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: March 31, 20102011
¨ | 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)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ | Accelerated Filer ¨ |
Non-Accelerated Filer ¨(Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common equity, as of November17, 2010May 12, 2011 is as follows:
Class of Securities | | Shares Outstanding |
Common Stock, $0.001 par value | | 15,265,714 |
Quarterly Report on FORM 10-Q
Three Months and Six Months Ended March 31, 20102011
Table of Contents
| PART I | |
| FINANCIAL INFORMATION | |
| | |
ITEM 1. | FINANCIAL STATEMENTS. | 43 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 1617 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 24 |
ITEM 4. | CONTROLS AND PROCEDURES. | 24 |
| | |
| PART II | |
| OTHER INFORMATION | |
ITEM 1. | LEGAL PROCEEDINGS. | |
ITEM 6. | EXHIBITS. | 25 |
EXPLANATORY NOTE
China SLP Filtration Technology, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q (“Form 10-Q/A”) to restate its consolidated financial statements for the three and six months ended March 31, 2010. Subsequent to the issuance of the Company’s consolidated unaudited interim financial statements for the three and six months ended March 31, 2010, included in its Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the United States Securities and Exchange Commission (the “SEC”) on May 24, 2010, as amended on May 26, 2010 (collectively, the “Original Form 10-Q”), and in connection with the SEC’s review of the Company’s registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that the Company failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with its private placement of convertible notes which closed on February 12, 2010. Accordingly, the Company is restating its unaudited interim financial statements for the three month and six month periods ended March 31, 2010 and 2009, as set forth in the Original Form 10-Q.
See Item 1 of Part I, “Financial Statements — Note 18 — Restatements of Previously Issued Financial Statements” for a detailed discussion of the effects of the restatement of the Company’s unaudited interim financial statements for the three and six months ended March 31, 2010.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Original Form 10-Q that was affected by the restatement has been amended and restated in its entirety. No material changes have been made in this Form 10-Q/A to update other disclosures presented in the Original Form 10-Q, except as required to reflect the effects of the restatement. This Form 10-Q/A does not reflect events occurring after the filing of the Original Form 10-Q or modify or update those disclosures, including the exhibits to the Original Form 10-Q affected by subsequent events. The following sections of this Form 10-Q/A have been amended to reflect the restatement:
| · | Part I—Item 1—Financial Statements (Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows), |
| · | Part I—Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations (Liquidity and Capital Resources), and |
| · | Part I—Item 4—Controls and Procedures |
This Form 10-Q/A is dated as of a current date and includes as exhibits 31.1, 31.2 and 32 new certifications by the Company’s Chief Executive Officer and Chief Financial Officer as required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Form 10-Q for the fiscal quarter ended March 31, 2010.
PART I
FINANCIAL INFORMATION
ITEM 1. | ITEM 1. FINANCIAL STATEMENTS. |
China SLP Filtration Technology, Inc.
Condensed Consolidated Financial Statements
Three months and Six Months Endedsix months ended March 31, 20102011 and 20092010
Index to Condensed Consolidated Financial Statements
| Page |
| |
Unaudited Condensed Consolidated Balance Sheets (Restated) | 54 |
| |
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss (Restated)Income (Loss) | 65 |
| |
Unaudited Condensed Consolidated Statements of Cash Flows (Restated) | 7 |
| |
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Restated) | 86 |
| |
Notes to Unaudited Consolidated Financial Statements (Restated) | 97 |
CHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
| | March 31, | | | September 30, | |
| | 2011 | | | 2010 | |
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 3,548,947 | | | $ | 5,295,301 | |
Accounts receivable - Net | | | 3,206,644 | | | | 2,207,073 | |
Advance to suppliers | | | 461,237 | | | | - | |
Inventory | | | 2,073,068 | | | | 1,564,537 | |
Prepaid taxes | | | 472,665 | | | | - | |
Prepaid expenses and other current assets | | | 830,357 | | | | 585,385 | |
Total Current Assets | | | 10,592,918 | | | | 9,652,296 | |
| | | | | | | | |
Deposits | | | 8,061 | | | | 4,906,370 | |
Property and equipment - Net | | | 16,790,642 | | | | 10,961,234 | |
Receivable from related party | | | 36,777 | | | | - | |
Land use rights - Net | | | 540,524 | | | | 535,480 | |
Total Assets | | $ | 27,968,922 | | | $ | 26,055,380 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
Short-term loan | | $ | 3,511,397 | | | $ | 3,796,053 | |
Accounts payable and accrued liabilities | | | 2,016,884 | | | | 742,384 | |
Customers’ deposits | | | 158,710 | | | | 286,700 | |
Other payable - related party | | | 164,134 | | | | 160,673 | |
Taxes payable | | | 58,623 | | | | 31,406 | |
Warrants liabilities | | | 592,276 | | | | 739,000 | |
Convertible notes payable, net of discount | | | 3,887,453 | | | | 3,225,007 | |
Total Current Liabilities | | | 10,389,477 | | | | 8,981,223 | |
| | | | | | | | |
Total Liabilities | | | 10,389,477 | | | | 8,981,223 | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,265,714 shares issued and outstanding at March 31, 2011 and September 30, 2010 | | | 15,266 | | | | 15,266 | |
Additional paid-in capital | | | 8,726,258 | | | | 8,375,860 | |
Retained earnings | | | 6,406,864 | | | | 6,721,609 | |
Accumulated other comprehensive income | | | 2,431,057 | | | | 1,961,422 | |
Total Stockholders’ Equity | | | 17,579,445 | | | | 17,074,157 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 27,968,922 | | | $ | 26,055,380 | |
See accompanying notes to financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | Three Months Ended | | | Six Months Ended | |
| | March 31 | | | March 31 | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Net Sales | | $ | 4,895,596 | | | $ | 4,628,671 | | | $ | 10,676,569 | | | $ | 9,847,025 | |
Cost of Sales | | | 3,911,768 | | | | 3,237,311 | | | | 8,135,330 | | | | 6,843,833 | |
Gross Profit | | | 983,828 | | | | 1,391,360 | | | | 2,541,239 | | | | 3,003,192 | |
| | | | | | | | | | | | | | | | |
Selling, General and Administration Expenses | | | 989,685 | | | | 557,461 | | | | 1,802,321 | | | | 812,138 | |
Income (Loss) from Operations | | | (5,857 | ) | | | 833,899 | | | | 738,918 | | | | 2,191,054 | |
| | | | | | | | | | | | | | | | |
Other Income (Expense) | | | | | | | | | | | | | | | | |
Interest Income | | | 7,658 | | | | 292 | | | | 12,988 | | | | 517 | |
Interest Expense | | | (326,235 | ) | | | (390,355 | ) | | | (1,103,932 | ) | | | (452,387 | ) |
Gain (Loss) on Disposal of Fixed Assets | | | - | | | | 496 | | | | (23,575 | ) | | | 496 | |
Government subsidy | | | - | | | | - | | | | 6,133 | | | | - | |
Changes in Fair Value of Warrants | | | (44,276 | ) | | | - | | | | 146,724 | | | | - | |
Total Other Income (Expenses) | | | (362,853 | ) | | | (389,567 | ) | | | (961,662 | ) | | | (451,374 | ) |
Income (Loss) before Income Taxes | | | (368,710 | ) | | | 444,332 | | | | (222,744 | ) | | | 1,739,680 | |
| | | | | | | | | | | | | | | | |
Income Tax Provision | | | 3,398 | | | | - | | | | 92,001 | | | | - | |
Net Income (Loss) | | $ | (372,108 | ) | | $ | 444,332 | | | $ | (314,745 | ) | | $ | 1,739,680 | |
| | | | | | | | | | | | | | | | |
Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | |
Foreign Currency Translation Adjustments | | | 160,575 | | | | (23,939 | ) | | | 469,635 | | | | (25,245 | ) |
Total Comprehensive Income (Loss) | | $ | ( 211,533 | ) | | $ | 420,393 | | | $ | 154,890 | | | $ | 1,714,435 | |
| | | | | | | | | | | | | | | | |
Net Income (Loss) Per Common Shares: | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | (0.02 | ) | | $ | 0.03 | | | $ | (0.02 | ) | | $ | 0.12 | |
Weighted-Average Common Shares Outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 15,265,714 | | | | 14,897,143 | | | | 15,265,714 | | | | 14,701,547 | |
Diluted | | | 17,189,523 | | | | 15,798,367 | | | | 17,189,523 | | | | 15,147,208 | |
| | Restated 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 | | | 521,247 | | | | 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 | | | 7,398,935 | | | | 5,064,425 | |
| | | | | | | | |
Total Liabilities | | | 7,398,935 | | | | 5,064,425 | |
Stockholder's 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, 15,235,714 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 | | | 6,240,,212 | | | | 4,500,532 | |
Accumulated other comprehensive income | | | 1,520,402 | | | | 1,545,647 | |
Total Stockholder's Equity | | | 15,981,432 | | | | 13,609,441 | |
| | | | | | | | |
Total Liabilities and Stockholder's Equity | | $ | 23,380,367 | | | $ | 18,673,866 | |
See accompanying notes to financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMECASH FLOW
(Unaudited)
| | Three Months Ended | | | Six Months Ended | |
| | March 31 | | | March 31 | |
| | Restated 2010 | | | 2009 | | | Restated 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 | | | 557,461 | | | | 275,526 | | | | 812,138 | | | | 758,442 | |
Income from Operations | | | 833,899 | | | | 565,493 | | | | 2,191,054 | | | | 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 Income Taxes | | | 444,332 | | | | 489,207 | | | | 1,739,680 | | | | 731,746 | |
Income tax provision | | | - | | | | - | | | | - | | | | - | |
Net Income | | $ | 444,332 | | | $ | 489,207 | | | $ | 1,739,680 | | | $ | 731,746 | |
| | | | | | | | | | | | | | | | |
Other Comprehensive Income | | | | | | | | | | | | | | | | |
Foreign Currency Translation Adjustments | | | (23,939 | ) | | | 14,446 | | | | (25,245 | ) | | | (90,836 | ) |
Total Comprehensive Income | | $ | 420,393 | | | $ | 503,653 | | | $ | 1,714,435 | | | $ | 640,910 | |
| | | | | | | | | | | | | | | | |
Net Income Per Common Share: | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.12 | | | $ | 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 | |
| | Six Months Ended March 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Cash Flow from Operating Activities: | | | | | | |
Net income (loss) | | $ | (314,745 | ) | | $ | 1,739,680 | |
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities: | | | | | | | | |
Depreciation | | | 607,464 | | | | 569,358 | |
Amortization | | | 6,420 | | | | 6,217 | |
Bad debt allowance | | | (7,425 | ) | | | - | |
Non-cash interest charges | | | 762,447 | | | | 304,950 | |
Equity-based compensation expense | | | 350,398 | | | | - | |
Change in warrants valuation | | | (146,724 | ) | | | - | |
Loss (gain) from disposal of fixed assets | | | 23,576 | | | | (496 | ) |
| | | | | | | | |
Change in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (934,606 | ) | | | (491,997 | ) |
Advance to suppliers | | | (456,388 | ) | | | (656,586 | ) |
Inventory | | | (469,846 | ) | | | 173,173 | |
Prepaid taxes | | | (467,695 | ) | | | - | |
Prepaid expenses and other current assets | | | (229,922 | ) | | | (143,956 | ) |
Accounts payable & accrued liabilities | | | 1,256,439 | | | | 111,719 | |
Customers deposits | | | (132,754 | ) | | | (75,069 | ) |
Taxes payable | | | 26,834 | | | | 16,430 | |
Net cash provided by (used in) operating activities | | | (126,527 | ) | | | 1,553,423 | |
| | | | | | | | |
Cash Flow from Investing Activities: | | | | | | | | |
Addition-property and equipment, land use right | | | (1,218,056 | ) | | | (3,333 | ) |
Deposits for purchase of equipment | | | - | | | | (1,946,280 | ) |
Proceeds from disposal of fixed assets | | | 3,832 | | | | 496 | |
Proceeds from related party | | | - | | | | 559,535 | |
Advance to related party | | | (36,390 | ) | | | - | |
Net cash (used in) provided by investing activities | | | (1,250,614 | ) | | | (1,389,582 | ) |
| | | | | | | | |
Cash Flow from Financing Activities: | | | | | | | | |
Repayment of loans | | | (7,764,702 | ) | | | (768,535 | ) |
Proceeds from loans | | | 7,402,148 | | | | 3,404,798 | |
Net cash provided by (used) in financing activities | | | (362,554 | ) | | | 2,636,263 | |
| | | | | | | | |
Effects of Exchange Rates on Cash | | | (6,659 | ) | | | (5,418 | ) |
Net increase (decrease) in cash and cash equivalents | | | (1,746,354 | ) | | | 2,794,686 | |
Cash and cash equivalents, beginning of year | | | 5,295,301 | | | | 3,297,648 | |
| | | | | | | | |
Cash and cash equivalents, end of year | | $ | 3,548,947 | | | $ | 6,092,334 | |
| | | | | | | | |
Supplemental information of cash flows | | | | | | | | |
Cash paid for interest | | $ | 335,480 | | | $ | 85,329 | |
Cash paid for income taxes | | $ | 52,166 | | | | - | |
See accompanying notes to financial statements
Consolidated Statements of Cash Flows
(Unaudited)
| | Six Months Ended March 31 | |
| | Restated 2010 | | | 2009 | |
| | | | | | |
Cash Flow from Operating Activities: | | | | | | |
Net income | | $ | 1,739,680 | | | $ | 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 | | | 111,719 | | | | (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
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Restated)
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Additional | | | | | | Other | | | Total | |
| | Common Stock | | | Preferred Stock | | | Paid-in | | | Retained | | | Comprehensive | | | Stockholders' | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings (Deficit) | | | Income | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, September 30, 2008 | | | 14,510,204 | | | $ | 14,510 | | | | - | | | $ | - | | | $ | 7,548,752 | | | $ | 2,054,880 | | | $ | 1,602,725 | | | $ | 11,220,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,445,652 | | | | - | | | | 2,445,652 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | (57,078 | ) | | | (57,078 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, September 30, 2009 | | | 14,510,204 | | | $ | 14,510 | | | | - | | | $ | - | | | $ | 7,548,752 | | | $ | 4,500,532 | | | $ | 1,545,647 | | | $ | 13,609,441 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares effectively issued to former shareholders - 2/12/2010 | | | 2,600,000 | | | | 2,600 | | | | | | | | | | | | (2,600 | ) | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cancellation of stock in recapitalization | | | (2,528,000 | ) | | | (2,528 | ) | | | | | | | | | | | 2,528 | | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
Shares issued to placement agents in conjunction with convertible note | | | 653,510 | | | | 654 | | | | - | | | | - | | | | 656,902 | | | | | | | | - | | | | 657,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income - Restated | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,739,680 | | | | (25,245 | ) | | | 1,714,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, March 31, 2010 - Restated | | | 15,235,714 | | | $ | 15,236 | | | | - | | | $ | - | | | $ | 8,205,582 | | | $ | 6, 240,212 | | | $ | 1,520,402 | | | $ | 15,981,432 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
Notes to Consolidated Financial Statements for the three months and the six months ended March 31, 20102011
(Unaudited - Expressedexpressed in US dollars)dollars except indicated otherwise)
1. | Nature of Business and Organization History: |
1. Nature of Business and Organization History
China SLP Filtration Technology, Inc., formerly known asnamed Perpetual Technologies, Inc. (the “Company” or “we”) was incorporated under the laws of the State of Delaware in March 2007. Prior to a reverse merger completed on February 12, 2010, we had no operations or substantial assets.
Hong Hui Holdings Limited (“Hong Hui”) was formed in January 2010 in the territory of the British Virgin Islands as a holding company by the shareholders of Technic International Inc. (“Technic”)., a Hong Kong company. On formation, each shareholder transferred hisits ownership of Technic to Hong Hui. As a result of this transaction, Technic became a wholly-foreign owned enterprise under PRC law. This acquisition was accounted for as a transfer of entities under common control.
Technic International Ltd. (“Technic”) was incorporated in September 2005 under the laws of Hong Kong as a holding company that ownsowned a 100% equity interest ofin Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin Long was established in 2000 under the laws of China. In September 2005, Jin Long became a wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co., 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.
On March 24, 2010, the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively showed in all periods presented.
We engage in manufacturing, marketingThrough Foshan, we manufacture, market and sale, research and development of polyester spun-bondedsell nonwoven fabrics polyester needle-punch nonwovens, spun-laced nonwovens, polylactic acid nonwovens,in China.
2. Basis of Presentation and special functions nonwovens ( flame retardant, anti-static, oil & water repellent, etc).
2. | Basis of presentation and principles of consolidation: |
Principles of Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2010,2011, the condensed consolidated statements of operations for the ninethree months and the six months ended March 31, 20102011 and 2009,2010, and the condensed consolidated statements of cash flow for the six months ended March 31, 20102011 and 20092010 are unaudited. These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all the disclosures required for annual financial statements under generally accepted accounting principles. However, these interim consolidated financial statements follow the same accounting policies and methods of application as the Company’s most recent annual financial statements. These unauditedinterim 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 and the six month period ended March 31, 20102011 are not necessarily indicative of the results that may be expected for the full year ending September 30, 20102011, or for any other period.
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
3. | Summary of significant accounting policies: |
3. Summary of Significant Accounting Policies
These unauditedinterim consolidated financial statements follow the same accounting policies and methods of application as the Company'sCompany’s most recent annual financial statements.
The Company maintains an allowance for potential credit losses on accounts receivable. Management periodically analyzes the composition of the accounts receivable, aging of the receivables and historical bad debt to evaluate the adequacy of the reserve for uncollectible accounts.
| | March 31, | | | September 30, | |
| | 2011 | | | 2010 | |
Accounts receivable | | $ | 3,223,870 | | | $ | 2,231,281 | |
Less: Allowance for doubtful accounts | | | (17,226 | ) | | | (24,208 | ) |
Accounts receivable – Net | | $ | 3,206,644 | | | $ | 2,207,073 | |
As of March 31, 2011 and September 30, 2010, the customer accounts receivable balance with significant percentage of the gross accounts receivable balance were as follows:
| | | March 31, | | | September 30, | |
| | | 2011 | | | 2010 | |
Customers: | | | Percentage | | | Percentage | |
A | | | | 19 | % | | | 28 | % |
B | | | | 14 | % | | | 6 | % |
C | | | | 12 | % | | | 5 | % |
| | | | | | | | | |
Total | | | | 45 | % | | | 39 | % |
Three customers individually accounted for 10% or more of the total gross accounts receivable and together accounted for 45% of the total gross accounts receivable at March 31, 2011. As of September 30, 2010, one customer’s account receivable accounted for 10% or more, and combined with two other customers whose accounts receivable were below 10%, represented 39% of the total gross accounts receivable as of September 30, 2010.
For the three months ended March 31, 2010, depreciation expense of $271,848 was included in cost of sales and $16,285 was included in selling, marketing, and administrative expenses, for a total of $288,133.
For the six months ended March 31, 2010, depreciation expense of $536,787 was included in cost of sales and $32,571 was included in selling, marketing, and administrative expenses, for a total of $569,358$569,358.
After allocating $1,052,000 to the initial fair value of warrants derivative liabilities, and agent fee of $730,187, the remaining proceeds received from the convertible note of $3,409,813 were allocated to placement agent common stock and convertible note payable based on their relative fair value. This results in a debt discount of $2,439,743 from the face amount of the convertible note payable, accordingly, thepayable. The discount is being amortized over the life of the note to accrete the note to its redemption value. The proceeds allocation is as follows:
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.
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.
NotesThe following table summarizes the activities for the 2010 Plan for the three month period ended March 31, 2011:
| | Number | | | | | | Remaining | |
| | | | | | | | Contractual Life | |
Options outstanding as of September 30, 2010 | | | 400,000 | | | $ | 6 | | | | 4.8 | |
Granted | | | - | | | | | | | | | |
Forfeiture | | | - | | | | | | | | | |
As of March 31, 2011 | | | 400,000 | | | $ | 6 | | | | 4.3 | |
Requisite Service Periods Lapsed (months) | | | 8 | | | | | | | | | |
Vested and exercisable as of March 31, 2011 | | | 106,521 | | | $ | 6 | | | | 4.3 | |
In addition, one of our independent directors was granted 30,000 shares of restricted common stock under the Company’s 2010 Plan, of which 20,000 shares vest over a period of two years. At the grant date, the fair value of these restricted shares issued was measured at estimated $6 per share. As of March 31, 2011, shares of 17,507 were not subject to Consolidated Financial Statementsforfeiture, of which 4,986 and 2,466 shares were recognized as shared-based compensation expense at an estimated fair market value of $6 per share for the six months and three months ended March 31, 20102011.
(Unaudited - - Expressed in US dollars)
17. | Recent accounting pronouncements |
In June 2009 the FASB established 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 principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAPTotal stock-based expense was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.
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. Restatements of Previously Issued Financial Statements
Subsequent to the issuance of our consolidated financial statementsrecorded for the threesix months and six months ended March 31, 2010, included in our Quarterly Report on Form 10-Q2011 as follows:
| | Three months ended | | | Six months ended | |
| | March 31, 2011 | | | March 31,2011 | |
Vested options | | $ | 136,206 | | | $ | 320,480 | |
Restricted stock | | $ | 14,796 | | | $ | 29,918 | |
| | $ | 151,002 | | | $ | 350,398 | |
15. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the period ended March 31, 2010, filed witheffect of dilutive common equivalent shares, if any, by the United States Securitiesweighted average number of common and Exchange Commission on May 24, 2010, as amended on May 26, 2010,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 in connection withcommon shares issuable upon the SEC’s reviewexercise of our registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that we failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with our private placement of convertible notes which closed on February 12, 2010. We have revisedoutstanding warrants (using the previously issued consolidated financial statements to includetreasury stock method). Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Using if-converted method, the liability in our consolidated balance sheet, consolidated statements of operations, and consolidated statements of cash flowsCompany’s earnings per share for the periods affected. The following tables highlight changes to specific accounts affected:
| | As reported | | | As restated | |
| | March 31, 2010 | | | March 31, 2010 | |
| | | | | | |
Accounts payable and accrued liabilities | | $ | 371,247 | | | $ | 521,247 | |
Total Current Liabilities | | $ | 7,248,935 | | | $ | 7,398,935 | |
Retained earnings | | $ | 6,390,212 | | | $ | 6,240,212 | |
Total Stockholders’ equity | | $ | 16,131,432 | | | $ | 15,981,432 | |
A restatement of the consolidated statements of operationsthree months and comprehensive income affected the three month and six month periods ended March 31, 2010 in general and administrative expenses as follows:
| | Three months ended | | | Six months ended | |
| | March 31, 2010 | | | March 31, 2010 | |
| | As reported | | | As restated | | | As reported | | | As restated | |
| | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | 407,461 | | | $ | 557,461 | | | $ | 662,138 | | | $ | 812,138 | |
Income from Operations | | $ | 983,899 | | | $ | 833,899 | | | $ | 2,041,054 | | | $ | 2,191,054 | |
Income before Income Taxes | | $ | 594,332 | | | $ | 444,332 | | | $ | 1,889,680 | | | $ | 1,739,680 | |
Net Income | | $ | 594,332 | | | $ | 444,332 | | | $ | 1,889,680 | | | $ | 1,739,680 | |
Comprehensive income | | $ | 570,393 | | | $ | 420,393 | | | $ | 1,864,435 | | | $ | 1,714,435 | |
Earnings per share – basic and diluted | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.13 | | | $ | 0.12 | |
Statements of Cash Flows for the six months ended March 31, 2010 are restated under net income and accounts payable and accrued liabilities as follows:
| | As reported | | | As restated | |
| | March 31, 2010 | | | March 31, 2010 | |
| | | | | | |
Net income | | $ | 1,889,680 | | | $ | 1,739,680 | |
Accounts payable and accrued liabilities | | $ | (38,281 | ) | | $ | 111,719 | |
2011 is anti-dilutive.
The net cash provided by the operating activities, the net cash used in investing activities, and the net cash provided by financing activities are not affected by the restatements.
| | Three Months Ended | | | Six Months Ended | |
| | March 31, | | | March 31, | | | March 31, | | | March 31, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Net Income (Loss) | | | | | | | | | | | | |
(numerator for basic net income (loss) per share) | | $ | (372,108 | ) | | $ | 444,332 | | | $ | (314,745 | ) | | $ | 1,739,680 | |
Plus interest on convertible note | | | 196,822 | | | | 356,700 | | | | 1,009,275 | | | | 356,700 | |
Net Income (loss) - assumed conversions | | | | | | | | | | | | | | | | |
(numerator for diluted net income (loss) per share) | | $ | (175,286 | ) | | $ | 801,032 | | | $ | 694,530 | | | $ | 2,096,380 | |
| | | | | | | | | | | | | | | | |
Weighted average common shares | | | | | | | | | | | | | | | | |
(denominator for basic net income (loss) per share) | | | 15,265,714 | | | | 14,897,143 | | | | 15,265,714 | | | | 14,701,547 | |
| | | | | | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Warrants - treasury stock method | | | - | | | | - | | | | - | | | | - | |
Convertible notes as if-converted method | | | 1,923,809 | | | | 901,224 | | | | 1,923,809 | | | | 445,661 | |
Weighted average common shares | | | | | | | | | | | | | | | | |
(denominator for diluted income (loss) per share) | | | 17,189,523 | | | | 15,798,367 | | | | 17,189,523 | | | | 15,147,208 | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | (0.02 | ) | | $ | 0.03 | | | $ | (0.02 | ) | | $ | 0.12 | |
Diluted net income (loss) per share are the same as basic net income (loss) per share as results would be anti-dilutive | | $ | (0.02 | ) | | $ | 0.03 | | | $ | (0.02 | ) | | $ | 0.12 | |
16 . Income Taxes
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of March 31, 2011 and September 30, 2010.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan is taxed at 25% of net income except for the year 2010 and 2011 during which there is a 50% discount on income tax.
The tax provision was $3,398 and $92,001 for the three months and six months ended March 31, 2011, respectively, and $0 for the same periods ended March 31, 2010. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 and March 31, 2010, net of tax allowance, because all other significant differences in tax basis and financial statement amounts are permanent differences.
We follow the guidance in FASB ASC 740 Accounting for Uncertainty in Income Taxes . We have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended March 31, 2011. Our methods of accounting are based on established income tax principles and are properly calculated and reflected within our income tax returns. In addition, we have timely filed extension of income tax returns in all applicable jurisdictions in which we believe we are required to make an income tax return filing.
We re-assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the three months ended March 31, 2011 and 2010.
All of the Company’s income before income taxes is from PRC sources. Actual income tax expense reported in the consolidated statements of operations and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 12.5% (50% discount of 25%) to income before income taxes for the three months and six months ended March 31, 2011 for the followings reasons:
| | Three Months | | | Six Months | |
| | Ended March 31, | | | Ended March 31, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Income (loss) before income taxes | | $ | (368,710 | ) | | | 444,332 | | | $ | (222,744 | ) | | | 1,739,680 | |
Temporary difference: | | | | | | | | | | | | | | | | |
Write-off for bad debt | | | | | | | - | | | | (7,372 | ) | | | - | |
Permanent difference: | | | | | | | | | | | | | | | | |
Undeductible interest expense | | | 152,547 | | | | - | | | | 762,447 | | | | - | |
Undeductible expense from valuation adjustment for warrants | | | 44,276 | | | | - | | | | (146,724 | ) | | | - | |
Undeductible stock-based compensation | | | 199,069 | | | | - | | | | 350,398 | | | | - | |
Adjusted taxable income | | $ | 27,182 | | | | - | | | $ | 736,005 | | | | - | |
Income tax rate at 12.5% and zero in 2010 and 2009 | | | 12.5 | % | | | - | | | | 12.5 | % | | | - | |
Income tax expense | | $ | 3,398 | | | | - | | | $ | 92,001 | | | | - | |
Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no interest and penalties recorded for the three months ended March 31, 2011 and 2010.
17. Recent accounting pronouncements
Recently, the following accounting standards or amendments to existing standards have been issued and communicated through the following FASB Accounting Standards Updates (ASU):
ASU No. 2011-03 - Transfers and Servicing (ASC Topic 860): Reconsideration of Effective Control for Repurchase Agreements.
ASU No. 2011-02 - Receivables (ASC Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.
ASU No. 2011-01 – Receivables (ASC Topic 310): Deferral of the Effective Date of Disclosure about Troubled
Debt Restructurings in Update No. 2010-20.
ASU No. 2010-29 - Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.
ASU No. 2010-28 - Intangibles—Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.
ASU No. 2010-26 - Financial Services—Insurance (ASC Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
After evaluation of the above standards, management concluded they are not applicable to the Company’s financial accounting and reporting, and, if adopted, there would be no significant effect on the Company’s financial statements.
18. Subsequent Events
We have evaluated subsequent events from the balance sheet date up to when the financial statements are issued.
In April 2011, the Company completed its capital project to build a new manufacturing facility to make Polypheneyplene Sulfide (PPS) non-woven fabrics directly from PPS resin using spun-bonded and needle-punched method. This facility can make filament (long fiber) non-woven PPS fabrics 2.6 meter wide with an annual capacity of 1,200 tons. Addition of this production line marks a milestone to the Company as the sale of PPS products will have a significant impact on the Company’s revenue growth and profitability.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Special Note Regarding Forward-Looking Statements
This report contains some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements involve risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historical or current facts. In some cases they are identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" in our registration statement of Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010 (the “S-1”). In light of these risks and uncertainties, therefactors. There can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.
Introduction
This section discusses and analyzes the results of operations and financial condition of China SLP Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc., (“we,” “us,” or the “Company”) which is the ultimate parent company of Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a China-based operating company located in Foshan, Guangdong Province in the People’s Republic of China.
On February 12, 2010, we acquired control of Foshan in a share exchange transaction which closed on that date.
In the share exchange or “reverse merger” we acquired control of Hong Hui Holdings Limited (“Hong Hui”), a British Virgin Islands company and the owner of all of the stock of Technic International Limited (“Technic”), a Hong Kong holding company which in turn is the owner of all of the equity of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares of our common stock in exchange for all of the outstanding capital stock of Hong Hui.
The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible has been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination. Beginning from February 12, 2010, the operating results of Foshan are consolidated in the Company’s financial results for that period.
Foshan is engaged in the manufacture and sale of nonwovens.
Nonwoven fabrics are broadly defined as sheet or web structures bonded together by entangling fiber or filaments (and by perforating films) mechanically, thermally or chemically. They are flat, porous sheets that are made directly from separate fibers or from molten plastic or plastic film. They are not made by weaving or knitting and do not require converting the fibers to yarn.
Our major market is the Chinese market. We sell products to industrial customers in China. In recent years, our products have been successfully launched in the European, North American and South East Asian markets.
Currently, our major products are spun-bond, thermal calendaring and needle-punched industrial non-woven PET (polyester) and PPS (polypropylene) fabrics. These products are used as filtration media and infrastructure engineering material, among other uses.
We currently operate three spun-bond production lines. Two lines are spun-bond, thermal calendaring production lines with a total annual capacity of 4,000 tons of spun-bond polyester filament thermal calendaring non-woven. In February 2009, we added the third line, spun-bond needle-punching production line with an annual capacity of 4,000 tons of spun-bond polyester filament, needle-punched non-woven fabric.
We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture polyphenylene sulfide fiber, or PPS, a specialized type of high temperature resistant non-woven fabric and intend to begin commercial production of PPS using our proprietary manufacturing process in 2011.
We have applied for a process patent in the PRC for this process (Patent No. PRC: 201010102660.2) and we intend to apply for a process patent in North America and Europe. In comparison to other filtration materials currently available, we believe that our non-woven fabric will be stronger, have lower production and operating costs, and will have higher filtration efficiency. Although our PPS product has been tested in laboratories, prototype bag filters made of our product have not been tested on site by any potential end user and we do not expect to develop prototype products for testing by any potential end user prior to commencing commercial production of PPS products. Our new PPS nonwoven fabric may never achieve broad market acceptance, due to any number of factors, including that the product may not be as effective as our initial testing indicates and competitive material may be introduced which renders our PPS product too expensive or obsolete.
On March 24, 2010, the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively showedshown in all periods presented.
OverviewOn February 12, 2010, immediately following the reverse merger, the Company entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds of $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum.
This section discusses and analyses our results of operations and financial condition, including the results and conditionRecent Development
On January 31, 2011, we entered into note extension agreements with each holder of our operating company, Foshan, which have been consolidatedoutstanding 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 own resultsaudited financial statements and accompanying notes as of September 30, 2010, and for all periods presented. This discussion is intended to help you understand our financial resultsthe year then ended, and the current factsunaudited condensed consolidated interim financial statements for the three months and trends thatsix months ended March 31, 2011.
Results of Operations
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may cause themnot add due to change, so that you may make informed judgments about our likelyrounding). See the financial resultsstatements of the Company and the related notes thereto and other financial information included elsewhere in the future and, insofar as those results may affect our stock price and informed investment decisions.this report.
| | Three Months Ended | |
| | March 31 | |
| | 2011 | | | 2010 | |
Net Sales | | $ | 4,895,596 | | | | 100 | % | | $ | 4,628,671 | | | | 100 | % |
Cost of Sales | | | 3,911,768 | | | | 80 | % | | | 3,237,311 | | | | 70 | % |
Gross Profit | | | 983,828 | | | | 20 | % | | | 1,391,360 | | | | 30 | % |
Selling, General and Administration expenses | | | 989,685 | | | | 20 | % | | | 557,461 | | | | 12 | % |
Income (Loss) from Operations | | | (5,857 | ) | | | 0 | % | | | 833,899 | | | | 18 | % |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest Income | | | 7,658 | | | | 0 | % | | | 292 | | | | 0 | % |
Interest Expense | | | (326,235 | ) | | | -7 | % | | | (390,355 | ) | | | -8 | % |
Gain (Loss) from Disposal of Fixed Assets | | | - | | | | - | | | | 496 | | | | - | |
Changes in Fair Value of Warrants | | | (44,276 | ) | | | -1 | % | | | - | | | | 0 | % |
Total other income (expenses) | | | (362,853 | ) | | | -7 | % | | | (389,567 | ) | | | -8 | % |
Income (Loss) before Income Taxes | | | (368,710 | ) | | | -8 | % | | | 444,332 | | | | 10 | % |
Income tax provision | | | 3,398 | | | | | | | | - | | | | | |
Net Income (Loss) | | $ | (372,108 | ) | | | -8 | % | | $ | 444,332 | | | | 10 | % |
Net Sales
Net sales consisted of revenue from sales of needle punched nonwoven product and thermal calendared products. Our net sales for the three month period ended March 31, 2011 were $4,895,596, an increase of $266,925, or 6%, from $4,628,671 for the same period of the prior year. The increase in revenue was primarily attributable to the appreciation of Renminbi, our transaction currency against the US dollars, our reporting currency. Reflected in the transaction currency, our net sales increased by 2% from the quarter ended March 31, 2010.
For the three month period ended March 31, 2011, sales of thermal calendared products increased by $112,482, or 4%, from the same period of the prior year. An increase of $403,038 in thermal calendared products in domestic market was offset by a decrease of $290,556 in international sales.
International sales of needle-punched products increased by $156,673 and domestic sales slightly decreased by $2,230.
Cost of Sales
Cost of sales principally consists of the cost of raw materials, labor and manufacturing overhead expenses.
Cost of sales for the three month period ended March 31, 2011 was $3,911,768, an increase of $674,457, or 21%, from $3,237,311 for the same period in 2010.
Raw material cost increased to 70% of net sales for the three month period ended March 31, 2011, compared to 52% of net sales for the same period of the prior year, reflecting more expensive raw materials associated with sales. Over 98% percent of our raw materials consist of polyester, the price of which fluctuates with the price of oil. Recent surge in the price of crude oil adversely affected the purchase price of polyester resin chips, our main raw material. During the three month period ended March 31, 2011, our cost of raw materials increased 20% from the same period of the prior year. The increase of our cost of sales was due principally from the increase in the cost of raw materials.
Labor cost accounted for 1% of net sales for the three month period ended March 31, 2011, the same level as the same period in 2009.
Overhead expenses were 14% of net sales for the three month period ended March 31, 2011, compared to 11% of net sales for the same period in 2010. As a percentage of net sales, overhead expenses increased due to lower capacity utilization and lower production volume, compared to the same period in 2010.
Gross Profit
Gross profit represents net sales less cost of sales. Gross profit for the three month period ended March 31, 2011 was $983,828, a decrease of $407,532, or 29%, from $1,391,360 for the same period in 2010. As a percentage of net sales, gross profit was 20% for the three month period ended March 31, 2011, compared to 30% for the same period of the prior year. The decrease in our gross profit was due primarily to the increase in cost of raw materials as a percentage of net sales.
Selling, General and Administrative Expenses
Selling expenses include salaries, advertising expenses, rent, and all expenses directly related to selling product. General expenses include general operating expenses that are directly related to the general operation of the Company. Administrative expenses include executive salaries and other expenses related to the overall administration of the company.
Selling, general and administrative expenses for the three month period ended March 31, 2011 were $989,685, an increase of $432,224, or 78%, compared to $557,461 for the same period in 2010. The increase primarily consisted of $132,120 in legal counsel and documentation fees related to the Company’s intended initial public offering, investor relation consulting fees of $70,500, fees paid to our auditors of $89,545, and $151,329 in stock-based employee compensation, offset by a decrease in administrative expenses.
Other Income and Expenses
Other expenses primarily consisted of interest expense while other income was primarily interest income and change in fair value of warrants.
Interest expense for the three month period ended March 31, 2011 was $326,235 compared to $390,355 for the same period in 2009. Interest expense as a percentage of sales decreased to 7% for the three month period ended March 31, 2011, from 8% for the same period of the prior year. The extension of the maturity date of the convertible notes helped reduce interest expense by decreasing accretion of the notes discount to the principal amount at the notes maturity date.
At March 31, 2011, under the requirements of FASB ASC 815, management re-measured the fair value of the warrants issued in connection with the sale of convertible notes to bridge loan creditors on February 12, 2010. This re-measurement resulted in an increase of the fair value of the warrants from December 31, 2010 and accordingly an increase of the value of the warrants liabilities and reported as other expense in amount of $44,276.
GeneralIncome Tax
We are a PRC based manufacturer of nonwoven fabrics. We currently manufacture two types of PET nonwoven fabrics which are used in a wide range of products, including filtration products, road construction materials, home furnishings, automobile interior insulation and industrial packaging.USA
Our current PET productsThe Company and its subsidiary and branch divisions are sold primarilysubject to PRC-based manufacturersincome taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which use our productsthey 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 raw material components for end-products they sell to their customers. We recently developed a manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product line around which our long-term growth strategy is centered.of March 31, 2011 and September 30, 2010.
Based on lab tests which we conducted internally we believe that our PPS nonwoven fabricBVI
Hong Hui is superior to other currently available high temperature filtration material because itincorporated under the International Business Companies Act of the British Virgin Islands and accordingly is lighter, thicker, stronger, has higher air permeability and filtration efficiency and significantly cheaper to produce. Dueexempt from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the superior characteristicsPRC Income Tax Laws, the prevailing statutory rate of our PPS product coupledenterprise income tax is 25% for Foshan SLP. For 2008 and 2009, Foshan SLP enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the 2010 and 2011 years where there is a 50% discount on income tax.
The current year tax provision was $3,398 for the three months ended March 31, 2011. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 and September 30, 2010 net of tax allowance because all other significant difference in tax basis and financial statement amounts are permanent differences. Valuation allowance is applied to deferred tax assets derived from immaterial temporary difference in tax and financial basis financial statements.
Net (Loss) Income
Our operations resulted in net loss for the three months ended March 31, 2011 in amount of $372,108, compared with a net income of $444,332 for the three months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in connection with the demand created by these new regulations, we believe that our PPS material will become a market leader for high temperature filtration applications. We expect to sell our PPS nonwoven products to operators of coal fired power plants, garbage incineratorsCompany’s intended initial public offering and other heavy industrial plants.
We intend to continue to manufacture PET nonwovens but we expect that the sales of our PPS nonwoven fabrics will ultimately eclipse the sales of our existing PET nonwoven products and become our main product offering.
Our manufacturing facility, which is located in Foshan City, Guangdong Province, PRC, currently has three production lines for PET nonwovens with annual product capacity of 8,000 tons. We plan to begin commercial production of our PPS nonwoven fabric in the latter part of 2010 with the addition of three high tech production lines with annual production capacity of 3,600 tons, which will bring our total overall production capacity to 11,600 tons per year.bridge financing.
ThreeSix Month Period Ended March 31, 20102011 compared to ThreeSix Month Period Ended March 31, 20092010
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 (unaudited) | | | 2009 (unaudited) | |
| | 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 | | | 557,461 | | | | 12 | % | | | 275,526 | | | | 12 | % |
Operating Income | | | 833,899 | | | | 18 | % | | | 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 | | | 444,332 | | | | 10 | % | | | 489,207 | | | | 22 | % |
Net Income | | | 444,332 | | | | 10 | % | | | 489,207 | | | | 22 | % |
Net Sales | | Six Months Ended | |
| | March 31 | |
| | 2011 | | | 2010 | |
Net Sales | | $ | 10,676,569 | | | | 100 | % | | $ | 9,847,025 | | | | 100 | % |
Cost of Sales | | | 8,135,330 | | | | 76 | % | | | 6,843,833 | | | | 70 | % |
Gross Profit | | | 2,541,239 | | | | 24 | % | | | 3,003,192 | | | | 30 | % |
Selling, General and Administration expenses | | | 1,802,321 | | | | 17 | % | | | 812,138 | | | | 8 | % |
Income from Operations | | | 738,918 | | | | 7 | % | | | 2,191,054 | | | | 22 | % |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest Income | | | 12,988 | | | | 0 | % | | | 517 | | | | 0 | % |
Interest Expense | | | (1,103,932 | ) | | | -10 | % | | | (452,387 | ) | | | -5 | % |
Gain (Loss) from Disposal of Fixed Assets | | | (23,575 | ) | | | 0 | % | | | 496 | | | | 0 | % |
Government subsidy | | | 6,133 | | | | - | | | | - | | | | - | |
Changes in Fair Value of Warrants | | | 146,724 | | | | 1 | % | | | - | | | | 0 | % |
Total other income (expenses) | | | (961,662 | ) | | | -9 | % | | | (451,374 | ) | | | -5 | % |
Income (Loss) before Income Taxes | | | (222,744 | ) | | | -2 | % | | | 1,739,680 | | | | 18 | % |
Income tax provision | | | 92,001 | | | | | | | | - | | | | | |
Net Income (Loss) | | $ | (314,745 | ) | | | -3 | % | | $ | 1,739,680 | | | | 18 | % |
Net sales revenue consisted of sales of needle punched non woven fabric and thermal calendared products. Our 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. The increase in net sales was largely attributable to higher sales volume after a new production line used to manufacture needle-punched nonwoven fabric was installed in February 2009. 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 sales principally consists of the cost of raw materials, labor, and manufacturing overhead expenses.
Our 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. The primary reason for the increase in cost of sales was an increase in our raw materials costs, which we believe was in line with our increased sales volume. 98.7% of our raw material costs consist of polyester, the cost of which increased with the price of oil.
Our raw material cost as a percentage of net sales 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.
Labor cost accounted for 1% of net 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
Our 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 the prior year. 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 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 directly 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 $557,461, an increase of $281,935 compared to $275,526 for the same period in 2009. The increase was primarily due to increase of $25,524 in export delivery expenses, $150,000 fees incurred in connection with the Company’s convertible note financing closed in February, and $ 83,286 additional professional expenses related to the Company’s proposed equity financing.
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.
Income Tax
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. Since the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of March 31, 2010 and September 30, 2009.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan SLP. For 2008 and 2009 Foshan SLP enjoys tax free holidays. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the 2010, 2011 and 2012 in which we receive a 50% discount on income tax.
The current year tax provision was $6,328 and $[6,328] for the three and six months ended March 31, 2010, respectively. The company has recorded zero deferred tax assets or liabilities as of March 31, 2010 and September 30, 2009, net of tax allowance, because all other significant difference in tax basis and financial statement amounts are permanent differences.
Net Income
Net income for the three months ended March 31, 2010 decreased by $44,875, from net income of $489,207 for the three month period ended March 31, 2009 to net income of $444,332. The decrease was largely due to $150,000 fees incurred for the convertible note financing closed in February 12, 2010 offset by an increase in net sales generated from new needle-punch products.
Six Month Period Ended March 31, 2010 compared to Six Month Period 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.
| | Six Months ended March 31 | |
| | 2010 (unaudited) | | | 2009 (unaudited) | |
| | 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 | | | 812,138 | | | | 8 | % | | | 758,442 | | | | 17 | % |
Operating Income | | | 2,191,054 | | | | 22 | % | | | 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 | | | 1,739,680 | | | | 18 | % | | | 731,746 | | | | 16 | % |
Net Income | | | 1,739,680 | | | | 18 | % | | | 731,746 | | | | 16 | % |
Net Sales
Net sales for the six month period ended March 31, 20102011 were $9.85 million,$10,676,569, an increase of $5.30 million$829,544 or 116 %,8%, from $4.55 million$9,847,025 for the same period of prior year. In February 2009, we installed a new production lineSales of thermal calendared products for the six month period ended March 31, 2011 were $6,202,228, an increase of $642,863 compared to manufacture needle punched non woven fabric.$5,559,365 for the same period of the prior year. Sales of needle-punched products for the six month period ended March 31, 20102011 were $4,300,022$4,474,341 compared to $220,718$4,300,022 for the same period of the prior year. In addition,Appreciation of Renminbi, our transaction currency, against the US dollars, contributed 3% of the increase in net sales of thermal calendared materialsrevenue for the six month periodmonths ended March 31, 2010 were $ 5,559,365, as increase of $ 1,228,361 compared to $ 4,331,204 for the same period of the prior year.2011.
Cost of Sales
Cost of sales for the six month period ended March 31, 20102011 was $6,843,833,$8,135,330, an increase of $3,937,431,$1,291,497, or 135%19%, from $2,906,402$6,843,833 for the same period of the prior year. As a percentage of net sales, cost of goods soldsales was 70%76% for the six month period ended March 31, 20012011 compared to 64 %70% for the same period in 2009.
Raw material costs increased to 56%64% of the sales for the six month period ended March 31, 2010,2011, compared to 40%56% of sales for the same period in 2009,2010, reflecting a mix of more expensive raw materials associated with 20102011 sales. 98.7%Over 98% of our raw materials consist of polyester, the price of which fluctuates with the price of oil.
Labor expensescosts were 6% of sales for the six month period ended March 31, 2010 compared to 2% for the same period in 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 12%1% of net sales for the six month period ended March 31, 2010,2011, and remained the same percentage when compared to 19%the percentage for the same period in 2010.
Overhead expenses were 14% of net sales for the six month period ended March 31, 2011, compared to 12% of net sales for the same period last year due to the increase of manufacturing capacity of the Company.in utility cost and depreciation expense.
Gross Profit
Gross profit for the six month period ended March 31, 20102011 was $3,003,192, an increase$2,541,239, a decrease of $1,368,761,$461,953, or 83%15%, from $1,634,431$3,003,192 for the same period of the prior year. As a percentage of net sales, gross profit was 30%24% for the six month period ended March 31, 2010, compared to 36%30% for the same period last year. This decrease was primarily due to the increase in the purchase price of the raw materials associated with 20102011 sales. 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.
SG&ASelling, General and Administrative Expenses
Selling, general and administrative expenses for the six month period ended March 31, 20102011 were $812,138,$1,802,321, an increase of $53,696,$990,183, or 7%122%, compared to $758,442$812,138 for the same period of the prior year. This isincrease was mainly due to a $150,000 liability incurredan increase in connection with our convertible note financing offset by a $77,327 decreaseaudit fees of $115,824, legal counsel fees of $177,096, investor relation consulting fees of $141,000, $350,398 in officeequity-based compensation expense, $18,449 SEC filing related expenses, compared to the same period 2009.and foreign currency exchange loss of $103,029.
Other Expenses
Interest expense for the six month period ended March 31, 2010 was $452,387$1,103,932 compared to $160,506$452,387 for the same period of the prior year. Interest expense as a percentage of net sales increased to 5%10% for the six month period ended March 31, 20102011 from 4%5% for the same period of the prior year. The cause for the increase in interest expense for the six month periodmonths ended March 31, 2011 was principally due to record $4,140,000the amortization of the 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%.note discount.
Net (Loss) Income
Net incomeOur operations resulted in net loss for the six months ended March 31, 2010 was $1,739,680, an increase2011 in amount of $1,007,934, or 138%, from$314,745, compared with a net income of $731,746$1,739,680 for the same periodsix months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in connection with the prior year. The increase was mainly due to the increase in sales generated from new needle-punch products.Company’s intended initial public offering and bridge borrowings.
Liquidity and Capital Resources
The following table sets forth a summary of our net cash flow information for the periods indicated:
| | Three Month Periods Ended December 31, | |
| | 2011 | | | 2010 | |
| | (Consolidated) | | | (Consolidated) | |
Net cash provided by (used in) operating activities | | $ | (126,527 | ) | | $ | 1,553,423 | |
Net cash (used in) investing activities | | $ | (1,250,614 | ) | | $ | (1,389,582 | ) |
Net cash provided by (used in) financing activities | | $ | (362,554 | ) | | $ | 2,636,263 | |
Effect of currency exchange rate | | $ | (6,659 | ) | | $ | (5,418 | ) |
Net cash inflow (outflow) | | $ | (1,746,354 | ) | | $ | 2,794,686 | |
| | Six Months Ended March 31, | |
| | 2010 | | | 2009 | |
| | (Consolidated, unaudited) | | | (Consolidated, unaudited) | |
Net cash provided by operating activities | | $ | 1,553,423 | | | $ | 3,586,444 | |
Net cash (used in) investing activities | | $ | (1,389,582 | ) | | $ | (4,927,447 | ) |
Net cash provided by financing activities | | $ | 2,636,263 | | | $ | 194,967 | |
Net cash inflow (outflow) | | $ | 2,794,686 | | | $ | (1,166,031 | ) |
We finance our legacy 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 investment in new production facilities to manufacture PPS filtration products consumed a large amount of the proceeds obtained from bank loans and the issuance of convertible notes. This capital expenditure to a large extent affected our liquidity.
The planned production of our new PPS products will require a large amount of working capital to purchase expensive raw materials from foreign suppliers. Our operating cash inflow will not be adequate to meet the new working capital needs. Therefore, we are actively seeking public and private financing to acquire additional capital in order to expand our business.
At March 31, 2010,2011, we had severaloutstanding bank loans forin the total amount of $3.8$3.5 million (RMB26(RMB 23 million) with AgricultureIndustrial and Commercial Bank of China, Foshan Branchbranch office. The loan is repayable on February 14, 2012.
On January 31, 2011, we entered into a note extension agreement with each holder (except for Lumen Capital LP who held a convertible note in the principal amount of $100,000) of our outstanding convertible notes to extend the maturity date of the notes from February 12, 2011 to June 30, 2011. On February 11, 2011, we repaid the note held by Lumen Capital. The proceeds received from the sale of the notes were invested in the manufacturing facility to make our new products.
Cash Flow from Operating Activities
Net cash used in operating activities for the six months ended March 31, 2011 was $126,527, compared to $1.5 million provided by operating activities for the same period of the prior year. The operating cash outflow resulted primarily from a decrease in net income and these loans are repayablean increase in December 2010. We haveaccounts receivable, advances to suppliers, and inventory, which were offset by an increase in accounts payable and accrued liabilities.
Cash Flow from Investing Activities
Net cash used by investing activities for the highest credit ratingsix months ended March 31, 2011was $1.25 million, compared to $1.4 million used for that bank.the same period of the prior year. The cash used by investing activities during the six month period ended March 31, 2011 was primarily for the capital project to build up a new PPS manufacturing facility.
On February 12, 2010, we completed a financing transaction in which we raised gross proceeds of $4,140,000 through a private placement of convertible notes and warrants to certain accredited investors.
OperatingCash Flow from Financing Activities
Net cash provide by operatingused in financing activities for the six months ended March 31, 2010 was approximately $1.552011was $0.36 million, compared to a$2.64 million of net cash flow of $3.59 millionprovided by financing activities for the same period of the prior year. The decrease was due primarily to increase in Non-cash interest charges, decrease in advance to suppliers.
Investing Activities
Net cash provided by investing activities forDuring the six months ended March 31, 20102011, the Company repaid more than borrowed from banks. The new loan obtained from Industrial and Commercial Bank of China was negative cash flow $1.39 million, comparedmainly used to a negative cash flowpay off the loan from Agriculture Bank of $4.93 million for the same period of the prior year. The increased cash used from investing activities because there were no large capital expenditures during the first six months of the year. Only deposits were made 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.
We are satisfied this cash expenditure with cash reserves and cash generated from 2009 and 2010 operations.
Financing Activities
Net cash provided by financing activities for the six month period ended March 31, 2010 was approximately $2.64 million, compared to $0.19 million for the same period of the prior year. The increase was the result of cash received from the sale of the convertible notes.
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.China.
Future Cash Commitments
We have an ambitious capital investment plansbusiness expansion plan for our PPS products. The PPS projects in 2010require significant capital expenditures. We financed the capital expenditures with short-term loans from banks and whichintended public equity offerings to raise additional capital to fund our capital projects. In addition, the planned launch of sales of PPS products will require a significant investment capital. This demand for investmentamount of working capital to purchase expensive raw materials. The new need of additional working capital will be met by the proceeds from the Februarythrough private placement, and by outside financing (including the public offering) that we intend to raise as needed to continue our expansion.
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.
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 | | | 6-810 years | |
Other assets | | | 6-10 years | |
Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Increases in the price of crude oil have a negative impact on the cost of our raw materials. Given the recent rise in the price of crude oil and the fact that the global economy is recovering, we expect that the price of our raw materials will stay at relatively high levels due to the relatively high price of crude oil which will adversely affect our gross margin for our PET products as our ability to pass on the increased material costs to customers is limited.
During 2010, all of our raw materials were purchased from suppliers located in the PRC. Because the raw materials for our new PPS products are expected to be sourced from the United States and Japan, we anticipate that, after introduction of our PPS products, a significant amount of our raw materials will be purchased from suppliers in the United States and Japan through their distributors in China. Accordingly, changes in the value of the RMB relative to the dollar and yen will affect our production costs and gross profit in 2011. However, we believe the RMB will continue to appreciate against the dollar based on the increasing pressure from the US government and so the impact of foreign currency conversion will be favorable to us.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that is required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Jie Li, our chief executive officerChief Executive Officer and Mr. Eric Gan our chief financial officer,Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures and internal controls as of March 31, 2010.2011. Based on that evaluation, Mr. LieLi and Mr. Gan concluded that as of March 31, 2010,2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures and internal controls was completed, our disclosure controls and procedures and internal controls were not effective in that certain “material weaknesses”“significant deficiencies” existed related to (i) the U.S. GAAP expertise of our internal accounting staff, and (ii) our internal audit function.
A material weakness is a control deficiency, or a combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected.
As more fully disclosed in a Current Report on Form 8-K filed on November 18, 2010, subsequent to the issuance of our consolidated financial statements for the three and six months ended March 31, 2010, included in our Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the United States Securities and Exchange Commission on May 24, 2010, as amended on May 26, 2010, and in connection with the SEC’s review of our registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that we failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with our private placement of convertible notes which closed on February 12, 2010.. This liability should have been reflected in (i) our unaudited interimfinancial statements for the three month and nine month periods ended June 30, 2010 and (ii) our unaudited interim financial statements for the three month and six month periods ended March 31, 2010.
Our chief executive officer and chief financial officer and our Audit Committee determined, after discussions with Child, Van Wagoner & Bradshaw, PLLC, our independent registered public accounting firm, that (i) our unaudited interim financial statements for the three month and nine month periods ended June 30, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 16, 2010, and (ii) our unaudited interim financial statements for the three month and six month periods ended March 31, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q filed on May 24, 2010, as amended on May 26, 2010 should be restated and should not be relied on.
Changes in Internal Control over Financial Reporting.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we identified a number of “significant deficiencies” in the process of preparing our financial statements for the quarter ended March 31, 2011 as described above.
Because our current accounting department is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies, our management has determined that they require additional training and assistance in U.S. GAAP matters.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 or have taken the following remediation measures:
| · | In August 2010, we hired Eric Gan as our new chief financial officer; |
| · | We are arranginghave arranged for necessary training for our accounting department staff; |
| · | We plan to engage external professional accounting orand consultancy firms to assist us in the preparation of the U.S.US GAAP accounts; and |
| · | We have allocated financial and human resourcesremain committed to strengthen the establishment of effective 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.audit functions. |
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. However, there is no guarantee that these improvements will be adequate or successful or that such improvements will be carried out on a timely basis.
Other than described above, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
The following exhibits are filed as part of this report or incorporated by reference:
Exhibit No. | | Description |
| | |
31.1 | | Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32 | | Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 24, 2010
| CHINA SLP FILTRATION TECHNOLOGY, INC. | |
| | | |
Dated: May 18, 2011 | By: | /s/ Jie Li | |
| | Jie Li | |
| | Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| By: | /s/ Eric Gan | |
| | Eric Gan | |
| | Chief Financial Officer | |
| | (Principal Financial and Accounting Officer) | |
EXHIBIT INDEX
Exhibit No. | | Description |
| | |
31.1 | | Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32 | | Certifications of Principal Executive Officer and Principal Accounting Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |