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

FORM 10−QQ/A
(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2010March 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 90-047505884-1465393
(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 22) 757-8668319786-757-86683197
(Registrant’s telephone number, including area code)

China Filtration Technology, Inc.
(Former  (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    o¨

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 August 15, 2010May 12, 2011 is as follows:
 
Class of Securities Shares Outstanding
Common Stock, $0.001 par value 15,235,71415,265,714

 
 
 

Quarterly Report on FORM 10-Q
 
Three Months and Nine MonthSix Months Ended June 30, 2010March 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.2524
ITEM 4.CONTROLS AND PROCEDURES.2524
   
PART II
OTHER INFORMATION 
   
ITEM 1.LEGAL PROCEEDINGS.26
ITEM 6.EXHIBITS.2625

 
2
 
 
PART I
FINANCIAL INFORMATION

EXPLANATORY NOTE
This amendment is being filed to correct the date in the signature page and the certifications to May 16, 2011.
ITEM 1.
ITEM 1.   FINANCIAL STATEMENTS.

China SLP Filtration Technology, Inc.
Condensed Consolidated Financial Statements
Three months and Nine Monthssix months ended June 30,March 31, 2011 and 2010 and 2009

Index to Condensed Consolidated Financial Statements

 Page
Unaudited Condensed Consolidated Balance Sheets4
  
Unaudited Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss)5
  
Unaudited Condensed Consolidated Statements of Cash Flows6
  
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity7
Notes to Unaudited Consolidated Financial Statements87

 
3
 

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 
  June 30,  September 30, 
  2010  2009 
  (Unaudited)    
       
Current Assets      
Cash and cash equivalents $6,333,417  $3,297,648 
Accounts receivable – Net  2,258,662   1,424,835 
Advance to suppliers  453,174   685,551 
Inventory  1,490,078   1,197,289 
Prepaid expenses and other current assets  279,595   45,656 
Total Current Assets  10,814,926   6,650,979 
         
Deposits  2,193,202   - 
Property and equipment – Net  11,032,609   10,711,865 
Receivable from related party  1,111   773,672 
Land use rights – Net  531,506   537,350 
Total Assets $24,573,354  $18,673,866 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Current Liabilities        
Short term loan $3,833,994  $4,578,409 
Accounts payable and accrued liabilities  696,703   410,114 
Client's deposits  -   75,176 
Taxes payable  9,378   726 
Warrants liabilities  690,000   - 
Convertible notes payable $4,140,000, net of discount  2,615,107   - 
         
Total Current Liabilities  7,845,182   5,064,425 
         
Total Liabilities  7,845,182   5,064,425 
Shareholder's Equity        
         
Preferred stock, $0.001 par value, 10,000,000 shares authorized, o shares issued and outstanding  -   - 
Common stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and 14,510,204 shares issued and outstanding at June 30, 2010 and September 30, 2009  15,236   14,510 
Additional paid-in capital  8,205,582   7,548,752 
Retained earnings  6,824,980   4,500,532 
Accumulated other comprehensive income  1,682,374   1,545,647 
Total Shareholders' Equity  16,728,172   13,609,441 
         
Total Liabilities and Shareholder's Equity $24,573,354  $18,673,866 

See accompanying notes to financial statements

 
4
 

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 
  Three Months Ended  Nine Months Ended 
  June 30  June 30 
  2010  2009  2010  2009 
Net Sales $5,072,791  $2,482,212  $14,919,816  $7,023,045 
Cost of Sales  3,537,571   1,779,328   10,381,404   4,685,730 
Gross Profit  1,535,220   702,884   4,538,412   2,337,315 
                 
Selling, General and Administrative Expenses  701,436   266,101   1,363,574   1,024,543 
Income from Operations  833,784   436,783   3,174,838   1,312,772 
                 
Other Income (expense)                
Interest Income  10,106   2,104   10,623   2,104 
Interest Expense  (764,794)  (65,162)  (1,216,685)  (225,668)
Loss on disposal of fixed assets  -   (16,263)  -   - 
Changes in Fair Value of Warrants  362,000   -   362,000   - 
Total Other Income (expenses)  (392,688)  (79,321)  (844,062)  (223,564)
Income before IncomeTaxes  441,096   357,462   2,330,776   1,089,208 
Income Tax Provision  6,328   -   6,328   - 
Net Income $434,768  $357,462  $2,324,448  $1,089,208 
                 
Other Comprehensive Income                
Foreign Currency Translation Adjustments  161,972   24,560   136,727   (66,276)
Total Comprehensive Income $596,740  $382,022  $2,461,175  $1,022,932 
                 
Net Income Per Common Shares:                
Basic and Diluted $0.03  $0.02  $0.16  $0.08 
Weighted-Average Common Shares Outstanding:                
Basic  15,235,714   14,510,204   14,879,603   14,510,204 
Diluted  16,925,510   14,510,204   15,739,975   14,510,204 

See accompanying notes to financial statements

 
5
 

CHINA SLP FILTRATION TECHNOLOGY, INC.
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)

 Nine Months Ended June 30  Six Months Ended March 31 
 2010  2009  2011  2010 
            
Cash Flow from Operating Activities:            
Net income $2,324,448  $1,089,208 
Adjustments to reconcile net income to net cash      
flow provided by (used in) 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 864,016  632,799   607,464   569,358 
Amortization 9,339  9,342   6,420   6,217 
Changes in fair value of warrants (362,000) - 
Bad debt allowance  (7,425)  - 
Non-cash interest charges 914,850       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 (832,721) (561,041)  (934,606)  (491,997)
Allowance for doubtful accounts 13,743     
Advance to suppliers 235,358  (34,311)  (456,388)  (656,586)
Inventory (282,992) (525,210)  (469,846)  173,173 
Prepaid taxes  (467,695)  - 
Prepaid expenses and other current assets (232,102) (131,539)  (229,922)  (143,956)
Accounts payable & accrued liabilities 282,009  (610,775)  1,256,439   111,719 
Clients' deposits (75,176) (93,457)
Customers deposits  (132,754)  (75,069)
Taxes payable  1,357   (8,949)  26,834   16,430 
Net cash provided by (used in) operating activities  2,860,129  (233,933)  (126,527)  1,553,423 
                
Cash Flow from Investing Activities:              
Addition-property, equipment, and land use rights (1,105,084) (844,747)
Addition-property and equipment, land use right  (1,218,056)  (3,333)
Deposits for purchase of equipment (2,178,792) -   -   (1,946,280)
Proceeds from related party receivable  772,573   735,878 
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 (2,511,303) (108,869)  (1,250,614)  (1,389,582)
                
Cash Flow from Financing Activities:              
Repayment of loans (769,631)  (5,172,817)  (7,764,702)  (768,535)
Proceeds from loans  -   4,974,197   7,402,148   3,404,798 
Proceeds from notes issued  3,404,798   - 
Net cash provided by (used) in financing activities  2,635,167   (198,620)  (362,554)  2,636,263 
                
Effects of Exchange Rates on Cash  51,776   (14,504)  (6,659)  (5,418)
Net increase (decrease) in cash and cash equivalents 3,035,769  (555,926)  (1,746,354)  2,794,686 
      
Cash and cash equivalents, beginning of year 3,297,648  2,367,570   5,295,301   3,297,648 
                
Cash and cash equivalents, end of year $6,333,417  $1,811,644  $3,548,947  $6,092,334 
              
Supplemental information of cash flows                
Cash paid for interest $298,270  $216,705  $335,480  $85,329 
Cash paid for income taxes $-  $-  $52,166   - 

See accompanying notes to financial statements

 
6
 

CHINA SLP FILTRATION TECHNOLOGY, INC.
Condensed 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           - 
                         
Shares issued to placement agents in conjunction with convertible note  653,510   654   656,902       -   657,556 
Net Income  -   -   -   2,324,448       2,324,448 
                         
Currency translation adjustment  -   -   -   -   136,727   136,727 
                         
BALANCE, June 30, 2010 - UNAUDITED  15,235,714  $15,236  $8,205,582  $6,824,980  $1,682,374  $16,728,172 

See accompanying notes to financial statements

7
 
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the ninethree months and the six months ended June 30, 2010March 31, 2011
(Unaudited - - Expressedexpressed in US dollars)dollars except indicated otherwise)      
 
1.Nature of Business and Organization History:
1.  Nature of Business and Organization History
 
China SLP Filtration Technology, Inc., formerly named Perpetual Technologies, Inc. (the “Company”, or ”We”“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, a Hong Kong company. On formation, each shareholder transferred theirits 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 ownsowned a 100% equity interest ofin 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 thea 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 bewas 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 operation of Foshan, we engage in manufacturing, marketingmanufacture, market and sale, research and development of polyester spun-bondedsell nonwoven fabrics polyester needle-punch nonwovens, spun-laced nonwovens, polylactic acid nonwovens,in China.
2.  Basis of Presentation and special functions nonwovens ( flame retardant, anti-static, oil & water repellent, etc).

2.Basis of Presentation and Principles of Consolidation:
Principles of Consolidation

The accompanying condensed consolidated balance sheet as of June 30, 2010,March 31, 2011, the condensed consolidated statements of operations for the ninethree months and the six months ended June 30,March 31, 2011 and 2010, and 2009, and the condensed consolidated statements of cash flow for the ninesix months ended June 30,March 31, 2011 and 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 as 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, 2009.2010.

 
87
 

Operating results for the ninethree month period and the six month period ended June 30, 2010March 31, 2011 are not necessarily indicative of the results that may be expected for the full year ending September 30, 20102011, or for any other period.

3.Summary of Significant Accounting Policies:
3.  Summary of Significant Accounting Policies

These interim consolidated financial statements follow the same accounting policies and methods of application as the Company'sCompany’s most recent annual financial statements.

4.  Accounts Receivable: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.

 June 30,  
September
30,
  March 31,  September 30, 
 2010  2009  2011  2010 
Accounts receivable $2,309,626  $1,461,721  $3,223,870  $2,231,281 
Less: Allowance for doubtful accounts  (50,964)  (36,886)  (17,226)  (24,208)
Accounts receivable – Net $2,258,662  $1,424,835  $3,206,644  $2,207,073 

As of June 30, 2010March 31, 2011 and September 30, 2009,2010, the customer accounts receivable balances exceeding 10%balance with significant percentage of the gross accounts receivable balance arewere as follows:

 June 30,  
September
30,
   March 31,  September 30, 
 2010  2009   2011  2010 
Customers: Percentage  Percentage   Percentage  Percentage 
A  23%  30%   19%  28%
B  13%  13%   14%  6%
C  10%  13%   12%  5%
         
Total  46%  56%   45%  39%

Three customers individually accounted for 10% or more of the total gross accounts receivable and together accounted for 46% and 56%45% of the total gross accounts receivable at JuneMarch 31, 2011. As of September 30, 2010, one customer’s account receivable accounted for 10% or more, and 2009.combined with two other customers whose accounts receivable were below 10%, represented 39% of the total gross accounts receivable as of September 30, 2010.


8
5.Advances to Suppliers:

5.  Advances to Suppliers
As of June 30, 2010 and September 30, 2009,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:
6.  Inventories

Inventory consisted of the following:

 June 30,  
September
30,
  March 31,  September 30, 
 2010  2009  2011  2010 
Raw materials $281,146  $40,126  $254,137  $205,099 
Work in progress  63,226   50,443 
Work-in-process  11,919   39,828 
Finished goods  1,145,706   1,106,720   1,807,012   1,319,610 
 $1,490,078  $1,197,289  $2,073,068  $1,564,537 

 
9
 

7.  Property, plantPlant, and equipment:Equipment

Property, plant and equipment isare 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 

10
  June 30,  
September
30,
 
  2010  2010 
Building and plant $2,716,302  $2,958,978 
Machinery  11,542,131   11,174,517 
Office equipment and other equipment  776,760   771,829 
Vehicles  140,678   139,753 
Construction in progress  1,087,395   - 
   16,263,266   15,045,077 
Less:        
Accumulated depreciation  (5,230,657)  (4,333,212)
  $11,032,609  $10,711,865 

Depreciation expense is computed using straight-line method with estimated useful lives as follows:

Building and plant20 years
Machinery10 years
Office equipment and other equipment5 years
Vehicles10 years

For the three month periodmonths ended June 30, 2010,March 31, 2011, depreciation expense of $276,661$288,190 was included in cost of sales and $16,222$16,946 was included in selling, marketing, and administrative expenses, for a total of $292,883$305,136.

For the three month periodmonths ended June 30, 2009,March 31, 2010, depreciation expense of $263,724$271,848 was included in cost of sales and $16,250$16,285 was included in selling, generalmarketing, and administrative expenses, for a total of $279,974$288,133.

For the nine month periodsix months ended June 30, 2010,March 31, 2011, depreciation expense of $815,191$573,732 was included in cost of sales and $48,825$33,732 was included in selling, generalmarketing, and administrative expenses, for a total of $864,016$607,464.

For the nine month periodsix months ended June 30, 2009,March 31, 2010, depreciation expense of $581,505$536,787 was included in cost of sales and $51,294$32,571 was included in selling, generalmarketing, and administrative expenses, for a total of $632,799.

10
$569,358.

8.Deposits:
8.  Deposits

AsDeposits consisted of June 30, 2010, we have deposits of $2,193,202 withpayments made to suppliers for equipment providers to ensure timely fulfillment of our purchase contracts to build up new production facilities.be received.

9.Land Use Rights:
9.  Land Use Rights

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

 
June 30,
2010
  
September 30,
2009
  March 31,  September 30, 
 　  　  2011  2010 
Land use rights $626,699  $622,578  $648,833  $635,154 
Less:                
Accumulated amortization  (95,193)  (85,228)  (108,309)  (99,674)
 $531,506  $537,350  $540,524  $535,480 

For the three month periods ended June 30, 2010 and 2009, amortization expense was $3,132 and $3,139, respectively.
For the nine month periods ended June 30, 2010 and 2009, amortization expense was $9,339 and $9,342, respectively.
Change in cost of the land use rights from September 30, 20092010 to June 30, 2010 was caused byMarch 31, 2011 reflects the effect of changes in foreign currency exchange rate.

10.   Short-term Loans:

The Company has several loans withrepaid 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 these loans areCommercial Bank of China, Foshan Branch and the loan is due in September 2010.on February 14, 2012. The interest on the outstanding balance is payable every month at rates rangingan 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 5.93%People’s Central Bank of China.
11.  Other payable to 7.75% per annum.related party:

11.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:Payable

On February 12, 2010, immediately following the closing of a share exchange agreement,January 31, 2011, the Company entered into a note purchase into an agreement with certain accredited investors  for the sale ofits convertible notes inholders to extend the aggregatematurity 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 $4,140,000 and warrants.  In addition to$100,000 plus interest when the finance costnotes matured on February 11, 2011 under its original terms.

Except for the term of approximately $730,000 which is accounted formaturity, the notes extension agreement carries the same terms as debt discount, 653,510 common shares were issued to placement agents.  Thethose of the original notes have the following material terms:purchase agreement as follows:

11
 
Maturity:    The notes mature in one year.on June 30, 2011 days.  If principal is not paid on maturity then 150% of the principal amount shall be payable.

InterestInterest: :     10% per annum and payable quarterly increasingon the last day of a quarter. The interest will increase to 15% if there is a default. At closeInterest expense of $99,616 was recorded and paid for the transaction, $204,464, out of the closing proceeds, was held in an escrow account to cover the first six months interest and it was included as prepaid expense. As of June 30, 2010, prepaid interest expense was $68,609.quarter ended March 31, 2011.

ConversionConversion: :    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, the Company recorded interest expenses are recordedexpense for amortization of the debt discount resulted from finance cost and warrants liabilities in conjunction with the issuance of the notes to accrete the notenotes to its principal balance of $4,140,000$4,040,000 at the due date on February 12,June 30, 2011.  Accretion on interest expensesInterest expense for this accretion amounted to $609,900 and $914,850$152,547 for the three months ended March 31, 2011 and nine$762,447 for the six months ended June 30, 2010.

11
March 31, 2011.    

Allocation of the proceeds: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, accordingly, thepayable. The discount is being amortized over the life of the note to acreteaccrete 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 
February 12, 2010 convertible note finance   
Gross proceeds $4,140,000 
Less cash fee paid to placement agent  730,187 
Net proceeds $3,409,813 
     
Record warrant as derivative liability $1,052,000 
Allocated remaning proceeds to :    
Common stock issued to placement agents  657,556 
Convertible Note  1,700,257 
  $3,409,813 
The convertible notes recorded at the transaction date with discount consisted of the following items:

12.   Receivable From Related Party :
Warrants $1,052,000 
Stock issued to placement agent  657,556 
Cash paid for commission and legal fees  730,187 
  $2,439,743 

As of June 30, 2010, receivable from related party in the amount of $1,111 was an advance to shareholders for travel related expenses occurring in normal course of business.

13.   Subsequent Events
.
On July 26, 2010, the Company repaid outstanding term loan in amount of $2,927,961 （20,000,000 in RMB） to Agricultural Bank of China, Foshan Branch. On July 27, 2010, the Company entered into an agreement with the same branch office to borrow $2,927,961 (20,000,000 in RMB）with a term of 5 months. Interest on the new loan is payable on monthly basis at rates ranging from 5.85% to 7.75% per annum.

On August 4, 2010, the Company appointed Eric Gan as Chief Financial Officer. The compensation package included an annual salary of $120,000 and grant of non-statutory stock options to acquire 400,000 shares of the Company’s common stock. The options vest over a period of three years.

14.   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.

 
12
 
 
Convertible notes payable, net of discount, at the transaction date was $1,700,257.
  For the three months ended 
  June 30, 2010   June 30, 2010 
Net Income       
(numerator for basic income per share) $434,768   $357,462 
Plus interest on convertible note  697,811    - 
Net Income - assumed conversions         
(numerator for diluted income per share) $1,132,579   $357,462 
          
          
Weighted average common shares         
(denominator for basic income per share)  15,235,714    14,510,204 
          
Effect of Dilutive Securities:         
Warrants - treasury stock method  -    - 
Convertible note as if-converted method  1,689,796    - 
Weighted average common shares         
(denominator for diluted income per share)  16,925,510    14,510,204 
          
Basic net income per share $0.03   $0.02 
Diluted net income per share $0.07  Antidilutive $0.02 
As of March 31, 2011, after a note discount amortization of $2,287,197, net convertible notes payable was accreted to $3,887,453.

  For the nine months ended 
  June 30, 2010   June 30, 2010 
Net Income       
(numerator for basic income per share) $2,324,448   $1,089,208 
Plus interest on convertible note  1,114,535    - 
Net Income - assumed conversions         
(numerator for diluted income per share) $3,438,983   $1,089,208 
          
          
Weighted average common shares         
(denominator for basic income per share)  14,879,603    14,510,204 
          
Effect of Dilutive Securities:         
Warrants - treasury stock method  -    - 
Convertible note as if-converted method  860,372    - 
Weighted average common shares         
(denominator for diluted income per share)  15,739,975    14,510,204 
          
Basic net income per share $0.16   $0.08 
Diluted net income per share $0.22  Antidilutive $0.08 
13.   Accounting for Warrants

15.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 in conjunction with the convertible notes have the following material terms:

13
 
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.$20,000,000.   The warrants can notcannot 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 Topic 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to FASB ASC Topic 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.

13

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 Topic 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 Topic 815.  The provisions in FASB ASC Topic 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by FASB ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

Management concluded thatBecause the exercise price of the warrants issued in conjunction withis not fixed and will be determined by the private placement of convertible notes in February 2010price at which the Company completes a Financing prior to certain accredited investorsthe 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 treatedaccounted 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 periodreport date until they are exercised or expire, with any change in the fair value charged or credited to income each period.income.

As a result of adopting accounting treatment ofaccording to ASC Topic 815-40, investor and placement agent warrants are recorded as derivative liabilities and valued at $1,052,000 based on 1,218,857 shares using the Black-Scholesa binomial option pricing model on the date of issuance and as of March 31, 2010.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 a companythree companies with similar business and financial size comparable to the Company’s and the remaining term of the warrants.

As of June 30, 2010,March 31, 2011, these warrants were valued at$690,000.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 valuationrevaluation inputs are provided in the table as follows.follows:
 
  At date of issuance  As of 
Attribute February 12, 2010  June 30, 2010 
       
Warrants outstanding  1,218,857(*)  1,218,857(*)
Exercise Price $2.45  $2.45 
Risk Free Interst Rate  2.25%  0.32%
Volatility  90%  70%
Dividend Yield  0%  0%
Contractual Life (years)  1   0.7 
  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, 201115,265,714
Shares of common stock to be issued in the public offerings4,166,667
Anti-dilutive shares to be issued to placement agent458,373
Total19,890,754
8% of the fully-diluted shares outstanding immediately after IPO8%
Shares underlying the warrants1,591,260
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.

 
14
 

16.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 
15

 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 June 30, 2010March 31, 2011 and September 30, 2009.2010.
 
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 enjoysenjoyed 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 2011years where2011 during which there is a 50% discount on income tax.
 
The current year tax provision was $6,328$3,398 and $6,328$92,001 for the three months and ninesix months ended June 30, 2010, respectively.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 June 30,March 31, 2011 and March 31, 2010, and September 30, 2009 net of tax allowance, because all other significant differencedifferences in tax basis and financial statement amounts are permanent differences.

  
For the three months
ended
  
For the nine months
ended
 
  June 30,  June 30, 
  2010  2009  2010  2009 
             
Income Tax Expense:            
             
Current tax $6,328  $0  $6,328  $0 
Change in deferred tax assets – Net operating loss  46,911   76,959   285,019   199,513 
                 
Change in valuation allowance  (46,911)  (76,959)  (285,019)  (199,513)
                 
Total $6,328  $0  $6,328  $0 
 
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 June 30, 2010.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 ninethree months ended June 30, 2010March 31, 2011 and 2009.2010.

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 ninesix months ended June 30, 2010March 31, 2011 for the followings reasons:

15
  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   - 
 
  
For the three months
ended
  
For the nine months
ended
 
  June 30,  June 30, 
  2010  2009  2010  2009 
             
             
Income before income taxes $441,096  $357,462  $2,330,776  $1,089,208 
                 
Computed “expected” income tax expense at 12.5% and zero in 2010 and 2009 $142,363  $-  $430,664  $- 
Tax effect of net taxable permanent differences  (89,124)  -   (139,317)  - 
                 
Effect of cumulative tax losses  (46,911)  -   (285,019)  - 
                 
                 
  $6,328  $-  $6,328  $- 

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 ninethree months ended June 30, 2010March 31, 2011 and 2009.2010.

17. Recent Accounting Pronouncementsaccounting pronouncements

Fair Value MeasurementsRecently, 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.

In January 2010,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 FASB issued guidanceEffective 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 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 LevelPerform Step 2 of the fair value measurement hierarchy, including the reasons and the timingGoodwill 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 transfersabove standards, management concluded they are not applicable to the Company’s financial accounting and information on purchases, sales, issuance,reporting, 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 Companyif adopted, this guidance at January 1, 2010, except for the Level 3 reconciliation disclosuresthere would be no significant effect on the rollforward activities, which it will adopt at the beginning of January 1, 2011. Adoption did not have a material impact on our consolidatedCompany’s financial statements.

Receivables18. Subsequent Events

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

In April 2010,2011, the FASB issued ASU 2010-18, Receivables (Topic 310), EffectCompany 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 Loan Modification Whenmilestone to the Loan is PartCompany as the sale of A Pool That Is Accounted for asPPS products will have 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 materialsignificant impact on its consolidated financial statements.the Company’s revenue growth and profitability.

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.

 
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Special Note Regarding Forward-Looking Statements

This Quarterly Reportreport 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 Form 10-Q, including the followingthese words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations.” containsIn 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 that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements.  All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors” sections of our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2010, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are basedmay 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 information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.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 and research and development of advanced spun-bond PET, or polyester, non-wovens.nonwovens.

Non-wovenNonwoven 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 PPPPS (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.

 
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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 2010.  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 filteringfiltration 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.  We have testedAlthough our PPS material non-woven fabric internally and, although aproduct has been tested in laboratories, prototype usingbag filters made of our material hasproduct have not yet been deployedtested on site by any industrialpotential end user and we believedo 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 has the potential to replace the filtration materials and products currently available and become the most popular filtration material in high temperature environments such as coal-fired power plants, garbage incinerators and cement factories.  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 showedshown 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, 2009,2010, and for the year then ended, and the unaudited condensed consolidated interim financial statements for the ninethree months and six months ended June 30, 2010.March 31, 2011.

Results of Operations

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 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%
  Three Months Ended June 30 
  2010  2009 
  Amount  %  Amount  % 
Sales $5,072,791   100% $2,482,212   100%
Cost of Sales  3,537,571   70%  1,779,328   72%
Gross Profit  1,535,220   30%  702,884   28%
Selling, General and Administrative Expense  701,436   14%  266,101   11%
Operating Income  833,784   16%  436,783   18%
Interest Income  10,106   0.2%  2,104   0%
Interest Expense  (764,794)  15%  (65,162)  3%
Loss on disposition of fixed assets  -       (16,263)  1%
Changes in Fair Value of Warrants  362,000   7%  -   0%
Net Income before taxes  441,096   9%  357,462   14%
Income tax provision  6,328       -     
Net Income $434,768   9% $357,462   14%

 
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Net Sales

Net sales consisted of revenue from sales of needle punched non-woven fabricnonwoven product and thermal calendared products. Our net sales for the three month period ended June 30, 2010March 31, 2011 were $5,072,791,$4,895,596, an increase of $2,590,579,$266,925, or 104%6%, from $2,482,212$4,628,671 for the same period of the prior year.  In February 2010, we installed a new production lineThe increase in revenue was primarily attributable to manufacture needle punched non-woven fabric and startthe appreciation of Renminbi, our transaction currency against the US dollars, our reporting currency. Reflected in the transaction currency, our net sales ofincreased by 2% from the new products.  Sales of needle-punched products forquarter ended March 31, 2010.
For the three month period ended June 30, 2010 were $2,054,318 compared to $518,752 forMarch 31, 2011, sales of thermal calendared products increased by $112,482, or 4%, from the same period of the prior year.  In addition,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 thermal calendared materials for the three month period ended June 30, 2010 were $3,018,473, an increase of $1,062,855 compared to $1,955,618 for the same period of the prior year.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 June 30, 2010March 31, 2011 was $3,537,571,$3,911,768, an increase of $1,758,243,$674,457, or 99%21%, from $1,779,328$3,237,311 for the same period in 2009.2010.

Raw material cost increased to 56%70% of thenet sales for the three month period ended June 30, 2010,March 31, 2011, compared to 51%52% of net sales for the same period of the prior year, reflecting a mix of more expensive raw materials associated with 2010 sales. 98.7%Over 98% percent of our raw materials consistsconsist 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 June 30, 2010,March 31, 2011, the same level foras the same period of yearin 2009.

Overhead expenses were 13%14% of net sales for the three month period ended June 30, 2010,March 31, 2011, compared to 18%11% of net sales for 2009.the same period in 2010. As a percentage of net sales, overhead expenses decreasedincreased due to lower capacity utilization and lower production capacity expansion and volume, increase.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 June 30, 2010March 31, 2011 was $1,535,220, an increase$983,828, a decrease of $832,336,$407,532, or 118%29%, from $702,884$1,391,360 for the same period in 2009.2010.  As a percentage of net sales, gross profit was 30%20% for the three month period ended June 30, 2010,March 31, 2011, compared to 28%30% for the same period lastof the prior year. The improveddecrease in our gross profit was due primarily attributed to lowered overheadthe increase in cost of raw materials as a percentage of the 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.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 June 30, 2010March 31, 2011 were $701,436,$989,685, an increase of $435,335$432,224, or 78%, compared to $266,101$557,461 for the same period in 2009.2010. The increase was primarily due to increaseconsisted of $47,219$132,120 in delivery chargeslegal counsel and documentation fees related to overseas sales and $309,040 in the Company’s IPO related legalintended initial public offering, investor relation consulting fees of $70,500, fees paid to our auditors of $89,545, and other$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 June 30, 2010March 31, 2011 was $764,791$326,235 compared to $65,162$390,355 for the same period in 2009.  Interest expense as a percentage of sales increaseddecreased to 15%7% for the three month period ended June 30, 2010March 31, 2011, from 3%8% for the same period of lastthe prior year.  The increase inextension of the maturity date of the convertible notes helped reduce interest expense was mainly attributedby decreasing accretion of the notes discount to adoptionthe principal amount at the notes maturity date.

At March 31, 2011, under the requirements of derivative accounting rules underFASB ASC 815-40 to record $4,140,000815, management re-measured the fair value of the warrants issued in connection with the sale of convertible notes to bridge loan notes. These accounting rules require us to accrete interestcreditors 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 $609,900, based on the term of the notes and note discount. Excluding the derivative-accounting-driven interest expense, our interest expense for this three month period remained the same level as for the same period of last year. The accreted interest expense was partially offset by the fair value change of the warrants after re-measurement at this reporting period.$44,276.

 
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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 June 30, 2010March 31, 2011 and September 30, 2009.2010.
 
BVI
 
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly is exemptedexempt 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 enjoysenjoyed 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 areis a 50% discount on income tax.
 
The current year tax provision was $6,328 and $6,328$3,398 for the three and nine months ended June 30, 2010, respectively.March 31, 2011.  The Company has recorded zero deferred tax assets or liabilities as of June 30, 2010March 31, 2011 and September 30, 20092010 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

Net incomeOur operations resulted in net loss for the three months ended June 30, 2010 increased by $77,306 fromMarch 31, 2011 in amount of $372,108, compared with a net income of $357,462$444,332 for the same periodthree months ended June 30, 2009March 31, 2010. The net loss was attributable to net incomea combination of $434,768. Excluding accretion of interest expense discussed abovedeclining gross margin, high general and administrative expenses and high finance cost in connection with the gains on change in warrant value, net income rose to $682,668, an increase of $325,206 over the same period of last year.Company’s intended initial public offering and bridge financing.  

NineSix Month Period Ended June 30, 2010March 31, 2011 compared to NineSix Month Period Ended June 30, 2009March 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.

  Nine Months Ended June 30 
  2010  2009 
  Amount  %  Amount  % 
Sales $14,919,816   100% $7,023,045   100%
Cost of Sales  10,381,404   70%  4,685,730   67%
Gross Profit  4,538,412   30%  2,337,315   33%
Selling, General and Administrative Expense  1,363,574   9%  1,024,543   15%
Operating Income  3,174,838   21%  1,312,772   19%
                 
Interest Income  10,623   0%  2,104   0%
                 
Interest Expense  (1,216,685)  8%  (225,668)  3%
Changes in Fair Value of Warrants  362,000   2%  -   0%
Net Income before taxes  2,330,776   16%  1,089,208   16%
Income tax provision  6,328       -     
Net Income $2,324,448   16% $1,089,208   16%

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  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 revenue consisted of revenue from sales of needle punched non-woven fabric and thermal calendared products. Net sales for the ninesix month period ended June 30, 2010March 31, 2011 were $14,919,816,$10,676,569, an increase of $7,896,771$829,544 or 112 %,8%, from $7,023,045$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.  The increase is mainly attributable to sales of the needle punched non-woven fabric products we launched during the second quarter of 2010. Sales of needle-punched products for the ninesix month period ended June 30, 2010March 31, 2011 were $6,342,001$4,474,341 compared to $739,097$4,300,022 for the same period of the prior year.  In  addition,Appreciation of Renminbi, our transaction currency, against the US dollars, contributed 3% of the increase in net sales of thermal calendared materialsrevenue for the nine month periodsix months ended June 30, 2010 were  $8,577,815, an increase of $2,293,867 compared to $6,283,948 for the same period of the prior year.March 31, 2011.

Cost of Sales

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

Cost of sales for the ninesix month period ended June 30, 2010March 31, 2011 was $10,381,404,$8,135,330, an increase of $5,695,674,$1,291,497, or 122%19%, from $4,685,730$6,843,833 for the same period of the prior year.  As a percentage of net sales, cost of sales was 70%76% for the ninesix month period ended June 30, 2010March 31, 2011 compared to 67%70% for the same period in 2009.

Raw material costcosts increased to 55%64% of the sales for the ninesix month period ended June 30, 2010,March 31, 2011, compared to 44%56% of sales for the same period in 2009,2010, reflecting a mix of more expensive raw materials associated with 20102011 sales.  ApproximatelyOver 98% of our raw materials consistsconsist of polyester, the price of which fluctuates with the price of oil.

Labor cost wascosts were 1% of net sales for the ninesix month period ended June 30, 2010March 31, 2011, and remained the same percentage when compared to 2%the percentage for the same period in 2009.2010.  

Overhead expenses were 13%14% of net sales for the ninesix month period ended June 30, 2010,March 31, 2011, compared to 20%12% of net sales for the same period last year reflecting operation efficiency achieved by increased production volume.due to increase in utility cost and depreciation expense.

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Gross Profit

Gross profit represents net sales less Cost of sales.  Gross profit for the ninesix month period ended June 30, 2010March 31, 2011 was $4,538,412, an increase$2,541,239, a decrease of $2,201,097$461,953, or 94%15%, from $2,337,315$3,003,192 for the same period lastof the prior year.  As a percentage of net sales, gross profit was 30%24% for the ninesix month period ended June 30,March 31, 2010, compared to 33%30% for the same period last year.  This decrease was primarily due to the increase in the purchase price of the raw materials associated with 20102011 sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the ninesix month period ended June 30, 2010March 31, 2011 were $1,363,574,$1,802,321, an increase of $339,031,$990,183, or 122%, compared to $1,024,543$812,138 for the same period lastof the prior year.   This is primarilyincrease was mainly due to an increase in IPOaudit 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 legal and other expenses, and shipping expense associated with overseas sales, offset by decrease in other general expenses.foreign currency exchange loss of $103,029.

Other Income and Expenses

Other expenses consisted solely of interest expenses and change in fair value of warrants.

Interest expense for the ninesix month period ended June 30,March 31, 2010 was $1,216,685$1,103,932 compared to $225,668$452,387 for the same period of lastthe prior year.  Interest expense as a percentage of net sales increased to 8%10% for the ninesix month period ended June 30, 2010March 31, 2011 from 3%5% for the same period of lastthe prior year.   The cause for the increase in interest expense for the nine month periodsix months ended March 31, 2011 was principally due to the same as foramortization of the three month period. Excluding the accretion of interest expense, interest expense for this nine month period increased by $76,000 over the same period of last year, and, as a percentage of net sales, decreased to 2% from 3%.convertible note discount.

Net (Loss) Income

Net incomeOur operations resulted in net loss for the ninesix months ended June 30, 2010 increased by $1,235,240 fromMarch 31, 2011 in amount of $314,745, compared with a net income of $1,089,208$1,739,680 for the same period in 2009six months ended March 31, 2010. The net loss was attributable to net incomea combination of $2,324,448. The increase was mainly attributed to the increased net sales generated from our new needle-punched products and the lower selling,declining gross margin, high general and administrative expenses relative to net sales. Excluding IPO related expenses and accretion of interest expense from convertible notes sold, net income increased by $2.1 million forhigh finance cost in connection with the nine month period.

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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 June 30, 2010,March 31, 2011, we had severaloutstanding bank loans forin the total amount of $3.8$3.5 million (RMB26(RMB 23 million) with AgricultureIndustrial and Commercial Bank of China, Foshan Branch and these loans arebranch office.   The loan is repayable in December 2010.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, 20102011 to June 30, 2011.  On February 11, 2011, we completed a financing transactionrepaid the note held by Lumen Capital. The proceeds received from the sale of the notes were invested in which we raised gross proceeds of $4.14 million through a private placement of convertible notes and warrantsthe manufacturing facility to certain accredited investors.make our new products.

Cash Flow from Operating Activities

Nine month periodNet cash used in operating activities for the six months ended June 30, 2010March 31, 2011 was $126,527, compared with nine month period ended June 30, 2009.

Net cashto $1.5 million provided by operating activities for the nine months ended June 30, 2010 was approximately $2.86 million, compared to cash used of $0.25 million for the same period of the prior year. The increased operating cash inflowoutflow resulted primarily from increasea decrease in net income and favorable changesan increase in advanceaccounts receivable, advances to suppliers, and inventory, which were offset by an increase in accounts payable and accrued expenses offset by unfavorable changes in accounts receivable, inventory and prepaid expenses.liabilities.

Cash Flow from Investing Activities

Nine month period ended June 30, 2010 compared with nine month period ended June 30, 2009

Net cash used by investing activities for ninethe six months ended June 30, 2010 was $2.51March 31, 2011was $1.25 million, compared to cash$1.4 million used of $0.09 million for the same period of the prior year. The increased cash used fromby investing activities during the ninesix month period of the yearended March 31, 2011 was primarily attributedfor the capital project to capital expenditures on buildingbuild up a new PPS a new product, production line.manufacturing facility.

 
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Cash Flow from Financing Activities

Nine month period ended June 30, 2010 compared with nine month period ended June 30, 2009

Net cash provided byused in financing activities for the nine month periodsix months ended June 30, 2010 was approximately $2.64March 31, 2011was $0.36 million, compared to $0.20$2.64 million of net cash used inprovided 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 increasenew loan obtained from Industrial and Commercial Bank of China was mainly used to pay off the loan from the cash received from the saleAgriculture Bank of the convertible notes.China.

Future Cash Commitments

We have an ambitious business expansion plan for our PPS products. The PPS projects require significant capital expenditures. We plan to financefinanced the capital expenditures with short termshort-term loans from banks and intended public equity offerings.  We expectofferings 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 needs canto purchase expensive raw materials. The new need of additional working capital will be met by cash generated from operations.through private and public equity financing.

Critical Accounting Policies and Estimates

Management'sManagement’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 23 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.

 
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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
Other assets6-10 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.

 
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.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 would beis 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 June 30, 2010.March 31, 2011.  Based on that evaluation, Mr. Li and Mr., Gan concluded that as of June 30, 2010,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 controller,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, 20102011 as described above.  

During the quarter ended June 30, 2010, we began to take certain remedial measures as described below that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.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 are takinghave taken the following remediation measures:

 ·We recently hired Eric Gan as our new Chief Financial Officer;

·We are arranginghave arranged for necessary training for our accounting department staff;

 ·We plan to engage external professional accounting orand 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 and have recently hired a new Chief Financial Officer;

·In addition, we have allocated significant 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.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.

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PART II

OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

We are not aware of any legal proceedings or claims that we expect will have a material adverse affect on our business, financial condition or operating results. 

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.

 
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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.

Dated: August 15, 2010

 CHINA SLP FILTRATION TECHNOLOGY,  INC.
Dated: May 16, 2011By:/s/ Jie Li
Jie Li
Chief Executive Officer
(Principal Executive Officer)
  
 By: /s/ Jie Li
Eric Gan Jie Li
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Eric Gan
  Eric Gan
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 
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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.

 
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