PERPETUAL TECHNOLOGIES, INC. - FORM 10-Q

Attached files

file	filename
EX-32 - PERPETUAL TECHNOLOGIES, INC.	v222628_ex32.htm
EX-31.2 - PERPETUAL TECHNOLOGIES, INC.	v222628_ex31-2.htm
EX-31.1 - PERPETUAL TECHNOLOGIES, INC.	v222628_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 000-53010

CHINA SLP FILTRATION TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		84-1465393
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

Shishan Industrial Park

Nanhai District, Foshan City, Guangdong Province, PRC

(Address of principal executive offices, Zip Code)

86-757-86683197

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 12, 2011 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		15,265,714

Quarterly Report on FORM 10-Q

Three Months and Six Months Ended March 31, 2011

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	24
ITEM 4.	CONTROLS AND PROCEDURES.	24

PART II
OTHER INFORMATION

ITEM 6.	EXHIBITS.	25

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

China SLP Filtration Technology, Inc.

Condensed Consolidated Financial Statements

Three months and six months ended March 31, 2011 and 2010

Index to Condensed Consolidated Financial Statements

	Page
Unaudited Condensed Consolidated Balance Sheets	4

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5

Unaudited Condensed Consolidated Statements of Cash Flows	6

Notes to Unaudited Consolidated Financial Statements	7

CHINA SLP FILTRATION TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Expressed in US dollars)

	March 31,		September 30,
	2011		2010
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	3,548,947	$	5,295,301
Accounts receivable - Net		3,206,644		2,207,073
Advance to suppliers		461,237		-
Inventory		2,073,068		1,564,537
Prepaid taxes		472,665		-
Prepaid expenses and other current assets		830,357		585,385
Total Current Assets		10,592,918		9,652,296

Deposits		8,061		4,906,370
Property and equipment - Net		16,790,642		10,961,234
Receivable from related party		36,777		-
Land use rights - Net		540,524		535,480
Total Assets	$	27,968,922	$	26,055,380

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term loan	$	3,511,397	$	3,796,053
Accounts payable and accrued liabilities		2,016,884		742,384
Customers’ deposits		158,710		286,700
Other payable - related party		164,134		160,673
Taxes payable		58,623		31,406
Warrants liabilities		592,276		739,000
Convertible notes payable, net of discount		3,887,453		3,225,007
Total Current Liabilities		10,389,477		8,981,223

Total Liabilities		10,389,477		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, 200,000,000 shares authorized, 15,265,714 shares issued and outstanding at March 31, 2011 and September 30, 2010		15,266		15,266
Additional paid-in capital		8,726,258		8,375,860
Retained earnings		6,406,864		6,721,609
Accumulated other comprehensive income		2,431,057		1,961,422
Total Stockholders’ Equity		17,579,445		17,074,157

Total Liabilities and Stockholders’ Equity	$	27,968,922	$	26,055,380

See accompanying notes to financial statements

CHINA SLP FILTRATION TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended						Six Months Ended
	March 31						March 31
	2011			2010			2011			2010
Net Sales	$	4,895,596		$	4,628,671		$	10,676,569		$	9,847,025
Cost of Sales		3,911,768			3,237,311			8,135,330			6,843,833
Gross Profit		983,828			1,391,360			2,541,239			3,003,192

Selling, General and Administration Expenses		989,685			557,461			1,802,321			812,138
Income (Loss) from Operations		(5,857	)		833,899			738,918			2,191,054

Other Income (Expense)
Interest Income		7,658			292			12,988			517
Interest Expense		(326,235	)		(390,355	)		(1,103,932	)		(452,387	)
Gain (Loss) on Disposal of Fixed Assets		-			496			(23,575	)		496
Government subsidy		-			-			6,133			-
Changes in Fair Value of Warrants		(44,276	)		-			146,724			-
Total Other Income (Expenses)		(362,853	)		(389,567	)		(961,662	)		(451,374	)
Income (Loss) before Income Taxes		(368,710	)		444,332			(222,744	)		1,739,680

Income Tax Provision		3,398			-			92,001			-
Net Income (Loss)	$	(372,108	)	$	444,332		$	(314,745	)	$	1,739,680

Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments		160,575			(23,939	)		469,635			(25,245	)
Total Comprehensive Income (Loss)	$	( 211,533	)	$	420,393		$	154,890		$	1,714,435

Net Income (Loss) Per Common Shares:
Basic and diluted	$	(0.02	)	$	0.03		$	(0.02	)	$	0.12
Weighted-Average Common Shares Outstanding:
Basic		15,265,714			14,897,143			15,265,714			14,701,547
Diluted		17,189,523			15,798,367			17,189,523			15,147,208

See accompanying notes to financial statements

CHINA SLP FILTRATION TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

	Six Months Ended March 31
	2011			2010

Cash Flow from Operating Activities:
Net income (loss)	$	(314,745	)	$	1,739,680
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
Depreciation		607,464			569,358
Amortization		6,420			6,217
Bad debt allowance		(7,425	)		-
Non-cash interest charges		762,447			304,950
Equity-based compensation expense		350,398			-
Change in warrants valuation		(146,724	)		-
Loss (gain) from disposal of fixed assets		23,576			(496	)

Change in operating assets and liabilities:
Accounts receivable		(934,606	)		(491,997	)
Advance to suppliers		(456,388	)		(656,586	)
Inventory		(469,846	)		173,173
Prepaid taxes		(467,695	)		-
Prepaid expenses and other current assets		(229,922	)		(143,956	)
Accounts payable & accrued liabilities		1,256,439			111,719
Customers deposits		(132,754	)		(75,069	)
Taxes payable		26,834			16,430
Net cash provided by (used in) operating activities		(126,527	)		1,553,423

Cash Flow from Investing Activities:
Addition-property and equipment, land use right		(1,218,056	)		(3,333	)
Deposits for purchase of equipment		-			(1,946,280	)
Proceeds from disposal of fixed assets		3,832			496
Proceeds from related party		-			559,535
Advance to related party		(36,390	)		-
Net cash (used in) provided by investing activities		(1,250,614	)		(1,389,582	)

Cash Flow from Financing Activities:
Repayment of loans		(7,764,702	)		(768,535	)
Proceeds from loans		7,402,148			3,404,798
Net cash provided by (used) in financing activities		(362,554	)		2,636,263

Effects of Exchange Rates on Cash		(6,659	)		(5,418	)
Net increase (decrease) in cash and cash equivalents		(1,746,354	)		2,794,686
Cash and cash equivalents, beginning of year		5,295,301			3,297,648

Cash and cash equivalents, end of year	$	3,548,947		$	6,092,334

Supplemental information of cash flows
Cash paid for interest	$	335,480		$	85,329
Cash paid for income taxes	$	52,166			-

See accompanying notes to financial statements

China SLP Filtration Technology, Inc.

Notes to Consolidated Financial Statements for the three months and the six months ended March 31, 2011

(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 a 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 March 31, 2011, the condensed consolidated statements of operations for the three months and the six months ended March 31, 2011 and 2010, and the condensed consolidated statements of cash flow for the six months ended March 31, 2011 and 2010 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.

Operating results for the three month period and the six month period ended March 31, 2011 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. 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.

	March 31,			September 30,
	2011			2010
Accounts receivable	$	3,223,870		$	2,231,281
Less: Allowance for doubtful accounts		(17,226	)		(24,208	)
Accounts receivable – Net	$	3,206,644		$	2,207,073

As of March 31, 2011 and September 30, 2010, the customer accounts receivable balance with significant percentage of the gross accounts receivable balance were as follows:

	March 31,			September 30,
	2011			2010
Customers:	Percentage			Percentage
A		19	%		28	%
B		14	%		6	%
C		12	%		5	%

Total		45	%		39	%

Three customers individually accounted for 10% or more of the total gross accounts receivable and together accounted for 45% of the total gross accounts receivable at March 31, 2011. As of September 30, 2010, one customer’s account receivable accounted for 10% or more, and combined with two other customers whose accounts receivable were below 10%, represented 39% of the total gross accounts receivable as of September 30, 2010.

5. Advances to Suppliers

As of March 31, 2011, 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.

6. Inventories

Inventory consisted of the following:

	March 31,		September 30,
	2011		2010
Raw materials	$	254,137	$	205,099
Work-in-process		11,919		39,828
Finished goods		1,807,012		1,319,610
	$	2,073,068	$	1,564,537

7. Property, Plant, and Equipment

Property, plant and equipment are 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:

	March 31,			September 30,
	2011			2010
Building and plant	$	2,827,505		$	2,767,897
Machinery		12,028,668			11,697,862
Office and other equipment		804,194			787,240
Vehicles		145,647			142,576
Construction in progress		7,323,934			1,173,702
		23,129,948			16,569,277
Less:
Accumulated depreciation		(6,339,306	)		(5,608,043	)
	$	16,790,642		$	10,961,234

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 months ended March 31, 2011, depreciation expense of $288,190 was included in cost of sales and $16,946 was included in selling, marketing, and administrative expenses, for a total of $305,136.

For the three months ended March 31, 2010, depreciation expense of $271,848 was included in cost of sales and $16,285 was included in selling, marketing, and administrative expenses, for a total of $288,133.

For the six months ended March 31, 2011, depreciation expense of $573,732 was included in cost of sales and $33,732 was included in selling, marketing, and administrative expenses, for a total of $607,464.

For the six months ended March 31, 2010, depreciation expense of $536,787 was included in cost of sales and $32,571 was included in selling, marketing, and administrative expenses, for a total of $569,358.

8. Deposits

Deposits consisted of payments made to suppliers for equipment to be received.

9. Land Use Rights

Land use rights are amortized over a lease term of 50 years.

	March 31,			September 30,
	2011			2010
Land use rights	$	648,833		$	635,154
Less:
Accumulated amortization		(108,309	)		(99,674	)
	$	540,524		$	535,480

Change in cost of the land use rights from September 30, 2010 to March 31, 2011 reflects the effect of changes in foreign currency exchange rate.

10. Short-term Loans:

The Company repaid a short-term loan in amount of $3,029,247 (RMB 20,000,000) to Agricultural Bank of China, Foshan Branch on February 14, 2011. On February 16, 2011, the Company obtained a short-term loan of $3,511,397 (RMB 23,000,000) from Industrial and Commercial Bank of China, Foshan Branch and the loan is due on February 14, 2012. The interest on the outstanding balance is payable every month at an annual rate of 6.969% fixed for periods. After the six month period, a new rate will be set at 115% of the prime rate from People’s Central Bank of China.

11. Other payable to related party:

Other payable to related party consisted of the Company’s borrowing from its CEO. This loan is non-interest bearing and is repayable on demand.

12. Convertible Note Payable

On January 31, 2011, the Company entered into an agreement with its convertible notes holders to extend the maturity date of the notes from February 11, 2011 to June 30, 2011, except for one note holder to which the Company repaid the principal amount of $100,000 plus interest when the notes matured on February 11, 2011 under its original terms.

Except for the term of maturity, the notes extension agreement carries the same terms as those of the original notes purchase agreement as follows:

Maturity: The notes mature on June 30, 2011 days. 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 $99,616 was recorded and paid for the quarter ended March 31, 2011.

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, the Company recorded interest expense for amortization of the debt discount resulted from finance cost and warrants liabilities in conjunction with the issuance of the notes to accrete the notes to its principal balance of $4,040,000 at the due date on June 30, 2011. Interest expense for this accretion amounted to $152,547 for the three months ended March 31, 2011 and $762,447 for the six months ended March 31, 2011.

Allocation of the proceeds received from the issuance of the notes:

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 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 March 31, 2011, after a note discount amortization of $2,287,197, net convertible notes payable was accreted to $3,887,453.

13. 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 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 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 with 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.

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 March 31, 2011, these warrants were re-valued at $592,276 based on revaluation of factors including the probability of the these warrants to be voided, the probability of the warrants to be in-the-money, changes in expected volatility, and the remaining life of these warrants. The revaluation inputs are provided in the table as follows:

	As of
	March 31,
Attribute	2011
Warrants Outstanding		1,670,823	(*)
Stock Market Price	$	6
Exercise Price	$	6
Risk-free Interest Rate, Year 1		0.3	%
Risk-free Interest Rate, Year 2		0.8	%
Risk-free Interest Rate, Year 3		1.29	%
Risk-free Interest Rate, Year 4		2.4	%
Estimated Volatility		72	%
Expected Dividend Yield		0	%
Options Life (years)		3.87

(*) Warrants outstanding as of March 31, 2011 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 March 31, 2011	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. 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:

	As of
	September 10,
Attribute	2010
Stock Market Price	$	6
Exercise Price	$	6
Risk-free Interest Rate		0.27	%
Estimated Volatility		75	%
Expected Dividend Yield		0
Options 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.

The following table summarizes the activities for the 2010 Plan for the three month period ended March 31, 2011:

	Number				Remaining
	of Shares		Exercise Price		Contractual Life
Options outstanding as of September 30, 2010		400,000	$	6		4.8
Granted		-
Forfeiture		-
As of March 31, 2011		400,000	$	6		4.3
Requisite Service Periods Lapsed (months)		8
Vested and exercisable as of March 31, 2011		106,521	$	6		4.3

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 March 31, 2011, shares of 17,507 were not subject to forfeiture, of which 4,986 and 2,466 shares were recognized as shared-based compensation expense at an estimated fair market value of $6 per share for the six months and three months ended March 31, 2011.

Total stock-based expense was recorded for the six months and six months ended March 31, 2011 as follows:

	Three months ended		Six months ended
	March 31, 2011		March 31,2011
Vested options	$	136,206	$	320,480
Restricted stock	$	14,796	$	29,918
	$	151,002	$	350,398

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 earnings per share for the three months and six months ended March 31, 2011 is anti-dilutive.

	Three Months Ended					Six Months Ended
	March 31,			March 31,		March 31,			March 31,
	2011			2010		2011			2010
Net Income (Loss)
(numerator for basic net income (loss) per share)	$	(372,108	)	$	444,332	$	(314,745	)	$	1,739,680
Plus interest on convertible note		196,822			356,700		1,009,275			356,700
Net Income (loss) - assumed conversions
(numerator for diluted net income (loss) per share)	$	(175,286	)	$	801,032	$	694,530		$	2,096,380

Weighted average common shares
(denominator for basic net income (loss) per share)		15,265,714			14,897,143		15,265,714			14,701,547

Effect of dilutive securities:
Warrants - treasury stock method		-			-		-			-
Convertible notes as if-converted method		1,923,809			901,224		1,923,809			445,661
Weighted average common shares
(denominator for diluted income (loss) per share)		17,189,523			15,798,367		17,189,523			15,147,208

Basic net income (loss) per share	$	(0.02	)	$	0.03	$	(0.02	)	$	0.12
Diluted net income (loss) per share are the same as basic net income (loss) per share as results would be anti-dilutive	$	(0.02	)	$	0.03	$	(0.02	)	$	0.12

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 March 31, 2011 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 $3,398 and $92,001 for the three months and six months ended March 31, 2011, respectively, and $0 for the same periods ended March 31, 2010. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 and March 31, 2010, 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 March 31, 2011. 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 March 31, 2011 and 2010.

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 and six months ended March 31, 2011 for the followings reasons:

	Three Months					Six Months
	Ended March 31,					Ended March 31,
	2011			2010		2011			2010
Income (loss) before income taxes	$	(368,710	)		444,332	$	(222,744	)		1,739,680
Temporary difference:
Write-off for bad debt					-		(7,372	)		-
Permanent difference:
Undeductible interest expense		152,547			-		762,447			-
Undeductible expense from valuation adjustment for warrants		44,276			-		(146,724	)		-
Undeductible stock-based compensation		199,069			-		350,398			-
Adjusted taxable income	$	27,182			-	$	736,005			-
Income tax rate at 12.5% and zero in 2010 and 2009		12.5	%		-		12.5	%		-
Income tax expense	$	3,398			-	$	92,001			-

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 March 31, 2011 and 2010.

17. Recent accounting pronouncements

Recently, the following accounting standards or amendments to existing standards have been issued and communicated through the following FASB Accounting Standards Updates (ASU):

ASU No. 2011-03 - Transfers and Servicing (ASC Topic 860): Reconsideration of Effective Control for Repurchase Agreements.

ASU No. 2011-02 - Receivables (ASC Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.

ASU No. 2011-01 – Receivables (ASC Topic 310): Deferral of the Effective Date of Disclosure about Troubled

Debt Restructurings in Update No. 2010-20.

ASU No. 2010-29 - Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.

ASU No. 2010-28 - Intangibles—Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.

ASU No. 2010-26 - Financial Services—Insurance (ASC Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.

After evaluation of the above standards, management concluded they are not applicable to the Company’s financial accounting and reporting, and, if adopted, there would be no significant effect on the Company’s financial statements.

18. Subsequent Events

We have evaluated subsequent events from the balance sheet date up to when the financial statements are issued.

In April 2011, the Company completed its capital project to build a new manufacturing facility to make Polypheneyplene Sulfide (PPS) non-woven fabrics directly from PPS resin using spun-bonded and needle-punched method. This facility can make filament (long fiber) non-woven PPS fabrics 2.6 meter wide with an annual capacity of 1,200 tons. Addition of this production line marks a milestone to the Company as the sale of PPS products will have a significant impact on the Company’s revenue growth and profitability.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward-Looking Statements

This report 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. Forward-looking statements involve risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historical or current facts. 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.” 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 report 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. 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.

Introduction

This section discusses and analyzes the results of operations and financial condition of China SLP Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc., (“we,” “us,” or the “Company”) which is the ultimate parent company of Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a China-based operating company located in Foshan, Guangdong Province in the People’s Republic of China.

On February 12, 2010, we acquired control of Foshan in a share exchange transaction which closed on that date.

In the share exchange or “reverse merger” we acquired control of Hong Hui Holdings Limited (“Hong Hui”), a British Virgin Islands company and the owner of all of the stock of Technic International Limited (“Technic”), a Hong Kong holding company which in turn is the owner of all of the equity of Foshan, 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.

The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible has been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination. Beginning from February 12, 2010, the operating results of Foshan are consolidated in the Company’s financial results for that period.

Foshan is engaged in the manufacture and sale of nonwovens.

Nonwoven fabrics are broadly defined as sheet or web structures bonded together by entangling fiber or filaments (and by perforating films) mechanically, thermally or chemically. They are flat, porous sheets that are made directly from separate fibers or from molten plastic or plastic film. They are not made by weaving or knitting and do not require converting the fibers to yarn.

Our major market is the Chinese market. We sell products to industrial customers in China. In recent years, our products have been successfully launched in the European, North American and South East Asian markets.

Currently, our major products are spun-bond, thermal calendaring and needle-punched industrial non-woven PET (polyester) and PPS (polypropylene) fabrics. These products are used as filtration media and infrastructure engineering material, among other uses.

We currently operate three spun-bond production lines. Two lines are spun-bond, thermal calendaring production lines with a total annual capacity of 4,000 tons of spun-bond polyester filament thermal calendaring non-woven. In February 2009, we added the third line, spun-bond needle-punching production line with an annual capacity of 4,000 tons of spun-bond polyester filament, needle-punched non-woven fabric.

We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture polyphenylene sulfide fiber, or PPS, a specialized type of high temperature resistant non-woven fabric and intend to begin commercial production of PPS using our proprietary manufacturing process in 2011.

We have applied for a process patent in the PRC for this process (Patent No. PRC: 201010102660.2) and we intend to apply for a process patent in North America and Europe. In comparison to other filtration materials currently available, we believe that our non-woven fabric will be stronger, have lower production and operating costs, and will have higher filtration efficiency. Although our PPS product has been tested in laboratories, prototype bag filters made of our product 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 commencing 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.

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.

On February 12, 2010, immediately following the reverse merger, 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 (which are exercisable only in certain circumstances), with net proceeds of $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum.

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 holds 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. We repaid Lumen Capital the principal amount of $100,000 on February 11, 2011.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. 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 condensed consolidated interim financial statements for the three months and six months ended March 31, 2011.

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

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 report.

	Three Months Ended
	March 31
	2011					2010
Net Sales	$	4,895,596		100	%	$	4,628,671		100	%
Cost of Sales		3,911,768		80	%		3,237,311		70	%
Gross Profit		983,828		20	%		1,391,360		30	%
Selling, General and Administration expenses		989,685		20	%		557,461		12	%
Income (Loss) from Operations		(5,857	)	0	%		833,899		18	%

Other income (expense)
Interest Income		7,658		0	%		292		0	%
Interest Expense		(326,235	)	-7	%		(390,355	)	-8	%
Gain (Loss) from Disposal of Fixed Assets		-		-			496		-
Changes in Fair Value of Warrants		(44,276	)	-1	%		-		0	%
Total other income (expenses)		(362,853	)	-7	%		(389,567	)	-8	%
Income (Loss) before Income Taxes		(368,710	)	-8	%		444,332		10	%
Income tax provision		3,398					-
Net Income (Loss)	$	(372,108	)	-8	%	$	444,332		10	%

Net Sales

Net sales consisted of revenue from sales of needle punched nonwoven product and thermal calendared products. Our net sales for the three month period ended March 31, 2011 were $4,895,596, an increase of $266,925, or 6%, from $4,628,671 for the same period of the prior year. The increase in revenue was primarily attributable to the appreciation of Renminbi, our transaction currency against the US dollars, our reporting currency. Reflected in the transaction currency, our net sales increased by 2% from the quarter ended March 31, 2010.

For the three month period ended March 31, 2011, sales of thermal calendared products increased by $112,482, or 4%, from the same period of the prior year. An increase of $403,038 in thermal calendared products in domestic market was offset by a decrease of $290,556 in international sales.

International sales of needle-punched products increased by $156,673 and domestic sales slightly decreased by $2,230.

Cost of Sales

Cost of sales principally consists of the cost of raw materials, labor and manufacturing overhead expenses.

Cost of sales for the three month period ended March 31, 2011 was $3,911,768, an increase of $674,457, or 21%, from $3,237,311 for the same period in 2010.

Raw material cost increased to 70% of net sales for the three month period ended March 31, 2011, compared to 52% of net sales for the same period of the prior year, reflecting more expensive raw materials associated with sales. Over 98% percent of our raw materials consist of polyester, the price of which fluctuates with the price of oil. Recent surge in the price of crude oil adversely affected the purchase price of polyester resin chips, our main raw material. During the three month period ended March 31, 2011, our cost of raw materials increased 20% from the same period of the prior year. The increase of our cost of sales was due principally from the increase in the cost of raw materials.

Labor cost accounted for 1% of net sales for the three month period ended March 31, 2011, the same level as the same period in 2009.

Overhead expenses were 14% of net sales for the three month period ended March 31, 2011, compared to 11% of net sales for the same period in 2010. As a percentage of net sales, overhead expenses increased due to lower capacity utilization and lower production volume, compared to the same period in 2010.

Gross Profit

Gross profit represents net sales less cost of sales. Gross profit for the three month period ended March 31, 2011 was $983,828, a decrease of $407,532, or 29%, from $1,391,360 for the same period in 2010. As a percentage of net sales, gross profit was 20% for the three month period ended March 31, 2011, compared to 30% 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.

Selling, general and administrative expenses for the three month period ended March 31, 2011 were $989,685, an increase of $432,224, or 78%, compared to $557,461 for the same period in 2010. The increase primarily consisted of $132,120 in legal counsel and documentation fees related to the Company’s intended initial public offering, investor relation consulting fees of $70,500, fees paid to our auditors of $89,545, and $151,329 in stock-based employee compensation, offset by a decrease in administrative expenses.

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 March 31, 2011 was $326,235 compared to $390,355 for the same period in 2009. Interest expense as a percentage of sales decreased to 7% for the three month period ended March 31, 2011, from 8% for the same period of the prior year. The extension of the maturity date of the convertible notes helped reduce interest expense by decreasing accretion of the notes discount to the principal amount at the notes maturity date.

At March 31, 2011, 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 an increase of the fair value of the warrants from December 31, 2010 and accordingly an increase of the value of the warrants liabilities and reported as other expense in amount of $44,276.

Income Tax

USA

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.

The current year tax provision was $3,398 for the three months ended March 31, 2011. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 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 (Loss) Income

Our operations resulted in net loss for the three months ended March 31, 2011 in amount of $372,108, compared with a net income of $444,332 for the three months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in connection with the Company’s intended initial public offering and bridge financing.

Six Month Period Ended March 31, 2011 compared to Six Month Period Ended March 31, 2010

	Six Months Ended
	March 31
	2011					2010
Net Sales	$	10,676,569		100	%	$	9,847,025		100	%
Cost of Sales		8,135,330		76	%		6,843,833		70	%
Gross Profit		2,541,239		24	%		3,003,192		30	%
Selling, General and Administration expenses		1,802,321		17	%		812,138		8	%
Income from Operations		738,918		7	%		2,191,054		22	%

Other income (expense)
Interest Income		12,988		0	%		517		0	%
Interest Expense		(1,103,932	)	-10	%		(452,387	)	-5	%
Gain (Loss) from Disposal of Fixed Assets		(23,575	)	0	%		496		0	%
Government subsidy		6,133		-			-		-
Changes in Fair Value of Warrants		146,724		1	%		-		0	%
Total other income (expenses)		(961,662	)	-9	%		(451,374	)	-5	%
Income (Loss) before Income Taxes		(222,744	)	-2	%		1,739,680		18	%
Income tax provision		92,001					-
Net Income (Loss)	$	(314,745	)	-3	%	$	1,739,680		18	%

Net Sales

Net sales for the six month period ended March 31, 2011 were $10,676,569, an increase of $829,544 or 8%, from $9,847,025 for the same period of prior year. Sales of thermal calendared products for the six month period ended March 31, 2011 were $6,202,228, an increase of $642,863 compared to $5,559,365 for the same period of the prior year. Sales of needle-punched products for the six month period ended March 31, 2011 were $4,474,341 compared to $4,300,022 for the same period of the prior year. Appreciation of Renminbi, our transaction currency, against the US dollars, contributed 3% of the increase in net sales revenue for the six months ended March 31, 2011.

Cost of Sales

Cost of sales for the six month period ended March 31, 2011 was $8,135,330, an increase of $1,291,497, or 19%, from $6,843,833 for the same period of the prior year. As a percentage of net sales, cost of sales was 76% for the six month period ended March 31, 2011 compared to 70% for the same period in 2009.

Raw material costs increased to 64% of the sales for the six month period ended March 31, 2011, compared to 56% of sales for the same period in 2010, reflecting more expensive raw materials associated with 2011 sales. Over 98% of our raw materials consist of polyester, the price of which fluctuates with the price of oil.

Labor costs were 1% of net sales for the six month period ended March 31, 2011, and remained the same percentage when compared to the percentage for the same period in 2010.

Overhead expenses were 14% of net sales for the six month period ended March 31, 2011, compared to 12% of net sales for the same period last year due to increase in utility cost and depreciation expense.

Gross Profit

Gross profit for the six month period ended March 31, 2011 was $2,541,239, a decrease of $461,953, or 15%, from $3,003,192 for the same period of the prior year. As a percentage of net sales, gross profit was 24% for the six month period ended March 31, 2010, compared to 30% for the same period last year. This decrease was primarily due to increase in the purchase price of the raw materials associated with 2011 sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six month period ended March 31, 2011 were $1,802,321, an increase of $990,183, or 122%, compared to $812,138 for the same period of the prior year. This increase was mainly due to an increase in audit fees of $115,824, legal counsel fees of $177,096, investor relation consulting fees of $141,000, $350,398 in equity-based compensation expense, $18,449 SEC filing related expenses, and foreign currency exchange loss of $103,029.

Other Expenses

Interest expense for the six month period ended March 31, 2010 was $1,103,932 compared to $452,387 for the same period of the prior year. Interest expense as a percentage of net sales increased to 10% for the six month period ended March 31, 2011 from 5% for the same period of the prior year. The increase in interest expense for the six months ended March 31, 2011 was principally due to the amortization of the convertible note discount.

Net (Loss) Income

Our operations resulted in net loss for the six months ended March 31, 2011 in amount of $314,745, compared with a net income of $1,739,680 for the six months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in connection with the Company’s intended initial public offering and bridge borrowings.

Liquidity and Capital Resources

The following table sets forth a summary of our net cash flow information for the periods indicated:

	Three Month Periods Ended December 31,
	2011			2010
	(Consolidated)			(Consolidated)
Net cash provided by (used in) operating activities	$	(126,527	)	$	1,553,423
Net cash (used in) investing activities	$	(1,250,614	)	$	(1,389,582	)
Net cash provided by (used in) financing activities	$	(362,554	)	$	2,636,263
Effect of currency exchange rate	$	(6,659	)	$	(5,418	)
Net cash inflow (outflow)	$	(1,746,354	)	$	2,794,686

We finance our legacy 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.

The planned production of our new PPS products will require a large amount of working capital to purchase expensive raw materials from foreign suppliers. Our operating cash inflow will not be adequate to meet the new working capital needs. Therefore, we are actively seeking public and private financing to acquire additional capital in order to expand our business.

At March 31, 2011, we had outstanding bank loans in the total amount of $3.5 million (RMB 23 million) with Industrial and Commercial Bank of China, Foshan branch office. The loan is repayable on February 14, 2012.

On January 31, 2011, we entered into a note extension agreement 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. The proceeds received from the sale of the notes were invested in the manufacturing facility to make our new products.

Cash Flow from Operating Activities

Net cash used in operating activities for the six months ended March 31, 2011 was $126,527, compared to $1.5 million provided by operating activities for the same period of the prior year. The operating cash outflow resulted primarily from a decrease in net income and an increase in accounts receivable, advances to suppliers, and inventory, which were offset by an increase in accounts payable and accrued liabilities.

Cash Flow from Investing Activities

Net cash used by investing activities for the six months ended March 31, 2011was $1.25 million, compared to $1.4 million used for the same period of the prior year. The cash used by investing activities during the six month period ended March 31, 2011 was primarily for the capital project to build up a new PPS manufacturing facility.

Cash Flow from Financing Activities

Net cash used in financing activities for the six months ended March 31, 2011was $0.36 million, compared to $2.64 million of net cash provided by financing activities for the same period of the prior year. During the six months ended March 31, 2011, the Company repaid more than borrowed from banks. The new loan obtained from Industrial and Commercial Bank of China was mainly used to pay off the loan from Agriculture Bank of China.

Future Cash Commitments

We have an ambitious business expansion plan for our PPS products. The PPS projects require significant capital expenditures. We financed the capital expenditures with short-term loans from banks and intended public equity offerings to raise additional capital to fund our capital projects. In addition, the planned launch of sales of PPS products will require a significant amount of working capital to purchase expensive raw materials. The new need of additional working capital will be met through private and public equity financing.

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 3 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 of 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.

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 a lease term of 50 years using the straight-line method.

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:

Buildings		20 years
Machinery and equipment		10 years
Office equipment		5 years
Motor 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.

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.

ITEM 3.

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 will 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 from suppliers located 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, after introduction of our PPS products, a significant amount of our raw materials will be purchased from suppliers in the United States and Japan through their distributors in China. 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.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that is required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Jie Li, our Chief Executive Officer and Mr. Eric Gan our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on that evaluation, Mr. Li and Mr. Gan concluded that as of March 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective in that certain “significant deficiencies” existed related to (i) the U.S. GAAP expertise of our internal accounting staff, and (ii) our internal audit function.

Changes in Internal Control over Financial Reporting.

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we identified a number of “significant deficiencies” in the process of preparing our financial statements for the quarter ended March 31, 2011 as described above.

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 and the SEC regulations. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.

In order to correct the foregoing significant deficiencies, we have taken the following remediation measures:

We have arranged for necessary training for our accounting department staff;

We plan to engage external professional accounting and consultancy firms to assist us in the preparation of the US GAAP accounts; and

We remain committed to the establishment of effective internal audit functions.

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

PART II

OTHER INFORMATION

ITEM 6.

EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA SLP FILTRATION TECHNOLOGY, INC.

Dated: May 18, 2011	By:	/s/ Jie Li
		Jie Li
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Eric Gan
		Eric Gan
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications of Principal Executive Officer and Principal Accounting Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

PERPETUAL TECHNOLOGIES, INC. - FORM 10-Q - May 16, 2011

Attached files

PERPETUAL TECHNOLOGIES, INC. Reports