is
subject to restrictions on transferability and must be effected only in compliance with the
Israeli securities laws and regulations.
103
LEGAL
MATTERS
The
validity of the shares sold by us under this prospectus will be passed upon by
Guzov Ofsink, LLC, New York, New York. Pillsbury Winthrop Shaw Pittman,
LLP, Washington, D.C. and Global Law Office, China, will pass upon certain legal
matters for the underwriters. Legal matters as to PRC law will be passed upon
for us by Han Kun Law Firm. Pillsbury Winthrop Shaw Pittman LLP may rely upon
Global Law Office with respect to matters governed by PRC law.
With
respect to certain matters involving the enforcement of foreign judgments in the
PRC and the bringing of original actions in the PRC predicated solely on the
federal securities laws of the United States, Han Kun Law Firm, has given us
certain advice.
SERVICE
OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are a
company incorporated under the laws of the State of Delaware in the United
States. However, all of our business, assets and operations are located in
China. In addition, a substantial majority of our directors and officers reside
outside of the United States. As a result, it may be difficult for United States
investors to effect service of process within the United States upon us or such
persons or to enforce against us or them, judgments obtained in United States
courts, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any State thereof.
Han Kun
Law Offices, our counsel as to Chinese law, has advised us that there is
uncertainty as to whether the courts of China would (1) recognize or
enforce judgments of United States courts obtained against us or such persons
predicated upon the civil liability provisions of the securities laws of the
United States or any State thereof, or (2) be competent to hear original
actions brought in each respective jurisdiction, against us or such persons
predicated upon the securities laws of the United States or any State
thereof.
Han Kun
Law Offices has advised us that the recognition and enforcement of foreign
judgments are provided for under the Chinese Civil Procedure Law. Chinese courts
may recognize and enforce foreign judgments in accordance with the requirements
of the Chinese Civil Procedure Law based either on treaties between China and
the country where the judgment is made or in reciprocity between jurisdictions.
China does not have any treaties or other agreements with the United States that
provide for the reciprocal recognition and enforcement of foreign judgments. As
a result, it is uncertain whether a Chinese court would enforce a judgment
rendered by a court in the United States.
We have
appointed Vcorp Services, LLC as our agent to receive service of process with
respect to any action brought against us in a court in the United
States.
EXPERTS
Child Van
Wagoner & Bradshaw, PLLC, independent registered public accountants, located
in Utah, have audited our financial statements included in this registration
statement to the extent and for the periods set forth in their report. We
have relied on such reports given upon the authority of such firm as experts in
accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and other reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. You may read and copy any
materials we file with the SEC at the SEC’s public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available to the public through the SEC’s website at http://www.sec.gov.
104
INDEX
TO FINANCIAL STATEMENTS
1.
Unaudited Condensed Consolidated Financial Statements of
China SLP Filtration Technology, Inc. as of December 31, 2010 and
September 30, 2010 and for the three month periods ended December 31, 2010
and 2009.
|
|||
i.
|
Unaudited
Condensed Consolidated Balance Sheets as of December
31, 2010 and September 30, 2010
|
F-2
|
|
iii.
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income
for the three months ended December 31, 2010 and December 31,
2009
|
F-3
|
|
iv.
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 2010 and December 31,
2009
|
F-4
|
|
vi.
|
Notes
to Unaudited Consolidated Financial Statements
|
F-5
|
|
2.
Audited Consolidated Financial Statements of China
SLP Filtration Technology, Inc. as of September 30, 2010 and
2009 and for the years ended September 30, 2010 and
2009
|
|||
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-15
|
|
ii.
|
Consolidated
Balance Sheets as of September 30, 2010 and 2009
|
F-16
|
|
iii.
|
Consolidated
Statements of Operations and Comprehensive Income for the years ended
September 30, 2010 and 2009
|
F-17
|
|
iv.
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2010 and
2009
|
F-19
|
|
v.
|
Consolidated
Statements of Stockholders' Equity for the years ended September 30,
2010 and 2009
|
F-18
|
|
vi.
|
Notes
to Consolidated Financial Statements
|
F-20
|
|
3. Unaudited
Pro Forma Consolidated Financial Statements of China SLP
Filtration Technology, Inc. as of December 31, 2010; for
the three months ended December 31, 2010 and for the year ended September
30, 2010
|
F-35
|
||
i.
|
Notes
to Unaudited Pro Forma Consolidated Financial
Statements
|
F-39
|
F-1
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
September
30,
|
||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
5,273,088
|
$
|
5,295,301
|
||||
Restricted
cash
|
454,387
|
-
|
||||||
Accounts
receivable – Net
|
2,282,430
|
2,207,073
|
||||||
Advance
to suppliers
|
1,262,826
|
-
|
||||||
Inventory
|
1,820,136
|
1,564,537
|
||||||
Taxes
refund receivable
|
570,093
|
-
|
||||||
Prepaid
expenses and other current assets
|
652,813
|
585,385
|
||||||
Total
Current Assets
|
12,315,773
|
9,652,296
|
||||||
Deposits
|
1,534,549
|
4,906,370
|
||||||
Property
and equipment – Net
|
14,771,900
|
10,961,234
|
||||||
Land
use rights – Net
|
539,470
|
535,480
|
||||||
Total
Assets
|
$
|
29,161,692
|
$
|
26,055,380
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Short-term
loan
|
$
|
3,938,022
|
$
|
3,796,053
|
||||
Accounts
payable and accrued liabilities
|
2,239,652
|
742,384
|
||||||
Clients’
deposits
|
-
|
286,700
|
||||||
Other
payable - related party
|
920,148
|
160,673
|
||||||
Taxes
payable
|
88,943
|
31,406
|
||||||
Warrants
liabilities
|
548,000
|
739,000
|
||||||
Convertible
notes payable $4,140,000, net of discount
|
3,834,907
|
3,225,007
|
||||||
Total
Current Liabilities
|
11,569,672
|
8,981,223
|
||||||
|
|
|||||||
Total
Liabilities
|
11,569,672
|
8,981,223
|
||||||
Stockholders’
Equity
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
outstanding; Common stock, $0.001 par value, 40,000,000 shares authorized,
15,265,714 shares issued and outstanding at December 31, 2010 and
September 30, 2010
|
15,266
|
15,266
|
||||||
Additional
paid-in capital
|
8,527,190
|
8,375,860
|
||||||
Retained
earnings
|
6,779,081
|
6,721,609
|
||||||
Accumulated
other comprehensive income
|
2,270,483
|
1,961,422
|
||||||
Total
Stockholders’ Equity
|
17,592,020
|
17,074,157
|
||||||
|
|
|||||||
Total
Liabilities and Stockholder’s Equity
|
$
|
29,161,692
|
$
|
26,055,380
|
See
accompanying notes to financial statements
F-2
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended
|
|||||||
|
December 31
|
|||||||
2010
|
2009
|
|||||||
Net
Sales
|
$
|
5,780,973
|
$
|
5,224,961
|
||||
Cost
of Sales
|
4,223,562
|
3,611,088
|
||||||
Gross
Profit
|
1,557,411
|
1,613,873
|
||||||
Selling,
General and Administration Expenses
|
812,636
|
274,023
|
||||||
Income
from Operations
|
744,775
|
1,339,850
|
||||||
Other
Income (expense)
|
||||||||
Interest
Income
|
5,330
|
225
|
||||||
Interest
Expense
|
(777,697
|
)
|
(58,909
|
)
|
||||
Loss
on Disposal of Fixed Assets
|
(23,408
|
)
|
(107
|
)
|
||||
Government
subsidy
|
6,090
|
-
|
||||||
Changes
in Fair Value of Warrants
|
191,000
|
-
|
||||||
Total
Other Income (expenses)
|
(598,685
|
)
|
(58,791
|
)
|
||||
Income
before Income Taxes
|
146,090
|
1,281,059
|
||||||
Income
Tax Provision
|
88,618
|
-
|
||||||
Net
Income
|
$
|
57,472
|
$
|
1,281,059
|
||||
Other
Comprehensive Income
|
||||||||
Foreign
Currency Translation Adjustments
|
309,061
|
(1,306
|
)
|
|||||
Total
Comprehensive Income
|
$
|
366,533
|
$
|
1,279,753
|
||||
Net
Income Per Common Shares:
|
||||||||
Basic
and diluted
|
$
|
0.00
|
$
|
0.09
|
||||
Weighted-Average
Common Shares Outstanding:
|
||||||||
Basic
|
15,265,714
|
14,510,204
|
||||||
Diluted
|
17,189,523
|
14,510,204
|
See
accompanying notes to financial statements
F-3
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW
(Unaudited)
|
Three Months Ended December
31,
|
|||||||
2010
|
2009
|
|||||||
Cash
Flow from Operating Activities:
|
||||||||
Net
income
|
$ | 57,472 | $ | 1,281,059 | ||||
Adjustments
to reconcile net income to net cash flow provided by (used in) operating
activities:
|
||||||||
Depreciation
|
301,818 | 282,521 | ||||||
Amortization
|
3,187 | 3,112 | ||||||
Bad
debt allowance
|
(7,372 | ) | - | |||||
Non-cash
interest charges
|
609,900 | - | ||||||
Non-cash
equity-based expense
|
151,329 | - | ||||||
Changes
in warrants valuation
|
(191,000 | ) | - | |||||
Loss(gain)
from disposal of fixed assets
|
23,408 | 107 | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(37,838 | ) | (473,263 | ) | ||||
Advance
to suppliers
|
(1,250,571 | ) | 178,534 | |||||
Inventory
|
(232,266 | ) | (69,973 | ) | ||||
Taxes
refund receivable
|
(564,561 | ) | - | |||||
Prepaid
expenses and other current assets
|
(58,972 | ) | (22,866 | ) | ||||
Accounts
payable & accrued liabilities
|
1,479,878 | 277,822 | ||||||
Clients’
deposits
|
(287,739 | ) | (75,164 | ) | ||||
Taxes
payable
|
57,098 | 15,297 | ||||||
Net
cash provided by (used in) operating activities
|
53,771 | 1,397,186 | ||||||
Cash
Flow from Investing Activities:
|
||||||||
Addition-property,
equipment, and land use rights
|
(442,051 | ) | (893 | ) | ||||
Deposits
for purchase of equipment
|
(110,079 | ) | - | |||||
Proceeds
from disposal of fixed assets
|
3,805 | - | ||||||
Proceeds
from related party receivable
|
- | 161,116 | ||||||
Net
cash (used in) provided by investing activities
|
(548,325 | ) | 160,223 | |||||
Cash
Flow from Financing Activities:
|
||||||||
Repayment
of loans
|
(3,809,810 | ) | (330,101 | ) | ||||
Proceeds
from loans
|
3,899,805 | - | ||||||
Due
to related parties
|
749,963 | - | ||||||
Restricted
cash to secure bank loans
|
(454,387 | ) | - | |||||
Net
cash provided by (used) in financing activities
|
385,571 | (330,101 | ) | |||||
Effects
of Exchange Rates on Cash
|
86,770 | (269 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
(22,213 | ) | 1,227,039 | |||||
Cash
and cash equivalents, beginning of year
|
5,295,301 | 3,297,648 | ||||||
Cash
and cash equivalents, end of year
|
$ | 5,273,088 | $ | 4,524,687 | ||||
Supplemental
information of cash flows
|
||||||||
Cash
paid for interest
|
$ | 478,111 | $ | 58,909 | ||||
Cash
paid for income taxes
|
$ | 24,023 | $ | - |
See
accompanying notes to financial statements
F-4
China
SLP Filtration Technology, Inc.
Notes
to Consolidated Financial Statements for the three months ended December 31,
2010
(Unaudited - Expressed in US dollars
except indicated otherwise)
1.
Nature of Business and Organization History
China
SLP Filtration Technology, Inc., formerly named Perpetual Technologies, Inc.
(the “Company” or “we”) was incorporated under the laws of the State of
Delaware in March 2007. Prior to a reverse merger completed on February 12,
2010, we had no operations or substantial assets.
Hong
Hui Holdings Limited (“Hong Hui”) was formed in January 2010 in the British
Virgin Islands as a holding company by the shareholders of Technic International
Inc. (“Technic”), a Hong Kong company. On formation, each shareholder
transferred its ownership of Technic to Hong Hui. This acquisition was accounted
for as a transfer of entities under common control.
Technic
International Ltd. (“Technic”) was incorporated in September 2005 under the laws
of Hong Kong as a holding company that owned a 100% equity interest in Nanhai
Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong
Province, the People’s Republic of China (“China”). Jin Long was established in
2000 under the laws of China. In September 2005, Jin Long became the
wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its
name to Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”).
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of the
share exchange agreement, we issued and delivered to the Hong Hui stockholders a
total of 14,510,204 (72,551,020 pre-split) shares of our common stock in
exchange for all of the outstanding shares of Hong Hui. As a result of the
share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary.
The transaction is accounted for as a reverse acquisition, except that no
goodwill or other intangible was recorded. The recapitalization is considered to
be a capital transaction in substance, rather than a business
combination.
On
March 24, 2010, the Company effected a 1 for 5 reverse stock split of its
outstanding common stock. The effect of the reverse split is retrospectively
showed in all periods presented.
Through
Foshan, we manufacture, market and sell nonwoven fabrics in
China.
2. Basis of Presentation
and Principles of Consolidation
The
accompanying condensed consolidated balance sheet as of December 31, 2010, the
condensed consolidated statements of operations for the three months ended
December 31, 2010 and 2009, and the condensed consolidated statements of cash
flow for the three months ended December 31, 2010 and 2009 are unaudited. These
unaudited condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). They do not include all the disclosures required for annual
financial statements under generally accepted accounting principles. However,
these interim consolidated financial statements follow the same accounting
policies and methods of application as the Company’s most recent annual
financial statements. These interim consolidated financial statements should be
read in conjunction with the Company’s annual consolidated financial statements
for the year ended September 30, 2010.
F-5
Operating
results for the three month period ended December 31, 2010 are not necessarily
indicative of the results that may be expected for the full year ending
September 30, 2011, or for any other period.
3.
Summary of Significant Accounting Policies
These
interim consolidated financial statements follow the same accounting policies
and methods of application as the Company’s most recent annual financial
statements.
4.
Restricted Cash
Restricted
cash is a deposit of $454,387 (RMB 3,000,000) with the Standard Chartered Bank
as a guarantee of the loan of RMB6,000,000 on a term of six months the
Company obtained in December 2010 from the bank. We cannot withdraw
the funds from the deposit account until we repay the loan.
5.
Accounts Receivable
The
Company maintains an allowance for potential credit losses on accounts
receivable. Management periodically analyzes the composition of the accounts
receivable, aging of the receivables and historical bad debt to evaluate the
adequacy of the reserve for uncollectible accounts.
|
December 31,
|
September
30,
|
||||||
2010
|
2010
|
|||||||
Accounts
receivable
|
$
|
2,299,520
|
$
|
2,231,281
|
||||
Less:
Allowance for doubtful accounts
|
(17,090
|
)
|
(24,208
|
)
|
||||
Accounts
receivable – Net
|
$
|
2,282,430
|
$
|
2,207,073
|
As of
December 31, 2010 and September 30, 2010, the customer accounts receivable
balance with significant percentage of the gross accounts receivable
balance were as follows:
December 31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
Customers:
|
Percentage
|
Percentage
|
||||||
A
|
12 | % | 28 | % | ||||
B
|
11 | % | 6 | % | ||||
C
|
10 | % | 5 | % | ||||
Total
|
33 | % | 39 | % |
Three
customers individually accounted for 10% or more of the total gross accounts
receivable and together accounted for 33% of the total gross accounts receivable
at December 31, 2010. As of September 30, 2010, one customer’s account
receivable exceeded 20%, and combined with two other customers whose accounts
receivable was below 10%, represented 39% of the total gross accounts receivable
as of September 30, 2010.
F-6
6. Advances
to Suppliers
As of
December 31, 2010, advances to suppliers consisted of deposits on account with
several key raw materials suppliers to secure preferential pricing of raw
materials. The deposits also are used to ensure timely delivery of
materials purchased.
7. Inventories
Inventory
consisted of the following:
|
December
31,
|
September 30,
|
||||||
2010
|
2010
|
|||||||
Raw
materials
|
$
|
178,957
|
$
|
205,099
|
||||
Work-in-process
|
86,710
|
39,828
|
||||||
Finished
goods
|
1,554,469
|
1,319,610
|
||||||
$
|
1,820,136
|
$
|
1,564,537
|
F-7
8.
Property, Plant, and Equipment
Property,
plant and equipment is recorded at cost. Expenditures incurred for repairs and
maintenance are charged to earnings. Betterment, additions and renewals to
property, plant and equipment are capitalized. When property, plant and
equipment are retired or disposed of, associated cost and accumulated
depreciation are removed, and gain or loss, if any, incurred from disposal is
included under other income or expense in the statement of
operations.
Property,
plant and equipment consist of the following:
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
Building
and plant
|
2,805,146
|
$
|
2,767,897
|
|||||
Machinery
|
11,825,802
|
11,697,862
|
||||||
Office
and other equipment
|
797,834
|
787,240
|
||||||
Vehicles
|
144,518
|
142,576
|
||||||
Construction
in progress
|
5,183,496
|
1,173,702
|
||||||
20,756,796
|
16,569,277
|
|||||||
Less:
|
||||||||
Accumulated
depreciation
|
(5,984,896
|
)
|
(5,608,043
|
)
|
||||
$
|
14,771,900
|
$
|
10,961,234
|
F-8
Depreciation
expense is computed using straight-line method with estimated useful lives as
follows:
Building
and plant
|
20
years
|
Machinery
|
10
years
|
Office
equipment and other equipment
|
5
years
|
Vehicles
|
10
years
|
For
the three month period ended December 31, 2010, depreciation expense of
$284,579 was included in cost of sales and $17,239 was included in selling,
marketing, and administrative expenses, for a total of
$301,818.
For
the three month period ended December 31, 2009, depreciation expense of $265,570
was included in cost of sales and $16,951 was included in selling, general and
administrative expenses, for a total of $282,521
9.
Deposits
As of
December 31, 2010, we have deposits of $1,534,549 with equipment providers to
ensure timely fulfillment of our purchase contracts to build new production
facilities.
10.
Land Use Rights
Land
use rights are amortized over a lease term of 50 years.
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
Land
use rights
|
$
|
643,703
|
$
|
635,154
|
||||
Less:
|
||||||||
Accumulated
amortization
|
(104,233
|
)
|
(99,674
|
)
|
||||
$
|
539,470
|
$
|
535,480
|
Change
in cost of the land use rights from September 30, 2010 to December 31, 2010
reflects the effect of changes in foreign currency exchange
rate.
11.
Short-term Loans:
The
Company has a short-term loan of $3,029,247 (RMB 20,000,000) with
Agricultural Bank of China, Foshan Branch and the loan is due on June 21,
2011. The interest on the outstanding balance is payable every month at a
floating rate, currently at 6.21% per annum.
The
Company has another short-term loan from Standard Chartered Bank in the amount
of $908,775 (RMB 6,000,000) for a term of 90 days. The loan carries an interest
rate of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as
guarantee. The loan is repayable on March 7, 2011.
12. Other
payable to related party:
Other
payable to related party accounts for the amount of $920,148 the Company
borrowed from its CEO. This loan is non-interest bearing and is repayable on
demand.
13.
Convertible Note Payable
On
February 12, 2010, immediately following the closing of a share exchange
agreement, the Company entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants. In addition to the finance
cost of $730,187 which is accounted for as debt discount, 653,510 common shares
were issued to placement agents. The notes have the following material
terms:
F-9
Maturity:
The
notes mature in one year. If principal is not paid on maturity then 150%
of the principal amount shall be payable.
Interest: 10%
per annum and payable on the last day of a quarter. The interest will increase
to 15% if there is a default. Interest expense of $104,351 was recorded and paid
for the quarter ended December 31, 2010.
Conversion: In
the event of the closing of any equity or series of related financings resulting
in aggregate gross proceeds to the Company of at least $20,000,000 (or such
lesser amount as shall be approved in writing by the holder(s) of notes
evidencing at least 50% of the principal amount of the notes then outstanding),
a “qualified financing,” prior to the
maturity date of the notes, the principal amount of the notes converts
automatically into the securities sold in such financing at a 65% discount to
the offering price of such securities.
Besides
the stated interest at 10% per annum, interest expenses are recorded to accrete
the note to its principal balance of $4,140,000 at its due date on February 12,
2011. Accretion on interest expenses amounted to $609,900 for the three
months ended December 31, 2010.
Allocation
of the proceeds:
After
allocating $1,052,000 to the initial fair value of warrants derivative
liabilities, and agent fee of $730,187, the remaining proceeds received from the
convertible note of $3,409,813 were allocated to placement agent common stock
and convertible note payable based on their relative fair value. This results in
a debt discount of $2,439,743 from the face amount of the convertible
note payable. The discount is being amortized over the life of the note to
accrete the note to its redemption value. The proceeds allocation is as
follows:
Gross
proceeds
|
$
|
4,140,000
|
||
Less:
|
||||
Commission
paid to placement agent
|
404,000
|
|||
Legal
fee
|
326,187
|
|||
Net
proceeds
|
$
|
3,409,813
|
||
Net
proceeds were presented as follows:
|
||||
Recorded
warrants as derivative liability
|
$
|
1,052,000
|
||
Allocated
remaining proceeds to :
|
||||
Common
stock issued to placement agents
|
657,556
|
|||
Convertible
Note
|
1,700,257
|
The
convertible notes were recorded at the transaction date with discount consisted
of the following items:
Warrants
|
$
|
1,052,000
|
||
Stock
issued to placement agent
|
657,556
|
|||
Cash
paid for commission and legal fees
|
730,187
|
|||
$
|
2,439,743
|
F-10
Convertible
notes payable, net of discount, at the transaction date was
$1,700,257.
As of
December 31, 2010, after a note discount amortization of $2,134,650, net
convertible notes payable was accreted to $3,834,907.
14.
Accounting for Warrants
In
conjunction with issuing the convertible notes, the Company agreed to issue
common stock warrants to the convertible note investors in the debt financing
transaction described in note 13. The warrants issued have the following
material terms:
The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $20,000,000. The warrants cannot be
exercised if no financing is consummated within a five-year period after the
issue date and become void if the notes automatically convert into common
stock.
Number of
Shares: The warrants represent the right to purchase 8% of the
total shares of common stock outstanding (on a fully-diluted basis) immediately
after the closing of the financing.
Exercise
Price: The warrants are exercisable at the price for
which the shares of common stock (or common stock equivalent if derivative
securities are sold) are sold in the financing. If the financing
includes more than one type of security, the exercise price shall equal the
lowest price per share of common stock or common stock equivalent included in
the financing.
At the
time of the notes issuance, the Company also issued non-conversion warrants to
the placement agent to purchase 5% of the Company’s common stock underlying the
warrants issued to the convertible notes investors, exercisable at the same
price at which the investors’ warrants become exercisable.
The
Company analyzed the warrants issued in connection of the issuance of the notes
and the conversion features embedded in the notes to assess whether they meet
the definition of a derivative under the guidance set forth by FASB ASC 815
(SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and,
thereof, the applicability of the accounting rules in accordance to FASB ASC 815
to treat the conversion option and the warrants as derivative
liabilities.
Under
FASB ASC 815-10-15, a financial instrument is a derivative if it meets one of
the following three criteria: i) it requires or permits net settlement; ii)
there is a market mechanism for the net settlement; and iii) the net settlement
can be fulfilled by delivery of assets that are readily convertible to cash.
Management concluded that the conversion option embedded in the notes does not
meet the above criteria and therefore is not a derivative.
F-11
Since
the warrants permit the holder to perform a cashless exercise and receive a net
number of shares of the Company’s common stock at the time of exercise, these
warrants meet the definition of derivative instrument under ASC
815-10-15-83.
Management
also evaluated whether the warrants meet the scope exception set forth by FASB
ASC 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity’s Own Stock”), which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of FASB ASC 815. The provisions in FASB ASC 815-40 apply to
any freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by FASB ASC 815 and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. Because the exercise price of the warrants is not fixed and
will be determined by the price at which the Company completes a Financing prior
to the time the warrants become exercisable, the warrants are not considered
indexed to the Company’s common stock. The exceptions provided under FASB ASC
815-40-15 are not available; therefore, management determined the warrants
should be accounted for as a derivative liability. The terms of the placement
agent non-conversion warrants have terms identical to the investors’ warrants
and are therefore accounted as a derivative liability.
Derivative
instruments are initially measured and recorded at their fair value and
marked-to-market at each report date until they are exercised or expire, with
any change in the fair value charged or credited
to income.
As a
result of adopting accounting treatment according to ASC 815-40, investor and
placement agent warrants are recorded as derivative liabilities and valued at
$1,052,000 using a binomial option pricing model on the date of issuance.
Because there was no trade market for the Company’s stock, management used
substitute volatility in the initial and subsequent measuring of the fair market
value of the warrants issued. Management re-measured the fair market value based
on the adjusted volatility of publicly traded stock of three companies with
business and financial size comparable to the Company’s and the remaining term
of the warrants.
As of
December 31, 2010, these warrants were re-valued at $548,000 based on
factors including the probability of the exercisability of the warrants, changes
in the estimate of volatility, and remaining life of these warrants. The
revaluation inputs are provided in the table as follows:
Attribute
|
As of
December
31,
2010
|
|||
Warrants
Outstanding
|
1,670,823
|
(*)
|
||
Stock
Market Price
|
$
|
6.00
|
||
Exercise
Price
|
$
|
6.00
|
||
Risk-free
Interest Rate
|
2.01
|
%
|
||
Estimated
Volatility
|
75
|
%
|
||
Expected
Dividend Yield
|
0
|
%
|
||
Options
Life (years)
|
4.17
|
(*)
Warrants outstanding as of December 31, 2010 is based on 8% of the total
outstanding common shares on fully diluted basis and warrants issued to
placement agent equal to 5% of investors’ warrants :
Shares
of common stock outstanding as of December 31, 2010
|
15,265,714
|
|||
Shares
of common stock to be issued in the public offerings
|
4,166,667
|
|||
Anti-dilutive
shares to be issued to placement agent
|
458,373
|
|||
Total
|
19,890,754
|
|||
8%
of the fully-diluted shares outstanding immediately after
IPO
|
8
|
%
|
||
Shares
underlying the warrants
|
1,591,260
|
|||
Placement
agent’s non-conversion warrants (5% of investors’
warrants)
|
79,563
|
|||
1,670,823
|
15.
Equity and stock option based compensation
2010
Stock Incentive Plan
In
September 2010, the Board of Directors adopted the 2010 Stock Incentive Plan
(“2010 Plan”) under which it may grant incentive and nonqualified stock options,
restricted stock and stock appreciation rights to eligible employees,
non-employee directors, or consultants. Stock options granted
generally have a 5-year life and vest pursuant to terms set forth under
employment agreement. Under the 2010 Plan, stock options of 400,000 were granted
with exercise price equal to the Company’s intended initial public offering
price and will be vested over a three year period. The vesting period starts at
August 1, 2010 under the compensation terms of the employment
contract.
The
Company accounts for stock-based compensation under provisions of FASB ASC 718
– Accounting for Stock Compensation which establishes standards for the
accounting for equity instruments exchanged for employee services. Under the
provisions of FASB ASC 718, share-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and is recognized as
an expense over the employee’s requisite service period (generally the vesting
period of the equity grant), net of estimated forfeitures.
The
fair value of the employee stock options granted is estimated using a binomial
pricing model at the grant date with input as follows:
Attribute
|
|
As of
September
10,
2010
|
|
|
Stock
Market Price
|
$
|
6.00
|
||
Exercise
Price
|
$
|
6.00
|
||
Risk-free
Interest Rate
|
0.27
|
%
|
||
Estimated
Volatility
|
75
|
%
|
||
Expected
Dividend Yield
|
0
|
|||
Warrants
Life (years)
|
4.8
|
Total
cost of the share-based compensation from the grant of the stock options
was initially estimated at $1,351,000 at the grant date based on the
valuation of the options. The cost is recognized on the number of shares vested
over the vesting period.
F-12
The
following table summarizes the activities for the 2010 Plan for the three month
period ended December 31, 2010:
|
Number of
|
Exercise
|
Remaining
Contractual
|
|||||||||
|
Shares
|
Price
|
Life
|
|||||||||
Options
outstanding as of September 30, 2010
|
400,000
|
$
|
6.00
|
4.8
|
||||||||
Granted
|
-
|
|||||||||||
Forfeiture
|
0
|
|||||||||||
As
of December 31, 2010
|
400,000
|
$
|
6.00
|
4.6
|
||||||||
Requisite
Service Periods Lapsed (months)
|
5
|
|||||||||||
Vested
and exercisable as of December 31, 2010
|
67,068
|
$
|
6.00
|
4.6
|
In
addition, one of our independent directors was granted 30,000 shares of
restricted common stock under the Company’s 2010 Plan, of which 20,000 shares
vest over a period of two years. At the grant date, the fair value of
these restricted shares issued was measured at estimated $6 per share. As of
December 31, 2010, shares of 15,854 were not subject to forfeiture, of which
2,520 shares were recognized as shared-based compensation expense at an
estimated fair market value of $6 per share for the three months ended December
31, 2010.
Total
stock-based expense was recorded for the three months ended December 31, 2010 as
follows:
Vested
options
|
$
|
136,206
|
||
Restricted
stock
|
15,120
|
|||
$
|
151,326
|
16.
Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to common
shareholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is calculated by dividing net income
attributable to common shareholders as adjusted for the effect of dilutive
common equivalent shares, if any, by the weighted average number of common and
dilutive common equivalent shares outstanding during the year. Common equivalent
shares consist of the common shares issuable upon the conversion of the
convertible note (using the if-converted method) and common shares issuable
upon the exercise of outstanding warrants (using the treasury stock method).
Diluted EPS excludes all dilutive potential shares if their effect is
anti-dilutive. Using if-converted method, the Company’s earnings per share for
the three months ended December 31, 2010 is anti-dilutive.
|
Three Months Ended
|
|||||||
|
December
31,
|
December
31,
|
||||||
2010
|
2009
|
|||||||
Net
Income
|
||||||||
(numerator
for basic income per share)
|
$
|
57,472
|
$
|
1,281,059
|
||||
Plus
interest on convertible note
|
523,251
|
-
|
||||||
Net
Income - assumed conversions
|
||||||||
(numerator
for diluted income per share)
|
$
|
580,723
|
$
|
1,281,059
|
||||
Weighted
average common shares
|
||||||||
(denominator
for basic income per share)
|
15,265,714
|
14,510,204
|
||||||
Effect
of dilutive securities:
|
||||||||
Warrants
- treasury stock method
|
-
|
-
|
||||||
Convertible
notes as if-converted method
|
1,923,809
|
-
|
||||||
Weighted
average common shares
|
||||||||
(denominator
for diluted income per share)
|
17,189,523
|
14,510,204
|
||||||
Basic
net income per share
|
$
|
0.00
|
$
|
0.09
|
||||
Diluted
net income per share (anti-dilutive)
|
$
|
0.00
|
$
|
0.09
|
F-13
17.
Income Taxes
USA
The
Company and its subsidiary and branch divisions are subject to income taxes on
an entity basis on income arising in, or derived, from the tax jurisdiction in
which they operate. As the Company had no income generated in the United States,
there was no tax expense or tax liability due to the Internal Revenue Service of
the United States as of December 31, 2010 and September 30,
2010.
BVI
Hong
Hui is incorporated under the International Business Companies Act of the
British Virgin Islands and accordingly, is exempted from payment of British
Virgin Island’s income taxes.
PRC
Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday for
two years. From January 2010 onwards, Foshan is taxed at 25% of net income
except for the year 2010 and 2011 during which there is a 50% discount on income
tax.
The
tax provision was $88,618 and $0 for the three months ended December 31, 2010
and December 31, 2009, respectively. The Company has recorded zero
deferred tax assets or liabilities as of December 31, 2010 and December 31,
2009, net of tax allowance, because all other significant differences in tax
basis and financial statement amounts are permanent
differences.
We
follow the guidance in FASB ASC 740 Accounting for Uncertainty in Income
Taxes. We have not taken any uncertain tax positions on any of
our open income tax returns filed through the period ended December 31,
2010. Our methods of accounting are based on established income tax
principles and are properly calculated and reflected within our income tax
returns. In addition, we have timely filed extension of income tax
returns in all applicable jurisdictions in which we believe we are required to
make an income tax return filing.
We
re-assess the validity of our conclusions regarding uncertain tax positions on a
quarterly basis to determine if facts or circumstances have arisen that might
cause us to change our judgment regarding the likelihood of a tax position’s
sustainability under audit. We have determined that there were no
uncertain tax positions for the three months ended December 31, 2010 and
2009.
All of
the Company’s income before income taxes is from PRC sources. Actual income tax
expense reported in the consolidated statements of operations and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 12.5% (50% discount of 25%) to income before income taxes for the three
months ended December 31, 2010 for the followings reasons:
|
For the Three Months
Ended
|
|||||||
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Income
before income taxes
|
$
|
146,090
|
$
|
357,462
|
||||
Temporary
difference:
|
||||||||
Write-off
for bad debt
|
(7,372
|
)
|
-
|
|||||
Permanent
difference:
|
||||||||
Undeductible
interest expense
|
609,900
|
-
|
||||||
Non-taxable
income from valuation adjustment for warrants
|
(191,000
|
)
|
-
|
|||||
Non-deductible
stock-based compensation
|
151,329
|
-
|
||||||
Adjusted
taxable income
|
$
|
708,947
|
-
|
|||||
Income
tax rate at 12.5% and zero in 2010 and 2009
|
12.50
|
%
|
-
|
|||||
Income
tax expense
|
$
|
88,618
|
-
|
Our
policy for recording interest and penalties associated with audits is to record
such items as a component of income tax expense. There were no interest and
penalties recorded for the three months ended December 31, 2010 and
2009.
18. Subsequent
Events
On
January 31, 2011, we entered into note extension agreements with each of the
purchasers (other than Lumen Capital LP) of our 10% secured convertible notes in
the aggregate principal amount of $4,040,000, issued on February 12,
2010, to extend the maturity date from February 12, 2011
to June 30, 2011. The note in the principal amount of
$100,000 held by Lumen Capital LP was repaid on February 11,
2011.
F-14
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The Board of Directors and Stockholders of
China
SLP Filtration Technology, Inc.
China
We
have audited the accompanying consolidated balance sheets of China SLP
Filtration Technology, Inc. (the Company) as of September 30, 2010 and
2009, and the related consolidated statements of operations and
comprehensive income, changes in stockholders’ equity, and cash flows for
the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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 consolidated financial position of China SLP
Filtration Technology, Inc. as of September 30, 2010 and 2009, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United
States of America.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
December
22, 2010
|
F-15
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
BALANCE SHEETS
|
September 30,
|
September 30,
|
||||||
|
2010
|
2009
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
5,295,301
|
$
|
3,297,648
|
||||
Accounts
receivable – Net
|
2,207,073
|
1,424,835
|
||||||
Advance
to suppliers
|
-
|
685,551
|
||||||
Inventory
|
1,564,537
|
1,197,289
|
||||||
Prepaid
expenses and other current assets
|
585,385
|
45,656
|
||||||
Total
Current Assets
|
9,652,296
|
6,650,979
|
||||||
Deposits
|
4,906,370
|
-
|
||||||
Property
and equipment – Net
|
10,961,234
|
10,711,865
|
||||||
Receivable
from related party
|
-
|
773,672
|
||||||
Land
use rights – Net
|
535,480
|
537,350
|
||||||
Total
Assets
|
$
|
26,055,380
|
$
|
18,673,866
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Short
term loan
|
$
|
3,796,053
|
$
|
4,578,409
|
||||
Accounts
payable and accrued liabilities
|
742,384
|
410,114
|
||||||
Clients'
deposits
|
286,700
|
75,176
|
||||||
Other
payable - related party
|
160,673
|
-
|
||||||
Taxes
payable
|
31,406
|
726
|
||||||
Warrants
liabilities
|
739,000
|
-
|
||||||
Convertible
notes payable $4,140,000, net of discount
|
3,225,007
|
-
|
||||||
Total
Current Liabilities
|
8,981,223
|
5,064,425
|
||||||
Total
Liabilities
|
8,981,223
|
5,064,425
|
||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 authorized, 0 share issued and
outstanding; common stock, $0.001 par value, 40,000,000 shares authorized,
15,265,714 and 14,510,204 shares issued and outstanding at September 30,
2010 and September 30, 2009
|
15,266
|
14,510
|
||||||
Additional
paid-in capital
|
8,375,860
|
7,548,752
|
||||||
Retained
earnings
|
6,721,609
|
4,500,532
|
||||||
Accumulated
other comprehensive income
|
1,961,422
|
1,545,647
|
||||||
Total
Stockholders' Equity
|
17,074,157
|
13,609,441
|
||||||
Total
Liabilities and Stockholder's Equity
|
$
|
26,055,380
|
$
|
18,673,866
|
See the
accompanying notes to consolidated financial statements
F-16
CHINA
SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Net
Sales
|
$
|
19,952,422
|
$
|
11,849,712
|
||||
Cost
of Sales
|
13,772,843
|
7,296,327
|
||||||
Cost
of Sales - Related Party
|
-
|
610,287
|
||||||
Gross
Profit
|
6,179,579
|
3,943,098
|
||||||
Selling,
General and Administration Expenses
|
2,286,066
|
1,219,114
|
||||||
Bad
Debt (Recovery) Expense
|
(13,185
|
)
|
11,497
|
|||||
Income
from Operations
|
3,906,698
|
2,712,487
|
||||||
Other
Income (expense)
|
||||||||
Interest
Income
|
14,341
|
3,014
|
||||||
Interest
Expense
|
(1,988,832
|
)
|
(269,849
|
)
|
||||
Loss
on Disposal of Fixed Assets
|
(107
|
)
|
-
|
|||||
Changes
in Fair Value of Warrants
|
313,000
|
-
|
||||||
Total
Other Income (expenses)
|
(1,661,598
|
)
|
(266,835
|
)
|
||||
Income
before Income Taxes
|
2,245,100
|
2,445,652
|
||||||
Income
Tax Provision
|
24,023
|
-
|
||||||
Net
Income
|
$
|
2,221,077
|
$
|
2,445,652
|
||||
Other
Comprehensive Income:
|
||||||||
Foreign
Currency Translation Adjustments
|
415,775
|
(57,078
|
)
|
|||||
Total
Comprehensive Income
|
$
|
2,636,852
|
$
|
2,388,574
|
||||
Net
Income Per Common Share:
|
||||||||
Basic
|
$
|
0.15
|
$
|
0.17
|
||||
Diluted
|
$
|
0.15
|
$
|
0.17
|
||||
Weighted-Average
Common Shares Outstanding:
|
||||||||
Basic
|
14,979,390
|
14,510,204
|
||||||
Diluted
|
16,227,061
|
14,510,204
|
See
accompanying notes to consolidated financial statements
F-17
CHINA
SLP FILTRATION TECHNOLOGY, INC.
Consolidated
Statements of Changes in Stockholders’ Equity
|
Accumulated
|
|||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Stockholders'
|
|||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings (Deficit)
|
Income
|
Equity
|
||||||||||||||||||
BALANCE,
September 30, 2008
|
14,510,204
|
$
|
14,510
|
$
|
7,548,752
|
$
|
2,054,880
|
$
|
1,602,725
|
$
|
11,220,867
|
|||||||||||||
Net
Income
|
-
|
-
|
-
|
2,445,652
|
-
|
2,445,652
|
||||||||||||||||||
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
(57,078
|
)
|
(57,078
|
)
|
||||||||||||||||
BALANCE,
September 30, 2009
|
14,510,204
|
$
|
14,510
|
$
|
7,548,752
|
$
|
4,500,532
|
$
|
1,545,647
|
$
|
13,609,441
|
|||||||||||||
Shares
effectively issued to former shareholders – 2/12/2010
|
2,600,000
|
2,600
|
(2,600
|
)
|
-
|
-
|
-
|
|||||||||||||||||
Cancellation
of stock in recapitalization
|
(2,528,000
|
)
|
(2,528
|
)
|
2,528
|
-
|
-
|
-
|
||||||||||||||||
Common
stock issued to placement agents in conjunction with convertible
note
|
653,510
|
654
|
656,902
|
-
|
-
|
657,556
|
||||||||||||||||||
Restricted
common stock issued – compensation
|
30,000
|
30
|
79,968
|
-
|
-
|
79,998
|
||||||||||||||||||
Employee
stock options
|
90,310
|
-
|
-
|
90,310
|
||||||||||||||||||||
Net
Income
|
-
|
-
|
-
|
2,221,077
|
-
|
2,221,077
|
||||||||||||||||||
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
415,775
|
415,775
|
||||||||||||||||||
BALANCE,
September 30, 2010
|
15,265,714
|
$
|
15,266
|
$
|
8,375,860
|
$
|
6,721,609
|
$
|
1,961,422
|
$
|
17,074,157
|
See
accompanying notes to consolidated financial statements
F-18
Consolidated
Statements of Cash Flows
Year Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flow from Operating Activities:
|
||||||||
Net
income
|
$ | 2,221,077 | $ | 2,445,652 | ||||
Adjustments
to reconcile net income to net cash flow provided by (used in)
operating activities:
|
||||||||
Depreciation
|
1,166,260 | 929,995 | ||||||
Amortization
|
12,499 | 12,458 | ||||||
Bad
debt allowance
|
(13,185 | ) | 11,497 | |||||
Non-cash
interest charges
|
1,524,750 | - | ||||||
Non-cash
equity-based expense
|
170,308 | - | ||||||
Changes
in warrants valuation
|
(313,000 | ) | - | |||||
Interest
capitalized to CIP
|
(13,177 | ) | - | |||||
Loss(gain)
from disposal of fixed assets
|
107 | - | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(726,921 | ) | (477,736 | ) | ||||
Advance
to suppliers
|
687,009 | (289,192 | ) | |||||
Advance
to suppliers - related parties
|
- | 610,287 | ||||||
Inventory
|
(336,983 | ) | (354,825 | ) | ||||
Prepaid
expenses and other current assets
|
(529,261 | ) | 326,225 | |||||
Accounts
payable & accrued liabilities
|
325,798 | (466,410 | ) | |||||
Clients'
deposits
|
206,285 | (18,383 | ) | |||||
Taxes
payable
|
30,123 | (29,406 | ) | |||||
Net
cash provided by (used in) operating activities
|
4,411,689 | 2,700,162 | ||||||
Cash
Flow from Investing Activities:
|
||||||||
Addition-property,
equipment, and land use rights
|
(1,185,582 | ) | (844,419 | ) | ||||
Payments
to related parties receivable
|
- | (313,614 | ) | |||||
Deposits
for purchase of equipment
|
(4,819,447 | ) | - | |||||
Proceeds
from disposal of fixed assets
|
- | - | ||||||
Proceeds
from related party receivable
|
774,466 | - | ||||||
Net
cash (used in) provided by investing activities
|
(5,230,563 | ) | (1,158,033 | ) | ||||
Cash
Flow from Financing Activities:
|
||||||||
Repayment
of loans
|
(859,346 | ) | (600,498 | ) | ||||
Due
to related parties payable
|
157,827 | - | ||||||
Proceeds
from notes issued
|
3,409,813 | - | ||||||
Net
cash provided by (used) in financing activities
|
2,708,294 | (600,498 | ) | |||||
Effects
of Exchange Rates on Cash
|
108,233 | (11,553 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
1,997,653 | 930,078 | ||||||
Cash
and cash equivalents, beginning of year
|
3,297,648 | 2,367,570 | ||||||
Cash
and cash equivalents, end of year
|
$ | 5,295,301 | $ | 3,297,648 | ||||
Supplemental
information of cash flows
|
||||||||
Cash
paid for interest
|
$ | 478,111 | $ | 269,849 | ||||
Cash
paid for income taxes
|
$ | 24,023 | $ | - |
See
accompanying notes to consolidated financial statements
F-19
CHINA
SLP FILTRATION TECHNOLOGY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Nature of Business and
Organization History
|
China SLP
Filtration Technology, Inc., formerly named Perpetual Technologies, Inc. (the
“Company”, or ”We”) was incorporated under the laws of the State of Delaware in
March 2007. Prior to a reverse merger completed on February 12, 2010, we had no
operations or substantial assets.
Hong Hui
Holdings Limited (“Hong Hui”) was formed in January 2010 in the territory of the
British Virgin Islands as a holding company by the shareholders of Technic
International Inc. (“Technic”). Upon the formation, each shareholder transferred
their ownership of Technic to Hong Hui. As a result of this transaction, Technic
became a wholly-foreign owned enterprise under PRC law. This acquisition was
accounted for as a transfer of entities under common control.
Technic
International Ltd. (“Technic”) was incorporated in September 2005 under the laws
of Hong Kong as a holding company that owns 100% equity interest of Nanhai
Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong
Province, the People’s Republic of China (“China”). Jin Long was established in
the year 2000 under the laws of China. In September 2005, Jin Long became the
wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its
name to Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”).
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of the
share exchange agreement we issued and delivered to the Hong Hui stockholders a
total of 14,510,204 (72,551,020 pre-split) shares of our common stock in
exchange for all of the outstanding shares of Hong Hui. As a result of the
share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary.
The transaction is accounted for as a reverse acquisition, except that no
goodwill or other intangible should be recorded. The recapitalization is
considered to be a capital transaction in substance, rather than a business
combination.
On March
24, 2010 the Company effected a 1 for 5 reverse stock split of its outstanding
common stock. The effect of the reverse split is retrospectively shown in all
periods presented.
Through
operation of Foshan, we engage in manufacturing, marketing and sale, research
and development of polyester spun-bonded nonwoven fabrics, polyester
needle-punch nonwovens, spun-laced nonwovens, polylactic acid nonwovens, and
special functions nonwovens ( flame retardant, anti-static, oil & water
repellent, etc).
2.
|
Basis of Presentation and
Principles of Consolidation
|
The
accompanying consolidated balance sheets as of September 30, 2010 and as of
September 30, 2009, the consolidated statements of income and comprehensive
income for the years ended September 30, 2010 and 2009, the consolidated
statements of cash flow for the years ended September 30, 2010 and 2009, and the
consolidated statements of changes in stockholders’ equity for the same
periods are prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). This basis differs from that used
in the statutory accounts of our subsidiary in China, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises in China. All necessary adjustments have been made to
present the consolidated financial statements in accordance with U.S.
GAAP.
F-20
3.
|
Summary of Significant Accounting
Policies
|
Principles
of consolidation
The
consolidated financial statements include all accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions are eliminated
in the consolidation.
Use
of estimates
Preparing
financial statements requires management to make estimates and assumptions that
affect the reporting amounts of assets, liabilities, revenue and expenses
reported. Examples include estimates of valuation of accounts receivable,
inventories, useful life of property and equipment, and derivative liabilities.
Actual results and outcomes may differ from those estimates.
Cash
and cash equivalents
Cash and
cash equivalents include cash on hand and demand deposits held by banks. As of
September 30, 2010, 99% of the cash and cash equivalents were placed with banks
in China, which is uninsured. The remittance of these funds out of China is
subject to exchange control restrictions imposed by the Chinese
government.
Allowance
for doubtful accounts
The
allowance for doubtful accounts reflects our best estimate of probable losses
inherent in the accounts receivable balance. We determine the allowance based on
known trouble accounts, historical experience, and other currently available
evidence.
Inventory
Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market, using the average cost method. Cost includes
materials, labor, and manufacturing overhead related to the purchase and
production commitments with our suppliers, and the estimated utility of our
inventory. If our review indicates any obsolete or idle inventory or a reduction
in utility below carrying value, we reduce our inventory to a new cost
basis.
Property
and equipment
Property
and equipment is stated at cost and depreciated using the straight-line method
over the estimated life of the assets, ranging from 5 to 20 years. The annual
depreciation rates are as follows:
Building
and plant
|
20
years
|
|
Machinery
|
10
years
|
|
Office
equipment and computers
|
5
years
|
|
Vehicles
|
10
years
|
Capitalized
Interest
Capitalized
interest is recorded in property and equipment for construction-in-progress
using the average interest rate over the construction
period. Capitalized interest for the year ended September 30, 2010
was $13,414. During fiscal year 2009, no interest was
capitalized.
F-21
Land
use rights
According
to the laws of China, the government owns all of the land in China. Companies or
individuals are authorized to use the land only through land use rights granted
by the Chinese government. Accordingly, the Company paid in advance for land use
rights. Prepaid land use rights are being amortized and recorded as amortization
expenses using the straight-line method over the use terms of the lease, which
is 50 years.
Construction
in progress
Construction
in progress represents the cost of constructing buildings and manufacturing
facilities for the new Polyphenylene sulfide (“PPS”) nonwoven fabric production
line. The major cost includes materials, labor and overhead.
Intangible
assets
The
Company adopted the provisions of FASB ASC 350 Intangibles – Goodwill and Other
Assets. Goodwill and indefinite lived intangible assets are not amortized, but
are reviewed annually for impairment, or more frequently, if indications of
possible impairment exist. The Company has no indefinite lived intangible
assets.
Impairment
of long-lived assets
Long-lived
assets are tested for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cash flows
attributable to such assets. During the reporting periods, the Company has not
identified any indicators that would require testing for
impairment.
Revenue
recognition
Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are delivered to and accepted by its customers, the price is fixed or
determinable as stated on the sales contract, and collectability is reasonably
assured. Customers do not have a general right of return or warranty on
products shipped. There are no post-shipment obligations, price
protection, or bill and hold arrangements.
Product
development expenses
Product
development costs are expensed as incurred, and the Company expensed
approximately $185,000 and $200,000 in product development for 2010 and
2009.
Advertising
expenses
Advertising
costs are expensed as incurred. The Company incurred $14,339 and $5,679 in
advertising costs for the years ended September 30, 2010 and 2009.
Shipping
and handling costs
Shipping
and handling costs related to costs of raw materials purchased are included in
cost of sales. Shipping and handling amounts billed to customers in related sale
transactions are included in sales revenues.
F-22
The
out-bound freight expenses of $75,476 and $156,911 for 2010 and 2009,
respectively, are recorded in the Consolidated Statement of Operations and
Comprehensive Income as a component of selling, general, & administrative
expenses.
Accumulated
other comprehensive income
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Segment
reporting
ASC
Topic 280, “Disclosure about Segments of an Enterprise and Related Information”
requires use of the management approach model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. Accordingly, the Company has reviewed its business
activities and determined that multiple segments do not exist to be
reported.
Fair
value of financial instruments
The
carrying amount of the Company’s cash and cash equivalents approximate their
fair value due to the short maturity of those instruments. The carrying amounts
of the Company’s receivables, short-term loans, payables and accrued liabilities
approximated their fair value as of the balance sheet dates due to their short
maturities and the interest rates currently available.
Reclassification
Certain
amounts in the 2010 financial statements have been reclassified to conform to
the 2009 financial statement presentation. Such reclassification had no
effect on net income.
Taxes
Income
taxes expense is based on reported income before income taxes. Deferred income
taxes reflect the effect of temporary differences between assets and liabilities
that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. In accordance with FASB ASC 740, these deferred taxes are
measured by applying currently enacted tax laws.
The
Company has implemented FASB ASC 740, which provides for a
liability approach to accounting for income taxes. Deferred income taxes result
from the effect of transactions that are recognized in different periods for
financial and tax reporting purposes. The Company had no material adjustments to
its liabilities for unrecognized income tax benefits according to the provisions
of FASB ASC 740.
Translation
of foreign currency
The
Company’s functional and reporting currency is the U.S. dollar (“$”). Our
subsidiaries in Hong Kong and China use Chinese Yuan Renminbi (“RMB”) as their
functional currency. The financial statements of these subsidiaries are
translated into U.S. dollars in accordance with FASB ASC topic 830, Foreign Currency Matters.
According to the topic, all assets and liabilities were translated at the
current exchange rate, stockholders’ equity are translated at the historical
rates and income statement items are translated at the average exchange rate for
the period. The resulting translation adjustments are reported under other
comprehensive income in accordance with FASB ASC 220, Comprehensive Income. Foreign
exchange transaction gains and losses are reflected in the income
statement. At the end of the fiscal year ended September 30, 2010,
the Company’s accumulated foreign currency translation adjustments presented
under other comprehensive income were $1,961,422.
F-23
Earnings
per share
Earnings
per share is computed by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding.
4.
|
Accounts
Receivable
|
The
Company maintains allowance for potential credit losses on accounts receivable.
Management periodically analyzes the composition of the accounts receivable,
aging of the receivables and historical bad debt to evaluate the adequacy of the
reserve for uncollectible accounts.
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Accounts
receivable
|
$
|
2,231,281
|
$
|
1,461,721
|
||||
Less:
Allowance for doubtful accounts
|
(24,208
|
)
|
(36,886
|
)
|
||||
Accounts
receivable – Net
|
$
|
2,207,073
|
$
|
1,424,835
|
As of
September 30, 2010 and September 30, 2009, customer accounts receivable balances
with significant percentages are as follows:
September 30, 2010
|
September 30, 2009
|
|||||||
Customers:
|
Percentage
|
Percentage
|
||||||
A
|
27.84
|
%
|
30.45
|
%
|
||||
B
|
6.2
|
%
|
13.01
|
%
|
||||
C
|
5.35
|
%
|
12.7
|
%
|
||||
Total
|
39.39
|
%
|
56.16
|
%
|
Three
customers individually accounted for 10% or more of the total gross accounts
receivable and together accounted for 56.16% of the total gross accounts
receivable at September 30, 2009. One customer’s account receivable exceeds 10%
and combined with two other customers whose accounts receivable is slightly
below 10% represent 39.39% of the total gross accounts receivable as of
September 30, 2010.
5.
|
Inventories
|
Inventory
consisted of the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$
|
205,099
|
$
|
40,126
|
||||
Work
in progress
|
39,828
|
50,443
|
||||||
Finished
goods
|
1,319,610
|
1,106,720
|
||||||
$
|
1,564,537
|
$
|
1,197,289
|
F-24
6.
Property, plant and equipment
Property,
plant, and equipment are recorded at cost. Expenditures incurred for repairs and
maintenance are recorded as expense. Betterment, additions and renewals to
property, plant, and equipment are capitalized. When property, plant and
equipment are retired or disposed of, associated cost and accumulated
depreciation are removed, and gain or loss, if any, incurred from disposal is
included under other income or expense in the statement of
operations.
Property,
plant, and equipment consist of the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Building
and plant
|
$
|
2,767,897
|
$
|
2,958,978
|
||||
Machinery
|
11,697,862
|
11,174,517
|
||||||
Office
equipment and other equipment
|
787,240
|
771,829
|
||||||
Vehicles
|
142,576
|
139,753
|
||||||
Construction
in progress
|
1,173,702
|
-
|
||||||
16,569,277
|
15,045,077
|
|||||||
Less:
|
||||||||
Accumulated
depreciation
|
(5,608,043
|
)
|
(4,333,212
|
)
|
||||
$
|
10,961,234
|
$
|
10,711,865
|
Depreciation
expense is computed using straight-line method with estimated useful lives as
follows:
Building
and plant
|
20
years
|
|
Machinery
|
10
years
|
|
Office
equipment and other equipment
|
5
years
|
|
Vehicles
|
10
years
|
For the
years ended September 30, 2010 and September 30, 2009, depreciation expense of
$1,100,955 and $847,057 were included in cost of sales and $65,305 and $82,938
were included in selling, marketing, and administrative expenses, for a total of
$1,166,260 and $929,995 respectively.
7. Deposits
Deposits
were made as required to equipment suppliers to secure timely delivery for
equipment ordered for the new PPS production line. As of September 30, 2010, we
have deposits of $4,906,370.
8. Land
Use Rights
Land use
rights is amortized over a lease term of 50 years.
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Land
use rights
|
$
|
635,154
|
$
|
622,578
|
||||
Less:
|
||||||||
Accumulated
amortization
|
(99,674
|
)
|
(85,228
|
)
|
||||
$
|
535,480
|
$
|
537,350
|
F-25
During
2010 and 2009, amortization expense was $12,499 and $12,458, respectively. No
additional land use rights were acquired during the fiscal year 2010. Change in
cost of land use rights from September 30, 2009 to September 30, 2010 was caused
by the effect of changes in foreign currency exchange rate.
9.
Short-term Loans
The
Company has several loans with Agricultural Bank of China, Foshan Branch. As of
September 30, 2010, term loans of $2,989,018 (20,000,000 in RMB) and
$807,035(5,400,000 in RMB) are outstanding and repayable in December
2010. The interest on the outstanding balance is payable every month
at rates ranging from 5.85% to 7.75% per annum. Interest expense
during 2010 and 2009 was $203,219 and $269,849, respectively.
10. Clients’
Deposits
The
deposits from clients represent cash received from customers before the Company
shipped products purchased by these customers.
11.
Related Party Transaction
Certain
related party transactions occurred during fiscal year 2010 and 2009 as
follows:
September 30,
|
September 30,
|
|||||||
Amount due to and from related parties
|
2010
|
2009
|
||||||
Loan
payable to shareholder (a)
|
$
|
160,673
|
$
|
-
|
||||
Advance
to former shareholders (b)
|
-
|
259,538
|
||||||
Advance
to current shareholders (c)
|
-
|
1,413
|
||||||
Advance
to director (d)
|
-
|
73,246
|
||||||
Subtotal
|
160,673
|
$
|
334,197
|
|||||
Receivable
from related companies (e)
|
-
|
439,475
|
||||||
$
|
160,673
|
$
|
773,672
|
(a) Loan payable to a
shareholder:
To meet
short-term cash need, the Company borrowed from its CEO in amount of $160,673 in
August 2010. This loan is non-interest bearing and due on demand. No such
borrowing was outstanding as of September 30, 2009.
(b) Advance to former
shareholders:
The
advance to former shareholders was non-interest bearing and was repaid in
2010.
(c) Advance to current
shareholders:
The
advance to current shareholders included advances to six current shareholders.
The advance was non-interest bearing and repaid in 2010.
(d) Advance to
director:
The
advance to one of the directors was non-interest bearing and repaid in
2010.
(e) Receivable from related
companies:
The
receivable from related companies included funds lent to three companies which
have common shareholders of the Company. The loan was non-interest bearing and
repaid in 2010.
F-26
12.
Convertible Notes Payable
On
February 12, 2010, immediately following the closing of a share exchange
agreement, the Company entered into a note purchase agreement with certain
accredited investors for the sale of convertible notes in the aggregate
principal amount of $4,140,000 and warrants. In addition to the finance
cost of $730,187, which is accounted for as debt discount, 653,510 common shares
were issued to placement agents. The notes have the following material
terms:
Maturity: The notes mature in
one year. If principal is not paid on maturity then 150% of the principal
amount shall be payable.
Interest:
10% per annum payable quarterly increasing to 15% if there is a default.
Interest on the notes was recorded for the period ended September 30, 2010 in
amount of $260,863.
Conversion:
In the event of the closing of any equity or series of related financings
resulting in aggregate gross proceeds to the Company of at least $20,000,000 (or
such lesser amount as shall be approved in writing by the holder(s) of notes
evidencing at least 50% of the principal amount of the notes then outstanding),
a “qualified financing,” prior to the maturity
date of the notes, the principal amount of the notes converts automatically into
the securities sold in such financing at a 65% discount to the offering price of
such securities.
Besides
the stated interest expense at 10% per annum, interest expenses are recorded to
accrete the note to its balance of $4,140,000 due on February 12, 2011.
Accretion on interest expenses amounted to $1,524,750 for the year
ended September 30, 2010.
Allocation
of the proceeds:
After
allocating $1,052,000 to the initial fair value of warrants derivative
liabilities, and agent commission of $404,000 and legal fees of $326,187, the
remaining proceeds received from the convertible note of $3,409,813 were
allocated to placement agent common stock and convertible note payable based on
their relative fair value. This results in a debt discount of $2,439,743
from the face amount of the convertible notes payable; accordingly, the discount
is being amortized over the life of the notes to accrete the notes to its
redemption value. The proceeds allocation is as follows:
Gross
proceeds
|
$
|
4,140,000
|
||
Less:
|
||||
Commission
paid to placement agent
|
404,000
|
|||
Legal
fees
|
326,187
|
|||
Net
proceeds
|
$
|
3,409,813
|
||
Record
warrant as derivative liability
|
$
|
1,052,000
|
||
Allocated
remaining proceeds to :
|
||||
Common
stock issued to placement agents
|
657,556
|
|||
Convertible
Note
|
1,700,257
|
|||
$
|
3,409,813
|
F-27
Discount of
notes: the convertible notes were recorded at the
transaction date with discount consisted of the following items:
Warrants
|
$
|
1,052,000
|
||
Stock
issued to placement agent
|
657,556
|
|||
Cash
paid for commission and legal fees
|
730,187
|
|||
$
|
2,439,743
|
Convertible
notes payable, net of discount, at the transaction date was
$1,700,257.
As of
September 30, 2010, after $1,524,750 in accretion of interest expense, net
convertible notes payable was $3,225,007.
13.
Accounting for Warrants
In conjunction with
issuing the convertible notes, the Company agreed to issue common stock warrants
to the convertible notes investors in the debt financing transaction described
in note 12. The warrants issued have the following material terms:
The
warrants are exercisable at any time during a five-year period commencing on the
closing of a “financing,” which means the first sale (or series of related
sales) by us of stock (or debt or equity securities convertible into stock), in
a capital raising transaction, occurring after the maturity date (or the date
the notes become due pursuant to a default, if earlier) with aggregate gross
proceeds of at least $20,000,000. The warrants cannot be
exercised if no financing is consummated within five-year period after the issue
date and become void if the notes automatically convert into common
stock.
Number of
Shares: The warrants represent the right to purchase 8% of the
total shares of common stock outstanding (on a fully-diluted basis) immediately
after the closing of the financing.
Exercise
Price: The warrants are exercisable at the price for
which the shares of common stock (or common stock equivalent if derivative
securities are sold) are sold in the financing. If the financing
includes more than one type of securities, the exercise price shall equal the
lowest price per share of common stock or common stock equivalent included in
the financing.
At the
time of the notes issuance, the Company also issued non-conversion warrants to
the placement agent to purchase 5% of the Company’s common stock underlying the
warrants issued to the convertible notes investors, exercisable at the same
price at which the investors’ warrants become exercisable.
The
Company analyzed the warrants issued and the conversion features embedded in the
notes to assess whether they meet the definition of a derivative under the
guidance set forth by FASB ASC 815 (SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities”) and, thereof, the applicability of the
accounting rules in accordance to FASB ASC 815 to treat the conversion option
and the warrants as derivative liabilities.
Under
FASB ASC 815-10-15, a financial instrument is a derivative if it meets one of
the following three criteria: i) it requires or permits net settlement; ii)
there is a market mechanism for the net settlement; and iii) the net settlement
can be fulfilled by delivery of assets that are readily convertible to cash.
Management concluded that the conversion option embedded in the notes does not
meet the above criteria and therefore is not a derivative.
F-28
Since the
warrants permit the holder to perform a cashless exercise and receive a net
number of shares of the Company’s common stock at the time of exercise, these
warrants meet the definition of derivative instrument under ASC
815-10-15-83.
Management
also evaluated whether the warrants meet the scope exception set forth by FASB
ASC 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity’s Own Stock”), which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of FASB ASC 815. The provisions in FASB ASC 815-40 apply to
any freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by FASB ASC 815 and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. Because the exercise price of the warrants is not fixed and
will be determined by the price at which the Company completes a Financing prior
to the time the warrants become exercisable, the warrants are not considered
indexed to the Company’s common stock. The exception provided under FASB ASC
815-40-15 is not available therefore management determined the warrants should
be accounted for as a derivative liability. The terms of the placement agent
non-conversion warrants have terms identical to the investors’ warrants,
therefore are accounted as a derivative liability.
Derivative
instruments are initially measured and recorded at their fair value and
marked-to-market at each report date until they are exercised or expire, with
any change in the fair value charged or credited to income.
As a
result of adopting accounting treatment according to ASC 815-40, investor and
placement agent warrants are recorded as derivative liabilities and valued at
$1,052,000 using a binomial option pricing model on the date of issuance and as
of March 31, 2010. Because there was no trade market for the Company’s stock,
management used substitute volatility in the initial and subsequent measuring of
the fair market value of the warrants issued. Management re-measured the fair
market value based on the adjusted volatility of publicly traded stock of three
companies with business and financial size comparable to the Company’s and the
remaining term of the warrants.
As of
September 30, 2010, these warrants were valued at $739,000. The valuation
inputs are provided in the table as follows:
Attribute
|
As of
September
30, 2010
|
|||
Warrants
Outstanding
|
1,670,823
|
(*)
|
||
Stock
Market Price
|
$
|
6.00
|
||
Exercise
Price
|
$
|
6.00
|
||
Risk-free
Interest Rate
|
0.27
|
%
|
||
Estimated
Volatility
|
75
|
%
|
||
Expected
Dividend Yield
|
0
|
%
|
||
Warrants
Life (years)
|
4.4
|
F-29
(*)
Warrants outstanding as of September 30, 2010 is based on 8% of the total
outstanding common shares on fully diluted basis and warrants issued to
placement agent equal to 5% of investors’ warrants :
Shares
of common stock to be outstanding as of Sep 30, 2010
|
15,265,714 | |||
Shares
of common stock to be issued in the public offerings
|
4,166,667 | |||
Anti-dilutive
shares to be issued to placement agent
|
458,373 | |||
Total
|
19,890,754 | |||
8%
of the fully-diluted shares outstanding immediately after
IPO
|
8 | % | ||
Shares
underlying the warrants
|
1,591,260 | |||
Placement
agent's non-conversion warrants (5% of investors'
warrants)
|
79,563 | |||
1,670,823 |
14.
Equity and stock option based compensation
2010
Stock Incentive Plan
In
September 2010, the Board of Directors adopted the 2010 Stock Incentive Plan
(“2010 plan”) under which it may grant incentive and nonqualified stock options,
restricted stock and stock appreciation rights to eligible employees,
non-employee directors, or consultants. Stock options granted
generally have a 5-year life and vest pursuant to terms set forth under
employment agreement. Under the 2010 plan, stock options of 400,000 were granted
with exercise price equal to the Company’s intended initial public offering
price and will be vested over a three year period. Vesting period starts at
August 1, 2010 under the compensation terms of employment contract.
The
Company accounts for stock-based compensation under provisions of FASB ASC 718
– Accounting for Stock Compensation which establishes standards for the
accounting for equity instruments exchanged for employee services. Under the
provisions of FASB ASC 718, share-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and is recognized as
an expense over the employee's requisite service period (generally the vesting
period of the equity grant), net of estimated forfeitures.
The fair
value of the employee stock options granted is estimated using a binomial
pricing model at the grant date with input as follows:
Attribute
|
As of September
10, 2010
|
|||
Vested
Stock Options
|
26,740 | (*) | ||
Stock
Market Price
|
$ | 6.00 | ||
Exercise
Price
|
$ | 6.00 | ||
Risk-free
Interest Rate
|
0.27 | % | ||
Estimated
Volatility
|
75 | % | ||
Expected
Dividend Yield
|
0 | % | ||
Warrants
Life (years)
|
4.8 |
Total
cost of the share-based compensation from the issuance of the stock options is
valued at $1,351,000 and will be recognized over the vesting period. For the
year ended September 30, 2010, $90,310 was recognized as expense from the
options granted.
F-30
The
following table summarizes the activities for the stock options granted for the
year ended September 30, 2010:
Options Outstanding
|
||||||||||||
Number of
Shares
|
Exercise Price
|
Remaining
Life (years)
|
||||||||||
As
of October 1, 2009
|
- | |||||||||||
Granted
|
400,000 | $ | 6 | |||||||||
As
of September 30, 2010
|
400,000 | $ | 6 | 4.8 | ||||||||
Requisite
Service Periods Lapsed (months)
|
2 | |||||||||||
Vested
and exercisable as of September 30, 2010
|
26,740 | $ | 6 | 4.8 |
The
Company’s 2010 stock incentive plan also granted 30,000 shares of restricted
common stock to an independent director, of which 20,000 shares vest over a
period of two years. At the grant date, the fair value of these restricted
shares issued was measured at estimated $6 per share. As of September 30, 2010,
shares of 13,333 not subject to forfeiture were recognized as shared-based
compensation expense at an estimated fair market value of $6.00 per
share.
Total
stock-based expense was recorded as follows:
Restricted
stock
|
$ | 79,998 | ||
Vested
options
|
90,310 | |||
$ | 170,308 |
15.
Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to common
shareholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is calculated by dividing net income
attributable to common shareholders as adjusted for the effect of dilutive
common equivalent shares, if any, by the weighted average number of common and
dilutive common equivalent shares outstanding during the year. Common equivalent
shares consist of the common shares issuable upon the conversion of the
convertible note (using the if-converted method) and common shares issuable
upon the exercise of outstanding warrants (using the treasury stock method).
Diluted EPS excludes all dilutive potential shares if their effect is
anti-dilutive. Using if-converted method, the Company’s fiscal year 2010’s
earnings per share is anti-dilutive.
F-31
For the Years Ended
|
||||||||
September 30,
2010
|
September 30,
2009
|
|||||||
Net
Income
|
||||||||
(numerator
for basic income per share)
|
$ | 2,221,077 | $ | 2,445,652 | ||||
Plus
interest on convertible note
|
1,472,613 | - | ||||||
Net
Income - assumed conversions
|
||||||||
(numerator
for diluted income per share)
|
$ | 3,693,690 | $ | 2,445,652 | ||||
Weighted
average common shares
|
||||||||
(denominator
for basic income per share)
|
14,979,390 | 14,510,204 | ||||||
Effect
of Dilutive Securities:
|
||||||||
Warrants
- treasury stock method
|
- | - | ||||||
Convertible
note as-if-converted method
|
1,247,671 | - | ||||||
Weighted
average common shares
|
||||||||
(denominator
for diluted income per share)
|
16,227,061 | 14,510,204 | ||||||
Basic
net income per share
|
$ | 0.15 | $ | 0.17 | ||||
Diluted
net income per share (anti-dilutive)
|
$ | 0.15 | $ | 0.17 |
16.
Income Taxes
USA
The
Company and its subsidiary and branch divisions are subject to income taxes on
an entity basis on income arising in, or derived, from the tax jurisdiction in
which they operate. As the Company had no income generated in the United States,
there was no tax expense or tax liability due to the Internal Revenue Service of
the United States as of September 30, 2010 and September 30, 2009.
BVI
Hong Hui
is incorporated under the International Business Companies Act of the British
Virgin Islands and accordingly, is exempted from payment of British Virgin
Island’s income taxes.
PRC
Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday
for two years. From January 2010 onwards, Foshan is taxed at 25% of net income
except for the 2010 and 2011years where there is a 50% discount on income
tax.
The tax
provision was $24,023 and $0 for the years ended September 30, 2010 and
September 30, 2009, respectively. The Company has recorded zero
deferred tax assets or liabilities as of September 30, 2010 and September 30,
2009, net of tax allowance, because all other significant differences in tax
basis and financial statement amounts are permanent
differences.
F-32
For the Year Ended
|
||||||||
September 30
|
||||||||
2010
|
2009
|
|||||||
Income
Tax Expense:
|
||||||||
Current
Income Tax
|
$ | 24,023 | $ | - | ||||
Change
in Deferred Tax Assets – Net Operating Loss
|
89,631 | 89,631 | ||||||
Change
in valuation allowance
|
(89,631 | ) | (89,631 | ) | ||||
Total
|
$ | 24,023 | $ | - |
The
Company follows the guidance in FASB ASC 740 Accounting for Uncertainty in Income
Taxes. We have not taken any uncertain tax positions on any of
our open income tax returns filed through the period ended September 30,
2010. Our methods of accounting are based on established income tax
principles and are properly calculated and reflected within our income tax
returns. In addition, we have timely filed extension of income tax
returns in all applicable jurisdictions in which we believe we are required to
make an income tax return filing.
We
re-assess the validity of our conclusions regarding uncertain tax positions on a
quarterly basis to determine if facts or circumstances have arisen that might
cause us to change our judgment regarding the likelihood of a tax position’s
sustainability under audit. We have determined that there were no
uncertain tax positions for the years ended September 30, 2010 and
2009.
All of
the Company’s income before income taxes is from PRC sources. Actual income tax
expense reported in the consolidated statements of operations and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 12.5% (50% discount of 25%) to income before income taxes for the years
ended September 30, 2010 and September 30, 2009 for the followings
reasons:
For the Year Ended
|
||||||||
September 30
|
||||||||
2010
|
2009
|
|||||||
Income
before income taxes
|
$ | 2,245,100 | $ | 2,445,652 | ||||
Computed
“expected” income tax expense at 12.5% in 2010 and zero in
2009
|
$ | 280,638 | $ | 546,960 | ||||
Tax
effect of net taxable permanent differences
|
(166,984 | ) | (546,960 | ) | ||||
Effect
of cumulative tax losses
|
(89,631 | ) | - | |||||
$ | 24,023 | $ | - |
Our
policy for recording interest and penalties associated with audits is to record
such items as a component of income tax expense. There were no interest and
penalties recorded for the years ended September 30, 2010 and September 30,
2009.
17. Other
Comprehensive Income
Other
comprehensive income on the balance sheet represents accumulated foreign
currency translation adjustments.
F-33
18.
Recent Accounting Pronouncements
Fair
Value Measurements
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. The guidance is
effective for annual and interim reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for
annual and interim periods beginning after December 15, 2010. The Company
adopted this guidance at January 1, 2010, except for the Level 3 reconciliation
disclosures on the rollforward activities, which it will adopt at the beginning
of January 1, 2011. Adoption did not have a material impact on our consolidated
financial statements.
Receivables
In April
2010, the FASB issued ASU 2010-18, Receivables (Topic 310), Effect of a
Loan Modification When the Loan is Part of A Pool That Is Accounted for as a
Single Asset . ASU 2010-18 provides that modifications of loans that are
accounted for within a pool under Subtopic 310-30 do not result in the removal
of those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue
to be required to consider whether the pool of assets in which the loans are
included is impaired if expected cash flows for the pool change. This guidance
is effective prospectively for the first interim and annual period ending on or
after July 15, 2010. Early adoption is permitted. The Company adopted this
guidance without a material impact on its consolidated financial
statements.
Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
19.
Subsequent Events
On
December 20, 2010, the Company repaid its short-term loans of RMB 25,400,000 to
the Foshan branch of the Agriculture Bank of China. On December 22, 2010, the
Company obtained official approval from the same bank for a new six months
term loan in the amount of RMB 20 million to meet its short-term cash
needs to complete installation of a new PPS production line. The loan carries an
annual interest rate of 6.21% and is repayable on June 21, 2011.
On
December 8, 2010, the Company obtained a loan from Standard Chartered Bank in
the amount of RMB 6,000,000 for a term of 90 days. The loan carries an interest
rate of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as
guarantee.
F-34
CHINA
SLP FILTRATION TECHNOLOGY, INC.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The
following unaudited pro forma consolidated financial statements give effect to
the terms of the agreement between the Company and the bridge-loan investors on
the convertible notes issued to the investors, and are based on our consolidated
financial statements for the year ended September 30, 2010 and the three month
period ended December 31, 2010 and the related notes, certain estimates,
adjustments and assumptions that management believes to be reasonable. The
unaudited pro forma consolidated balance sheet as of December 31, 2010 is
presented as if the notes issued on February 12, 2010 were converted into the
Company’s common stock on December 31, 2010 at a $2.10 per share conversion
price. The unaudited pro forma consolidated statements of operations for the
year ended September 30, 2010 and the three months ended December 31, 2010 are
presented as if the conversion of the notes occurred on October 1,
2009.
The
unaudited pro forma consolidated financial statements include adjustments to
reflect the effects of the notes conversion. The unaudited pro forma
consolidated financial statements do not give effect to adjustments that are
unknown to us at this time, immaterial, or may arise when the conversion is
eventually consummated.
Pro forma
information is intended to provide investors with information about the
continuing impact of a transaction by showing how a specific transaction might
have affected historical financial statements, illustrating the scope of the
change in the historical financial position and results of operations. The
adjustments made to historical financial information give effect to events that
are directly attributable to the private financing transaction consummated on
February 12, 2010, factually supportable, and expected to have a continuing
impact. The unaudited pro forma financial statements are prepared in accordance
with Article 11 of Regulation S-X.
The
unaudited pro forma consolidated financial statements presented below are not
fact and therefore there can be no assurance that our actual results will not
differ significantly from those set forth below or that the impact of the
conversion of the notes will not differ significantly from those presented
below. Accordingly, the pro forma financial information is provided for
illustrative purposes only and does not purport to represent, and are not
necessarily indicative of, what our actual financial position and results of
operations would have been had the conversion occurred, nor are they indicative
of our future financial position or results of operations.
F-35
CHINA
SLP FILTRATION TECHNOLOGY, INC.
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31
|
December 31
|
|||||||||||
2010
|
Pro forma
|
2010
|
||||||||||
Actual
|
adjustments
|
Pro forma
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
and cash equivalents
|
$ | 5,273,088 | (100,000 |
)a
|
$ | 5,173,088 | ||||||
Restricted
cash
|
454,387 | 454,387 | ||||||||||
Accounts
receivable – Net
|
2,282,430 | - | 2,282,430 | |||||||||
Advance
to suppliers
|
1262826 | - | 1,262,826 | |||||||||
Inventory
|
1,820,136 | - | 1,820,136 | |||||||||
Taxes
refund receivable
|
570,093 | - | 570,093 | |||||||||
Prepaid
expenses and other current assets
|
652,813 | - | 652,813 | |||||||||
Total
Current Assets
|
12,315,773 | (100,000 | ) | 12,215,773 | ||||||||
Deposits
|
1,534,549 | - | 1,534,549 | |||||||||
Property
and equipment – Net
|
14,771,900 | - | 14,771,900 | |||||||||
Land
use rights – Net
|
539,470 | - | 539,470 | |||||||||
Total
Assets
|
$ | 29,161,692 | (100,000 | ) | $ | 29,061,692 | ||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
Current
Liabilities
|
||||||||||||
Short
term loan
|
3,938,022 | - | 3,938,022 | |||||||||
Accounts
payable and accrued liabilities
|
2,239,652 | - | 2,239,652 | |||||||||
Client's
deposits
|
- | - | - | |||||||||
Other
payable - related party
|
920,148 | - | 920,148 | |||||||||
Taxes
payable
|
88,943 | - | 88,943 | |||||||||
Warrants
liabilities
|
548,000 | (548,000 | )b | - | ||||||||
Convertible
notes payable $4,140,000, net of discount $1,524,893
|
3,834,907 | (3,834,907 | )c | - | ||||||||
Total
Current Liabilities
|
11,569,672 | (4,382,907 | ) | 7,186,765 | ||||||||
Total
Liabilities
|
11,569,672 | (4,382,907 | ) | 7,186,765 | ||||||||
Stockholders'
Equity
|
||||||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 share issued and
outstanding; common stock, $0.001 par value, 40,000,000 shares authorized,
15,265,714 actual, and 17,237,143 pro forma shares issued and outstanding
at December 31, 2010
|
15,266 | 1,924 | d | 17,190 | ||||||||
Additional
paid-in Capital
|
8,527,190 | 6,286,333 | e | 14,813,523 | ||||||||
Retained
earnings
|
6,779,081 | (2,005,350 | )f | 4,773,731 | ||||||||
Accumulated
other comprehensive income
|
2,270,483 | - | 2,270,483 | |||||||||
Total
Stockholders' Equity
|
17,592,020 | 4,282,907 | 21,874,927 | |||||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 29,161,692 | (100,000 | ) | $ | 29,061,692 |
See
accompanying notes to pro forma financial statements
F-36
CHINA
SLP FILTRATION TECHNOLOGY, INC.
PRO
FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For
the three months ended December 31, 2010
Historical
|
||||||||||||
As
|
Pro Forma
|
|||||||||||
Reported
|
Adjustments
|
Pro Forma
|
||||||||||
Net
Sales
|
$ | 5,780,973 | - | $ | 5,780,973 | |||||||
Cost
of Sales
|
4,223,562 | - | 4,223,562 | |||||||||
Gross
Profit
|
1,557,411 | 1,557,411 | ||||||||||
Selling,
General and Administrative Expenses
|
812,636 | - | 812,636 | |||||||||
Income
from Operations
|
744,775 | - | 744,775 | |||||||||
Other
Income (expense)
|
||||||||||||
Interest
Income
|
5,330 | - | 5,330 | |||||||||
Interest
Expense
|
(777,697 | ) | 711,730 | g | (65,967 | ) | ||||||
Loss
on disposal of fixed assets
|
(23,408 | ) | - | (23,408 | ) | |||||||
Government
subsidy
|
6,090 | - | 6,090 | |||||||||
Changes
in Fair Value of Warrants
|
191,000 | (191,000 | )h | 0 | ||||||||
Total
Other Income (expenses)
|
(598,685 | ) | 520,730 | (77,955 | ) | |||||||
Income
before Income Taxes
|
146,090 | 520,730 | 666,820 | |||||||||
Income
Tax Provision
|
88,618 | - | 88,618 | |||||||||
Net
Income
|
$ | 57,472 | $ | 520,730 | $ | 578,202 | ||||||
Net
Income Per Common Shares:
|
||||||||||||
Basic
|
$ | 0.00 | $ | 0.03 | ||||||||
Diluted
|
$ | 0.00 | $ | 0.03 | ||||||||
Weighted-Average
Common Shares Outstanding:
|
||||||||||||
Basic
|
15,265,714 | 1,923,809 | i | 17,189,523 | ||||||||
Diluted
|
17,189,523 | - | 17,189,523 |
F-37
CHINA
SLP FILTRATION TECHNOLOGY, INC.
PRO
FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For
the Year Ended September 30, 2010
Historical
|
||||||||||||
As
|
Pro Forma
|
|||||||||||
Reported
|
Adjustments
|
Pro Forma
|
||||||||||
Net
Sales
|
$ | 19,952,422 | - | $ | 19,952,422 | |||||||
Cost
of Sales
|
13,772,843 | - | 13,772,843 | |||||||||
Gross
Profit
|
6,179,579 | 6,179,579 | ||||||||||
Selling,
General and Administrative Expenses
|
2,272,881 | - | 2,272,881 | |||||||||
Income
from Operations
|
3,906,698 | - | 3,906,698 | |||||||||
Other
Income (expense)
|
||||||||||||
Interest
Income
|
14,341 | - | 14,341 | |||||||||
Interest
Expense
|
(1,988,832 | ) | (1,630,501 | )j | (3,619,333 | ) | ||||||
Loss
on disposal of fixed assets
|
(107 | ) | (107 | ) | ||||||||
Changes
in Fair Value of Warrants
|
313,000 | (313,000 | )k | - | ||||||||
Total
Other Income (expenses)
|
(1,661,598 | ) | (1,943,501 | ) | (3,605,099 | ) | ||||||
Income
before Income Taxes
|
2,245,100 | (1,943,501 | ) | 301,599 | ||||||||
Income
Tax Provision
|
24,023 | - | 24,023 | |||||||||
Net
Income
|
$ | 2,221,077 | $ | (1,943,501 | ) | $ | 277,576 | |||||
Net
Income Per Common Shares:
|
||||||||||||
Basic
|
$ | 0.15 | $ | 0.02 | ||||||||
Diluted
|
$ | 0.15 | $ | 0.02 | ||||||||
Weighted-Average
Common Shares Outstanding:
|
||||||||||||
Basic
|
14,979,390 | 2,210,133 | l | 17,189,523 | ||||||||
Diluted
|
16,227,061 | 962,462 | m | 17,189,523 |
See
accompanying notes to pro forma financial statements
F-38
CHINA
SLP FILTRATION TECHNOLOGY, INC.
Notes
to Unaudited Pro Forma Consolidated Financial Statements (Expressed in US
dollars)
Description
of Transaction and Basis of Presentation
The
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2010, and
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
September 30, 2010 and for the three months ended December 31, 2010 are
presented to illustrate the effects of the bridge-loan financing transaction of
February 12, 2010 on our financial position and results of operations had the
conversion of the notes into the Company’s common stock occurred on December 31,
2010 for purpose of the Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 2010, and on October 1, 2009 for the purpose of the Unaudited Pro
Forma Consolidated Statements of Operations for the year ended September 30,
2010 and the three month period ended December 31, 2010, respectively. The
conversion is based on $2.10 per share conversion price or 65% discount of our
expected IPO offering price of $6 per share. The convertible notes in the
principal amount of $100,000 that was due and repaid with cash on February
11, 2011 is reflected in the pro forma financial
statements.
The
historical information presented in the pro forma financial statements is
derived from our unaudited consolidated financial statements as of December 31,
2010 and for the three months ended December 31, 2010 and from our audited
consolidated statements of operations for the year ended September
30, 2010.
The pro
forma financial statements were prepared for comparative purpose only and are
not necessarily indicative of the results that may be expected in the
future.
Adjustments
in the Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2010
and the Unaudited Pro Forma Consolidated Statements of Operations for the year
ended September 30, 2010 and for the three months ended December 31,
2010:
a)
|
To reflect repayment of a note
in the principal amount of $100,000 that was due and repaid on February
11, 2011.
|
|
|
b)
|
To reverse warrants liability
derived from the issuance of warrants in conjunction with a sale of the
convertible notes on February 12, 2010 based on the provision that the
warrants are void on conversion of the
notes.
|
c)
|
To reverse the carrying amount
of the notes payable of $3,834,907 ($4,140,000 gross amount of convertible
notes, net of unamortized discount $305,
093.)
|
d)
|
To record $0.001 par value common
stock from the conversion into 1,923,809 shares of common
stock.
|
e)
|
To record the additional paid-in
capital from the conversion, consisted of the
following:
|
Face
value of the notes minus par value:
|
$ | 4,038,076 | ||
Reverse
void warrants:
|
548,000 | |||
Proceeds
allocated to debt:
|
1,700,257 | |||
$ | 6,286,333 |
F-39
f)
|
To charge unamortized notes
discount and beneficial conversion features to interest expense as a
result of adoption of the accounting treatment under ASC 470-20-25-6 and
470-20-35-3 which requires unamortized notes discount and beneficial
conversion features (BCF), limited to proceeds allocated to debt, be
charged to interest expense upon resolution of
contingency:
|
Unamortized
discount
|
$ | 305,093 | ||
BCF
(limited to proceeds allocated to debt)
|
1,700,257 | |||
$ | 2,005,350 |
Due to
different assumptions used in our pro forma balance sheet (conversion occurred
on December 31, 2010) and pro forma statements of operations (conversion
occurred on October 1, 2009 and no warrants liabilities were recorded), this
derived interest expense is not reconciled to the interest expense adjustments
in our pro forma statements of operations for the three months ended December
31, 2010.
g) Based assumption that the notes were converted into the
Company’s common stock on October 1, 2009, adjustments are made to reverse the
interest expense recorded for the three month period ended December 31, 2010 (i)
the $101,830 in interest paid on the notes ($104,351 paid in
total , less $2,521 paid to Lumen Capital LP) and, (ii) the $609,900 in interest
derived from amortization of the note discount to accrete the notes to its
principal amount.
h) To
reverse income resulted from the changed estimated value of warrants issued
along with the notes assuming the warrants would not be issued had the
conversion occurred on October 1, 2009.
i) The
adjustments in the weighted-average shares of commons stock is made to include
in the denominator for pro forma EPS computation the converted common stock
shares and common stock shares issuable to private placement agents and to shell
company owners as below:
Total
shares outstanding before conversion
|
15,265,714 | |||
Converted
shares
|
1,923,809 | |||
Total
pro forma common stock outstanding for the three months ended December 31,
2010
|
17,189,523 |
j) Based
assumption that the notes were converted into the Company’s common stock on
October 1, 2009, adjustments are made to reverse the interest expense recorded
for (i) the $254,562 in interest payable on the notes and, (ii)
the $1,524,750 in interest derived from amortization of the note discount to
accrete the notes to its principal amount. The beneficial conversion feature
(BCF) of $3,409,813 would be charged to interest expense under
provisions of the FASB ASC 470 with limit to the net proceeds allocated to debt.
Total interest expense would be $1,630,501.
The
BCF is calculated as follows:
Post-money
valuation per share:
|
$ | 6.00 | ||
Conversion
price per share at 65% discount:
|
$ | 2.10 | ||
BCF
per share:
|
$ | 3.90 | ||
Total
BCF (1,971,428*3.90, limited to net proceeds allocated to
debt):
|
$ | 3,409,813 |
k) To
reverse income resulted from the changed estimated value of warrants issued
along with the notes on assuming the warrants would not be issued had the
conversion occurred on October 1, 2009.
F-40
l) The
adjustments in the weighted-average shares of commons stock is made to include
in the denominator for pro forma EPS computation the converted common stock
shares and common stock shares issuable to private placement agents and to shell
company owners as below:
Total
shares outstanding before conversion
|
15,265,714 | |||
Converted
shares
|
1,923,809 | |||
Total
pro forma common stock outstanding for the year ended September 30,
2010
|
17,189,523 |
m) The
historical diluted weighted-average shares of commons stock is adjusted to have
the total diluted pro forma number of common stock shares outstanding equal to
the total basic pro forma number of common stock outstanding for the year ended
September 30, 2010 as no dilutive securities would have been
outstanding.
F-41
4,166,667
Shares
CHINA
SLP FILTRATION TECHNOLOGY, INC.
Common
Stock
PROSPECTUS
________,
2011
Brean
Murray, Carret & Co.
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting offers to buy these securities in any
state where the offer is not permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY 18, 2011
CHINA
SLP FILTRATION TECHNOLOGY, INC.
369,725
Shares
Offered
by Selling Stockholders
This
prospectus relates to the sale by the selling stockholders identified in this
prospectus of up to 369,725 shares of our common stock. Prior
to this offering, there has been no public market for our common
stock.
We expect
that the shares will be offered for sale at the price of $6.00 per share
until our common stock becomes quoted on the Over-the-Counter Bulletin
Board or listed on an exchange.
We have
applied to have our common stock listed on the NASDAQ Capital Market under the
symbol “SLPC.” We expect our listing to be effective as of the
date of this prospectus. No assurance can be given that our listing
application will be approved. If our listing application is not
approved we intend to complete this offering and apply to have out stock quoted
on the Over the Counter Bulletin Board.
The
369,725 shares being sold under this prospectus comprise of 369,725 of the
1,923,809 shares issuable on conversion of outstanding convertible notes in the
aggregate principal amount of $4,040,000 issued in February 2010.
These convertible notes are convertible at a price of $2.10 per share (which
represents a 65% discount to the assumed public offering price of $6.00 per
share for the 4,166,667 shares being offered for sale by the Company in a firm
commitment offering under a separate prospectus dated the date
hereof).
All of
the selling stockholders have entered into lock-up agreements with the
underwriters of the public offering under which they have agreed not to sell any
of the shares being registered hereby for a period of 90 days of the date
hereof. Following expiration of the lockup period the selling
stockholders may sell all or any portion of their shares of common stock in one
or more transactions in the public market or in private negotiated
transactions. We expect that the shares will be offered for
sale at the price of $6 per share until our common stock becomes quoted on
the Over-the-Counter Bulletin Board or listed on an
exchange. Although we will incur expenses in connection
with the registration of the common stock, we will not receive any of the
proceeds from the sale of the shares of common stock by the selling
stockholders.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 6 for a discussion of certain risk factors that you should
consider. You should
read the entire prospectus before making an investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ______, 2011
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE
OF CONTENTS
Prospectus
Summary
|
1
|
Risk
Factors
|
6
|
Caution
Regarding Forward Looking Statements and Other Information Contained in
this Prospectus
|
25
|
Use
of Proceeds
|
25
|
Determination
of Offering Price
|
25
|
Dividend
Policy
|
26
|
Exchange
Rate Information
|
26
|
Selling
Stockholders
|
A-3
|
Market
Price of our Common Stock and Related Stockholder Matters
|
29
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
Business
|
47
|
Additional
Disclosure Regarding Conversion of Notes and Exercise of
Warrants
|
63
|
Security
Ownership of Certain Beneficial Owners and Management
|
73
|
Management
|
74
|
Executive
Compensation
|
83
|
Certain
Relationships and Related Transactions
|
87
|
Description
of Securities
|
89
|
Material
United States Federal Income Tax Considerations
|
92
|
Material
PRC Income Tax Considerations
|
96
|
Plan
of Distribution
|
97
|
Legal
Matters
|
105
|
Experts
|
105
|
Service
of Process And Enforcement of Judgments
|
105
|
Where
You Can Find More Information
|
105
|
Index
to Financial Statements
|
F-1
|
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with additional or different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted.
This
prospectus includes market size, market share and industry data that we have
obtained from market research, publicly available information and various
industry publications. The third party sources from which we have obtained
information generally state that the information contained therein has been
obtained from sources believed to be reliable. We have not independently
verified any of the data from third party sources nor have we verified the
underlying economic assumptions relied upon by those third parties. Similarly,
industry forecasts and market research, which we believe to be reliable based
upon management’s knowledge of the industry, have not been verified by any
independent sources.
[RESALE
PROSPECTUS ALTERNATE PAGE]
THE
OFFERING
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 369,725 shares of our common stock comprising of 369,725 of
the 1,923,809 shares issuable on conversion of convertible notes in the
aggregate principal amount of $4,040,000 issued in February 2010. These
convertible notes are convertible at a price of $2.10 per share (which
represents a 65% discount to the assumed public offering price of $6.00 per
share for the 4,166,667 shares being offered for sale by the Company in a firm
commitment offering under a separate prospectus dated the date
hereof).
All of
the shares being registered are subject to a lock up agreement which expires on
the 90th day
following the date of this prospectus. After the lock up period expires
the shares may be offered for sale by the selling stockholders from time to
time. No shares are being offered for sale by the
Company.
Common
stock outstanding currently outstanding
|
15,265,714
|
|
Common
stock offered by the Company in this resale prospectus
|
0
|
|
Total
shares of common stock offered by selling stockholders
|
369,725
which number represents 369,725 of the 1,923,809 shares issuable on
conversion of the outstanding convertible notes in the aggregate principal
amount of $4,040,000 issued in February 2010. These convertible
notes are convertible at a price of $2.10 per share (which represents a
65% discount to the assumed public offering price of $6.00 per share for
the 4,166,667 shares being offered for sale by the Company in a firm
commitment offering under a separate prospectus dated the date
hereof).
|
|
Common
stock outstanding before the closing of the public offering of 4,166,667
shares being offered for sale by the Company in a firm commitment offering
under a separate prospectus dated the date hereof
|
17,189,523.
This number reflects (i) 15,265,714 shares currently outstanding plus (ii)
1,923,809 additional shares issuable on conversion of outstanding
convertible notes in the aggregate principal amount of
$4,040,000 which conversion will occur immediately prior to the
closing of the public offering by the Company.
|
|
Total
number of share to be outstanding after the closing of the public
offering of 4,166,667 shares being offered for sale
by the Company in a firm commitment offering under a separate prospectus
dated the date hereof
|
21,814,562. This number
reflects (i) 15,265,714 shares currently
outstanding; (ii) 1,923,809 additional shares that are issuable
on conversion of outstanding convertible notes in the aggregate
principal amount of $4,040,000 which conversion will occur
immediately prior to the closing of the public offering; (iii)
4,166,667 shares being offered for sale by the Company in the initial
public offering under a separate prospectus dated the date hereof
and (iv) 193,186 and 265,186 shares being issued to
United Best and Primary Capital, respectively, on closing of
the public offering by the Company.
|
|
Total
dollar value of common stock being registered
|
On
February 12, 2010, the closing date of the private placement of the notes
and the reverse merger, the shares of our common stock were not publicly
traded. Assuming a public offering price for the common stock of $6.00 per
share the dollar value of the 369,725 shares being registered is
$2,218,350.
|
|
Use
of Proceeds
|
We
will not receive any of the proceeds from the sales of the shares by the
selling stockholders.
|
|
Listing
|
We
have applied to have our common stock listed on the NASDAQ Capital
Market.
|
|
Risk
Factors
|
The
securities offered by this prospectus are speculative and involve a high
degree of risk. Investors purchasing our securities should not purchase
the securities unless they can afford the loss of their entire investment.
See “Risk Factors” section beginning on page
6.
|
A-1
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of common
stock.
A-2
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
This
prospectus relates to the offer and sale of our shares of common stock by the
selling stockholders identified in the table below.
Prior to
this offering there has been no public market for our common stock.
We expect
that the shares will be offered for sale at the price of $6.00 per share until
our common stock becomes quoted on the Over-the-Counter Bulletin Board or
listed on an exchange.
We have
applied to have our common stock listed on the NASDAQ Capital Market under the
symbol “SLPC.” We expect our listing to be effective as of the
date of this prospectus. No assurance can be given that our listing
application will be approved. If our listing application is not approved we
intend to complete this offering and apply to have our stock quoted on the Over
the Counter Bulletin Board.
Tim
O’Donnell, a selling stockholder, is affiliated with Primary Capital, a broker
dealer. Mr. O’Donnell purchased the securities that he is offering for resale
under this prospectus in the ordinary course of business and at the time of the
purchase of the securities Mr. O’Donnell had no agreement or understanding,
directly or indirectly, with any person to distribute the securities. Any
distribution of shares by Mr. O’Donnell will be transacted through unaffiliated
FINRA members.
Except
for Tim O’Donnell, none of the selling stockholders is a broker dealer or
an affiliate of a broker dealer. Broker dealers and, with certain
exceptions, affiliates of broker dealers, are “underwriters” within the meaning
of the Securities Act in connection with the sales of shares registered in this
prospectus.
Except as
set forth below, none of the selling stockholders has been an officer, director
or affiliate of the Company or any of its predecessors or affiliates within the
last three years, nor has any selling stockholder had a material relationship
with the Company.
A-3
|
¨
|
Joseph Nemelka, a selling
stockholder, served as a director of our predecessor Perpetual
Technologies, Inc. from October 2006 until February 12, 2010 and from
January 2008 through December 2008 served as its chief executive officer.
On December 27, 2008 Mr. Nemelka purchased 9,000,000 shares of common
stock from Seth Winterton for $9,000. On February 12, 2010, 12,640,000 of
the 13,000,000 shares then outstanding were cancelled with 360,000 shares
(or 72,000 post reverse split) remaining outstanding. Of these 72,000
shares, 18,834 were held by Joe Nemelka. None of these shares are being
registered. The 9,152 shares being registered for resale by Mr.
Nemelka represent a portion of the 47,619 shares issuable on conversion of
the convertible note in the principal amount of $100,000 purchased by him
in the February private
placement.
|
The table
set forth below lists the names of the selling stockholders as well as (1) the
number of shares of common stock that are being registered for resale by each of
the selling stockholders; and (2) the number of shares underlying the notes
acquired by each of the selling stockholders in the private placement that are
being registered for resale.
After the
expiration of the lock-up period, each selling stockholder may offer for sale
all or part of its shares from time to time. The table below assumes that the
selling stockholders will sell all of the shares offered for sale. A
selling stockholder is under no obligation, however, to sell any shares pursuant
to this prospectus.
After due
inquiry and investigation and based on information provided by the selling
stockholders, none of the selling stockholders has an existing short position in
our stock.
Other
than as described in this prospectus, we have not in the past three years
engaged in any securities transaction with any of the selling stockholders, any
affiliates of the selling stockholders, or, after due inquiry and investigation,
to the knowledge of the management of the Company, any person with whom any
selling stockholder has a contractual relationship regarding the transaction (or
any predecessors of those persons).
In
addition, other than in connection with the contractual obligations set forth in
(i) the share exchange agreement entered into between the Company and certain
selling stockholders, (ii) the note purchase agreement (and the related
registration rights agreement) entered into between the Company and each of the
selling stockholders who invested in the private placement financing, and (iii)
the registration rights letter agreement dated as of February 18, 2010 with the
holders of our common stock who acquired their share prior to the private
placement, we do not have any agreement or arrangement with any selling
stockholder with respect to the performance of any current or future
obligations.
A-4
Name of Selling
Stockholder
|
Number of Shares
of Common Stock
Beneficially Owned
Prior to the
Offering (1) (2)
|
Percentage
|
Maximum
Number
of Shares
to be Sold in
Offering
|
Number of
Shares
Beneficially
Owned
after
Offering
|
Percentage
|
|||||||||||||||
Joseph
Nemelka
159 South 975
West,
Mapleton, UT 84664 (3)
|
66,453 | * | 9,152 | 57,301 | * | |||||||||||||||
|
||||||||||||||||||||
Jayhawk
Private
Equity Fund II,
LP
930 Tahoe Blvd
802-281
InclineVillage, NV 89451 (4)
|
1,190,476 | 7.23 | % | 228,790 | 961,686 | 4.4 | % | |||||||||||||
Blue Earth Fund
LP
1312 Cedar
Street
Santa Monica, CA 90405 (5)
|
476,190 | 3 | % | 91,516 | 384,674 | 1.8 | % | |||||||||||||
Trading Systems
LLC
14 Red Tail
Drive, Highlands
Ranch
CO 80126 (6)
|
47,619 | * | 9,152 | 38,467 | * | |||||||||||||||
Glenn A.
Little
1103 Stewart Ave.,
Suite
200, Garden City,
NY
11530 (7)
|
95,238 | * | 18,303 | 76,935 | * | |||||||||||||||
Jeffrey
Grossman
35 Rochelle
Dr.
New City NY 10956 (8)
|
47,619 | * | 9,152 | 38,467 | * | |||||||||||||||
Grace King
1235 Park Ave
New York, NY 10128 (9)
|
9,524 | * | 1,830 | 7,694 | * | |||||||||||||||
Timothy
O’Donnell
160 Henry St.
Apt.3B,
Brooklyn, NY 11201 (10)
|
4,762 | * | 915 | 3,847 | * | |||||||||||||||
Sik Wing Sung
53 Braisted
Avenue,
Staten Island, NY 10314 (11)
|
4,762 | * | 915 | 3,847 | * |
A-5
*
Less than 1%
(1) As
of the close of business on February 16, 2011, there were 15,265,714 shares
of our common stock outstanding. Following the closing of the firm
commitment underwritten offering by the Company, there will be 21,814,562 shares
issued and outstanding (including shares issuable on conversion of the notes and
the additional shares to be issued to United Best and Primary Capital on closing
of the firm commitment offering by the Company).
(2) In
determining beneficial ownership of the common stock, the number of shares shown
includes shares which the beneficial owner may acquire within 60 days of
February 16, 2011 upon exercise of convertible securities, warrants or
options. In accordance with Rule 13d-3 in determining the percentage
of common stock owned by a person on February 16, 2011, (a) the numerator is the
number of shares of the class beneficially owned by such person, including
shares which the beneficial owner may acquire within 60 days upon conversion
or exercise of the warrants and other convertible securities, and (b)
the denominator is the sum of (i) the total shares of that class outstanding on
February 16, 2011, and (ii) the total number of shares that the beneficial owner
may acquire upon conversion or exercise of other securities. Unless otherwise
stated, each beneficial owner has sole power to vote and dispose of the
shares.
(3) Represents
18,834 shares acquired by Mr. Nemelka prior to the reverse merger and 47,619
shares issuable on conversion of the convertible notes (at a 65% discount to the
public offering price assuming a public offering price of
$6.00). None of the 18,834 shares acquired by Mr. Nemelka prior to
the reverse merger are being registered for resale. 9,152 of the
47,619 shares issuable on conversion of the convertible notes are being
registered for resale.
(4) Represents
1,190,476 shares issuable on conversion of the convertible notes (at a 65%
discount to the public offering price assuming a public offering price of
$6.00). 228,790 of these shares are being registered for
resale. Kent C. McCarthy is the Managing Member of
Jayhawk Private Equity LLC, which is the General Partner of Jayhawk
Private Equity GP II, LP, which is the General Partner of Jayhawk Private Equity
Fund II, L.P. and has voting power and investment power over securities held by
Jayhawk Private Equity Fund, L.P
(5) Represents
476,190 shares issuable on conversion of the convertible notes (at a 65%
discount to the public offering price assuming a public offering price of
$6.00). 91,516 of these shares are being registered for
resale. Blue Earth Fund is not a broker-dealer or an affiliate of a
broker dealer. Brett Conrad, Managing Member of LongBoard Capital Advisors, LLC
which is General Partner of Blue Earth Fund, L.P. and has the sole voting and
dispositive powers over shares beneficially owned by Blue Earth Fund,
LP.
(6) Represents 47,619
shares issuable on conversion of the convertible notes (at a 65% discount to the
public offering price assuming a public offering price of $6.00). 9,152 of
these shares are being registered for resale. Gary Mc Adams has the
sole voting and dispositive power over shares beneficially owned by Trading
Systems, LLC.
(7) Represents
95,238 shares issuable on conversion of the convertible notes (at a 65% discount
to the public offering price assuming a public offering price of
$6.00). 18,303 of these shares are being registered for
resale.
(8) Represents
47,619 shares issuable on conversion of the convertible notes (at a 65% discount
to the public offering price assuming a public offering price of
$6.00). 9,152 of these shares are being registered for
resale.
(9) Represents
9,524 shares issuable on conversion of the convertible notes (at a 65% discount
to the public offering price assuming a public offering price of
$6.00). 1,830 of these shares are being registered for
resale.
(10) Represents
4,762 shares issuable on conversion of the convertible notes (at a 65% discount
to the public offering price assuming a public offering price of
$6.00). 915 of these shares are being registered for
resale.
(11) Represents
4,762 shares issuable on conversion of the convertible notes (at a 65% discount
to the public offering price assuming a public offering price of
$6.00). 915 of these shares are being registered for
resale.
A-6
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
Prior to
this offering there has been no public market for our common stock.
We expect
that the shares will be offered for sale at the price of $6.00 per share until
our common stock becomes quoted on the Over-the-Counter Bulletin Board or
listed on an exchange.
The
selling security holders and any of their pledgees, donees, assignees and
successors-in-interest may, after the expiration of the lock-up period, from
time to time, sell any or all of their shares of common stock being offered
under this prospectus on any stock exchange, market or trading facility on which
shares of our common stock are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling security holders may use any
one or more of the following methods when disposing of shares:
|
¨
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
¨
|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
¨
|
purchases by a broker-dealer as
principal and resales by the broker-dealer for its
account;
|
|
¨
|
An exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
¨
|
privately negotiated
transactions;
|
|
¨
|
to cover short sales made after
the date that the registration statement of which this prospectus is a
part is declared effective by the
Commission;
|
|
¨
|
broker-dealers may agree with the
selling security holders to sell a specified number of such shares at a
stipulated price per share;
|
|
¨
|
a combination of any of these
methods of sale; and
|
|
¨
|
any other method permitted
pursuant to applicable law.
|
The
shares may also be sold under Rule 144 under the Securities Act of 1933, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
A-7
The
selling security holders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling security holder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers
engaged by the selling security holders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling security holders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, which
commissions as to a particular broker or dealer may be in excess of customary
commissions to the extent permitted by applicable law. The maximum
commission or discount to be received by any FINRA member of independent
broker-dealer for the sale of any securities being registered hereunder pursuant
to Commission Rule 415 will not be greater than eight percent (8%).
If sales
of shares offered under this prospectus are made to broker-dealers as
principals, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part. In the post-effective
amendment, we would be required to disclose the names of any participating
broker-dealers and the compensation arrangements relating to such
sales.
The
selling security holders and any broker-dealers or agents that are involved in
selling the shares offered under this prospectus are “underwriters” within the
meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities
Act. Any broker-dealers or agents that are deemed to be
underwriters may not sell shares offered under this prospectus unless and until
we set forth the names of the underwriters and the material details of their
underwriting arrangements in a supplement to this prospectus or, if required, in
a replacement prospectus included in a post-effective amendment to the
registration statement of which this prospectus is a part. Broker
dealers and affiliates of broker dealers are “underwriters” within the meaning
of the Securities Act in connection with the sales of shares registered in this
prospectus.
The
selling security holders and any other persons participating in the sale or
distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Exchange Act, and the rules and regulations under
that act, including Regulation M. These provisions may restrict
activities of, and limit the timing of purchases and sales of any of the shares
by, the selling security holders or any other person. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and other activities
with respect to those securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the
shares.
If any of
the shares of common stock offered for sale pursuant to this prospectus are
transferred other than pursuant to a sale under this prospectus, then subsequent
holders could not use this prospectus until a post-effective amendment or
prospectus supplement is filed, naming such holders. We offer no assurance as to
whether any of the selling security holders will sell all or any portion of the
shares offered under this prospectus.
We have
agreed to pay all fees and expenses we incur incident to the registration of the
shares being offered under this prospectus. However, each selling security
holder and purchaser is responsible for paying any discounts, commissions and
similar selling expenses they incur.
We and
the selling security holders have agreed to indemnify one another against
certain losses, damages and liabilities arising in connection with this
prospectus, including liabilities under the Securities Act.
A-8
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the shares sold by us under this prospectus will be passed upon by
Guzov Ofsink, LLC, New York.
With
respect to certain matters involving the enforcement of foreign judgments in the
PRC and the bringing of original actions in the PRC predicated solely on the
federal securities laws of the United States, Han Kun Law Firm, has given us
certain advice.
SERVICE
OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are a
company incorporated under the laws of the State of Delaware in the United
States. However, all of our business, assets and operations are located in
China. In addition, a substantial majority of our directors and officers reside
outside of the United States. As a result, it may be difficult for United States
investors to effect service of process within the United States upon us or such
persons or to enforce against us or them, judgments obtained in United States
courts, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any State thereof.
Han Kun
Law Offices, our counsel as to Chinese law, has advised us that there is
uncertainty as to whether the courts of China would (1) recognize or
enforce judgments of United States courts obtained against us or such persons
predicated upon the civil liability provisions of the securities laws of the
United States or any State thereof, or (2) be competent to hear original
actions brought in each respective jurisdiction, against us or such persons
predicated upon the securities laws of the United States or any State
thereof.
Han Kun
Law Offices has advised us that the recognition and enforcement of foreign
judgments are provided for under the Chinese Civil Procedure Law. Chinese courts
may recognize and enforce foreign judgments in accordance with the requirements
of the Chinese Civil Procedure Law based either on treaties between China and
the country where the judgment is made or in reciprocity between jurisdictions.
China does not have any treaties or other agreements with the United States that
provide for the reciprocal recognition and enforcement of foreign judgments. As
a result, it is uncertain whether a Chinese court would enforce a judgment
rendered by a court in the United States.
We have
appointed Vcorp Services, LLC as our agent to receive
service of process with respect to any action brought against us in a court in
the United States.
EXPERTS
Child Van
Wagoner & Bradshaw, PLLC, independent registered public accountants, located
in Utah, have audited our financial statements included in this registration
statement to the extent and for the periods set forth in their report. We have
relied on such reports given upon the authority of such firm as experts in
accounting and auditing.
A-9
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following is a statement of estimated expenses, to be paid solely by us, in
connection with the issuance and distribution of the securities being registered
hereby
SEC
Registration Fee
|
$ | 4,322.00 | ||
FINRA
Filing Fee
|
$ | 8,700.00 | ||
Professional
Fees and Expenses*
|
$ | 450,000.00 | ||
Printing
and Engraving Expenses *
|
$ | 1,000.00 | ||
Transfer
Agent’s Fees*
|
$ | 10,000.00 | ||
Miscellaneous
Expenses*
|
$ | 34,000.00 | ||
Total
|
$ | 509,022.00 | * |
*
Estimates
Item
14. Indemnification of Directors and Officers.
Under our
By-Laws, we may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Company) by reason of the fact that such person is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with such action or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the Company and, in the case
of a criminal action or proceeding, had no reasonable cause to believe the
conduct of such person was unlawful.
Under
Section 145 of the Delaware General Corporation Law (“DGCL”) the
Company has the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. In addition the Company has
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
The
Company is required, to the fullest extent allowed by the DGCL, indemnify hold
harmless each of the foregoing directors from and against any expenses,
including reasonable attorney’s fees, judgments, fines, settlements and other
legally permissible amounts, incurred in connection with any proceeding arising
out of, or related to, such director’s position with the Company. The
Company is required to advance to each such director any expenses, including
attorney’s fees and costs of settlement, incurred in defending any such
proceeding to the fullest extent allowed by the DGCL.
Such
costs and expenses incurred by the Director in defense of any such proceeding
shall be paid by the Company in advance of the final disposition of such
proceeding promptly upon receipt by the Company of (a) written request for
payment; (b) appropriate documentation evidencing the incurrence, amount and
nature of the costs and expenses for which payment is being sought; and (c) an
undertaking adequate under applicable law made by or on behalf of the Director
to repay the amounts so advanced if it shall ultimately be determined pursuant
to any non-appealable judgment or settlement that the Director is not entitled
to be indemnified by the Company or any subsidiary thereof.
II-1
Under
an independent directors agreement entered between the Company and Richard
Cohen, the company is required, to the fullest extent allowed by the DGCL,
indemnify and hold Mr. Cohen harmless from and against any expenses, including
reasonable attorney’s fees, judgments, fines, settlements and other legally
permissible amounts incurred in connection with any proceeding arising out of,
or related to, Mr. Cohen’s position with the Company. The Company is required
shall advance to Mr. Cohen any expenses, including attorney’s fees and costs of
settlement, incurred in defending any such proceeding to the fullest extent
allowed by the DGCL.
The
Company has obtained “side A” executive liability coverage for each of
Chris Bickel and Richard Cohen with coverage of up to $2,000,000 per
claim.
Item
15. Recent Sales of Unregistered Securities
Following
are all issuances of securities by the registrant during the past three years
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"). In each of these issuances the recipient represented that he
or it was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with any
transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act or the availability of an applicable exemption therefrom.
Unless specifically set forth below, no underwriter participated in the
transaction and no commissions were paid in connection with the
transactions.
February
2010 Share Exchange
On
February 12, 2010, we entered into a share exchange agreement with the owners of
all of the outstanding shares of Hong Hui. Under the terms of
the share exchange agreement we issued and delivered to the Hong Hui
stockholders a total of 14,510,204 shares of our common stock in exchange for
all of the outstanding shares of Hong Hui. As a result of the share
exchange or reverse merger, Hong Hui became our wholly-owned subsidiary, and the
Hong Hui stockholders became holders of 14,510,204 shares of our common
stock. The Hong Hui stockholders with whom we completed the share
exchange are as set forth below, each of whom is a company incorporated in
the British Virgin Islands and each of whom received the number of shares set
forth beside their respective names:
II-2
Bestyield
Group Limited, 4,353,061;
Proudlead
Limited, 4,353,061;
Newise
Holdings Limited, 2,321,633;
Pilot
Link International Limited, 1,668,673;
High
Swift Limited, 1,088,265; and
China
Investment Management Inc., 725,510.
All of
the above issuances were deemed to be exempt under Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of ours
or our executive officers, and transfer was restricted by us in accordance with
the requirements of the Securities Act.
February
2010 Private Placement Transaction
On
February 12, 2010, immediately following the closing of a share exchange
agreement we entered into a note purchase agreement with certain accredited
investors for the sale of convertible notes, in the aggregate principal
amount of $4,140,000, and warrants (which are exercisable only in certain
circumstances). The closing of the sale of the notes and
warrants occurred on February 12, 2010.
The
terms of the notes and warrants is described elsewhere in this registration
statement. See “OUR CORPORATE HISTORY – Private Placement” beginning
on page 43 of this prospectus.
Placement
Agent Warrant and Financial Advisor Warrant
United
Best
United
Best, our foreign advisor controlled by Mr. Li Jun, one of our directors,
provided financial services in connection with the financing and reverse
merger.
Under
the terms of a consulting agreement between United Best and the Company
United Best was paid a commission of $202,000 at the closing of the financing.
United Best is also owed an additional $75,000 for services rendered in
connection with financing. Additionally, under the consulting
agreement, as amended, United Best, our foreign advisor, is entitled to be paid
fee on completion of this offering a success of $750,000 (which represents 3% of
the $25,000,000 in gross proceeds received by us in connection with the
underwritten offering).
At the
closing of the transaction, United Best received 362,755 shares of our common
stock for their services. United Best is also entitled to receive an
additional 193,186 shares of closing of this offering.
In
addition, as partial consideration for providing these financial services,
United Best is entitled to receive, on conversion of the notes issued to the
investors in the February 2010 private placement (which occurs upon consummation
of this offering), a five-year warrant to purchase 96,190 shares of
common stock (which represents 5% of the number of the 1,923,809
shares common stock issued to the note holders on conversion), exercisable at
the price of $2.10 per share (i.e. the asset price at
which the notes converted assuming a public offering price of $6.00 per share).
Unlike the investor warrants, these warrants will not terminate but instead
become exercisable on conversion of the notes and consummation of this
offering. If the note conversion does not occur United Best will
receive a five-year warrant to purchase that number of shares of common stock
equal to 5% of the common stock underlying the warrants issued to the investors
in the private financing exercisable at the same price at which those investor
warrants are
Primary
Capital
Primary
Capital also provided financial services in connection with the private
placement and reverse merger.
Under
the terms of a financial services agreement between Primary Capital and the
Company, Primary Capital was paid a commission of $202,000 at the closing of the
February 2010 private financing. Primary Capital is also owed an additional
$75,000 for services rendered in connection with the private
placement. Primary Capital is also entitled to receive $15,000 on
completion of the offering and $15,000 for the next succeeding seven calendar
quarters for an aggregate amount of $120,000.
At the
closing of the financing, Primary Capital received 290,755 shares of our common
stock. Primary is also entitled to receive 265,186 shares of common
stock on the closing of this offering.
In
addition, for providing these financial services Primary Capital is
entitled to receive, on conversion of the notes issued to the investors in the
February 2010 private placement (which occurs upon consummation of this
offering), a five-year warrant to purchase 96,190 shares of common stock
(which represents 5% of the number of the 1,923,809 shares of common
stock issued to the noteholders on conversion), exercisable at $2.10 (which
equals the price at which the notes converted.) Unlike the investor
warrants, these warrants will not terminate but instead become exercisable upon
conversion of the notes and consummation of this offering. If the
note conversion does not occur, Primary Capital will receive a five-year warrant
to purchase that number of shares of common stock equal to 5% of the common
stock underlying the warrants issued to the investors in the private financing
exercisable at the same price at which those investor warrants are
exercisable.
II-3
Other
than the securities mentioned above, we have not issued or sold any securities
without registration within the past three years.
All of
the above issuances in connection with the February Private Placement were
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of ours or
our executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act.
Item
16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1
|
Form
of Underwriting Agreement (1)
|
|
3.1
|
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
the Annual Report of Form 10-K for the fiscal year ended September 30,
2010 filed on January 3, 2011.)
|
|
3.2
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Annual Report of Form 10-K for the fiscal year ended September 30, 2010
filed on January 3, 2011.)
|
|
4.1
|
Specimen
of common stock certificate (1)
|
|
4.2
|
Form
of Convertible Promissory Note (issued pursuant to Note Purchase
Agreement, dated as of February 12, 2010 between the Company and the
investors.) (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K filed on February 12, 2010)
|
|
4.3
|
Form
of Warrant (issued pursuant to Note Purchase Agreement, dated as of
February 12, 2010 between the Company and the investors.) (incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
4.4
|
Stock
Pledge Agreement, dated as of February 12, 2010, by and among the Company
and certain stockholders of the Company (incorporated by reference to
Exhibit 4.4 to the Current Report on Form 8-K filed on February 12,
2010)
|
|
4.5
|
Form
of Warrant to be issued to underwriter (1)
|
|
5.1
|
Legal
Opinion of Guzov Ofsink, LLC re legality of the common stock being
registered
|
|
10.1
|
Share
Exchange Agreement, dated as of February 12, 2010 between the Company,
Hong Hui and the former stockholders of Hong Hui. (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
10.2
|
Note
Purchase Agreement, dated as of February 12, 2010 between the Company and
the investors (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed on February 12, 2010)
|
|
10.3
|
Escrow
Agreement, dated as of February 12, 2010, by and between the Company, each
of the investors, and Interwest Transfer Agent , as escrow agent
(incorporated by reference to Exhibit 10.3 to the Current Report on Form
8-K filed on February 12, 2010)
|
|
10.4
|
Registration
Rights Agreement dated February 12, 2010, by and among the Company and the
Purchasers (incorporated by reference to Exhibit 10.6 to the Current
Report on Form 8-K filed on February 12, 2010)
|
|
10.5
|
Non
Recourse Guaranty Agreement dated as of February 12, 2010, by and among
the Company and certain stockholders of the Company (incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed on
February 12, 2010)
|
II-4
10.
6
|
Stock
Pledge Agreement dated as of February 12, 2010, by and among the Company,
certain stockholders of the Company and the collateral agent (incorporated
by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on
February 12, 2010)
|
|
10.7
|
Engagement
Letter Agreement, dated November 17, 2009, as amended, by and
between Foshan and Primary Capital LLC, as
amended (1)
|
|
10.8
|
Voting
Agreement dated as of February 12, 2010 by and among the Company, the
Investors, Bestyield Limited and Proudlead Limited (incorporated by
reference to Exhibit 10.7 to the Current Report on Form 8-K filed on
February 12, 2010).
|
|
10.9
|
Employment
Agreement dated as of November 20, 2008 by and between the Company and Ji
Lie (1)
|
|
10.10
|
Employment
Agreement dated as of November 20, 2008 by and between the Company and
Zeng Shijun (1)
|
|
10.11
|
Employment
Agreement dated as of January 1, 2010 by and between the Company and Law
Wawai. (1)
|
|
10.12
|
Financial
Services Agreement dated November 17, 2009, as amended, between United
Best and the Company (1)
|
|
10.13
|
Form
of Lock Up Agreement (1)
|
|
10.14
|
Independent
Director’s Agreement dated May 2010 between Richard
M. Cohen and the Company (1)
|
|
10.15
|
Loan
Agreement dated July 27, 2010 between Foshan City SLP Special Materials
Co., Ltd. and Foshan Nanhai Shishan Branch of China Agriculture Bank Stock
Co., Ltd. (1)
|
|
10.16
|
The
China SLP Filtration Technology, Inc. 2010 Stock Incentive
Plan (incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed on September 9,
2010)
|
|
10.17
|
Employment
Agreement dated August 11, 2010 between the Company and Eric Gan
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed on August 11, 2010)
|
|
10.18
|
Convertible
Note dated February 7, 2007 and conversion notice dated December 2008 by
and between Perpetual Technologies, Inc. and 1st Orion Corp.
(1)
|
|
10.19
|
Convertible
Note dated February 7, 2007 and conversion notice dated December 2008 by
and between Perpetual Technologies, Inc. and Lorikeet, Inc.
(1)
|
|
10.20
|
Letter
Agreement dated February 8, 2010 by and among the Company and Joseph
Nemelka, 1st
Orion Corporation and Lorikeet, Inc. (1)
|
|
10.21
|
Form
of Note Extension Agreement executed on January 31, 2011 by certain of the
note holders (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on February 2,
2011)
|
|
21.1
|
List
of Subsidiaries (1)
|
|
23.1
|
Consent
of Guzov Ofsink to the use of the opinion annexed as Exhibit 5.1
(contained in the opinion annexed as Exhibit 5.1)
|
|
23.2
|
Consent
of Child, Van Wagoner & Bradshaw, independent certified public
accountants, for use of their audit report relating to the financial
statements of China SLP Filtration Technology, Inc.
|
|
23.3
|
Consent
of Han Kun Law Firm
|
|
99.1
|
Stock
Purchase Agreement dated as of February 1, 2010 by and between Newise
Holdings Limited and Ming Liu (1)
|
|
99.2
|
Stock
Purchase Agreement dated as of February 1, 2010 by and between Newise
Holdings Limited and Primary Capital (1)
|
|
99.3
|
Stock
Sale Agreement dated as of December 27, 2008 by and
between Seth Winterton and Joseph Nemelka
(1)
|
(1)
Previously filed.
II-5
(b) Financial Statement
Schedules. None
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement(or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement;
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4) That,
for the purpose of determining liability of the undersigned registrant under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to the
purchaser:
i.
in any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule 424;
ii.
any free writing prospectus relating to the offering prepared by or on behalf of
the undersigned registrant or used or referred to by the undersigned
registrant;
iii. the
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
II-6
iv. any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(5) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in this registration statement, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) That,
for purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(7) That,
for purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time shall be deemed the
initial bona fide offering of those securities.
(8) For
the purpose of determining liability under the Securities Act to any purchaser,
the undersigned registrant undertakes that:
i. if
the undersigned registrant is relying on Rule 430B:
a.
each prospectus filed by the undersigned registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the date the
filed prospectus was deemed part of and included in the registration statement;
and
b.
each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule 430B relating
to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of providing the information required by section 10(a) of the Securities Act
shall be deemed to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an Underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date,
or
ii.
if the undersigned registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying
on Rule 430B or other than prospectuses filed in reliance
on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior
to such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
II-7
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned thereunto duly authorized in Foshan, PRC,
on February 18, 2011.
CHINA
SLP FILTRATION
TECHNOLOGY, INC.
|
|
/s/ Li Jie
|
|
By:
Li Jie
|
|
Chief
Executive Officer and a director
(principal
executive officer)
|
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 was signed by the following persons in the
capacities and on the dates indicated.
Name and Title
|
Date
|
|
/s/ Li Jie
|
February
18, 2011.
|
|
Li
Jie
Chief
Executive Officer and a director
(principal
executive officer)
|
||
/s/ Eric Gan
|
February
18, 2011.
|
|
Eric
Gan
Chief
Financial Officer
(principal financial officer
and accounting officer)
|
||
/s/ Li Jun
|
February
18, 2011.
|
|
Li
Jun
Director
|
||
/s/ Chris Bickel
|
February 18,
2011.
|
|
Chris
Bickel
Director
|
||
/s/ Richard M. Cohen
|
February
18, 2011.
|
|
Richard
M. Cohen
Director
|
||
/s/ Law Wawai
|
February
18, 2011.
|
|
Law
Wawai
President
of Sales and Director
|
||
/s/ Su Lei
|
February
18, 2011.
|
|
Su
Lei
Director
|
II-8