UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q/AQ
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: MarchDecember 31, 2010
¨ | 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)
Perpetual Technologies, Inc.__________________________________________________________________________________________
1442 East Lower River Road, Kamas, Utah
December 31
(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 May 10, 2010February 2, 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 Ended MarchDecember 31, 2010
Table of Contents
PART I FINANCIAL INFORMATION | |
| | |
ITEM 1. | FINANCIAL STATEMENTS. | 34 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 419 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 1626 |
ITEM 4. | CONTROLS AND PROCEDURES. | 1626 |
| | |
PART II OTHER INFORMATION | |
| | |
ITEM 1. | LEGAL PROCEEDINGS. | 19 |
ITEM 6. | EXHIBITS. | 1927 |
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A amends our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed on May 24, 2010, to correct certain typographical errors contained in the section entitled “Management’s Discussion and Analysis of Financial and Results of Operations” and on the signature page.
FINANCIAL INFORMATION
China SLP Filtration Technology, Inc.
Condensed Consolidated Financial Statements
Three months ended MarchDecember 31, 2010 and 2009
Index to Condensed Consolidated Financial Statements
| Page |
| |
Unaudited Condensed Consolidated Balance Sheets | 45 |
| |
Unaudited Condensed Consolidated Statements of Operations and Comprehensive LossIncome | 56 |
| |
Unaudited Condensed Consolidated Statements of Cash Flows | 6 |
| |
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity | 7 |
| |
Notes to Unaudited Consolidated Financial Statements | 8 |
CONSOLIDATED BALANCE SHEETS
| | December 31, | | | September 30, | |
| | 2010 | | | 2010 | |
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 5,273,088 | | | $ | 5,295,301 | |
Restricted cash | | | 454,387 | | | | - | |
Accounts receivable - Net | | | 2,282,430 | | | | 2,207,073 | |
Advance to suppliers | | | 1,262,826 | | | | - | |
Inventory | | | 1,820,136 | | | | 1,564,537 | |
Taxes refund receivable | | | 570,093 | | | | - | |
Prepaid expenses and other current assets | | | 652,813 | | | | 585,385 | |
Total Current Assets | | | 12,315,773 | | | | 9,652,296 | |
| | | | | | | | |
Deposits | | | 1,534,549 | | | | 4,906,370 | |
Property and equipment - Net | | | 14,771,900 | | | | 10,961,234 | |
Land use rights - Net | | | 539,470 | | | | 535,480 | |
Total Assets | | $ | 29,161,692 | | | $ | 26,055,380 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
Short-term loan | | $ | 3,938,022 | | | $ | 3,796,053 | |
Accounts payable and accrued liabilities | | | 2,239,652 | | | | 742,384 | |
Clients’ deposits | | | - | | | | 286,700 | |
Other payable - related party | | | 920,148 | | | | 160,673 | |
Taxes payable | | | 88,943 | | | | 31,406 | |
Warrants liabilities | | | 548,000 | | | | 739,000 | |
Convertible notes payable $4,140,000, net of discount | | | 3,834,907 | | | | 3,225,007 | |
| | | | | | | | |
Total Current Liabilities | | | 11,569,672 | | | | 8,981,223 | |
| | | | | | | | |
Total Liabilities | | | 11,569,672 | | | | 8,981,223 | |
Stockholders’ Equity | | | | | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding; Common stock, $0.001 par value, 40,000,000 shares authorized, 15,265,714 shares issued and outstanding at December 31, 2010 and September 30, 2010 | | | 15,266 | | | | 15,266 | |
Additional paid-in capital | | | 8,527,190 | | | | 8,375,860 | |
Retained earnings | | | 6,779,081 | | | | 6,721,609 | |
Accumulated other comprehensive income | | | 2,270,483 | | | | 1,961,422 | |
Total Stockholders’ Equity | | | 17,592,020 | | | | 17,074,157 | |
| | | | | | | | |
Total Liabilities and Stockholder’s Equity | | $ | 29,161,692 | | | $ | 26,055,380 | |
See accompanying notes to financial statements
| | March 31, | | | | |
| | 2010 | | | September 30, | |
| | (Unaudited) | | | 2009 | |
ASSETS | | | | | | |
| | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 6,092,334 | | | $ | 3,297,648 | |
Accounts receivable - Net | | | 1,914,786 | | | | 1,424,835 | |
Advance to suppliers | | | 1,341,121 | | | | 685,551 | |
Inventory | | | 1,022,404 | | | | 1,197,289 | |
Prepaid expenses and other current assets | | | 189,535 | | | | 45,656 | |
Total Current Assets | | | 10,560,180 | | | | 6,650,979 | |
| | | | | | | | |
Deposits | | | 1,946,280 | | | | - | |
Property and equipment - Net | | | 10,130,508 | | | | 10,711,865 | |
Receivable from related party | | | 213,035 | | | | 773,672 | |
Land use rights - Net | | | 530,364 | | | | 537,350 | |
Total Assets | | $ | 23,380,367 | | | $ | 18,673,866 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
Short term loan | | $ | 3,803,327 | | | $ | 4,578,409 | |
Accounts payable and accrued liabilities | | | 371,247 | | | | 410,114 | |
Client's deposits | | | - | | | | 75,176 | |
Taxes payable | | | 17,154 | | | | 726 | |
Warrants liabilities | | | 1,052,000 | | | | | |
Convertible notes payable $4,140,000, net of discount -$2,134,793 | | | 2,005,207 | | | | - | |
| | | | | | | | |
Total Current Liabilities | | | 7,248,935 | | | | 5,064,425 | |
| | | | | | | | |
Total Liabilities | | | 7,248,935 | | | | 5,064,425 | |
Stockholder's Equity | | | | | | | | |
| | | | | | | | |
Common stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and 14,510,214 shares issued and outstanding at March 31, 2010 and September 30, 2009 | | | 15,236 | | | | 14,510 | |
Additional paid-in Capital | | | 8,205,582 | | | | 7,548,752 | |
Retained earnings | | | 6,390,212 | | | | 4,500,532 | |
Accumulated other comprehensive income | | | 1,520,402 | | | | 1,545,647 | |
Total Stockholder's Equity | | | 16,131,432 | | | | 13,609,441 | |
| | | | | | | | |
Total Liabilities and Stockholder's Equity | | $ | 23,380,367 | | | $ | 18,673,866 | |
CHINA SLP FILTRATION TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
| | Three Months Ended | |
| | December 31 | |
| | 2010 | | | 2009 | |
Net Sales | | $ | 5,780,973 | | | $ | 5,224,961 | |
Cost of Sales | | | 4,223,562 | | | | 3,611,088 | |
Gross Profit | | | 1,557,411 | | | | 1,613,873 | |
| | | | | | | | |
Selling, General and Administration Expenses | | | 812,636 | | | | 274,023 | |
Income from Operations | | | 744,775 | | | | 1,339,850 | |
| | | | | | | | |
Other Income (expense) | | | | | | | | |
Interest Income | | | 5,330 | | | | 225 | |
Interest Expense | | | (777,697 | ) | | | (58,909 | ) |
Loss on Disposal of Fixed Assets | | | (23,408 | ) | | | (107 | ) |
Government subsidy | | | 6,090 | | | | - | |
Changes in Fair Value of Warrants | | | 191,000 | | | | - | |
Total Other Income (expenses) | | | (598,685 | ) | | | (58,791 | ) |
Income before Income Taxes | | | 146,090 | | | | 1,281,059 | |
Income Tax Provision | | | 88,618 | | | | - | |
Net Income | | $ | 57,472 | | | $ | 1,281,059 | |
| | | | | | | | |
Other Comprehensive Income | | | | | | | | |
Foreign Currency Translation Adjustments | | | 309,061 | | | | (1,306 | ) |
Total Comprehensive Income | | $ | 366,533 | | | $ | 1,279,753 | |
| | | | | | | | |
Net Income Per Common Shares: | | | | | | | | |
Basic and diluted | | $ | 0.00 | | | $ | 0.09 | |
Weighted-Average Common Shares Outstanding: | | | | | | | | |
Basic | | | 15,265,714 | | | | 14,510,204 | |
Diluted | | | 17,189,523 | | | | 14,510,204 | |
See accompanying notes to financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMECASH FLOW
(Unaudited)
| | Three Months Ended | | | Six Months Ended | |
| | March 31 | | | March 31 | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Net Sales | | $ | 4,628,671 | | | $ | 2,214,940 | | | $ | 9,847,025 | | | $ | 4,540,833 | |
Cost of Sales | | | 3,237,311 | | | | 1,373,921 | | | | 6,843,833 | | | | 2,906,402 | |
Gross Profit | | | 1,391,360 | | | | 841,019 | | | | 3,003,192 | | | | 1,634,431 | |
Selling, General and Administration expenses | | | 407,461 | | | | 275,526 | | | | 662,138 | | | | 758,442 | |
Income from Operations | | | 983,899 | | | | 565,493 | | | | 2,341,054 | | | | 875,989 | |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest Income | | | 292 | | | | - | | | | 517 | | | | - | |
Interest Expense | | | (390,355 | ) | | | (76,286 | ) | | | (452,387 | ) | | | (160,506 | ) |
Gain on disposal of fixed assets | | | 496 | | | | - | | | | 496 | | | | 16,263 | |
Total other income (expenses) | | | (389,567 | ) | | | (76,286 | ) | | | (451,374 | ) | | | (144,243 | ) |
Income before IncomeTaxes | | | 594,332 | | | | 489,207 | | | | 1,889,680 | | | | 731,746 | |
Income tax provision | | | - | | | | - | | | | - | | | | - | |
Net Income | | $ | 594,332 | | | $ | 489,207 | | | $ | 1,889,680 | | | $ | 731,746 | |
| | | | | | | | | | | | | | | | |
Other Comprehensive Income | | | | | | | | | | | | | | | | |
Foreign Currency Translation Adjustments | | | (23,939 | ) | | | 14,446 | | | | (25,245 | ) | | | (90,836 | ) |
Total Comphrensive Income | | $ | 570,393 | | | $ | 503,653 | | | $ | 1,864,435 | | | $ | 640,910 | |
| | | | | | | | | | | | | | | | |
Net Income Per Common Share: | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.13 | | | $ | 0.05 | |
Weighted-Average Common Shares Outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 14,897,143 | | | | 14,510,204 | | | | 14,701,547 | | | | 14,510,204 | |
Diluted | | | 15,798,367 | | | | 14,510,204 | | | | 15,147,208 | | | | 14,510,204 | |
| | Three Months Ended December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Cash Flow from Operating Activities: | | | | | | |
Net income | | $ | 57,472 | | | $ | 1,281,059 | |
Adjustments to reconcile net income to net cash | | | | | | | | |
flow provided by (used in) operating activities: | | | | | | | | |
Depreciation | | | 301,818 | | | | 282,521 | |
Amortization | | | 3,187 | | | | 3,112 | |
Bad debt allowance | | | (7,372 | ) | | | - | |
Non-cash interest charges | | | 609,900 | | | | - | |
Non-cash equity-based expense | | | 151,329 | | | | - | |
Changes in warrants valuation | | | (191,000 | ) | | | - | |
Loss(gain) from disposal of fixed assets | | | 23,408 | | | | 107 | |
Change in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (37,838 | ) | | | (473,263 | ) |
Advance to suppliers | | | (1,250,571 | ) | | | 178,534 | |
Inventory | | | (232,266 | ) | | | (69,973 | ) |
Taxes refund receivable | | | (564,561 | ) | | | - | |
Prepaid expenses and other current assets | | | (58,972 | ) | | | (22,866 | ) |
Accounts payable & accrued liabilities | | | 1,479,878 | | | | 277,822 | |
Clients’ deposits | | | (287,739 | ) | | | (75,164 | ) |
Taxes payable | | | 57,098 | | | | 15,297 | |
Net cash provided by (used in) operating activities | | | 53,771 | | | | 1,397,186 | |
| | | | | | | | |
Cash Flow from Investing Activities: | | | | | | | | |
Addition-property, equipment, and land use rights | | | (442,051 | ) | | | (893 | ) |
Deposits for purchase of equipment | | | (110,079 | ) | | | - | |
Proceeds from disposal of fixed assets | | | 3,805 | | | | - | |
Proceeds from related party receivable | | | - | | | | 161,116 | |
Net cash (used in) provided by investing activities | | | (548,325 | ) | | | 160,223 | |
| | | | | | | | |
Cash Flow from Financing Activities: | | | | | | | | |
Repayment of loans | | | (3,809,810 | ) | | | (330,101 | ) |
Proceeds from loans | | | 3,899,805 | | | | - | |
Due to related parties | | | 749,963 | | | | - | |
Restricted cash to secure bank loans | | | (454,387 | ) | | | - | |
Net cash provided by (used) in financing activities | | | 385,571 | | | | (330,101 | ) |
| | | | | | | | |
Effects of Exchange Rates on Cash | | | 86,770 | | | | (269 | ) |
Net increase (decrease) in cash and cash equivalents | | | (22,213 | ) | | | 1,227,039 | |
| | | | | | | | |
Cash and cash equivalents, beginning of year | | | 5,295,301 | | | | 3,297,648 | |
| | | | | | | | |
Cash and cash equivalents, end of year | | $ | 5,273,088 | | | $ | 4,524,687 | |
| | | | | | | | |
Supplemental information of cash flows | | | | | | | | |
Cash paid for interest | | $ | 478,111 | | | $ | 58,909 | |
Cash paid for income taxes | | $ | 24,023 | | | $ | - | |
See accompanying notes to financial statements
CHINA FILTRATION TECHNOLOGY,INC.
Consolidated Statements of Cash Flows
(Unaudited)
| | Six Months Ended March 31 | |
| | 2010 | | | 2009 | |
| | | | | | |
Cash Flow from Operating Activities: | | | | | | |
Net income | | $ | 1,889,680 | | | $ | 731,746 | |
Adjustments to reconcile net income to net cash flow provided by operating activities: | | | | | | | | |
Depreciation | | | 569,358 | | | | 352,070 | |
Amortization | | | 6,217 | | | | 6,204 | |
Non-cash interest charges | | | 304,950 | | | | - | |
Gain from disposal of fixed assets | | | (496 | ) | | | (16,263 | ) |
Change in operating assets and liabilities: | | | - | | | | - | |
Accounts receivable | | | (491,997 | ) | | | (122,271 | ) |
Advance to suppliers | | | (656,586 | ) | | | 3,271,122 | |
Inventory | | | 173,173 | | | | (124,682 | ) |
Prepaid expenses and other current assets | | | (143,956 | ) | | | (337,288 | ) |
Accounts payable & accrued liabilities | | | (38,281 | ) | | | (71,094 | ) |
Clients' deposits | | | (75,069 | ) | | | (93,257 | ) |
Taxes payable | | | 16,430 | | | | (9,843 | ) |
Net cash provided by (used in) operating activities | | | 1,553,423 | | | | 3,586,444 | |
| | | | | | | | |
Cash Flow from Investing Activities: | | | | | | | | |
Addition-property and equipment, land use right | | | (3,333 | ) | | | (6,010,706 | ) |
Deposits for purchase of equipment | | | (1,946,280 | ) | | | - | |
Proceeds from disposal of fixed assets | | | 496 | | | | 16,263 | |
Proceeds from related party receivable | | | 559,535 | | | | 1,066,996 | |
Net cash (used in) provided by investing activities | | | (1,389,582 | ) | | | (4,927,447 | ) |
| | | | | | | | |
Cash Flow from Financing Activities: | | | | | | | | |
Dividend paid | | | - | | | | (1,070,823 | ) |
Repayment of loans | | | (768,535 | ) | | | (4,963,547 | ) |
Proceeds from loans | | | 3,404,798 | | | | 6,229,337 | |
Net cash provided by (used) in financing activities | | | 2,636,263 | | | | 194,967 | |
| | | | | | | | |
Effects of Exchange Rates on Cash | | | (5,418 | ) | | | (19,995 | ) |
Net increase (decrease) in cash and cash equivalents | | | 2,794,686 | | | | (1,166,031 | ) |
| | | | | | | | |
Cash and cash equivalents, beginning of year | | | 3,297,648 | | | | 2,367,570 | |
| | | | | | | | |
Cash and cash equivalents, end of year | | $ | 6,092,334 | | | $ | 1,201,539 | |
| | | | | | | | |
Supplemental information of cash flows | | | | | | | | |
Cash paid for interest | | $ | 85,329 | | | $ | 58,909 | |
Cash paid for income taxes | | $ | - | | | $ | - | |
See accompanying notes to financial statements
China Filtration Technology, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Additional | | | | | | Other | | | Total | |
| | Common Stock | | | Preferred Stock | | | Paid-in | | | | | | Comprehensive | | | Stockholders' | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | | | | 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 conjuction with convertible note | | | 653,510 | | | | 654 | | | | - | | | | - | | | | 656,902 | | | | | | | | - | | | | 657,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,889,680 | | | | (25,245 | ) | | | 1,864,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, March 31, 2010 | | | 15,235,714 | | | $ | 15,236 | | | | - | | | $ | - | | | $ | 8,205,582 | | | $ | 6,390,212 | | | $ | 1,520,402 | | | $ | 16,131,432 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the sixthree months ended MarchDecember 31, 2010
(Unaudited - - Expressed 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 known asnamed 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, a Hong Kong company. On formation, each shareholdersshareholder transferred hisits ownership of Technic to Hong Hui. This acquisition was accounted for as a transfer of entities under common control.
Technic International Ltd. (“Technic”) was incorporated in September 2005 under the laws of Hong Kong as a holding company that 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 2000 under the laws of China. In September 2005, Jin Long became athe wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co., LtdLtd. (“Foshan SLP”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 has beenwas recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination.
ThroughOn March 24, 2010, the operationsCompany effected a 1 for 5 reverse stock split of Foshan S.L.P., we engageits outstanding common stock. The effect of the reverse split is retrospectively showed in the manufacturing and sale, research and development of non wovens fabrics..all periods presented.
2. | Basis of presentation and principles of consolidation: |
Through Foshan, we manufacture, market and sell nonwoven fabrics in China.
2. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated balance sheet as of December 31, 2010, the condensed consolidated statements of operations for the three months ended December 31, 2010 and 2009, and the condensed consolidated statements of cash flow for the three months ended December 31, 2010 and 2009 are unaudited. These interimunaudited 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.
Operating results for the six-monththree month period ended MarchDecember 31, 2010 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.
China Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
Restricted cash is a deposit of $454,387 (RMB 3,000,000) with the Standard Chartered Bank as a guarantee of the loan of RMB6,000,000 on a term of six months the Company obtained in December 2010 from the bank. We cannot withdraw the funds from the deposit account until we repay the loan.
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.
As of | | March 31, | | | September 30, | | |
| | | December 31, | | | September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2010 | |
Accounts receivable | | $ | 1,951,619 | | | $ | 1,461,721 | | | $ | 2,299,520 | | | $ | 2,231,281 | |
Less: Allowance for doubtful accounts | | | (36,833 | ) | | | (36,886 | ) | | | (17,090 | ) | | | (24,208 | ) |
| | | | | | | | | |
Accounts receivable – Net | | $ | 1,914,786 | | | $ | 1,424,835 | | | $ | 2,282,430 | | | $ | 2,207,073 | |
As of MarchDecember 31, 2010 and September 30, 2009,2010, the customer accounts receivable balances exceedingbalance with significant percentage of the gross accounts receivable balance were as follows:
| | December 31, | | September 30, | |
| | 2010 | | 2010 | |
Customers: | | Percentage | | Percentage | |
A | | 12 | % | 28 | % |
B | | 11 | % | 6 | % |
C | | 10 | % | 5 | % |
Total | | 33 | % | 39 | % |
Three customers individually accounted for 10% or more of the total balance aregross accounts receivable and together accounted for 33% of the total gross accounts receivable at December 31, 2010. As of September 30, 2010, one customer’s account receivable exceeded 20%, and combined with two other customers whose accounts receivable was below 10%, represented 39% of the total gross accounts receivable as follows:
| | March 31, 2010 | |
Customers: | | Amount | | | Percentage | |
Wu jiang jingshan | | $ | 338,704 | | | | 17 | % |
Dalian Ji er | | | 440,766 | | | | 23 | % |
Shang hai run dong | | | 239,591 | | | | 12 | % |
San Ya | | | 210,877 | | | | 11 | % |
of September 30, 2010.
| | September 30,2009 | |
Customers: | | Amount | | | Percentage | |
Wu jiang jingshan | | $ | 434,556 | | | | 30 | % |
Shen zhen Ya ming water | | | 185,625 | | | | 13 | % |
Xiantao ruixin | | | 181,260 | | | | 13 | % |
6. Advances to Suppliers
As of MarchDecember 31, 2010, and September 30, 2009, respectively, 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.
Inventory consisted of the following:
| | December 31, | | | September 30, | |
| | 2010 | | | 2010 | |
Raw materials | | $ | 178,957 | | | $ | 205,099 | |
Work-in-process | | | 86,710 | | | | 39,828 | |
Finished goods | | | 1,554,469 | | | | 1,319,610 | |
| | $ | 1,820,136 | | | $ | 1,564,537 | |
8. Property, Plant, and Equipment
Property, plant and equipment is recorded at cost. Expenditures incurred for repairs and maintenance are charged to earnings. Betterment, additions and renewals to property, plant and equipment are capitalized. When property, plant and equipment are retired or disposed of, associated cost and accumulated depreciation are removed, and gain or loss, if any, incurred from disposal is included under other income or expense in the statement of operations.
Property, plant and equipment consist of the following:
| | December 31, | | | September 30, | |
| | 2010 | | | 2010 | |
Building and plant | | | 2,805,146 | | | $ | 2,767,897 | |
Machinery | | | 11,825,802 | | | | 11,697,862 | |
Office and other equipment | | | 797,834 | | | | 787,240 | |
Vehicles | | | 144,518 | | | | 142,576 | |
Construction in progress | | | 5,183,496 | | | | 1,173,702 | |
| | | 20,756,796 | | | | 16,569,277 | |
Less: | | | | | | | | |
Accumulated depreciation | | | (5,984,896 | ) | | | (5,608,043 | ) |
| | $ | 14,771,900 | | | $ | 10,961,234 | |
As of | | March 31, | | | September 30, | |
| | 2010 | | | 2009 | |
Raw materials | | $ | 85,239 | | | $ | 40,126 | |
Work in progress | | | 240,386 | | | | 50,443 | |
Finished goods | | | 696,779 | | | | 1,106,720 | |
| | | | | | | | |
| | $ | 1,022,404 | | | $ | 1,197,289 | |
China Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
Depreciation expense is computed using straight-line method with estimated useful lives as follows:
7.Building and plant | Property20 years |
Machinery | 10 years |
Office equipment and equipment:other equipment | 5 years |
Vehicles | 10 years |
As of | | | | | | | | March 31, 2010 | |
| | | | | Accumulated | | | Net book | |
| | Cost | | | depreciation | | | value | |
Building and plant | | $ | 2,958,252 | | | $ | 592,938 | | | $ | 2,365,314 | |
Machinery | | | 11,158,514 | | | | 3,585,441 | �� | | $ | 7,573,073 | |
Office equipment and other equipment | | | 770,547 | | | | 669,760 | | | $ | 100,787 | |
Vehicles | | | 139,553 | | | | 48,219 | | | $ | 91,334 | |
| | $ | 15,026,866 | | | $ | 4,896,358 | | | $ | 10,130,508 | |
As of | | | | | | | | September 30, 2009 | |
| | | | | Accumulated | | | Net book | |
| | Cost | | | depreciation | | | value | |
Building and plant | | $ | 2,958,978 | | | $ | 526,654 | | | $ | 2,432,324 | |
Machinery | | | 11,174,517 | | | | 3,096,112 | | | $ | 8,078,405 | |
Office equipment and other equipment | | | 771,829 | | | | 668,448 | | | $ | 103,381 | |
Vehicles | | | 139,753 | | | | 41,998 | | | $ | 97,755 | |
| | $ | 15,045,077 | | | $ | 4,333,212 | | | $ | 10,711,865 | |
For the three monthsmonth period ended MarchDecember 31, 2010, depreciation expense of $271,848$284,579 was included in cost of sales and $16,285$17,239 was included in selling, marketing, and administrative expenses, for a total of $288,133.$301,818.
For the three monthsmonth period ended MarchDecember 31, 2009, depreciation expense of $158,525$265,570 was included in cost of sales and $16,035$16,951 was included in selling, marketing,general and administrative expenses, for a total of $174,560.$282,521
For the six months ended March 31, 2010, depreciation expense of $536,787 was included in cost of sales and $32,571 was included in selling, marketing, and administrative expenses, for a total of $569,3589. Deposits
For the six months ended March 31, 2009, depreciation expense of $318,986 was included in cost of sales and $33,084 was included in selling, marketing, and administrative expenses, for a total of $352,070.
As of MarchDecember 31, 2010, we have deposits of $1,946,280$1,534,549 with equipment providers to ensure timely fulfillment of our purchase contracts to build new product assembly lines.
China Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
As of | | March 31 ,2010 | | | September 30 ,2009 | |
| | USD | | | USD | |
Cost | | $ | 621,817 | | | $ | 622,578 | |
Less: accumulated amortization | | | (91,453 | ) | | | (85,228 | ) |
| | $ | 530,364 | | | $ | 537,350 | |
Land use rights are amortized over a lease term of 50 years.
For | | December 31, | | | September 30, | |
| | 2010 | | | 2010 | |
Land use rights | | $ | 643,703 | | | $ | 635,154 | |
Less: | | | | | | | | |
Accumulated amortization | | | (104,233 | ) | | | (99,674 | ) |
| | $ | 539,470 | | | $ | 535,480 | |
Change in cost of the three months ended Marchland use rights from September 30, 2010 to December 31, 2010 and 2009, amortization expense was $3,114 and $3,110, respectively.reflects the effect of changes in foreign currency exchange rate.
For the six months ended March 31, 2010 and 2009, amortization expense was $6,217 and $6,204 respectively.11. Short-term Loans:
The Company has several loansa short-term loan of $3,029,247 (RMB 20,000,000) with Agricultural Bank of China, Foshan Branch and these loans arethe loan is due in September 2010.on June 21, 2011. The interest on the outstanding balance is payable every month at rates ranging from 5.93% to 7.75%a floating rate, currently at 6.21% per annum.
11. | Convertible note payable: |
The Company has another short-term loan from Standard Chartered Bank in the amount of $908,775 (RMB 6,000,000) for a term of 90 days. The loan carries an interest rate of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as guarantee. The loan is repayable on March 7, 2011.
12. Other payable to related party:
Other payable to related party accounts for the amount of $920,148 the Company borrowed from its CEO. This loan is non-interest bearing and is repayable on demand.
13. Convertible Note Payable
On February 12, 2010, immediately following the closing of a share exchange agreement, wethe Company entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants. In addition to the finance cost of approximately $730,000, 654,510$730,187 which is accounted for as debt discount, 653,510 common shares were issued to placement agents. The notes have the following material terms:
Maturity: The notes mature afterin one year. If principal is not 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. $204,464 is being held in escrow from the closing proceeds andInterest expense of $104,351 was recorded as prepaid expense..and paid for the quarter ended December 31, 2010.
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, interest expenses are recorded to accrete the note to its principal balance of $4,140,000 at its due date on February 12, 2011. Accretion on interest expenses amounted to $609,900 for the three months ended December 31, 2010.
Allocation of the proceeds:
After allocating $1,052,000 to the initial fair value of warrants derivative liabilities, and agent fee of $730,187, the remaining proceeds received from the convertible note of $3,409,813 were allocated to placement agent common stock and convertible note payable based on their relative fair value. This results in a debt discount of $2,439,743 from the face amount of the convertible note payable. The discount is being amortized over the life of the note to accrete the note to its redemption value. The proceeds allocation is as follows:
| | $ | 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 | |
12. | Related party transactions: |
The convertible notes were recorded at the transaction date with discount consisted of the following items:Warrants | | $ | 1,052,000 | |
Stock issued to placement agent | | | 657,556 | |
Cash paid for commission and legal fees | | | 730,187 | |
| | $ | 2,439,743 | |
Amount due from related parties | | March 31, | | | September 30, | |
| | 2010 | | | 2009 | |
Advance to former shareholders (a) | | $ | 212,329 | | | $ | 259,538 | |
Advance to current shareholders (b) | | | 706 | | | | 1,413 | |
Advance to director (c) | | | - | | | | 73,246 | |
Subtotal | | | 213,035 | | | | 334,197 | |
Receivable from related companies (d) | | | - | | | | 439,475 | |
| | $ | 213,035 | | | $ | 773,672 | |
China Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
| (a) | Advance to former shareholders: |
The advance to former shareholders includes advances to three of the former shareholders. The advance is non-interest bearing and due on demand.
| (b) | Advance to current shareholders: |
The advance to current shareholders includes advances to current shareholders. The advance is non-interest bearing and due on demand.
| (c) | Receivable from related companies |
The receivable from related companies includes Foshan SLP owned its parents company and loans are non-interest bearing and due on demand.
The Company advised shareholders of action taken to approve a change in our corporate name to China SLP Filtration Technology, Inc., which action was approved on April 22, 2010 by the board of directors and on April 22, 2010 by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted.
The name change will become effective on the filing of a certificate of amendment to our certificate of incorporation with the Secretary of State of Delaware, which filing will occur at least 20 days after the date of the mailing of this Information Statement to our shareholders.
Earnings (loss) per share for the six months ended March 31, 2010 and 2009 is computed by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.
The number of shares outstanding is used in calculation of basic and diluted earnings per share as below.
| | Three Months ended March 31, 2010 | | | Three Months ended March 31, 2009 | |
Numerator for basic and diluted EPS | | | | | | |
- Net income from continuing operations | | | 594,332 | | | | 489,207 | |
Denominator for basic and diluted EPS | | | | | | | | |
Weighted average shares of common stock outstanding shares – basic | | | 14,897,143 | | | | 14,510,204 | |
Weighted average shares of common stock outstanding shares – diluted | | | 15,798,367 | | | | 14,510,204 | |
EPS– basic and diluted | | | 0.04 | | | | 0.03 | |
| | | | | | | | |
| | Six Months ended March 31, 2010 | | | Six Months ended March 31, 2009 | |
Numerator for basic and diluted EPS | | | | | | | | |
- Net income from continuing operations | | | 1,889,680 | | | | 731,746 | |
Denominator for basic and diluted EPS | | | | | | | | |
Weighted average shares of common stock outstanding shares – basic | | | 14,701,547 | | | | 14,510,204 | |
Weighted average shares of common stock outstanding shares – diluted | | | 15,147,208 | | | | 14,510,204 | |
EPS– basic and diluted | | | 0.13 | | | | 0.05 | |
China Filtration Technology, Inc.Convertible notes payable, net of discount, at the transaction date was $1,700,257.
Notes to Consolidated Financial Statements for the six months ended MarchAs of December 31, 2010,
(Unaudited - - Expressed in US dollars)
15. | Accounting for Warrants |
after a note discount amortization of $2,134,650, net convertible notes payable was accreted to $3,834,907.
14. Accounting for Warrants
In conjunction with issuing the convertible notes, the Company agreed to issue common stock warrants to the convertible note investors in the debt financing transaction described in note 13. The warrants issued in conjuction with the convertible notes have the following material terms:
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000.$20,000,000. The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date and become void if the notes automatically convert into common stock.
Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
At the time of the notes issuance, the Company also issued non-conversion warrants to the placement agent to purchase 5% of the Company’s common stock underlying the warrants issued to the convertible notes investors, exercisable at the same price at which the investors’ warrants become exercisable.
The Company analyzed the warrants issued in connection of the issuance of the notes and the conversion features embedded in the notes to assess whether they meet the definition of a derivative under the guidance set forth by FASB ASC 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.
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 and the derivative accounting rules under ASC Topic 815-40 were adopted to record the warrants. Fair market valueliability. The terms of the placement agent non-conversion warrants werehave terms identical to the investors’ warrants and are therefore accounted as a derivative liability.
Derivative instruments are initially measured using the Black-Scholes pricing model at the issuance date and recorded as warrants liabilities. Changeat their fair value and marked-to-market at each report date until they are exercised or expire, with any change in the fair value of the warrants is recorded in other incomecharged or loss in the statement of operations in the future reporting periods. Change in warrant value from February 2010credited to March 31, 2010 were not material.income.
As a result of adopting accounting treatment ofaccording to ASC Topic 815-40, $1,052,000 wasinvestor and placement agent warrants are recorded as derivative liabilities and valued at $1,052,000 using a binomial option pricing model on the date of issuance. Because there was no trade market for the Company’s stock, management used substitute volatility in the initial and subsequent measuring of the fair market value of the warrants liabilitiesissued. Management re-measured the fair market value based on 1,218,857 shares entitled underthe adjusted volatility of publicly traded stock of three companies with business and financial size comparable to the Company’s and the remaining term of the warrants.
As of December 31, 2010, these warrants were re-valued at $548,000 based on factors including the probability of the exercisability of the warrants, changes in the estimate of volatility, and the valuationremaining life of these warrants. The revaluation inputs asare provided in the table as follows.follows:
| | As of December 31, 2010 | |
Warrants Outstanding | | | 1,670,823 | (*) |
Stock Market Price | | $ | 6.00 | |
Exercise Price | | $ | 6.00 | |
Risk-free Interest Rate | | | 2.01 | % |
Estimated Volatility | | | 75 | % |
Expected Dividend Yield | | | 0 | % |
Options Life (years) | | | 4.17 | |
(*) Warrants outstanding as of December 31, 2010 is based on 8% of the total outstanding common shares on fully diluted basis and warrants issued to placement agent equal to 5% of investors’ warrants :
| | | 15,265,714 | |
Shares of common stock to be issued in the public offerings | | | 4,166,667 | |
Anti-dilutive shares to be issued to placement agent | | | 458,373 | |
Total | | | 19,890,754 | |
| | | | |
8% of the fully-diluted shares outstanding immediately after IPO | | | 8 | % |
| | | | |
Shares underlying the warrants | | | 1,591,260 | |
| | | | |
Placement agent’s non-conversion warrants (5% of investors’ warrants) | | | 79,563 | |
| | | | |
| | | 1,670,823 | |
15. Equity and stock option based compensation
2010 Stock Incentive Plan
In September 2010, the Board of Directors adopted the 2010 Stock Incentive Plan (“2010 Plan”) under which it may grant incentive and nonqualified stock options, restricted stock and stock appreciation rights to eligible employees, non-employee directors, or consultants. Stock options granted generally have a 5-year life and vest pursuant to terms set forth under employment agreement. Under the 2010 Plan, stock options of 400,000 were granted with exercise price equal to the Company’s intended initial public offering price and will be vested over a three year period. The vesting period starts at August 1, 2010 under the compensation terms of the employment contract.
The Company accounts for stock-based compensation under provisions of FASB ASC 718 – Accounting for Stock Compensation which establishes standards for the accounting for equity instruments exchanged for employee services. Under the provisions of FASB ASC 718, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
The fair value of the employee stock options granted is estimated using a binomial pricing model at the grant date with input as follows:
| | As of September 10, 2010 | |
Stock Market Price | | $ | 6.00 | |
Exercise Price | | $ | 6.00 | |
Risk-free Interest Rate | | | 0.27 | % |
Estimated Volatility | | | 75 | % |
Expected Dividend Yield | | | 0 | |
Warrants Life (years) | | | 4.8 | |
Total cost of the share-based compensation from the grant of the stock options was initially estimated at $1,351,000 at the grant date based on the valuation of the options. The cost is recognized on the number of shares vested over the vesting period.
The following table summarizes the activities for the 2010 Plan for the three month period ended December 31, 2010:
| | Number of | | | Exercise | | | Remaining | |
| | Shares | | | Price | | | Contractual Life | |
Options outstanding as of September 30, 2010 | | | 400,000 | | | $ | 6.00 | | | | 4.8 | |
Granted | | | - | | | | | | | | | |
Forfeiture | | | 0 | | | | | | | | | |
As of December 31, 2010 | | | 400,000 | | | $ | 6.00 | | | | 4.6 | |
Requisite Service Periods Lapsed (months) | | | 5 | | | | | | | | | |
Vested and exercisable as of December 31, 2010 | | | 67,068 | | | $ | 6.00 | | | | 4.6 | |
In addition, one of our independent directors was granted 30,000 shares of restricted common stock under the Company’s 2010 Plan, of which 20,000 shares vest over a period of two years. At the grant date, the fair value of these restricted shares issued was measured at estimated $6 per share. As of December 31, 2010, shares of 15,854 were not subject to forfeiture, of which 2,520 shares were recognized as shared-based compensation expense at an estimated fair market value of $6 per share for the three months ended December 31, 2010.
Total stock-based expense was recorded for the three months ended December 31, 2010 as follows:
| | $ | 136,206 | |
Restricted stock | | | 15,120 | |
| | $ | 151,326 | |
16. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common equivalent shares, if any, by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible note (using the if-converted method) and common shares issuable upon the exercise of outstanding warrants (using the treasury stock method). Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Using if-converted method, the Company’s earnings per share for the three months ended December 31, 2010 is anti-dilutive.
| | Three Months Ended | |
| | December 31, | | | December 31, | |
| | 2010 | | | 2009 | |
Net Income | | | | | | |
(numerator for basic income per share) | | $ | 57,472 | | | $ | 1,281,059 | |
Plus interest on convertible note | | | 523,251 | | | | - | |
Net Income - assumed conversions | | | | | | | | |
(numerator for diluted income per share) | | $ | 580,723 | | | $ | 1,281,059 | |
| | | | | | | | |
| | | | | | | | |
Weighted average common shares | | | | | | | | |
(denominator for basic income per share) | | | 15,265,714 | | | | 14,510,204 | |
| | | | | | | | |
Effect of dilutive securities: | | | | | | | | |
Warrants - treasury stock method | | | - | | | | - | |
Convertible notes as if-converted method | | | 1,923,809 | | | | - | |
Weighted average common shares | | | | | | | | |
(denominator for diluted income per share) | | | 17,189,523 | | | | 14,510,204 | |
| | | | | | | | |
Basic net income per share | | $ | 0.00 | | | $ | 0.09 | |
Diluted net income per share (anti-dilutive) | | $ | 0.00 | | | $ | 0.09 | |
February 2010 Financing Warrants - Valuation Inputs | |
| | February 12 and March 31, | |
Attribute | | 2010 | |
Stock Price | | $ | 2.45 | |
Risk Free Interest Rate | | | 2.25 | % |
Volatility | | | 90.00 | % |
Exercise Price | | $ | 2.45 | |
Dividend Yield | | | 0 | % |
Contractual Life (Years) | | | 1 | |
China Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
16. | Recent accounting pronouncements |
17. Income Taxes
In June 2009USA
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 FASB establishedtax jurisdiction in which they operate. As the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principlesCompany had no income generated in the United States, (“GAAP”). Rules and interpretive releasesthere was no tax expense or tax liability due to the Internal Revenue Service of the SecuritiesUnited States as of December 31, 2010 and Exchange Commission (“SEC”September 30, 2010.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan is taxed at 25% of net income except for the year 2010 and 2011 during which there is a 50% discount on income tax.
The tax provision was $88,618 and $0 for the three months ended December 31, 2010 and December 31, 2009, respectively. The Company has recorded zero deferred tax assets or liabilities as of December 31, 2010 and December 31, 2009, net of tax allowance, because all other significant differences in tax basis and financial statement amounts are permanent differences.
We follow the guidance in FASB ASC 740 Accounting for Uncertainty in Income Taxes. We have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended December 31, 2010. Our methods of accounting are based on established income tax principles and are properly calculated and reflected within our income tax returns. In addition, we have timely filed extension of income tax returns in all applicable jurisdictions in which we believe we are required to make an income tax return filing.
We re-assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the three months ended December 31, 2010 and 2009.
All of the Company’s income before income taxes is from PRC sources. Actual income tax expense reported in the consolidated statements of operations and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 12.5% (50% discount of 25%) issued under authority of federal securities laws are also sources of GAAPto income before income taxes for SEC registrants. Existing GAAP was not intendedthe three months ended December 31, 2010 for the followings reasons:
| | For the Three Months Ended | |
| | December 31, | |
| | 2010 | | | 2009 | |
Income before income taxes | | $ | 146,090 | | | $ | 357,462 | |
Temporary difference: | | | | | | | | |
Write-off for bad debt | | | (7,372 | ) | | | - | |
Permanent difference: | | | | | | | | |
Undeductible interest expense | | | 609,900 | | | | - | |
Non-taxable income from valuation adjustment for warrants | | | (191,000 | ) | | | - | |
Non-deductible stock-based compensation | | | 151,329 | | | | - | |
Adjusted taxable income | | $ | 708,947 | | | | - | |
Income tax rate at 12.5% and zero in 2010 and 2009 | | | 12.50 | % | | | - | |
Income tax expense | | $ | 88,618 | | | | - | |
Our policy for recording interest and penalties associated with audits is to be changedrecord such items as a resultcomponent of income tax expense. There were no interest and penalties recorded for the Codification,three months ended December 31, 2010 and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.2009.
Statement of Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855), “Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.
Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and Various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.
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.
18. Subsequent Events
On January 31, 2011, we entered into note extension agreements with each of the purchasers (other than Lumen Capital LP) of our 10% secured convertible notes in the aggregate principal amount of $4,040,000, issued on February 12, 2010, to extend the maturity date from February 12, 2011 to June 30, 2011. The note in the principal amount of $100,000 held by Lumen Capital LP was repaid on February 11, 2011.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward LookingForward-Looking Statements
This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains 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 based 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.
INTRODUCTIONIntroduction
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”“us,” or the “Company”) which is the ultimate parent company of Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a PRC-basedChina-based operating company located in Foshan, Guangdong Province in the PRC.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 with the quarter ended March 31,from February 12, 2010, the operating results of Foshan are consolidated in the Company’s financialsfinancial 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.
NonwovenNon-woven 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 PP (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 nonwoven.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 nonwovennon-woven fabric.
We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture polyphenylenepolyphenylene sulfide fiber, or PPS, a specialized type of high temperature resistant nonwovennon-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 nonwovennon-woven fabric will be stronger, have lower production and operating costs, and will have higher filtration efficiency. We have testedAlthough prototype bag filters made of our PPS materialproduct have been tested in laboratories, they have not been tested on site by any potential end user and we do not expect to develop prototype products for testing by any potential end user prior to commence commercial production of PPS products. Our new PPS nonwoven fabric internallymay 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 although a prototype usingcompetitive material may be introduced which renders our material has not yet been deployed by any industrial end user, we believe that our 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. PPS product too expensive or obsolete.
On March 24, 2010, the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively shown in all periods presented.
On February 12, 2010, immediately following the reverse merger, the Company entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds of $3.2$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 six monhtsthree months ended MarchDecember 31, 2010.
Three Month PeriodMonths Ended MarchDecember 31, 2010 comparedCompared to Three Month PeriodMonths Ended March 31, 2009
The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.
| | Three months ended March 31 | |
| | 2010 | | | 2009 | |
| | Amount | | | % | | | Amount | | | % | |
Sales | | | 4,628,671 | | | | 100 | % | | | 2,214,940 | | | | 100 | % |
Cost of Sales | | | 3,237,311 | | | | 70 | % | | | 1,373,921 | | | | 62 | % |
Gross Profit | | | 1,391,360 | | | | 30 | % | | | 841,019 | | | | 38 | % |
SG&A expense | | | 407,461 | | | | 9 | % | | | 275,526 | | | | 12 | % |
Operating Income | | | 983,899 | | | | 21 | % | | | 565,493 | | | | 26 | % |
Interest Income | | | 292 | | | | 0 | % | | | - | | | | 0 | % |
Interest Expenses | | | (390,355 | ) | | | 8 | % | | | (76,286 | ) | | | 3 | % |
Gain on disposal of fixed assets | | | 496 | | | | 0 | % | | | 0 | | | | 0 | % |
Net Income before taxes | | | 594,332 | | | | 13 | % | | | 489,207 | | | | 22 | % |
Net Income | | | 594,332 | | | | 13 | % | | | 489,207 | | | | 22 | % |
Sales
Net sales revenue consists of revenue from sales of needle punched non woven fabric and thermal calendared product. Net sales for three month period ended March 31, 2010 were $4,628,671, an increase of $2,413,731, or 109%, from $2,214,940 for the same period of prior year. In February 2009, we installed a new production line to manufacture needle punched non woven fabric. Sales of needle-punched products for the three month period ended March31, 2010 were $1,942,811 compared to $220,718 for the same period of the prior year. In addition, sales of thermal calendared materials for the three month period ended March 31, 2010 $2,308,801, as increase of $569,189 compared to $1,739,612 for the same period of the prior year.
Cost of Goods Sold
Cost of goods sold principally consists of the cost of raw materials, labor, and manufacturing overhead expenses.
Cost of goods sold for the three month period ended March 31, 2010 was $3,237,311, an increase of $1,863,390, or 136%, from $1,373,921 for the same period in 2009.
Raw material expenses increased to 52% of the sales for the three month period ended March 31, 2010, compared to 41% of sales for the same period of the prior year, reflecting a mix of more expensive raw materials associated with 2010 sales. 98.7 % of our raw materials consists of polyester the price of which fluctuates with the price of oil
Labor expenses were 6% of sales for the three month period ended March 31, 2010 compared to 2% for the same period of year 2009. Beginning in February 2009 we hired 17 additional employees to work the new production line. Labor costs also increased due to increased demand for labor.
Overhead expenses were 11% of net sales for the three month period ended March 31, 2010, compared to 19% of net sales for 2009 due to the increase of manufacturing capacity of the Company with the addition of the new production line in February 2009.
Gross Profit
Gross profits represents net sales less cost of goods sold. Gross profit for the three month period ended March 31, 2010 was $1,391,360, an increase of $550,341, or 65%, from $841,019 for the same period in 2009. As a percentage of net sales, gross profit was 30% for the three month period ended March 31, 2010, compared to 38% for the same period last year. This was primarily due to increase of purchase of price of the raw materials associated with 2010 sales, which price increase was caused by fluctuations in the price of oil.
Selling, Marketing and Administrative Expenses
Selling expenses include salaries, advertising expenses, cost of manufacturing, rent, and all expenses dirirectly related to producing and selling product. General expenses include general operating expenses that are directly related to the general operation of the company but excluding selling and administrative expenses. Administrative expense includes executive salaries and other expenses related to the overall administration of the company.
Selling, general and administrative expenses for the three month period ended March 31, 2010 were $407,461, an increase of $131,935 compared to $275,526 for the same period 1n 2009. The increase was primarily due to increase of $25,524 in export delivery expenses and $83,286 additional professional expenses incurred in connection with the company’s planned financing.
Other Expenses
Other expenses solely consist of interest expense.
Interest expense for the three month period ended March 31, 2010 was $390,355 compared to $76,286 for the same period in 2009. Interest expense as a percentage of sales increased to 8% for the three month period ended March 31, 2010 from 3% for the same period of last year. The increase in interest expense was principally due to interest on the convertible notes in the aggregate principal amount of $4,140,000. We accreted non-cash related interest expense in the amount of $304,950. Excluding the accretion of interest, our interest expense for this three-month period was the same as for the same period in 2009.Net Income
Net income for the three months ended March 31, 2010 increased by $105,125, from net income of $489,207 for the three month period ended March 31, 2009 to net income of $594,332. The increase was largely due to an increase in net sales due to the sales generated from new needle-punch products.
Six Month Period Ended March 31, 2010 compared to Six Month Period Ended MarchDecember 31, 2009
The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.
| | Three Months Ended December 31 | |
| | 2010 | | | 2009 | |
Net Sales | | $ | 5,780,973 | | | | 100 | % | | $ | 5,224,961 | | | | 100 | % |
Cost of Sales | | | 4,223,562 | | | | 73 | % | | | 3,611,088 | | | | 69 | % |
Gross Profit | | | 1,557,411 | | | | 27 | % | | | 1,613,873 | | | | 31 | % |
Selling, General and Administrative Expense | | | 812,636 | | | | 14 | % | | | 274,023 | | | | 5 | % |
Operating Income | | | 744,775 | | | | 13 | % | | | 1,339,850 | | | | 26 | % |
Interest Income | | | 5,330 | | | | - | % | | | 225 | | | | 0 | % |
Interest Expense | | | (777,697 | ) | | | -13 | % | | | (58,909 | ) | | | -1 | % |
Loss on disposition of fixed assets | | | (23,408 | ) | | | - | % | | | (107 | ) | | | - | % |
Government subsidy | | | 6,090 | | | | - | % | | | - | | | | - | % |
Changes in Fair Value of Warrants | | | 191,000 | | | | 3 | % | | | - | | | | - | % |
Total Other Income (expenses) | | | (598,685 | ) | | | -10 | % | | | (58,791 | ) | | | -1 | % |
Income before income taxes | | | 146,090 | | | | 3 | % | | | 1,281,059 | | | | 25 | % |
Income tax provision | | | 88,618 | | | | | | | | - | | | | | |
Net Income | | $ | 57,472 | | | | 1 | % | | $ | 1,281,059 | | | | 25 | % |
| | Six months ended March 31 | |
| | 2010 | | | 2009 | |
| | Amount | | | % | | | Amount | | | % | |
Sales | | | 9,847,025 | | | | 100 | % | | | 4,540,833 | | | | 100 | % |
Cost of Sales | | | 6,843,833 | | | | 70 | % | | | 2,906,402 | | | | 64 | % |
Gross Profit | | | 3,003,192 | | | | 30 | % | | | 1,634,431 | | | | 36 | % |
SG&A expense | | | 662,138 | | | | 7 | % | | | 758,442 | | | | 17 | % |
Operating Income | | | 2,341,054 | | | | 24 | % | | | 875,989 | | | | 19 | % |
Interest income | | | 517 | | | | 0 | % | | | - | | | | 0 | % |
Interest Expenses | | | (452,387 | ) | | | 5 | % | | | (160,506 | ) | | | 4 | % |
Gain on disposal of fixed assets | | | 496 | | | | 0 | % | | | 16,263 | | | | 0 | % |
Net Income before taxes | | | 1,889,680 | | | | 19 | % | | | 731,746 | | | | 16 | % |
Net Income | | | 1,889,680 | | | | 19 | % | | | 731,746 | | | | 16 | % |
Net Sales
Net sales revenue consistsconsisted of revenue from sales of needle punched non woven fabricnon-woven product and thermal calendared product. Netproducts. Our net sales for sixthe three month period ended MarchDecember 31, 2010 were $9.85 million,$5,780,973, an increase of $5.30 million$556,012, or 116 %,11%, from $4.55 million for the same period of prior year. In February 2009, we installed a new production line to manufacture needle punched non woven fabric. Sales of needle-punched products for the six month period ended March 31, 2010 were $4,300,022 compared to $220,718$5,224,961 for the same period of the prior year. In addition,Thermal calendared non-woven products contributed 10% of the increase in total revenue and needle-punched non-woven fabric contributed 1% to the increase in total revenue. The increase in revenue was primarily attributable to the price increase on both our thermal calendared products and needle-punched products sold to domestic customers which price increases ranged from 3% to 22% and were put in place in order to pass on the higher costs of raw materials in this period. However, as a result of the price increase, domestic sales of thermal calendared materialsvolume declined by 6%. Demand for our products from overseas continued to rise reflecting the sixglobal economic recovery. Our international sales during this period increased 41% in volume and 42% in sales, respectively.
For the three month period ended MarchDecember 31, 2010, were $5,559,365, as increasesales of $1,228,361 compared to $4,331,204 forthermal calendared products increased by $526,938, or 18%, from the same period of the prior year. Domestic sales volume of thermal calendared products decreased by 4% and international sales increased by 15%.
Sales of needle-punched products increased by $29,085, or 0.6%. Domestic sales volume decreased by 8% which decrease was offset by increased international sales. Our price increase for our needle-punched products has had a negative impact on our sales to smaller sized domestic customers which were less receptive to our price increase.
Cost of Goods SoldSales
Cost of goods soldsales principally consists of the cost of raw materials, labor and manufacturing overhead expenses.
Cost of goods soldsales for the sixthree month period ended MarchDecember 31, 2010 was $6,843,833,$4,223,562, an increased $3,937,431,increase of $612,474, or 135%17%, from $2,906,402$3,611,088 for the same period in 2009.
Raw material cost increased to 55% of net sales for the three month period ended December 31, 2010, compared to 47% of net sales for the same period of the prior year. As a percentage of net sales cost of good sold was 70 % for the six month period ended March 31, 2001 compared to 64% for the same period in 2009.
Raw material expenses increased to 56% of the sales for the six month period ended March 31, 2010, compared to 40% of sales for the same period in 2009,year, reflecting a mix of more expensive raw materials associated with 2010 sales. 98.7%98% percent of our raw materials consistsconsist of polyester, the price of which fluctuates with the price of oil.
Labor expenses were 6% of sales for During the sixthree month period ended MarchDecember 31, 2010, compared to 2% forthe cost of raw materials increased 17% from the same period of the prior year. The increase of our cost of sales was due principally from the increase in 2009. Beginning in February 2009 we hired 17 additional employees to work the new production line. cost of raw materials.
Labor costs also increased due to increased demandcost accounted for labor.
Overhead expenses were 12%1% of net sales for the sixthree month period ended MarchDecember 31, 2010, the same level as the same period in 2009.
Overhead expenses were 19% of net sales for the three month period ended December 31, 2010, compared to 19%18% of net sales for the same period last yearin 2009. As a percentage of net sales, overhead expenses slightly increased due to lower capacity utilization and sales volume, compared to the increase of manufacturing capacity of the Company.same period in 2009.
Gross Profit
Gross profitsprofit represents net sales less cost of goods sold.sales. Gross profit for the sixthree month period ended MarchDecember 31, 2010 was $3,003,192 and increase$1,557,411, a decrease of $1,368,761$56,462, or 83%4%, from $1,634,431$1,613,873 for the same period last year.in 2009. As a percentage of net sales, gross profit was 30%27% for the sixthree month period ended MarchDecember 31, 2010, compared to 36%31% for the same period lastof the prior year. ThisThe decrease in our gross profit was due primarily to the increase in cost of raw materials as a percentage of net sales.
Selling, General and Administrative Expenses
Selling expenses include salaries, advertising expenses, rent, and all expenses directly related to selling product. General expenses include general operating expenses that are directly related to the general operation of the company. Administrative expenses include executive salaries and other expenses related to the overall administration of the company.
Selling, general and administrative expenses for the three month period ended December 31, 2010 were $812,636, an increase of $538,613 or 197%, compared to $274,023 for the same period in 2009. The increase was primarily due to $246,149 in legal and documentation fees related to the Company’s planned initial public offering, investor relation consulting fees of $70,500, and fees paid to our auditors of $57,984, $151,329 in stock-based employee compensation, and payroll increases.
Other Income and Expenses
Other expenses primarily consisted of interest expense while other income was primarily interest income and change in fair value of warrants.
Interest expense for the three month period ended December 31, 2010 was $777,697 compared to $58,909 for the same period in 2009. Interest expense as a percentage of sales increased to 13% for the three month period ended December 31, 2010, from 1% for the same period of the prior year. The increase in interest expense was mainly attributed to adoption of derivative accounting rules under FASB ASC 815-40 to record $4,140,000 of convertible loan notes. These accounting rules require us to accrete interest expense, in the purchase priceamount of $609,900 for the period, based on the term of the raw materials associated with 2010 sales. Thisnotes and the note discount. Excluding the derivative accounting driven interest expense, our interest expense was $167,797 for this three month period, an increase of $108,888, or 185%, from the same period of the prior year, primarily due to increaseinterest paid to the bridge-loan creditors.
At December 31, 2010, under the requirements of purchase of priceFASB ASC 815, management re-measured the fair value of the raw materials associatedwarrants issued in connection with 2010 sales, which price increase was caused by fluctuationsthe sale of convertible notes to bridge loan creditors on February 12, 2010. This re-measurement resulted in a decrease of the pricefair value of oil.the warrants and accordingly a decrease of the value of the warrants liabilities and reported as other income in amount of $191,000.
Selling, Marketing and Administrative ExpensesIncome Tax
Selling, generalUSA
The Company and administrative expensesits subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of December 31, 2010 and September 30, 2010.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly is exempt from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan SLP. For 2008 and 2009, Foshan SLP enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the six month period2010 and 2011 years where there is a 50% discount on income tax.
The current year tax provision was $88,618 for the three months ended MarchDecember 31, 2010. The Company has recorded zero deferred tax assets or liabilities as of December 31, 2010 were $662,138, an decreaseand September 30, 2010 net of $96,304 comparedtax allowance because all other significant difference in tax basis and financial statement amounts are permanent differences. Valuation allowance is applied to $758,442 for the same period last year. This is mainly due to decreased stamp duty $18,394deferred tax assets derived from $21,301immaterial temporary difference in 2009 compare to $2,907 for the same period this year. Office expense also decreased $77,327 from $147,221 in 2009 compared to $69,894 for the same period 2010.
Other Expenses
Other expenses consist solely of interest expenses.tax and financial basis financial statements.
Interest expense for the six month period ended March 31, 2010 was $452,387 compared to $160,506 for the same period last year. Interest expense as a percentage of net sales increased to 5% for the six month period ended March 31, 2010 from 4% for the same period of last year. The increase in interest expense was principally due to record $4,140,000 of convertible notes. We accreted non-cash related interest expense, in the amount of $304,950. Excluding accretion on non-cash interest expense, interest expense for this six month period remained the same as last year, and, as a percentage of net sales, decreased to 1% from 4%.
Net Income
Net income for the sixthree months ended MarchDecember 31, 2010 increased by $1,157,934was $57,472, a decrease of $1,223,587, or 96%, from net income of $731,746$1,281,059 for the same period in 2009 to net income of $1,889,680.the prior year. The increasedecrease was mainly dueattributed to significant increases of general and administrative expenses related to the Company’s planned initial public offering, an increase in sales duefinance costs, and the adoption of FASB ASC 815 accounting rules to treat the sales generated from new needle-punch products.warrants issued in connection with privately placed bridge loan notes.
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, | |
| | 2010 | | | 2009 | |
| | (Consolidated) | | | (Consolidated) | |
Net cash provided by operating activities | | $ | 53,771 | | | $ | 1,397,186 | |
| | | | | | | | |
Net cash (used in) investing activities | | | (548,325 | ) | | | 160,223 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 385,571 | | | | (330,101 | ) |
| | | | | | | | |
Effect of currency exchange rate | | | 86,770 | | | | (269 | ) |
| | | | | | | | |
Net cash inflow | | | (22,213 | ) | | | 1,227,039 | |
We finance our business with cash flowsgenerated from operations and use short-term bank loans and we use shareholders’ equity investment and retained earnings to fund capital expenditures.
Working capital consists mainly of cash, accounts receivable, advances to suppliers and inventory. Cash, inventory and accounts receivable account for the majority of our working capital.
Our working capital requirements may be influenced by many factors, including cash flow, competition, relationships with suppliers, and the availability of credit facilities and financing alternatives, none of which can be predicted with certainty.
Our investment in new production facilities to manufacture PPS filtration products consumed a large amount of the proceeds obtained from bank loans and the issuance of convertible notes. This capital expenditure to a large extent affected our liquidity. We will need additional capital in order to expand our business.
At MarchDecember 31, 2010, we had severaloutstanding bank loans forin the total amount of $3.8$3.94 million (RMB26 million), namely, a loan in the amount of $3,029,247 (RMB20 million) with Agriculture Bank of China Foshan Branch, and these loans area loan in the amount of $908,775 (RMB6 million) with Standard Chartered Bank. The loan with Agriculture Bank of China is payable in June 2011 and the loan with Standard Chartered Bank is repayable in December 2010. We have the highest credit rating for that bank.February 2011.
On February 12, 2010, we completed a financing transaction in which we raised grossreceived net proceeds of $4,140,000$3,409,813 through a private placement of convertible notes and warrants to certain accredited investors.
The notes mature on February 11, 2011 and the principal amount of $4.14 million is repayable on its maturity date if the note holders do not extend the maturity date. On January 31, 2011, we entered into note extension agreements with each holder (except for Lumen Capital LP who holds a convertible note in the principal amount of $100,000) of our outstanding convertible notes to extend the maturity date of the notes from February 12, 2011 to June 30, 2011. On February 11, 2011, we repaid the note held by Lumen Capital.
Cash Flow from Operating Activities
Six month period ended March 31, 2010 compared with six month period ended March 31, 2009
Net cash provedprovided by operating activities for the sixthree months ended MarchDecember 31, 2010 was approximately $1.55 million,$53,771, compared to a cash flow of $3.59$1.4 million for the same period of the prior year. The decreased operating cash inflow resulted primarily from a decrease was due primarily toin net income and an increase in Non-cash interest charges, decreaseadvances to suppliers in advance to suppliers.the amount of $1.3 million, which was offset by an increase in non-cash expenses.
Cash inFlow from Investing Activities
Six month period ended March 31, 2010 compared with six month period ended March 31, 2009
Net cash providedused by investing activities for sixthree months ended MarchDecember 31, 2010 was negative cash flow $1.39$0.55 million, compared to a negative cash flowinflow from proceeds collected from related party receivable of $4.93$0.16 million for the same period of the prior year. The increased cash used from investing activities because there were no largeduring the three month period of the current year was primarily attributed to capital expenditures during the first six months of the year. Only deposits were madeon building up a new product assembly line project. The net cash used in investing activities for the same period of last year was due to the deposits for purchases of equipment and expenses relating to outfitting our facilities.PPS manufacturing facility.
We satisfied this cash expenditure with cash reserves and cash generated from 2009 and 2010 operations.Cash inFlow from Financing Activities
Six month period ended March 31, 2010 compared with six month period ended March 31, 2009
Net cash provided by financing activities for the sixthree month period ended MarchDecember 31, 2010 was approximately $2.64$0.39 million, compared to $0.19$0.33 million of net cash used in financing activities for the same period of the prior year. The increase was from the result of cash received from the sale of the convertible notes.
Loans
The balance of our outstanding short-term bank loans on March 31, 2010 was approximately $3.8 million, compared with $4.6 million on March 31, 2009
On February 12, 2010, immediately following the reverse merger, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds for $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum and interest for six month in amount of $204,464 to be held in an escrow account.
The warrants become void if the notes automatically convert into common stock.
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $20,000,000. The warrants cannot be exercised if no financing is consummated within the five-year period after the issue date.party loan.
Future Cash Commitments
We have an ambitious capital investment plansbusiness expansion plan for our PPS products. The PPS projects in 2010 and which will require significant investment capital. This demand for investment capital willexpenditures. We financed the capital expenditures with short-term loans from banks and planned public equity offerings to raise additional capital to fund our capital projects. We expect our working capital needs can be met by the proceedscash generated from the February private placement, and by outside financing (including the public offering) that we intend to raise as needed to continue our expansion.operations.
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 the respective useful lives,a lease term of 50 years using the straight-line method. Estimated useful lives range from 20 to 50 years.
Property, plant and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of plant and equipment are as follows:
| | | 15-3520 years | |
Machinery and equipment | | | 10 years | |
Office equipment | | | 6-105 years | |
Motor vehicles | | | 6-8 years | |
Other assets | | | 6-1010 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.
| 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 may adversely affect our gross margin for our PET products as our ability to pass on the increased material costs to customers is limited.
During 2010, all of our raw materials were purchased in the PRC. Because the raw materials for our new PPS products are expected to be sourced from the United States and Japan, we anticipate that, beginning in 2011, over 50% of our raw materials will be purchased from suppliers in the United States and Japan 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.
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 Ms. Sabrina Liang,Mr. Eric Gan our Controller,Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of MarchDecember 31, 2010. Based on that evaluation, Mr. LieLi and Ms. LiangMr. Gan concluded that as of MarchDecember 31, 2010, 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.
ChangesChanges 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 executive officer, identified a number of “significant deficiencies” in the process of preparing our financial statements for the quarter ended MarchDecember 31, 2010 as described above.
During the quarter ended March 31, 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 taking the following remediation measures:
| · | We recently hired Eric Gan as our new Chief Financial Officer; |
| · | We are arranging necessary training for our accounting department staff; |
| · | We plan to engage external professional accounting or consultancy firms to assist us in the preparation of the US GAAP accounts; and |
| · | We do not currently have a chief financial officer but are currently searching for a qualified candidiate. We remain committed to the establishment of effective internal audit functions; however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources before the end of our reporting period. However, we will increase our search for qualified candidates with assistance from recruiters and through referrals; |
| · | 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.
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.
The following exhibits are filed as part of this report or incorporated by reference:
| | 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. |
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: May 26, 2010
| CHINA SLP FILTRATION TECHNOLOGY, INC. | |
| | | |
| By: | /s/ Jie Li | |
| | Jie Li | |
| | Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| | | |
| By: | /s/ Jie LiEric Gan | |
| | Jie LiEric Gan | |
| | Chief ExecutiveFinancial Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Sabrina Liang |
| | Sabrina Liang |
| | Controller |
| | (Principal Financial and Accounting Officer) | |
| | 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. |