As filed with the Securities and Exchange Commission on July 8, 2010February 4, 2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CHINA SLP FILTRATION TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
| | | | 84-1465393 |
(State or Other Jurisdiction of Incorporation or Organization)
| | (Primary Standard Industrial | | (I.R.S. Employer |
| Incorporation or Organization) | | Classification Code Number) | | (I.R.S. Employer
Identification Number) |
Shishan Industrial Park
Nanhai District
Foshan City
Guangdong Province, PRC
86-757-86683197
(Address, including zip code, and telephone number including area code,
of registrant’s principal executive offices)
The Corporation Trust CompanyVcorp Services, LLC
1290 Orange Street1811 Silverside Road
Wilmington, Delaware 19801
(302) 658-7581(888) 528-2677
(Name, address, including zip code, and telephone number including area
code, of agent for service)
Copies to:
| | Louis A. Bevilacqua, Esq. |
| Darren Ofsink, Esq. | | Joseph R. Tiano, Esq. |
| Guzov Ofsink, LLC | | Jing Zhang, Esq. |
| 600 Madison Avenue | | Pillsbury Winthrop Shaw |
| | Pittman LLP |
| New York NY 10022 | | 2300 N Street, NW |
| Tel: (212) 371-8008 | | Washington, DC 20037 |
| Fax: (212) 688-7273 | | Telephone (202) 663-8000 |
| | Facsimile (202) 663-8007 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ | | Accelerated Filer ¨ |
| |
Non-Accelerated Filer ¨ | | Smaller Reporting Company x |
| | | |
| | | |
| CALCULATION OF REGISTRATION FEE | | |
Title of Each Class of Securities to Be Registered | | Proposed Maximum Aggregate Offering Price(1)(2)(3) | | | Amount of Registration Fee | |
| Common stock, $0.001 par value per share | | $ | 25,000,000 | | | $ | 1,783 | |
| Common stock, $0.001 par value per share (4) | | | 34,236,536 | | | | 2,442 | |
| Underwriter’s warrants and underlying shares of common stock (5) | | | 1,358,696 | | | | 97 | |
| Total | | | | | | $ | 4,322 | (6) |
| CALCULATION OF REGISTRATION FEE | |
Title of Each Class of Securities to Be Registered | | | Proposed Maximum Aggregate Offering Price(1)(2)(3) | | | Amount of Registration Fee | |
| Common stock, $0.001 par value per share | | | $ | 25,000,000 | | | $ | 1,783 | |
| Common stock, $0.001 par value per share (4) | | | | 34,236,536 | | | | 2,442 | |
| Underwriter’s warrants and underlying shares of common stock (5) | | | | 1,358,696 | | | | 97 | |
| Total | | | $ | 4,322 | |
| | (1) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). In accordance with Rule 457(g) under the Securities Act, because the shares of our common stock underlying the Underwriter’s Warrants (as(as defined below) are registered hereby, no separate registration fee is required with respect to the warrants registered hereby. |
| | (2) | In accordance with Rule 416(a), the registrant is also registering hereunder an indeterminate number of additional shares of common stock that may be issued and resold pursuant to stock splits, stock dividends, anti-dilution provisions, including the anti-dilution provisions under the Underwriter’s Warrants (as defined below), and similar transactions. |
| | (3) | The registration fee for securities to be offered by us is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). |
| (4) | This Registration Statement also covers the resale under a separate resale prospectus (the “Resale Prospectus”) by selling stockholders of the Registrant of up to [ ]369,725 shares of common stock previously issued to the selling stockholders named in the Resale Prospectus (including [ ] shares underlying warrants to be issued to a certain financial advisor and a certain placement agent).Prospectus. |
| | (5) | We have agreed to issue warrants to the representatives of the underwriters (the “Underwriter’s Warrants”) for nominal consideration. The exercise price of the Underwriter’s Warrants is equal to 125% of the price of the common stock offered hereby. The resale of the Underwriter’s warrantsWarrants is registered hereunder. The Underwriter’s Warrants arewill be exercisable withinfor four years commencing one year from the closingeffective date of the offering.registration statement and will therefore cease to be exercisable five years after the effective date of the registration statement. The shares of our common stock underlying the Underwriter’s Warrants are deemed to have the same issuance date as the warrants and are being registered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended. See “Underwriting.” |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
Explanatory Note
This Registration Statement includes two forms of prospectus as set forth below:
| | · | Prospectus. The first prospectus relates to an underwritten offering of shares of common stock (the “Prospectus”) ofby China SLP Filtration Technology, Inc. (the “Company”) through the underwriter named on the cover page of the Prospectus.prospectus. |
| | · | Resale Prospectus. The second prospectus relates to the resale of [ ]369,725 shares of common stock (the “Resale Prospectus”) by the selling stockholders named therein. These shares will be offered and sold at a fixed price of $6 until our common stock becomes quoted on the Over-the-Counter Bulletin Board or listed on an exchange. |
None of the underwriters named or referenced in the Prospectusprospectus is not participating or acting as underwriter, dealer or broker in connection with the sale of the shares to be sold pursuant to the Resale Prospectus. resale prospectus.
The Resale Prospectus isresale prospectus and the prospectus are substantively identical, to the Prospectus, except for the following principal points:differences:
| | · | they containeach contains different outside and inside front covers; |
| | · | they containeach contains different Offering“Offering” sections in the Prospectus Summary“Prospectus Summary” section beginning on page 51 for the Prospectusprospectus and Page A-5page A-1 for the Resale Prospectus;resale prospectus; |
| | · | they containeach contains different Use“Use of ProceedsProceeds” sections on page 2526 for the Prospectusprospectus and Page A-25A-26 for the Resale Prospectus.resale prospectus. |
| | · | the Capitalization“Capitalization” and Dilution“Dilution” sections on pages 2728 and 29, respectively, of the Prospectusprospectus are deleted from the Resale Prospectus;resale prospectus; |
| | · | a Selling Stockholder“Selling Stockholder” section is included in the Resale Prospectusresale prospectus beginning on page A-26;A-27; |
| | · | references to the Prospectusprospectus will be replaced in the resale prospectus with references to the Resale Prospectus;resale prospectus; |
| | · | the Underwriting“Underwriting” section fromin the Prospectusprospectus beginning on page 8297 is deleted from the Resale Prospectusresale prospectus and a Plan“Plan of DistributionDistribution” is inserted in its place on page A-82.A-97. |
| | · | the Legal Matters“Legal Matters” section in the Resale Prospectusresale prospectus on page A-87A-103 deletes the reference to counsel for the underwriters; and |
| | · | the outside back cover of the Prospectusprospectus is deleted from the Resale Prospectus.resale prospectus. |
The Registrantregistrant has included in this Registration Statement,registration statement, after the financial statements, a set of alternate pages to reflect the foregoing differences of the Resale Prospectusresale prospectus as compared to the Prospectus.prospectus.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 8, 2010Subject to Completion, Dated February 4, 2011
PRELIMINARY PROSPECTUS
________4,166,667 Shares
CHINA SLP FILTRATION TECHNOLOGY, INC.
Common Stock
This is firm commitmentour initial public offering. We are offering of ______4,166,667 shares of our common stock. Prior to this offering, there has been noNo public market currently exists for our common stock.
We expect thatcurrently anticipate the public offering price of our common stock will be between $___$5.00 and $____$7.00 per share.
We intend to applyhave applied to have our common stock listed on the NASDAQ Global Market or the NASDAQ Capital Market under the symbol “ ”. We expect our listing to be effective prior to the date of this prospectus.“SLPC.”
Investing in our common stock involves a high degree of risk. See the section entitled “Risk Factors” beginning on page 8.7.
| | | | | | | |
| Public offering price | | $ | | | | $ | | |
| Underwriting discount | | $ | | | | $ | | |
| Proceeds, before expenses, to us | | $ | | | | $ | | |
We have granted the underwriters a 45-day option to the representative of the underwriters to purchase up to ___625,000 additional shares of common stock from us to cover over-allotments, if any. The shares issuable upon exercise ofat the underwriters’ option are identical to those offered by this prospectusinitial public offering price less the underwriting discount and have been registered under the registration statement of which this prospectus forms a part.commission.
In connection with this offering, we have agreed to issue to the representative of the underwriters a warrant to purchase up to 5% of the shares sold pursuant to the offering (excluding the over-allotment) at $___$ per share (125% of the price of the shares sold in the offering), which may be exercised on the first anniversary of the date of this prospectus and expiring four years after such anniversary.
The underwriters expect to deliverUnder the terms of a consulting agreement between us and United Best Investment Limited, a Hong Kong company controlled by Li Jun, one of our directors, on the closing of this offering United Best shall receive a fee of $ , which represents 3% of the gross proceeds of this offering.
Delivery of our shares to purchasers in the offeringwill be made on or about ___, 2010., 2011.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
| Brean Murray, Carret & Co. |
The date of this prospectus is , 20102011
TABLE OF CONTENTS
| Prospectus Summary | | | 1 | |
| Risk Factors | | | 8 | 7 |
| Caution Regarding Forward Looking Statements and Other Information Contained in this Prospectus | | | 25 | 26 |
| Use of Proceeds | | | 25 | 26 |
| Determination of Offering Price | | | 26 | |
| Dividend Policy | | | 26 | 27 |
| Exchange Rate Information | | | 27 | |
| Capitalization | | | 27 | 28 |
| Dilution | | | 29 | |
Market Price of our Common Stock and Related Stockholder Matters | | | 30 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| Our Corporate History | | 31 | 40 |
| Business | | | 44 | 45 |
| Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants | | | 58 | 61 |
| Shares Eligible for Future Sale | | | 62 | 70 |
Security Ownership of Certain Beneficial Owners and Management | | | 63 | 71 |
| Management | | | 65 | 73 |
| Executive Compensation | | | 69 | 81 |
| Certain Relationships and Related Transactions | | | 71 | 85 |
| Description of Securities | | | 72 | 87 |
| Material United States Federal Income Tax Considerations | | | 75 | 90 |
| Material PRC Income Tax Considerations | | | 79 | 94 |
| Underwriting | | | 82 | 97 |
| Legal Matters | 103 |
| Service of Process and Enforcement of Judgments | | 87 | 103 |
| Experts | | | 87 | 103 |
| Where You Can Find More Information | | | 88 | 103 |
| Index to Financial Statements | | | F-1 | |
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with additional or different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted.
This prospectus includes market size, market share and industry data that we have obtained from market research, publicly available information and various industry publications. The third party sources from which we have obtained information generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified any of the data from third party sources nor have we verified the underlying economic assumptions relied upon by those third parties. Similarly, industry forecasts and market research, which we believe to be reliable based upon management’s knowledge of the industry, have not been verified by any independent sources.
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including “Risk Factors” beginning on page 87 and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. Unless otherwise indicated, all share amounts and prices described in this prospectus have been adjusted to reflect a 1-for-5 reverse stock split of our common stock effected on March 24, 2010.
References in this prospectus to “China SLP Filtration,” “the Company,” “we,” “us” or “our” refer to China SLP Filtration Technology, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
Our Company
We are a leading PRC-based manufacturer of nonwoven fabrics in the PRC. In 2009, we ranked No. 1 in sales revenue in the PRC forChina. Nonwoven fabrics, or nonwovens, are synthetic fabrics, such as felt and polyester, (PET) nonwoven fabrics according to a report issuedwhich are neither woven nor knitted, but instead are made from long fibers, bonded together by the China Nonwovens & Industrial Textiles Association,chemical, mechanical, heat or CNITA.solvent treatment.
We currently manufacture two types of PET nonwoven fabrics which are used in a wide range of products, including filtration products, road construction materials, home furnishings, automobile interior insulation and industrial packaging. Our current PET products are sold primarily to PRC-based manufacturers which use our products as raw material components for end-products they sell to their customers operating in the heavy industrial, automotive, construction and home furnishing industries.
We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product line around which our long-term growth strategy is centered. We believe that this manufacturing process is proprietary and have applied for a process patent in the PRC and intend to apply for a process patent in the U.S. and Europe. PPS nonwoven fabric is a heat resistant, corrosion-proof and flame retardant fabric, and iscan be used to manufacture dust filter bags for pollutant dust removal and emissions controls in coal-fired power plants, garbage incinerators and cement factories. As a result of the recent adoption of new,
The PRC government recently adopted stringent environmental regulations governing the discharge of carbon and other emissions by coal-fired power plants and other heavy industrial plants, weplants. Under these new regulations, which came into effect on January 1, 2010, pollutant emissions cannot exceed 50 milligrams per cubic meter. We believe, based on an article published in China Nonwoven & Industrial Textile (CNIT) in 2010, that less than 10% of the demand for our PPS nonwoven fabrics will be significant. Our independent market research indicates that over 80% of coal-fired power plantsboilers in China are notwere equipped with dust removal filtration bags and less than 10% of the bag filters in compliance with current government regulations and are faced with the choice of either complying or being shut down. use were made from PPS fiber.
Bag filters made of our PPS materials offer these and other plant operatorscan be used as a cost effective methodway of meeting thesethe new emission and dust pollutant standards in China.the PRC because the installation of bag filters is significantly cheaper than installing costly pollutant dust removal equipment, such as engineered scrubbing systems, which we believe could be cost prohibitive for smaller plant operators.
Based on lab tests which we conducted internally, we believe that our PPS nonwoven fabric is superior to other currently available high temperature filtration material because it is lighter, thicker, stronger, has higher air permeability and filtration efficiency and is significantly cheaper to produce. Due to the superior characteristics of our PPS product coupled with the demand created by these new regulations, we believe that our PPS material will become a market leader for high temperature filtration applications.
We willintend to continue to manufacture and generate revenues from the sale of PET nonwoven fabrics,nonwovens, but we expect the sales of our PPS nonwoven fabrics to ultimately eclipse the sales of our existing PET nonwoven products and become our main product offering.
Our manufacturing facility, which is located in Foshan City, Guangdong Province, PRC, currently has three production lines for PET nonwovens with total annual production 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 four high tech production lines with annual production capacity of 4,800 tons, which will bring our total overall production capacity to 12,800 tons per year.
Our Growth Strategy
We believe that our leading market position, our ability to meet customer demand and our commitment to innovation positions us well for future growth. Our growth strategy centers around the following strategic initiatives:is as follows:
| | · | Commence production of our PPS nonwoven fabric product.We plan to commence production of PPS nonwoven fabric product using our proprietary processnonwovens in the second halfearly part of 20102011 for sale to PRC-based operators of coal-fired power plants, garbage incinerators and other manufacturers that are not in compliance with recently adoptednew PRC environmental regulations governing the discharge of carbon and other emissions. We believe our PPS nonwoven fabric is superior to other currently available types of PPS fabric because it is lighter, thicker, stronger, has higher air permeability and filtration efficiency and significantly cheaper to produce and will ultimately replace other high temperature filter materials.
regulations; |
| | · | Expand our manufacturing facilities. We plan to significantly expand our PPS nonwoven manufacturing facilities and acquire fourinstall three new production lines to manufacture PPS nonwoven material. This will increasematerial, increasing our total annual manufacturing capacity from 8,000 tons to 12,80011,600 tons of nonwoven material. We believe that the expansion of our manufacturing capacity will allow us to meet the demand for our PPS nonwoven products by numerous plant operators which must become compliant with new PRC environmental regulations.
material; and |
| | · | Develop, protect and commercialize our proprietary technology. Our PPS nonwoven fabric products are manufactured using a proprietary, continuous filament, spun-bond, needle-punched manufacturing process which we believe is entitled to patent protection. We hold a number of authorized patents and have a patent application currently pending in the PRC for this process and we intend to apply for a process patent in North America and Europe. We intend to capitalize on our proprietary technology by developing and commercializing our nonwoven products for use in numerous applications and believe our proprietary technology gives us a competitive advantage and acts as a barrier to entry for our competitors. For the sales of the PPS nonwoven fabric, we will use our existing sales force which will focus our sales efforts on coal-fired boilers, located inside of coal-fired power plants, as this is currently the most suitable and largest market for PPS filtration materials.
applications. |
Our Competitive Strengths
We believe our competitive strengths are as follows:
| | · | We offer high quality PET products with lowlower production costs. We utilize high quality, proprietary manufacturing processes using advanced manufacturing equipment which allows us to offer nonwoven products which have lowerand operational and production costs than products offered by our competitors’ products. competitors; |
| | · | Our proprietary manufacturing processes presentBag filters made of our PPS material offer plant operators a barriercost effective alternative to entry for our potential competitors. We hold a number of authorized patentsmeet new emission and have a patent application pendingdust pollutant standards in the PRC including a process patent for the manufacture ofbecause using PPS nonwovens, andbag filters is significantly cheaper than installing pollutant dust removal equipment;
|
| · | We believe, based on laboratory tests which we intend to apply for a process patent in North America and Europe forconducted internally, that our PPS nonwoven manufacturing process. Additionally, we will continuematerial is superior to investother high temperature filtration material currently available for use in researchbag filters because it is lighter, thicker, stronger, has higher air permeability and development. filtration efficiency, and is significantly cheaper to produce; |
| · | We can offer our products at attractive pricing points because our PPS fabric, which like alternative products is priced according to weight, is lighter than alternative products; and |
| · | We believe thesethat our proprietary manufacturing processes give us a competitive advantage over our competitors and act as a barrier to entry. |
Risk Factors
The implementation of our growth strategy and our ability to grow based on our competitive strengths remain subject to a variety of external and internal challenges. Accordingly, investing in our common stock involves significant risks. Some of the challenges and risks we face are listed below:
| | · | We are well positionedneed to capitalize on China’s “green” movement. The Chinese government recently imposed stricter regulations on carbon and other emissions by coal-fired power plants and other emitters of pollutants in China. We believe that the vast majority of coal-fired power plants in the PRC are not in compliance with current government requirements. Bag filters made ofraise capital to fully commercialize our PPS material offer operators of coal-fired power plantsmanufacturing process and other plant operators a cost effective method of meeting these new emissioncannot grow and dust pollutant standards. execute our strategic plan if we fail to do so. |
| | · | We have efficient productiona limited operating history and operations management. As a resultno experience manufacturing PPS nonwoven fabric so it is difficult to evaluate our future prospects and historical results of our advanced equipment and proprietary manufacturing processes, we believe that we exceed industry standards in productivity, reduction of variability and delivery lead time for our existing products. This results in fewer product warranty claims and greater customer satisfaction. operations. |
| · | Our success depends in part on market acceptance of our PPS nonwoven fabric as a preferred material for use in dust filter bags. |
Our Industry | · | If we have miscalculated the future demand for our products, we may wind up unnecessarily spending a significant amount of funds on the expansion of our PPS manufacturing facilities. |
| · | We are subject to risks of conducting business in China. |
The nonwoven fabric industry is large and growing, driven primarily by China’s economic development in recent years. | · | We have significant outstanding short-term borrowings and we may not be able to obtain extensions when this debt matures. |
| · | Enforcement against us or our directors and officers may be difficult and investors could be unable to collect amounts due in the event we or any of our directors or officers violates applicable law. |
| · | Our executive officers and directors beneficially own a significant portion of our common stock and may take actions that are contrary to an investor's interests and could reduce the value of our stock. |
| · | We are a “controlled company” as such term is defined under the Nasdaq Marketplace Rules and our board of directors does not and will not have a majority of independent directors. Accordingly, the Company will lack the checks and balances that an independent Board can bring to management’s decision making process. |
You should carefully consider the risks described in “Risk Factors” beginning on page 7 before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment.
Our Industry
The nonwoven fabric industry in the PRC is large and growing, driven primarily by China’s continued economic development. China has experienced rapid economic and industrial growth in the past 30 years. China’s output of iron and steel, cement, coal, fertilizer and power generation all currently rank as first or second in the world.world (Source: US Department of Commerce and US Department of the Interior). China’s consumption of raw materials currently ranks second in the world.world (Source: Report from the EIA Energy Information Administration). Due to outdated technology and equipment in China’s chemical, raw materials and energy industries, China has encountered problems of inefficient utilization of energy and resources, as well as heavy pollution due to accelerated urbanization. Reducing emission pollution has been a focus for the Chinese Central Government for several years and is expected to remain a focus moving forward. As China’s government imposes stricter policies on environmental protection, industrial gas and dust emission limits have become stricter. Existing water foam and static dust removal technology is not capableWe believe this creates a significant market opportunity for the commercialization of complying with government regulations, which, in turn, increases the demand for filter bag type dust removal techniques.
Bag filters are a solution to smoke dust and powder dust emissions because they are highly efficient in air pollution reduction. By adoptingour PPS fiber as a filtration material, our end users can effectively and efficiently contain pollutants such as powder dust, smoke dust, sulfur dioxide and dioxin.
We expect the demand for fiber grade PPS products will increase substantially by operators of coal-fired power plants, the metallurgical plants, and garbage incinerators.
Corporate Structure
Our current corporate structure is shown in the diagram below:
Corporate Information
Our executive offices are located at Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province, People’s Republic of China, or PRC, and our telephone number is +86-757-86683197. Our website address is www.silepu.com and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.
Risk Factors
Investing in our common stock involves significant risks, some of which are listed below:
| · | We need to raise capital to fully commercialize our PPS manufacturing process and cannot grow and execute our strategic plan if we fail to do so. |
| · | We have a limited operating history and no experience manufacturing PPS nonwoven fabric so it is difficult to evaluate our future prospects and results of operations. |
| · | Our success depends in part on market acceptance of our PPS nonwoven fabric. |
| · | If we have miscalculated the future demand for our products, we may wind up unnecessarily spending a significant amount of funds on the expansion of our PPS manufacturing facilities |
| · | We are subject to risks of conducting business in China. |
You should carefully consider the risks described in “Risk Factors” beginning on page 8 before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment.
Use of Terms
Except where the context otherwise requires and for the purposes of this prospectus only:
| · | “We,” “us,” “our company,” “our,” and “China SLP Filtration” refer to the combined business currently conducted by China SLP Filtration Technology, Inc. and its consolidated subsidiaries; |
| · | “Hong Hui” refers to Hong Hui Holdings Limited, a British Virgin Islands holding company which was incorporated in the British Virgin Islands on January 6, 2010 and our direct, wholly-owned subsidiary; |
| · | “Technic” refers to Technic International Limited, a Hong Kong company, and a direct wholly-owned subsidiary of Hong Hui; |
| · | “Foshan” refers to Foshan S.L.P. Special Material Co., Ltd., a PRC operating company and our indirect wholly-owned subsidiary; |
| · | “China,” “Chinese” and “PRC,” refer to the People’s Republic of China; |
| · | “Renminbi” and “RMB” refer to the legal currency of China; |
| · | “U.S. dollars,” “dollars,” and “$” refer to the legal currency of the United States of America; |
| · | “SEC” refers to the United States Securities and Exchange Commission; |
| · | “Molokai” refers to Molokai Enterprises, Inc., a Colorado corporation and our predecessor which merged with and into our company when we were formerly known as Perpetual Technologies, Inc.;
|
| · | “Primary Capital” refers to Primary Capital, LLC.; |
| · | “United Best” refers to United Best Investment Limited, a Hong Kong company;
|
| · | “PPS” refers to polyphenylene sulfide fiber; |
| · | “PET” refers to polyester; and |
| · | “Share Exchange Transaction” and “Reverse Merger” refer to the transaction on February 12, 2010 pursuant to which shares of our company were exchanged for 100% of the shares of Hong Hui. |
The Offering
| Common stock offered by us | | shares.4,166,667 shares (4,791,667 shares if the representative of the underwriters exercises its over-allotment option in full.full). |
| | | |
Common stock outstanding before this offering | | 15,235,714 shares |
| | |
Common stock to be outstandingimmediately after this offering | | shares. |
| | |
Offering price | | $ per share21,814,562 shares, including (i) 15,265,714 shares of common stock currently outstanding, (ii) 1,923,809 shares issuable on conversion of the notes in the aggregate principal amount of $4,040,000, (iii) 4,166,667 shares to be issued in the offering, and (iv) 193,186 shares to be issued to United Best and 265,186 shares to be issued to Primary Capital on the closing of the offering. |
| | | |
| Use of proceeds | | We willintend to use the net proceeds offrom this offering (i) to repay a short term loan in the amount of $3.9 million which was used as part of the purchase price of approximately $9.6 million for the build-out and purchase of a new production line to manufacture PPS materials which is currently being installed and is expected to be completed in February 2011; and (ii) to purchase manufacturing equipment andtwo additional production lines to manufacture PPS materials. The balance of the net proceeds is expected to be used for product development, working capital and for general corporate purposes. See “Use of Proceeds” on page 2526 for more information. |
| | | |
| Over-allotment option | | We have granted the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase up to an additional ________625,000 shares of common stock from us at the public offering price less underwriting discounts, solely for the purpose of covering over-allotments, if any.to cover over-allotments. |
| | | |
Underwriter’s Warrants | | In connection with this offering, we have agreed to issue to the representative of the underwriters a warrant to purchase 5% of the shares sold in this offering (excluding the over-allotment) at $______ per share (125% of the price of the shares sold in the offering). |
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DividendsListing | | We have never paid a dividend onapplied to have our common stock and have no intention to pay dividends inlisted on the near future.NASDAQ Capital Market. |
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| Lock-up Agreement | | We and each of our directors, executive officers and certain principal stockholders have agreed, subject to certain exceptions, not to, including not to announce an intention to, for a period of 90 days from the date of this prospectus, sell, transfer or otherwise dispose of any shares of our common stock without the prior written consent of the underwriters’ representative. See “Underwriting.” |
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| Risk factors | | Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 8. |
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Listing | | We intend to apply to have our common stock listed on the NASDAQ Global Market or NASDAQ Capital Market.7. |
Summary Consolidated Financial Information
In the table below we provide you with historical consolidated financial data for the fiscal years ended September 30, 2009 and 2008 and the six month periods ended March 31, 2010 and 2009 derived from our audited and unaudited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical summary consolidated financial data, it is important that you read it along with the appropriate historical consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
| | | Fiscal Years Ended | |
| | | September 30 | |
| | | 2010 | | | 2009 | |
| Statement of Operations Data: | | | | | | |
| Net sales | | $ | 19,952,422 | | | $ | 11,849,712 | |
| Cost of sales | | | 13,772,843 | | | | 7,296,327 | |
| Cost of sales related party | | | - | | | | 610,287 | |
| Gross profit | | | 6,179,579 | | | | 3,943,098 | |
| Total operating expenses | | | 2,272,881 | | | | 1,230,611 | |
| Operating income | | | 3,906,698 | | | | 2,712,487 | |
| Total other income (expenses) | | | (1,661,598 | ) | | | (266,835 | ) |
| Income before income taxes | | | 2,245,100 | | | | 2,445,652 | |
| Net income | | | 2,221,077 | | | | 2,445,652 | |
| Net income per common share, basic and diluted | | | 0.15 | | | | 0.17 | |
| Basic shares outstanding | | | 14,979,390 | | | | 14,510,204 | |
| Diluted shares outstanding | | | 16,227,061 | | | | 14,510,204 | |
| Pro forma net income (loss) per common share, basic and diluted | | | 0.02 | | | | N/A | |
| | | Six Months Ended March 31, (unaudited) | | | Years Ended September 30, | |
| | | 2010 | | | 2009 | | | 2009 | | | 2008 | |
Statement of Operations Data: | |
Net sales | | $ | 9,847,025 | | | $ | 4,540,833 | | | $ | 11,849,712 | | | $ | 11,611,719 | |
Cost of sales | | | 6,843,833 | | | | 2,906,402 | | | | 7,296,327 | | | | 7,409,624 | |
Cost of sales related party | | | - | | | | - | | | | 610,287 | | | | 714,180 | |
Gross profit | | | 3,003,192 | | | | 1,634,431 | | | | 3,943,098 | | | | 3,487,915 | |
Total operating expenses | | | 662,138 | | | | 758,442 | | | | 1,230,611 | | | | 662,481 | |
Operating income | | | 2,341,054 | | | | 875,989 | | | | 2,712,487 | | | | 2,825,434 | |
Total other income (expenses) | | | (451,374 | ) | | | (144,243 | ) | | | 266,835 | | | | 126,259 | |
Income before income taxes | | | 1,889,680 | | | | 731,746 | | | | 2,445,652 | | | | 2,699,175 | |
Net income | | $ | 1,889,680 | | | $ | 731,746 | | | $ | 2,445,652 | | | $ | 2,699,175 | |
Net income per common share, basic and diluted | | $ | 0.13 | | | $ | 0.05 | | | $ | 0.17 | | | $ | 0.19 | |
Basic and diluted shares outstanding | | 14,701,547 | | | 14,510,204 | | | 14,510,204 | | | 14,510,204 | |
| Diluted shares outstanding | | 15,147,208 | | | 14,510,204 | | | 14,510,204 | | | 14,510,204 | |
| | | | | | | | | | As of | |
| | | | | | | As of | | | September 30, 2010 | |
| | | | | | | September 30, 2010 | | | Pro Forma | |
| | | | As of | | | Pro Forma | | | As adjusted | |
| Balance Sheet Data: | | As of September 30, 2009 | | | As of March 31, 2010 (unaudited) | | As adjusted (*) (unaudited) | | | September 30, 2010 | | | (unaudited) (1) | | | (unaudited) (2) | |
| Current assets | | $ | 6,650,979 | | | $ | 10,560,180 | | | | | $ | 9,652,296 | | | $ | 9,552,296 | | | $ | 27,652,296 | |
| Total assets | | | 18,673,866 | | | | 23,380,367 | | | | | | 26,055,380 | | | | 25,955,380 | | | | 44,055,380 | |
| Current liabilities | | | 5,064,425 | | | | 7,248,935 | | | | | | 8,981,223 | | | | 5,017,216 | | | | 1,117,216 | |
| Long-term debt | | | - | | | | - | | | | | | - | | | | - | | | | - | |
| Total liabilities | | | 5,064,425 | | | | 7,248,935 | | | | | | 8,981,223 | | | | 5,017,216 | | | | 1,117,216 | |
| Total stockholders’ equity | | | 13,609,441 | | | | 16,131,432 | | | | | | 17,074,157 | | | | 20,938,164 | | | | 42,938,164 | |
(1) Pro forma information assumes conversion of the convertible notes into common stock on September 30, 2010.
(2) Pro forma as adjusted amounts represent March 31,September 30, 2010 amounts adjusted to reflect (i) the conversion of our outstanding convertible notes in the aggregate principal amount of $4,040,000 (the portion of the outstanding notes with respect to which the maturity date has been extended to June 30, 2011) into 1,923,809 shares of common stock (at a conversion price of $2.10 (based on an assumed offering price of $6.00)), (ii) receipt of net proceeds from the offering estimated to be approximately $19,100,000,$22,000,000 (based on the assumed initial public offering price of $6.00 per share), not including any proceeds from the shares that may be offered pursuant to the underwriters’ over-allotment option. option, and (iii) repayment of short-term bank loans of $3.9 million.
| | | Fiscal Years Ended | |
| | | September 30, | |
| | | 2010 | | | 2009 | |
| Cash Flow Data: | | | | | | |
| Cash Flow from Operating Activities: | | | | | | |
| Net cash provided by operating activities | | $ | 4,411,689 | | | $ | 2,700,162 | |
| | | | | | | | | |
| Cash Flow from Investing Activities: | | | | | | | | |
| Net cash (used in) investing activities | | | (5,230,563 | ) | | | (1,158,033 | ) |
| | | | | | | | | |
| Cash Flow from Financing Activities: | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 2,708,294 | | | | (600,498 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 3,297,648 | | | | 2,367,570 | |
| Cash and cash equivalents, end of period | | $ | 5,295,301 | | | $ | 3,297,648 | |
| | | Six Months Ended March 31, (unaudited) | | | Fiscal Years Ended September 30, | |
| | | 2010 | | | 2009 | | | 2009 | | | 2008 | |
| Cash Flow Data: | | | | | | | | | | | | |
| Cash Flow from Operating Activities: | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 1,553,423 | | | $ | 449,129 | | | $ | 2,700,162 | | | $ | 3,381,782 | |
| | | | | | | | | | | | | | | | | |
| Cash Flow from Investing Activities: | | | | | | | | | | | | | | | | |
| Net cash (used in) investing activities | | | (1,389,582 | ) | | | (621,244 | ) | | | (1,158,033 | ) | | | (4,358,330 | ) |
| | | | | | | | | | | | | | | | | |
| Cash Flow from Financing Activities: | | | | | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 2,636,263 | | | | (928,128 | ) | | | (600,498 | ) | | | (92,974 | ) |
| | | | | | | | | | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 3,297,648 | | | | 2,367,570 | | | | 2,367,570 | | | | 3,110,180 | |
| Cash and cash equivalents, end of period | | $ | 6,092,334 | | | $ | 1,247,365 | | | $ | 3,297,648 | | | $ | 2,367,570 | |
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this prospectus, including the matters discussed under “Caution Regarding Forward Looking Statements and Other Information Contained in this Prospectus,” before you decide to invest in shares of our common stock. You should pay particular attention to the fact that we are a holding company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ from those of the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects would be materially and adversely affected. You should also consider all other information contained in this prospectus before deciding to invest in shares of our common stock.stock.
Risks Related to Our Business
We need to raise capital to fully commercialize our PPS manufacturing process and cannot grow andmay not be able to fully execute on our strategic plangrowth strategy if we fail to do so.
Our core growth strategy is to commence production of PPS fabric and bag filters using our proprietary manufacturing process for sale initially to the numerous coal-fired power plants and subsequently to steel manufacturers, operators of garbage incinerators and other potential users in the PRC that are not in compliance with environmental regulations. We intend to use the net proceeds raised in this offering to purchase PPS manufacturing equipment and to repay a short-term loan used to purchase manufacturing equipment and may need to raise additional capital in the future through public or private equity offerings or debt financings. We cannot be certain that additional funding will be available on acceptable terms, if at all. As of the date of this prospectus, we believe the U.S. capital markets are facing many difficulties. Potential sources of additional financing may be unwilling or unable to provide us with the additional financing we need to fully carry out our expansion plans. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution and the price of our common stock could decrease. Any debt financing, if available, would result in us incurring interest expenses and we may be required to pledge assets as security for the debt and may be constrained by restrictive financial or operational covenants. If we are unable to raise additional capital, when required, or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or the commercialization of one or more of our products,PPS product, which would harm our business operating results, financial condition and future growth prospects.
Management recently identified a material weakness in our internal control over financial reporting which required a restatement of our financial statements. If our internal controls and disclosure controls and procedures continue to be ineffective, there may be errors in our financial statements that could require a future restatement, our filings may not be timely filed and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.
Our success dependsmanagement identified material weaknesses and concluded that our internal controls over financial reporting and our disclosure controls and procedures were not effective as of March 31, 2010, June 30, 2010 and September 30, 2010, respectively.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in partinternal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Because our current accounting department is relatively new to U.S. GAAP and the market acceptancerelated internal control procedures required of U.S. public companies, our management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also deficient due to insufficient qualified resources to perform internal audit functions.
These material weaknesses resulted in our inability to detect accounting errors where we failed to record on our financial statements a liability of $75,000 owed to each of United Best and Primary Capital ($150,000 in total) for advisory services rendered in connection with our private placement of convertible notes, which closed on February 12, 2010, as selling, general and administrative expenses for the interim period ended March 31, 2010 and nine month period ended June 30, 2010. We also noted that a grant of 30,000 restricted shares of common stock in June 2010 to one of our directors was not reflected in the originally issued financial statements for the interim period ended June 30, 2010.
The identification of these errors resulted in the restatement of (i) our interim financial statements for the three month and nine month periods ended June 30, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 16, 2010 and in this registration statement previously filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010 and (ii) our interim financial statements for the three month and six month periods ended March 31, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q filed on May 24, 2010, as amended on May 26, 2010 and in this registration statement previously filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010. This error was not detected by our internal control procedures.
We have taken certain steps to resolve these material weaknesses, including:
| · | In August 2010, we hired Eric Gan as our new chief financial officer; |
| · | We are arranging necessary training for our accounting department staff; |
| · | We plan to engage external professional accounting or consultancy firms to assist us in the preparation of the U.S. GAAP accounts; and |
| · | We have allocated financial and human resources to strengthen the internal control structure and we have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting. |
We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. However, there is no guarantee that these improvements will be adequate or successful or that such improvements will be carried out on a timely basis. A material weakness in our internal controls and procedures may lead to further accounting errors, which in turn may result in further restatements of our financial statements. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting process, which could adversely affect the trading price of our shares.
If our PPS nonwoven fabric.fabric does not achieve wide market acceptance as a preferred material for use in pollutant dust removal bag filters by operators of coal fired power plants, incinerators, cement factories and other potential users, anticipated profits will not materialize and our business will suffer.
We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture PPS nonwoven fabric. We intend to commence commercial production of PPS material in the early part of 2011.
PPS nonwoven fabric has many applications including high temperature filtration of pollutant emissions and can be used as the material to manufacture high temperature bag filters for coal-fired power plant emissions, garbage incinerators and cement factories. Although our PPS nonwoven fabric has been tested in laboratories, a prototype bag filter made of our PPS material has not been tested on site by any potential end user. We intend to commence commercial production of PPS material using our manufacturing process in the later part of 2010. We believe that the
The PPS material that we plan to produce using our proprietary process differs from other types of PPS fabric currently available in the market place in that it is lighter, thicker, and stronger, has higher air permeability and filtration efficiency and is significantly cheaper to produce.produce than other types of high temperature filtration materials currently available in the market place.
Although prototype bag filters made of our PPS product have been tested in laboratories, they have not been tested on site by any potential end user and we do not expect to develop prototype products for testing by any potential end user prior to commence commercial production of PPS products. Our new PPS nonwoven fabric may never achieve broad market acceptance, due to any number of factors, including that the product may not be as effective as our initial testing indicates and competitive material may be introduced which renders our products and technologiesPPS product too expensive or obsolete.
If our PPS material is not broadly accepted in the marketplace for its intended uses, we may not achieve a competitive position in the market, anticipated profits will not materialize and our business will suffer.
We have a limited operating history and have no experience commercially manufacturing PPS nonwoven fabric thatwhich is a key component of our growth strategy which makes it difficult to evaluate our future prospects andbased on historical results of operations.
Our operating history is limited. We have a limited operating history. Wecurrently make two types of PET nonwoven fabrics and we commenced production of spun-bond thermal calendaredone type of PET nonwovensfabric in 2006 and spun-bond needle-punched or spun-bound polyester filament needle-puncheda second type of PET nonwovensfabric in 2009. We have not yet begun to commercially manufacture PPS nonwoven fabric. We plan to do so in the early part of 2011. Accordingly, you should consider our future prospects and historical results in light of the risks and uncertainties experienced by early-stage companies in evolving markets such as our ability to:
| | · | develop and successfully commercialize new products particularly PPS nonwoven fabricsnonwovens using our proprietary manufacturing process; |
| | · | attract new customers and retain existing customers;achieve widespread market acceptance of our PPS product for use in high temperature pollutant dust removal bag filters; |
| | · | increase awareness of our products and continue to develop customer loyalty; |
�� | · | respond to competitive market conditions; |
| | · | respond to changes in the regulatory environment; |
| | · | manage risks associated with intellectual property rights; |
| | · | maintain effective control of our costs and expenses; |
| | · | raise sufficient capital to sustain and expand our business; and |
| | · | attract, retain and motivate qualified personnel. |
Because we are a relatively new company, we may not be experienced enough to address all the risks in our business or in our planned expansion in a short period of time. If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
We have significantIf we cannot extend or renew our currently outstanding short-term borrowings,loans or if our convertible notes are not converted before their maturity date, we will have to repay these loans with cash on hand or refinance them with another lender or else face a default and potential foreclosure upon the collateral we may not be able to obtain extensions when they mature.pledged.
Our notes payable to banks for short-term borrowings for the year ended September 30, 2009 were approximately RMB 20 million. Generally, these short-term bank loans mature in one year or less and contain no specific renewal terms. However, in China, it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an on-going basis shortly before they mature. Although we have renewed our short-term borrowings in the past, we cannot assure you that we will be able to renew these loans in the future as they mature. In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks to increase the amount of reserves they hold and to reduce or limit their lending. In addition, our convertible notes in the principal amount of $4,040,000 mature on June 30, 2011. In December 2010 we repaid our outstanding short-term bank loans totaling RMB 25.4 million and we applied for and obtained official approval for a six month bank loan in the amount of RMB 20 million from the Foshan branch of the Agricultural Bank of China. On December 8, 2010, we obtained a 90 day term loan from Standard Chartered Bank in amount of RMB 6,000,000 for a term of 90 days. Although these short-term bank loans contain no specific renewal terms, in China, it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term loans on an on-going basis shortly before they mature. Although we have renewed our short-term loans in the past, we cannot assure you that we will be able to renew these loans in the future as they mature. If we are unable to obtain renewals of these loans or sufficient alternative funding on reasonable terms from banks or other parties,cannot renew them we will have to repay these borrowingsthem with the cash on our balance sheet or cash generated by our future operations, if any.from operations. We cannot assure you that our business will generate sufficient cash to do so.
We expect that the convertible notes will be converted into our common stock at the closing of this offering. If, however, the convertible notes are not converted before their maturity date, we believe we will be able to obtain additional loans from a bank or raise funds from private sources to pay off the principal and interest due on the notes. We cannot assure you, however, that this will be the case and if we are unable to do so and if our business fails to generate sufficient cash flow from operations to repay these borrowings.notes, we will be in default.
If we default on these loans and convertible notes, we will incur interest and penalties. In addition, as the loans are secured by our buildings and land if we fail to repay these loans, the lender could take possession of the collateral.
If we have miscalculated the future demand for our products, we may windend up unnecessarily spending a significant amount of funds on the expansion of our PPS manufacturing facilities.equipment which ultimately we may not have needed and which we may not be able to resell.
We are currently installing a new production line to produce PPS materials and intend to use the majority of the net proceeds of this offering to constructpurchase and significantly expand our manufacturing facilities and acquire four newinstall two additional production lines to manufacture PPS material.materials. This will increase our total annual manufacturing capacity from 8,000 tons to 12,80011,600 tons of nonwoven material. The scope and timing of our expansion plans have beenare based on our internal projections and estimated demand for our PPS products. If our projections are incorrect and the actual demand for our PPS products is less than our projections,projected, we may expend a significant amount of capital on an expansion projectequipment which ultimately may not have been needed.
If we are unable to adequately protect our intellectual property, we could lose a significant competitive advantage.advantage and competitors could use our processes and manufacture and market similar products using similar processes, which could harm our market share and lower our profits.
We hold a number of authorized process patents and have a patent application pending in the PRC for our PPS manufacturing process. We believe that one ofamong our competitive strengths are the proprietary PPS manufacturing processes which we have developed and believe act as a barrier to entry for our potential competitors. We hold a number of authorized patents and have a patent application pending in the PRC. Our success depends, in part, on our ability to protect ourthese unique processes against competitors and to defend our intellectual property rights when they are violated. If our pending patent application for our PPS manufacturing process is not granted or if we fail to adequately protect our intellectual property rights,existing process patents, competitors maycould use our processes, and manufacture and market similar products using similar processes, which could harm our market share and results of operations. Patents and licenses may not provide competitive advantages for our products. Our competitors may challenge, invalidate or avoid the application of any existing or future patents, trademarks, or other intellectual property rights that we receive or license. In addition, patent rights may not prevent our competitors from developing their own processes that produce products that are similar or functionally equivalent to our products. The lossIf we lose the protection of protection for our intellectual property could reduce the market value of our products, reduce product sales, lower our profits,business would suffer.
If PRC environmental regulations change and impair our financial condition.
Changes in PRC regulations could render one of more of our products, including our PPS nonwoven material,product was unable to meet those regulatory changes, our PPS product could become obsolete or less desirable for environmental compliance purposes, resulting in reduced demand.and this would harm our business and prospects.
To reduce air pollution in China, the Chinese government recently implemented a policy which imposes stricter rules on carbon and other emissions by coal-fired power plants and others. Under these rules for environmental compliance purposes,which came into effect on January 1, 2010, carbon and other emissions are required to be less than 50 milligrams per cubic meter by the end of 2010. Already, some of the larger, more developed cities, such as Beijing and Tianjin have adopted more stringent rules requiring that emissions be between 20-30less than 30 milligrams per cubic meter. (Source: Electric Power, May issue, 2008.)We believe, based on laboratory testing, that our PPS material satisfies current PRC governmental requirements and the more stringent local standards. If those regulations were to change and our PPS product were unable to meet those regulatory changes, our PPS product could become obsolete and this would harm our business and prospects.
The introduction by a competitor and market acceptance of a high temperature resistant pollutant emission filtration material which was superior to our PPS material would harm our business.
Our product may not meet the rapidly changing demands of customers which purchase our products.
Technologies and customer product requirements change rapidly in our industry. If a competitor was to successfully introduceintroduces a technology or product which is superior to our PPS products, and that product achieved wide market acceptance, our PPS productsproduct could become obsolete and the demand for them would decrease significantly.
As a manufacturer of components our revenues will decrease if there is less demand for the end products in which our products are installed.incorporated.
Our existing PET nonwoven products are sold, and we expect our PPS products will be sold, principally to customers that manufacture a wide range of end-use products, including filtration products, road construction materials, home furnishings, automobile interior insulation, and industrial packaging. Therefore, we are subject to the general changes in economic conditions affecting those industry sectors. If customers that operate in these industriesindustry sectors experience a downturn in their business or if they utilize substitutes for our products in their manufacturing operations,products, demand for our products and our business results will suffer.
Increases in prices forthe price of raw materials could reduce our profit margins.margins if we cannot pass the increases on to our customers in the form of higher prices for our products.
ThePolyester is the primary raw material used by us to manufacture most of our products is polyester.products. The price of polyester fluctuates based on manufacturing capacity, demand and the price of crude oil, among other things. Our PPS product will be made from high quality polyphenylene sulfide resin, which we intend to purchase in the United States. Accordingly, the cost of this raw material will fluctuate with the value of the RMB against the dollar. Even where we are able to pass along at least a portion of raw material price increases to some of our customers, there is often a delay between the time we are required to pay the increased raw material price and the time we are able to pass the increase on to our customers. To the extent we are not able to pass along all or a portion of such increased prices of raw materials, our cost of sales would increase and our operating income would correspondingly decrease. There can be no assuranceWe cannot assure you that the price of polyester will not increase in the future or that we will be able to pass on any increases to our customers. Material increases
There are only a small number of suppliers of the raw materials which are required to manufacture our new PPS product all of whom are based in raw material prices that cannot be passed onthe United States or Asia. We have not entered into any long term supply agreements with any of these suppliers. High demand for this polyphenylene-sulfide resin may result in us being unable to customers couldobtain sufficient quantities of this polyphenylene-sulfide resin to meet our customers’ demands for our PPS products which would harm our profit margins,business.
We recently developed a manufacturing process to manufacture PPS nonwoven fabric, which is the key product line around which our long-term growth strategy is centered. PPS is made from a high quality polyphenylene sulfide resin which is currently not available in China and we will be required to import from the United States and Asia. We have identified less than 10 suppliers in the U.S. and Asian market that can provide us with this high quality polyphenylene-sulfide resin. This exposes us to volatility in the price and availability of these raw materials. We have not entered into any long term supply agreement with any of these potential suppliers so high demand for this polyphenylene-sulfide resin may result in us being unable to obtain sufficient quantities of this polyphenylene-sulfide resin to meet our customers’ demands for our PPS products which would harm our business. Supply interruptions could also arise from shortages labor disputes or weather conditions affecting suppliers’ production, transportation disruptions, or other reasons beyond our control. Additionally, these suppliers could also increase pricing of their products, which would negatively affect our operating results of operations and financial condition.
if we were not able to pass these price increases through to our customers.
Increases in energy prices will increase our operating costs and impair our financial results if we may be unable tocannot pass all thesecost increases on to our customers in the form of higher prices for our products.
We use a significant amount of electricity, gasoline and other energy sources to manufacture and transport our nonwoven products. We do not hedge our exposure to higher prices via energy futures contracts. A substantial increase in the price of fuel and other energy sources would increase our operating costs and could negatively impact our profitability and cash flows if we cannot pass the increases on to our customers.
Our manufacturing capacity is limited capacity in our manufacturing facilities so a material interruption or breakdown in our machinery or material interruption of business could prevent or limit our ability to manufacture our products and cause us to lose revenue.revenue and profits and impair our relationships with our customers.
We manufacture all of our existing products and plan to manufacture our new PPS products at our existing facility. We currently have three production lines of production in operation which manufacture PET products and are currently installing a new production line to manufacture our new PPS products. We plan to acquire fourpurchase and install two additional production lines inwith the future.proceeds from this offering. Any breakdown or disruption of our machinery, or interruption of business due to fires, explosion, adverse weather conditions or other catastrophic event, would result in us being incapable of manufacturing nonwovens to meet our production requirements. This may cause us to lose revenue and impair our relationships with our customers. Without our existing production facilities, we would have no other means of manufacturing products until we were able to restore the manufacturing capability at the facility or identify an acceptable contract manufacturer. We do not carry business interruption insurance to cover lost revenue and profits. Furthermore, any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative effect on our profitability and cash flows.
We haveOur insurance is inadequate insurance coverage.so we could be exposed to significant losses if any of our products cause personal injury or illness or if our property is damaged.
We do not presently maintain product liability insurance and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposureso we could be exposed to significant losses if any of our products cause personal injury or illness or if our property is damaged. Any such loss could harm our business.
Increases in the event of loss or damage to our properties or claims filed against us.
We could incur substantialenvironmental compliance costs to comply with environmental laws, and violations of such laws may increase costs orenvironmental regulations by us could require us to change certain business practices.practices, increase our operating costs and lower our profits.
We use a variety of chemicals in our manufacturing operations. As a result, we are subject to a broad range of environmental laws and regulations. These environmental laws govern, among other things, air emissions, wastewater discharges, the handling, storage and release of wastes and hazardous substances. We regularly incur costs to comply with these environmental requirements,regulations, and those costs could increase significantly with changes in legal requirementsenvironmental regulations or their interpretation or enforcement. enforcement which could further increase our operating costs and lower our profits.
Although we have not sufferedbeen subject to material environmental claims in the past, the failureif we fail to comply with any present or future environmental regulations, damages, fines and criminal sanctions could result in the assessment of damages or imposition of finesbe assessed against us suspension ofand production cessation ofcould be suspended and our operations or even criminal sanctions.could cease. New regulations could also require us to acquire costly equipment or to incur other significant expenses. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension ofexpenses which would lower our business operations, which could cause damage to our business.profits.
We rely on Mr. Jie Li, our chief executive officer, for the management ofto manage our business, and the loss ofif we lose his services, could significantly harm our business and prospects.prospects could suffer.
We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Jie Li, our chief executive officer, for the direction of our business. The loss of the services of Mr. Li for any reason could have a material adverse effect onharm our business and prospects. We cannot assure you that the services of Mr. Li will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Li. We have entered into an employment contract with Mr. Li, but that agreement does not guarantee that Mr. Li will continue to manage the company. Although we plan to do so following the closing of this offering, we do not currently have key man insurance on Mr. Li, and if he were unable to continue as our chief executive officer due to death or disability and we were unable to replace him for a prolonged period of time, we could be unable to carry out our long-term business plan, and our future prospects for growth, and our business, could be harmed.
While weWe may have certain internal proceduresdifficulty establishing adequate management, legal and financial controls in the PRC, and such difficulties could reduce the value of any investment in our budgeting, forecasting, and management and allocation of funds, our internal controls may not be adequate.common stock.
The PRC historically has not adopted a western style of management and financial reporting concepts and practices, as well as inor modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. We may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
We are constantly striving to improve These deficiencies could impair our internal accounting controls. We hope to develop an adequate internal accounting control to budget, forecast, manage and allocate our funds and account for them. There is no guarantee that these improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under U.S. securities laws.results of operations.
We may have violated Section 402 of the Sarbanes-Oxley Act of 2002 and Section 13(k) of the Exchange Act and may be subject to sanctions for such violations.
Section 13(k) of the Exchange Act provides that it is unlawful for a company such as ours, which has a class of securities registered under Section 12(g) of the Exchange Act, to directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company. Issuers violating Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on the Company may have a material adverse effect on our financial position, results of operations or cash flows.
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui.Hui, a British Virgin Islands holding company which was incorporated in the British Virgin Islands on January 6, 2010 and our direct, wholly-owned subsidiary. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As a result of the share exchange, Hong Hui became our wholly-owned subsidiary and Foshan S.L.P. Special Material Co., Ltd., a PRC operating company, became our indirect wholly-owned subsidiary. At thethat time, Jie Li, Jie, who became our Chief Executive Officer on that date, was indebted on account of a previous loan in the amount of RMB 200,000 (approximately $29,474) made by Foshan. Mr. Li remains indebted to the Company for that amount.
The existence of indebtedness of Mr. Jie Li Jie at the time the Company acquired Foshan and the continuation of such indebtedness thereafter may constitute a violation of Section 13(k) of the Exchange Act (Section 402(a) of Sarbanes-Oxley). Mr.As of September 30, 2010, all loans had been repaid.
We do not have a Majority of Independent Directors.
Our Board of Directors comprises of six members, three of whom are “independent” within the NASDAQ rules. Accordingly, we do not currently have, and following the closing of this offering we will not have, a Board of Directors the majority of whom are “independent” within the meaning of the NASDAQ rules and we will lack the oversight of an independent board.
We fall within the definition of a “controlled company” under the NASDAQ Marketplace Rules which provide that a company is considered a "controlled company" if greater than 50% of its voting power is held by an individual, a group or another company. In order for a group to exist for purposes of this rule, the stockholders forming the group are required to publicly file a notice that they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a group consisting of Bestyield Group Limited, Jie Li, will repay all indebtedness owedProudlead Limited, Law Wawai, Pilot Link International Limited, Yang Wei, Li Shiyi, High Swift Limited, Han Hung Yuk, China Investment Management, Inc., Song Huaying, Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a group with respect to us priortheir holdings in the company. As a “controlled company” we are not subject to the consummationNASDAQ requirements (i) to have a majority of independent board members; (ii) for independent director oversight of executive officer compensation (as set forth in Section 5605(d) of the offering.
If we fail to comply withNASDAQ Marketplace Rule); and (iii) for independent director oversight of director nomination (as set forth in Section 4045605(e) of the Sarbanes-Oxley Act of 2002 in a timely manner, our business could be harmed and our stock price could declineNASDAQ Marketplace Rule).
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require us to provide an annual assessment of our internal control over financial reporting, and beginning with the fiscal year 2010 will require us to provide an attestation of this assessment by our independent registered public accountants. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. We can provide no assurance that we will be in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 or receive a positive attestation from our independent auditors in the future. Any of these possible outcomes could result in loss of investor confidence in the reliability of our reporting processes, which could adversely affect the price of our shares.
Risks Related to Doing Business in China
Our business operations are conducted entirely in the PRC. Because China’s economy and its laws, regulations and policies are different from those typically found in the West and are continually changing, we will face risks including those summarized below.
The PRC may be more susceptible to political, economic, and social upheaval than other nations; any such upheaval could cause us to temporarily or permanently cease operations.
China has experienced unprecedented growth economically in the past three decades. Although the country has relaxed some restrictions on individual liberties, the rule of law is still a relatively new concept. Thus the legal system may not be equipped to handle complicated social and political problems accompanying the country’s fast economic growth. China has an extremely large population, significant levels of poverty, widening income gaps between rich and poor and between urban and rural residents, large minority ethnic and religious populations, and growing access to information about the different social, economic, and political systems to be found in other countries. These conditions make China unique and may make it susceptible to major structural changes. Such changes could include a reversal of China’s movement to encourage private economic activity, labor disruptions or other organized protests, nationalization of private businesses, internal conflicts between the police or military and the citizenry, and international political or military conflict. If any of these events were to occur, it could damage China’s economy and impair our business.
If we fail to obtain approvals from the PRC Development and Reform Committee and its local counterparts for our construction, rebuilding and extension of production lines, we may be ordered to cease the construction of production lines and could be denied tax deductions and exemptions related to equipment purchases, which would impede planned expansion of our production capacity.
Under PRC laws and regulations, as a foreign invested company, we are required to obtain approval from the local counterparts of the PRC Development and Reform Committee for the new construction and extension of our production lines. Our three operating production lines have a maximum annual output of 8,000 tons. We have a production line currently under installation with an estimated annual output of 1,200 tons. Additionally, we plan to install three new production lines with an individual annual output of 1,200 tons and an aggregate annual output of 3,600 tons. After these four new lines are completed, we are expecting to have a total annual output of 12,800 tons. We have obtained approvals for our production of a maximum annual output of 6,000 tons from the Planning Bureau and Foreign Economy and Trade Bureau of Nanhai City, Guangdong Province in September, 2000 and for expansion of our annual production by 1,800 tons from Foreign Trade and Economic Bureau, Nanhai District, Foshan City, Guangdong Province in September, 2005. We are in the process of obtaining the approval for our four new production lines described above. We are expecting our total annual production output will reach 12,800 tons after we obtain the new approval and all our four new production lines are installed. However, if we fail to obtain the requisite approval for expansion of our production and our new production lines, the respective government authority may order us to cease the installation of new production lines and we could be prohibited from enjoying the tax deductions and exemptions related to equipment purchases, which would impair our expansion plans and our operating results.
The PRC environmental protection laws and regulations require PRC companies, especially PRC manufacturing companies, to obtain environmental approvals and pollution emission permits for the commencement and completion of production lines.lines and pollution emission permits. Failure to obtain the necessary environmental approvals and permits may subject us to fines and, in some cases, may even result in the mandated cessation of production, which may in turn impair our normal business operations and expansion plans.
In order to be in compliance with PRC environmental protection laws and regulations, we are required to obtain a construction commencement approval and a completion examination approval for each of our three finished production lines. We are also required to obtain a construction commencement approval from the local environmental protection bureau for one of our production lines that is currently under construction. However, weWe have only obtained the construction commencement approval and completion examination approval for each of theour three finished production lines. We have not obtained any of
On November 9, 2010, we submitted the completion examination approvalsapplication for the three finished production lines and the construction commencement approval for the new production line under construction to the local environmental protection bureau and on November 10, 2010, we received comments from them requesting us to complete the environment impact assessment of the new production line before submitting the application for the construction commencement approval. The environmental impact assessment is currently being conducted by a third party authorized by the local environmental bureau. We anticipate that it will be completed within 120 days from commencement (on or before March 10, 2011), but we cannot assure that this will be the case. Once the environmental impact assessment is completed, we intend to resubmit the application for the construction commencement approval together with the environmental impact assessment to the local environmental protection bureau. We anticipate that the construction commencement approval will be issued within 60 days from the submission date but we cannot assure that this will be the case.
In addition, we currently do not haveare required a pollution emission permit which is required for the disposal of waste gases, waste water, waste dust and other waste materials highly regulated bymaterials. We do not currently have a pollution emission permit but we are preparing the relevant PRC environmental lawsapplication for this permit and regulations. We are inintend to submit the application after the new production line is completed. The process of obtaining this permit after the above requisite environmental approvals and permit that we have not obtained, but weapplication has been submitted can take up to 5 months.
We cannot assure you that we will be able to obtain suchthe construction commencement approval or the pollution emission permit in a timely manner or at all. Failure to obtain such approvalsthis approval and permit may subject us to fines or disrupt our operations and construction, which may materially and adversely affect our business, results of operations and financial condition.
We are subject to comprehensive regulation by the PRC legal system, which is uncertain. As a result, it may limit the legal protections available to us and we may not be now, or remain in the future, in compliance with PRC laws and regulations.
Foshan, our operating company, is incorporated under and is governed by the laws of the PRC, where all of our operations are conducted. The PRC government exercises substantial control over virtually every sector of the PRC economy, including the production, distribution and sale of nonwovens. In particular, we are subject to regulations and administration by local and national branches of the Ministry of Environmental Protection, the Ministry of Commerce, as well as the General Administration of Quality Supervision, Inspection and Quarantine, the State Administration of Foreign Exchange, General Administration of Customs, the State Administration of Taxation and other regulatory bodies. In order to operate under PRC law, we must have valid licenses, certificates and permits, which must be renewed from time to time. If we were to fail to obtain the necessary renewals for any reason, including sudden or unexplained changes in local regulatory practice, we could be required to shut down all or part of our operations temporarily or permanently.
Foshan is subject to PRC accounting laws, which require that an annual audit be performed in accordance with PRC accounting standards. The PRC foreign-invested enterprise laws require that our subsidiary, Foshan, submit periodic fiscal reports and statements to financial and tax authorities and maintain its books of account in accordance with Chinese accounting laws. If PRC authorities were to determine that we were in violation of these requirements, we could lose our business license and be unable to continue operations temporarily or permanently.
The legal and judicial systems in the PRC are still rudimentary. The laws governing our business operations are sometimes vague and uncertain and enforcement of existing laws is inconsistent. Thus, we can offer no assurance that we are, or will remain, in compliance with PRC laws and regulations. Because of the vagaries of implementation, interpretation and enforcement of PRC laws, our ability to enforce commercial claims or to resolve commercial disputes is unpredictable.
We mustcould incur severe penalties if we fail to comply with the Foreign Corrupt Practices Act which prohibits U.S. companies from engaging in bribery and Chinese anti-corruption laws.prohibits payments to foreign officials for the purpose of obtaining or retaining business.
We are required to comply with the United States Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies from engaging in bribery or othermaking prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. The PRC also strictly prohibits bribery of government officials. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Our employees, agents, representatives and consultants may not always be subject to our control. If any of them violates FCPA or other anti-corruption law, we might be held responsible. We could suffer severe penalties in that event. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or which we acquire.
Anti-inflation measures could harm the economy generally and could harm our business.
The PRC government exercises significant control over the PRC economy. In recent years, the PRC government has instituted anti-inflationary measures from time to time to curb the risk of inflation. These measures have included devaluations of the RMB, restrictions on the availability of domestic credit, and limited re-centralization of the approval process for some international transactions. These austerity measures may not succeed in controlling inflation, or they may slow the economy below a healthy growth rate and lead to economic stagnation or recession; in the worst-case scenario, the measures could slow the economy without curbing inflation, causing “stagflation.” The PRC government could adopt additional measures to further combat inflation, including the establishment of price freezes or moratoriums on certain projects or transactions. These measures could harm the economy generally and hurt our business by limiting the income of our customers available to purchase our merchandise, by forcing us to lower our profit margins, and by limiting our ability to obtain credit or other financing to pursue our expansion plans or maintain our business.
The RMB is not a freely convertible currency and governmental control of currency conversions could limit our ability to distribute and/or obtain sufficient foreign currency to support our business operations in the future, may affect the value of our stock.
All of our revenue is earned in RMB, and current and future restrictions on currency conversions may limit our ability to use revenue generated in RMB to make dividend or other payments in U.S. dollars. The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at PRC banks specifically authorized to conduct foreign-exchange business and register foreign exchange transactions with the PRC government. This would impair our ability to pay dividends and could reduce the value of our stock.
In addition, conversion of foreign currencies for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility. In addition, failure to comply with any other PRC foreign exchange regulations may result in difficulties in converting foreign currency funds raised offshore into RMB.RMB and injecting such capital into our PRC operating company. These restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
Fluctuation of the exchange rate of the RMB against the US dollar could result in foreign currency losses.
In 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the United States dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the RMB against the United States dollar of approximately 17.5% from July 1, 2005 through September 1, 2009. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the United States dollar.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and RMB. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB, appreciation of the RMB against the U.S. dollar could reduce the value in RMB of the proceeds of the financing. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes, and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our business and dividends would be reduced. In addition, the depreciation of significant U.S. dollar-denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
Our PRC stockholders are required to register with SAFE; their failure to do so could cause us to lose our ability to remit profits out of the PRC as dividends.
The State Administration of Foreign Exchange, or SAFE, issued a public notice in October 2005, or the SAFE No. 75 Notice, requiring PRC residents, including both legal persons and natural persons, to register with the applicable local SAFE branch before establishing or controlling any company outside China, referred to as an “offshore special purpose company” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any asset located in China. If any PRC shareholder of an offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and remitting the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Mr. Jie Li, Jie, Mr. Li Jun, Mr. Li Shiyi, Ms. Wei Yang, and Ms. Song Huaying (collectively the “Individual Founders”) are PRC residents and the ultimate shareholders of Foshan. To the best of our knowledge, at the date hereof, the Individual Founders are subject to the registration requirements of SAFE No. 75 Notice. We are informed that Foshan has requested the Individual Founders to make the necessary applications and filings as required under the SAFE No. 75 Notice. We are informed by Foshan that the Individual Founders have liaised with the SAFE branch in Guangdong province and upon its confirmation, they will apply for the SAFE registration. However, we cannot assure you that the SAFE branch in Guangdong province will accept the application or the Individual Founders can obtain the SAFE registration. The failure or inability of the Individual Founders to receive any required approvals or make any required registrations may subject us Hong Hui, Technic. Foshan and the Individual Founders to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit Foshan’s ability to make distributions or pay dividends or affect the ownership structure, as a result of which our business operations and Foshan’s ability to distribute profits to us could be materially and adversely affected.
PRC regulation of loans to and direct investment by offshore holding companies in PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating companies, which could materially and adversely affect our liquidity and ability to fund and expand our business.
As an offshore holding company of a PRC operating Company, we may make loans or additional capital contributions to our existing or future PRC operating companies. Any loans to our PRC operating companies are subject to PRC regulations. For example, loans to our operating companies in China to finance their activities may not exceed statutory limits and must be registered with SAFE. If we decide to make capital contributions to our operating entities in the PRC, the PRC Ministry of Commerce, or MOFCOM, (or MOFCOM’s local counterpart, depending on the amount involved) must approve these capital contributions. We cannot assure you that we will be able to obtain these government approvals or registrations on a timely basis, if at all, with respect to any such capital contributions.contributions or shareholder loans. If we fail to receive such approvals or registrations, our ability to use the proceeds of this offering to capitalize our PRC operations may be negatively affected, which could adversely affect our ability to fund and expand our business.
On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for in its business scope. In addition, SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the company’s approved business scope.used. Violations of Circular 142 may result in severe penalties, including imposing substantial fines on us. We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC operating companies or with respect to future capital contributions by us to our PRC operating companies. If we fail to complete such registrations or obtain such approvals,Therefore, Circular 142 may significantly limit our ability to contribute additional capitalstransfer the net proceeds from this offering to fund our subsidiary in the PRC, operationswhich may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.the business expansion of Foshan.
The new provisions of the PRC Labor Contract Law may substantially increase our labor-related costs in the future.
The PRC Labor Contract Law, which became effective as of January 1, 2008, contains many provisions which are more favorable to employees than prior labor regulations in effect in China. This may substantially increase our labor-related costs in our future operations. According to the new law, an employee is entitled to terminate his or her employment relationship with his or her employer for certain causes, such as delay in payment of wages or social insurance contribution or dissatisfactory labor protection, and under such circumstances the employer is liable to pay compensation to the employee. The amount of such compensation payment shall be one month's salary for each year that the employee has served the employer. If the monthly wage of an employee is three times greater than the average monthly wage in the previous year for employees as announced by the people’s government at the municipal level directly under the central government or at the city-with-district level where the employer is located, the compensation paid must be three times the average monthly wage of employees up to a maximum of not more than 12 years of work. We may also be liable to compensate an employee if we decide to terminate an existing employment contract before its expiration. Under the new law, employees who either have worked for us for 10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches our rules and regulations or is in serious dereliction of his or her duties. Such non-cancelable employment contracts will substantially increase our employment related risks and limit our ability to downsize our workforce in the event of an economic downturn. No assurance can be given that we will not in the future be subject to labor strikes or that we will not have to make other payments to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that the labor laws will not change further or that their interpretation and implementation will vary, which may substantially increase our labor-related costs in the future.
We may be exposedOur operating subsidiary’s failure to monetarycomply with PRC regulations requiring it to open and contribute to housing accounts for its employees could cause us to have to pay unpaid housing funds and subject us to fines by the local housing authority and employee claims fromwhich would harm our employees in connection with Foshan’s non-compliance with regulations with respect to contribution of housing provident funds for employees.business and reputation.
According to the relevantUnder applicable PRC regulations, on housing provident funds, PRC enterprises are required to open housing fund accounts and contribute housing provident funds to those accounts for their employees. The monthly contributions must be at least 5% of each employee’s average monthly income in the previousprior year. Foshan has not paid suchopened the housing funds for its employeesaccounts since its establishment andestablishment. As of January 24, 2011, the accumulated unpaid amount iswas approximately RMB 1.51.80 million (approximately $220,000)$273,560). Under local regulations on collection of housing provident funds in Foshan City where Foshan is located, theThe local housing funds administrative authority may require Foshan to rectify its non-compliance by setting up bank accounts and making payment and relevant filings forpay the unpaid housing funds for its employeesdue within a specified time period. If Foshan fails to do so within the specified time period, the local housing authority may impose monetary fines on us and may also seek judicial enforcement.enforcement against Foshan employees mayto make such payment. Foshan could be also be entitledsubject to claim paymentfines imposed by the housing funds administrative authority of such funds individually. If we receive any notice from the local housing authority or any claim from oura minimum of RMB10,000 (approximately $1,471) and maximum of RMB 50,000 (approximately $7,353). Our current and former employees regardingare also entitled to claim their housing funds individually by arbitration or action. As of the date of this prospectus, we are not subject to any claims from our employees in connection with our failure to open or contribute to housing fund accounts. If any of our employees brings such action against us and the arbitration award or court judgment was made in their favor, we would have to pay the total amount of housing funds due to the employee. Our payment to rectify our non-compliance with theemployee’s housing provident funds regulations we will be required to respond to the notice and pay all amounts due to the government, including any administrative penalties imposed, which would require us to divert our financial resources if any, to make such payments. Additionally, any administrative costs in excess of the payments, if material, mayand thus will negatively impact our operating results.operations and our liquidity.
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular 698”) which was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation (SAT) released Circular 698 on December 10, 2009 that addresses the transfer of shares by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a PRC enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes.
There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate and quantify the effective tax in the country or jurisdiction and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are no formal declarations with regard to how to interpret “abuse of form of organization” and “reasonable commercial purpose,” to determine compliance with Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
Enforcement against us or our directors and officers may be difficult and you could be unable to collect amounts due to you in the event that we or any officer or director violates applicable law.
Our operating company, Foshan, is located in the PRC and substantially all of our assets are located in the PRC. Most of our current officers and directors are residents of the PRC, and most of their assets are located in the PRC. Due to the lack of reciprocal enforcement of civil and commercial court decisions between the U.S. and the PRC,As a result, it could be very difficult for investors to effect service of process on us or those persons in China,the United States, or to enforce a judgment obtained in the United States against us or any of these persons. In addition, it may be difficult to bring an original action in a PRC citizens.court to enforce liabilities based upon the U.S. federal securities laws against the above foreign persons. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise. See the section of this prospectus entitled “Service of Process and Enforcement of Judgments” below.
Our business will suffer ifIf we lose our land use rights.rights we would be required to identify another site for our operations and obtain the land use rights for that land. We would then have to relocate and move our operations to the new site, which would interrupt our business and would require us to incur relocation and build out costs at the new site, all of which would have a negative effect on our financial condition and results of operations.
ThereWe do not own the land where our plant and facility is located, for in China, there is no private ownership of land, in China, and land is owned by the state or rural collective economic organizations. The state issues to the land users the land use right certificate. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land transfer fee. In the case of land used for industrial purposes, land use rights can be obtained from the government for a period of up to 50 years, and are typically renewable. Land use rights, however, can be revoked, and the land users arecan be forced to vacate at any time, whenif redevelopment of the land is deemed to be in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. We do have land use rights andincurred costs in building on such lands we have built our own buildingsthe land on which our main facilitiesplant and machinery are located, and the loss oflocated. If we lost our land use rights (including as a result of failure of the failuregovernment to renew our land-use right certificate) we would be required to relocate and move our operations to a new site, which would interrupt our business and would require us to identifyincur relocation and relocate our manufacturing and other facilities,build out costs at the new site, all of which couldwould have a material adversenegative effect on our financial conditionscondition and results of operations.
The approval of the PRC Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain prior CSRC approval could delay this offering and failure to obtain such approval, if required, could have a material adverse effect on our business and could also create uncertainties for this offering.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the “Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or the M&A Rule, which took effect on September 8, 2006 and was further amended on June 22, 2009, to more effectively regulate foreign investment in PRC domestic enterprises. The M&A Rule requires offshore special purpose vehicles, or SPVs, formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that SPVs are required to submit when seeking the CSRC approval for their listings outside of China. The interpretation and application of the M&A Rule is currently unclear. However, our PRC counsel has advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rule, the M&A Rule does not require us to obtain prior CSRC approval for the listingthis offering and tradingwas not required for our reverse acquisition of our common stockHong Hui Holdings Limited because Foshan was established as a qualified foreign-invested enterprise before September 8, 2006, the effective date of the M&A Rule.
However, if the CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may limit our operating privileges, delay or restrict the repatriation of the proceeds from this offering into China or payment or distribution of dividends by Foshan, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of our common stock. Also, if the CSRC later requires that we obtain its approval, we may be unable to meet or obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our common stock.
We cannot predict when the CSRC will promulgate additional implementing rules or other guidance, if at all. If implementing rules or guidance is issued prior to the completion of this offering and consequently we conclude we are required to obtain CSRC approval, this offering will be delayed until we obtain CSRC approval, which may take several months or longer. Furthermore, any delay in the issuance of such implementing rules or guidance may create additional uncertainties with respect to this offering. Moreover, implementing rules or guidance, to the extent issued, may fail to resolve current ambiguities under the M&A Rule. Uncertainties and/or negative publicity regarding the M&A Rule could have a material adverse effect on the trading price of our common stock.
The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex than in the past. After the promulgation of the M&A Rule, the PRC government can now exert more control over the acquisitions of Chinese companies, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. We may grow our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share by share or asset acquisition of the PRC companies.
The discontinuation of any preferential tax treatment currently available to us in the PRC or imposition of any additional PRC taxes on us could adversely affect our financial condition and results of operations.
Before January 1, 2008, pursuant to the then applicable enterprise income tax laws in China, foreign-invested companies established in China were generally subject to a state and local enterprise income tax, or EIT, at statutory rates of 30% and 3%, respectively, and could often be granted various preferential tax treatments including preferential tax rates and tax holidays. Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both effective on January 1, 2008, a unified EIT rate of 25% and unified tax deduction standard is applied equally to both domestic-invested enterprises and foreign-invested enterprises, or FIEs. The New EIT Law provides a five-year transitional period starting from its effective date for those enterprises which were established before March 16, 2007, the promulgation date of the New EIT Law. Enterprises established prior to March 16, 2007 are eligible for certain prescribed preferential tax rate in accordance with the then applicable income tax laws and administrative regulations and gradually become subject to the new statutory EIT rate of 25% over a five-year transition period starting from January 1, 2008. For enterprises granted qualified tax holidays, such tax holidays continue until their expiration in accordance with previous tax laws and regulations, but where the tax holiday has not yet started because of a cumulative loss position, such tax holiday shall be deemed to commence from 2008, the first effective year of the New EIT Law. Currently, Foshan enjoys a 12.5% income tax preferential rate, which expires December 31, 2012. Thereafter, the expiration of Foshan’s preferential tax treatment will reduce our profitability and affect our financial results.
We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
The New EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC “tax resident enterprises” and will generally be subject to the uniform 25% PRC EIT rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation rules to the New EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management bodies” which are applicable to our company or our overseas subsidiary. A substantial majority of the members of our management team as well as the management team of some of our overseas subsidiary are located in China. If our company or any of our overseas subsidiaries is considered a PRC tax resident enterprise for PRC EIT purposes, a number of unfavorable PRC tax consequences could follow. First, our company or our overseas subsidiaries will be subject to the uniform 25% EIT rate as to our global income as well as PRC EIT reporting obligations. Second, dividends payable by us to our investors and gain on the sale of our shares may become subject to PRC withholding tax as described below.
Dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to taxes under PRC tax laws.
Under the New EIT law and its implementation rules, if we are considered a “resident enterprise”, income tax at the rate of 10% must be withheld on dividends payable by us to investors that are “non-resident enterprises” if such investors do not have an establishment or place of business in China or if, the relevant income is not effectively connected with an establishment or place of business in China. Similarly, any gain realized on the transfer of our common stock by such investors is also subject to a 10% PRC withholding income tax if such gain is regarded as income derived from sources within China and we are considered a “resident enterprise” for PRC EIT purposes. It is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise investors or a potential withholding tax of 20% for individual investors is imposed on dividends we pay to them and with respect to gains realized by such investors upon transfer of our common stock. In addition to the uncertainty surrounding “resident enterprise” classification, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the New EIT law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of our common stock under the circumstances mentioned above, the value of your investment in our common stock may be materially and adversely affected. It is unclear whether holders of our common stock would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas ifif we are considered a PRC “resident enterprise”“resident enterprise”.
We rely on dividends paid by Foshan for our cash needs, and any limitation on the ability of Foshan to make payments to us could have a material adverse effect on our ability to conduct our business.
As a holding company, wewe conduct substantially all of our business through our consolidated subsidiaries incorporated in China. We rely on dividends paid by these PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Foshan is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. As a result, Foshan isFoshan’s ability to transfer a portion of its net assets to us in the form of dividends, loans or advances is limited. In addition, if Foshan incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of Foshan to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Further, according to the Circular on Issues Concerning Outward Remittance of Profit, Stock Dividends and Stock Bonuses Processed by Designated Foreign Exchange Banks, or Circular 29, issued by the SAFE on September 22, 1998, and amended on September 14, 1999, a foreign-invested enterprise whose registered capital has not been fully paid as provided by the terms of its articles is not allowed to remit its profits or dividends abroad unless a special approval by the SAFE is granted. Circular 29 limits the ability of Foshan to remit funds to us, which could materially and adversely limit our ability to expand our business, make investments or acquisitions, pay dividends and otherwise fund and conduct our business.
All participants in our stock incentive plan who are PRC citizens may be required to register with SAFE and failure to comply may subject us and such participants to fines and legal sanctions. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors, employees and other parties under PRC laws.
In September 2010 we adopted a stock incentive plan under which we may make option grants and other awards to our officers, key employees, directors and consultants. All of our officers and directors, other than Chris Bickel and Richard M. Cohen, are PRC citizens.
On March 28, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as “Circular 78.” We believe that under Circular 78, PRC citizens and residents who are granted stock or options under our stock incentive plans are required to register with SAFE or its local counterparts and request us (or engage domestic agents) to handle various foreign exchange matters associated with their stock incentive plans. In addition, as the employer, we are (or a PRC agent is) required, on behalf of PRC recipients of stock awards, to apply annually to SAFE or its local offices for a quota for the conversion and/or payment of foreign currencies in connection with the domestic individuals’ exercise of the employee stock options. The foreign exchange proceeds received by the PRC persons from the sale of shares under our stock incentive plan are required to be remitted to bank accounts in China opened by their employers or PRC agents.
The registration and approval requirements set forth in Circular 78 will be burdensome and time consuming on us. If we fail to comply, our PRC subsidiary (if deemed to a domestic agent as defined under Circular 78) and participants of our stock incentive plan who are PRC citizens may be subject to fines and legal sanctions and we may be prevented form granting equity compensation to our officers, key employees, directors and consultants who are PRC citizens, in which event we will have to find alternative methods (such as addition salary and bonuses) to compensate such persons which would adversely affect our cash flow and business operations.
Risks Associated with thisThis Offering
Our executive officers and directors beneficially own a significant portionApproximately 92% of our common stock is beneficially owned by a group which includes some of our executive officers and directors; this group may take actions that are contrary to your interests and that could reduce the value of your stock.
OurOn December 29, 2010, a group consisting of Bestyield Group Limited (a company controlled by Jie Li, our chief executive officer and directorofficer), Jie Li, Jie,Proudlead Limited (a company controlled by Law Wawai, our president of sales and directorsales), Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management Inc., Song Huaying, and our directorNewise Holdings Limited (a company controlled by Li Jun, one of our directors) and Li Jun filed a Schedule 13D disclosing the existence of a group with respect to their holdings in the Company. This Schedule 13D reported that the “group” beneficially ownowned an aggregate of approximately 69.7%92% of our outstanding common stock. Even assuming conversion of all of the outstanding convertible notes and the exercise of all our warrants, theythe group will collectively own a significant portion of our outstanding common stock. As a result, they will be able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions such as business combinations. In any such stockholder vote, their interests may differ from that of other stockholders and they could cause us to take actions that are contrary to your interests and that could reduce the value of your stock.
We do not intend to pay cash dividends in the foreseeable future which may negatively affect the price of our stock.
We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends by us will depend on our future earnings, financial condition and such other business and economic factors as our management may consider relevant. In addition, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from Foshan, our PRC-based operating company, which, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. See “Risks Related to Doing Business in China” above.
There is currently no trading market for our common stock;stock and an active trading market may not develop after the offering.
Our shares are not currently traded on any exchange. We intend to applyhave applied to have our common stock listed on the NASDAQ Global Market or the NASDAQ Capital Market. On the consummation of the public offering, we believe that we will satisfy the listing requirements and expect that our common stock will be listed. Such listing, however, is not guaranteed. The underwriters are not obligated to make a market in our securities and, even after making a market, can discontinue market making at any time without notice. Neither we nor our underwriters can provide any assurance that an active and liquid trading market in our securities will develop or, if developed, that the market will continue.
Our common stock may be delisted from the NASDAQ which could negatively impact the price of our common stock and our ability to access the capital markets.
The listing standards of the NASDAQ Global Market and the NASDAQ Capital Market provide that a company, in order to qualify for continued listing, must maintain a minimum stock price, satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements. If, after listing, we fail to comply with all listing standards applicable to issuers listed on the NASDAQ Global Market or the NASDAQ Capital Market, our common stock may be delisted. If our common stock is delisted, it could reduce the price of our common stock and the levels of liquidity available to our shareholders. In addition, the delisting of our common stock could hinder our access to the capital markets and any limitation on liquidity or reduction in the price of our common stock could impair our ability to raise capital. Delisting from the NASDAQ Global Market or the NASDAQ Capital Market could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.
Future sales or perceived sales of our shares of common stock could depress our stock price.
All of our executive officers and directors and certain of our shareholders have agreed not to sell shares of common stock for a period of 90 days following this offering. In addition, all of the selling stockholders listed in the Resale Prospectusresale prospectus have agreed not to sell shares of their common stock for a period of 90 days following this offering. See “Underwriting.” Shares subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act of 1933, as amended. As we are a former “shell” company (as that term is defined in Rule 12b-2 under the Exchange Act), none of the shares held by our current shareholders are freely tradable, however commencing on February 12, 2011 those shares will be eligible for resale under Rule 144 subject to the restrictions set forth in Rule 144. See “Shares Eligible for Future Sale.” If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our common stock could decline. Moreover, the perceived risk of dilution from this offering or other potential sales could cause shareholders to attempt to sell their shares and investors to short shares of our common stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our common stock being offered for sale to increase, our common stock market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
You will experience immediate and substantial dilution in your investment.
The offering price of theour common stock is substantially higher than the net tangible book value per share of our common stock, which was $1.15$1.08 as of March 31,September 30, 2010. Therefore, when you purchase our common stock in this offering at an assumed public offering price of $[ ]$6.00 per share, you will incur immediate dilution of $[ ]$4.92 per common share. Holders of the common stock will experience further dilution if options, warrants or other rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted, or if we issue additional shares of our common stock, at prices lower than our net tangible book value at such time.
If the China Securities Regulatory Commission, or CSRC, or another Chinese regulatory agency, determines that CSRC approval is required in connection with this offering or our reverse acquisition of Hong Hui Holdings Limited, this offering may be delayed or cancelled, or we may become subject to penalties.
On August 8, 2006, six Chinese regulatory agencies, including the Chinese Securities Regulatory Commission, or CSRC, passed the M&A Regulation, which became effective on September 8, 2006. This regulation, among other things, has certain provisions that require offshore special purpose vehicles formed for the purpose of acquiring Chinese domestic companies and directly or indirectly established or controlled by Chinese entities or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval. It is not clear how the provisions in the regulation regarding the offshore listing and trading of the securities of a special purpose vehicle apply to us. We believe, based on the interpretation of the regulation and the practice experience of our Chinese legal counsel, Han Kun Law Firm, that CSRC approval is not required for this offering and was not required for our reverse merger with Hong Hui Holdings Limited. There remains some uncertainty as to how this regulation will be interpreted or implemented. If the CSRC or another Chinese regulatory agency subsequently determines that the CSRC’s approval is required for this offering or our reverse acquisition of Hong Hui Holdings Limited, we may face sanctions by the CSRC or another Chinese regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of our net proceeds from this offering into China, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares of common stock. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel this offering before settlement and delivery of the shares being offered by us.
We will retain broad discretion in using the net proceeds from this offering and may spend a substantial portion in ways with which you do not agree.
While we presently expectWe currently intend to use the net proceeds of thisfrom the offering to expand our manufacturing capacityrepay a short term loan in the amount of our$3.9 million and purchase two additional production lines to manufacture PPS products,materials. The balance of the net proceeds is expected to be used for working capital and general corporate purposes. Accordingly our management will retain broad discretion to allocate the net proceeds we receive from this offering. The net proceeds may be applied in ways with which you and other investors in the offering may not agree, or which do not increase the value of your investment. Our management might not be able to achieve a significant return, if any, on any investment of these net proceeds.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
This prospectus contains some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things,
| · | our projected sales, profitability and cash flows; |
| · | anticipated trends in our industry; |
| · | our future financing plans; and |
| · | our anticipated needs for working capital. |
In some cases they are identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial resultsresults.
Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $[ ] millionapproximately $ ($[ ] million if the underwriters exercise their over-allotment option) from the sale of [ ]4,166,667 shares of common stock offered hereby based on an assumed public offering price of $[ ] per share after deducting $[ ](i) $ million for underwriting discounts and commissions, and(ii) estimated expenses of the offering of $500,000, but before$ and (iii) the $ success fee payable on closing to United Best, our foreign advisor.advisor, controlled by our director, Mr. Li Jun.
We intend tocurrently anticipate that we will use the net proceeds we receive from the offering substantially as follows: (i) up to $3.9 million will be used to repay a short term loan in the amount of $3.9 million which was used as part of the offeringpurchase price of approximately $9.6 million for equipment purchasesthe build-out and product development primarily relatingpurchase of a new production line to our newmanufacture PPS product linematerials which is currently being installed and is expected to be completed in February 2011; and (ii) up to approximately $10 million will be used to purchase two additional production lines to manufacture PPS materials. The balance of the net proceeds, if any, is expected to be used for working capital and general corporate purposespurposes. The three new production lines are expected to increase our annual output by 3,600 tons of nonwoven materials to 11,600 tons of nonwoven material.
The short term loan matures on June 21, 2011 and bears interest at the rate of 6.21% per annum.
We believe that the proceeds of this offering when added to our existing working capital will be sufficient to fund our operations for the foreseeable future.
The public offering price of the common stock offered by this prospectus will be determined by negotiations between us and the underwriters. Factors to be considered in determining the public offering price include:
| | · | the information in this prospectus and otherwise available to the underwriters; |
| | · | the history and the prospects for the industry in which we compete; |
| | · | our current financial condition and the prospects for our future cash flows and earnings; |
| | · | the general condition of the economy and the securities markets at the time of this offering; |
| | · | the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and |
| | · | the public demand for our securities. |
The prices at which the common stock will sell in the public market after this offering, however, may not be equal to or greater thanexceed the public offering price.
DIVIDEND POLICY
We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant. In addition, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from Foshan, our PRC-based operating company, which, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
EXCHANGE RATE INFORMATION
EXCHANGE RATE INFORMATIONOur business is primarily conducted in China and substantially all of our revenues and expenses are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government exercises control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through intervention in the foreign exchange market on foreign trade.
The following table sets forth various information concerning exchange rates between the RMBRenminbi and the U.S. dollar for the periods indicated. The conversion of RMB into U.S. dollars in this prospectus is based on the noon buying rate in the city of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. As of June 11, 2010, the noon buying rate was RMB 6.8320 to US$1.00.
| | | Noon Buying Rate | |
| Renminbi per U.S. Dollar | | Average(2) | | | High | | | Low | | | Period- End | |
| Year Ended December 31 | | | | | | | | | | | | | | | | |
2005 (1) | | | 8.1826 | | | | 8.2765 | | | | 8.0702 | | | | 8.0702 | |
2006 (1) | | | 7.9579 | | | | 8.0702 | | | | 7.8041 | | | | 7.8041 | |
2007 (1) | | | 7.5806 | | | | 7.8127 | | | | 7.2946 | | | | 7.2946 | |
2008 (1) | | | 6.9193 | | | | 7.2946 | | | | 6.7800 | | | | 6.8225 | |
2009 (1) | | | 6.8408 | | | | 6.8430 | | | | 6.7880 | | | | 6.8372 | |
| For the months of | | | | | | | | | | | | | | | | |
| January 2010 | | | 6.8346 | | | | 6.8295 | | | | 6.7836 | | | | 6.8369 | |
| February 2010 | | | 6.8376 | | | | 6.8336 | | | | 6.7941 | | | | 6.8367 | |
| March 2010 | | | 6.8359 | | | | 6.8268 | | | | 6.8136 | | | | 6.8361 | |
| April 2010 | | | 6.8328 | | | | 6.8280 | | | | 6.7471 | | | | 6.8358 | |
| May 2010 (through May 9) | | | 6.8361 | | | | 6.8171 | | | | 6.8150 | | | | 6.8357 | |
| | | Exchange Rate | |
Period | | Period End | | | Average(1) | | | Low | | | High | |
| | | (RMB per US$1.00) | |
| 2005 | | | 8.0702 | | | | 8.1826 | | | | 8.2765 | | | | 8.0702 | |
| 2006 | | | 7.8041 | | | | 7.9579 | | | | 8.0702 | | | | 7.8041 | |
| 2007 | | | 7.2946 | | | | 7.5806 | | | | 7.8172 | | | | 7.2946 | |
| 2008 | | | 6.8225 | | | | 6.9193 | | | | 7.2946 | | | | 6.7800 | |
| 2009 | | | 6.8259 | | | | 6.8295 | | | | 6.8470 | | | | 6.8176 | |
| 2010 | | | | | | | | | | | | | | | | |
| Nine-month period ended September 30, 2010 | | | 6.6905 | | | | 6.7984 | | | | 6.8330 | | | | 6.6869 | |
| June | | | 6.7815 | | | | 6.8184 | | | | 6.8323 | | | | 6.7815 | |
| July | | | 6.7735 | | | | 6.7762 | | | | 6.7807 | | | | 6.7709 | |
| August | | | 6.8069 | | | | 6.7873 | | | | 6.8069 | | | | 6.7670 | |
| September | | | 6.6905 | | | | 6.7396 | | | | 6.8102 | | | | 6.6869 | |
| October | | | 6.6707 | | | | 6.6678 | | | | 6.6912 | | | | 6.6397 | |
| November | | | 6.6670 | | | | 6.6538 | | | | 6.6892 | | | | 6.6330 | |
| December | | | 6.6000 | | | | 6.6497 | | | | 6.6745 | | | | 6.6000 | |
(1) | All periods end December 31 of the stated year. |
(2) | Averages for a period are calculated by using the average of the exchange rates on the end of each month during the period. Monthly averages are calculated by using the average of the daily rates during the relevant period. |
(1) Annual averages and averages for the nine-month period ended September 30, 2010 were calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages were calculated by using the average of the daily rates during the relevant month.
CAPITALIZATION
The table set forth below depicts our capitalization and cash and cash equivalents as of March 31,September 30, 2010, on an actual and pro forma basis, as follows:
| · | On a pro forma basis to give effect to the conversion of our issued and outstanding convertible notes in the principal amount of $4,040,000 (representing the part of the outstanding notes that will not be repaid on February 12, 2011 and the maturity date of which has been extended to June 30, 2011) into [ ]1,923,809 shares of common stock (assuming a public offering price of $[ ]$6 per share) immediately prior to the closing of this offering (which notes are convertible into shares of common stock at $2.10 per share which represents a 65% discount to the assumed $6 offering price); and |
| · | On a pro forma basis as adjusted to reflect (i) the sale of [ ]4,166,667 shares of common stock in this offering by us at an assumed public offering price of $[ ]$6.00 per share, after deducting estimated underwriting discounts and commissions and other offering expenses (assuming the underwriters do not exercise their over-allotment option), but before and (ii) the 193,186 and 265,186 shares issuable at closing to United Best’s fee. Best and Primary Capital, respectively. |
| | | Actual | | | Pro Forma (unaudited) | | | Pro Forma As Adjusted (1) | |
Cash and cash equivalents | | $ | 6,092,334 | | | $ | 6,092,334 | | | $ | | |
Short-term liabilities | | | 7,248,935 | | | | 4,191,728 | | | | | |
Long-term liabilities | | | — | | | | — | | | | | |
Total liabilities | | | 7,248,935 | | | | 4,191,728 | | | | | |
| Common stock, $0.001 par value; 200,000,000 shares authorized; 15,235,714 shares issued and outstanding, actual; [ ] shares issued and outstanding, pro forma; and [ ] shares issued and outstanding, pro forma as adjusted | | | 15,235,714 | | | | | | | | | |
| Additional paid-in capital | | | 8,205,582 | | | | 15,096,360 | | | | | |
| Accumulated other comprehensive income | | | 1,520,402 | | | | 1,520,402 | | | | | |
| Retained earnings | | | 6,390,212 | | | | 2,555,162 | | | | | |
| Total stockholders’ equity | | | 16,131,432 | | | | 19,188,639 | | | | | |
| Total liabilities and stockholders’ equity | | | 23,380,367 | | | | 23,380,367 | | | | | |
| | | | | | | | | Pro Forma | |
| | | | | | Pro Forma | | | As Adjusted | |
| | | Actual | | | (unaudited) | | | (unaudited) | |
| Cash | | $ | 5,295,301 | | | $ | 5,195,301 | (1) | | $ | 23,295,301 | (2) |
| Cash equivalents | | | - | | | | - | | | | - | |
| Total cash and cash equivalents | | | 5,295,301 | | | | 5,195,301 | | | | 23,295,301 | (2) |
| | | | | | | | | | | | | |
| Total liabilities | | | 8,981,223 | | | | 5,017,216 | | | | 1,117,216 | (2) |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 share issued and outstanding; common stock, $0.001 par value; 200,000,000 shares authorized; 15,265,714 shares issued and outstanding, actual; 17,189,523 shares issued and outstanding, pro forma; and 21,814,562 shares issued and outstanding, pro forma as adjusted | | | 15,266 | | | | 17,190 | | | | 21,815 | |
| Additional paid-in capital (3) | | | 8,375,860 | | | | 14,853,193 | | | | 36,848,568 | |
| Accumulated other comprehensive income | | | 1,961,422 | | | | 1,961,422 | | | | 1,961,422 | |
| Retained earnings | | | 6,721,609 | | | | 4,106,359 | | | | 4,106,359 | |
| Total capitalization (3) | | $ | 17,074,157 | | | $ | 20,938,164 | | | $ | 42,938,164 | |
1(1) Pro forma cash reflects repayment of a note in the principal amount of $100,000 that matures and is expected to be repaid on February 12, 2011.
(2) Pro forma as adjusted cash and cash equivalents each reflect the receipt of the assumed net proceeds of $22,000,000 from this offering and the use of $3,900,000 of the net proceeds to pay down the outstanding short term bank loans. Pro forma as adjusted total liabilities reflects the repayment of the short term bank loans of $3,900,000.
(3) The increase of $22,000,000 in pro forma as adjusted total capitalization reflects receipt of the assumed net proceeds of this offering of $22,000,000. The increase of $21,995,375 in pro forma as adjusted additional paid-capital reflects the assumed net proceeds of this offering of $22,000,000 less $4,167 (which represents the aggregate par value of the 4,166,667 share being offered in this offering) and $458 (which represents the aggregate par value of the 458,373 shares being issued to Primary Capital and United Best at the closing.) A $1.00 increase (decrease) in the assumed public offering price of $[ ]$6.00 per share, would increase (decrease) each of the additional paid inpaid-in capital total stockholders equity and total liabilitiescapitalization by $3,750,000 and stockholders equity by $[ ] and ($[ ]),3,750,000) respectively, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the additional underwriting discounts and commissions and estimatedfees payable to United Best resulting from the increase (decrease) in the offering expenses payable by us.price.
DILUTION
Purchasers of shares of our common stock in the offering will suffer an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the public offering price paid by purchasers of our common stock exceeds the net tangible book value per share of common stock after the offering.
Our consolidated net tangible book value (i.e. consolidated tangible assets less consolidated liabilities) as of September 30, 2010 was $16,538,677. Our consolidated net tangible book value per share as of March 31, 2010 was $1.06. Net(consolidated net tangible book value per share represents consolidated tangible assets, less consolidated liabilities, divided by the aggregate number of shares of common stock outstandingoutstanding) as of September 30, 2010 was $1.08.
Our pro forma consolidated net tangible book value as of March 31,September 30, 2010 was $19,188,639,$20,402,684, or $1.15$1.19 per share of common stock. Pro forma consolidated net tangible book value per share represents our consolidated net tangible assets, less consolidated liabilities,book value ($20,402,684) divided by the17,189,524 (the aggregate number of shares of common stock outstanding, assuming conversion of the convertible notes immediately prior to the closing of this offering.offering).
After giving effect to the sale by us of (i) the [ ]4,166,667 shares of common stock in this offering at(at an assumed public offering price of $[ ]$6.00 per share (the midpointshare), (ii) the issuance of the range set forth on the cover page of this prospectus),193,186 shares to United Best and 265,186 shares to Primary Capital and (iii) the receipt and the application of the estimated net proceeds of $[ ], after$22,000,000 (after deducting the underwriting discounts and commissions, andthe estimated offering expenses payable by us,, but before and the fee payable to United Best’s fee,Best), our pro forma consolidated net tangible book value at March 31,September 30, 2010, as adjusted, would have been $[ ]$42,402,684 or $[ ]$1.94 per share. This represents an immediate increase in pro forma consolidated net tangible book value to existing stockholders of $[ ]$0.75 per share and an immediate dilution to new investors of $[ ]$4.06 per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the pro forma consolidated net tangible book value per share immediately after this offering.
The following table illustrates this per share dilution:
Assumed public offering price | | $ | | |
Pro forma consolidated net tangible book value per share as of March 31, 2010 | | | 1.15 | |
Increase in pro forma net tangible book value per share attributable to existing stockholders | | | | |
Pro forma consolidated net tangible book value per share, as adjusted for this offering | | | | |
Dilution per share to new investors | | $ | | |
| Consolidated net tangible book value per share as of September 30, 2010 | | $ | 1.08 | |
| Assumed public offering price | | | 6.00 | |
| Pro forma consolidated net tangible book value per share as of September 30, 2010 | | | 1.19 | |
| Increase in pro forma net tangible book value per share attributable to existing stockholders | | | 0.11 | |
| Pro forma consolidated net tangible book value per share, as adjusted for this offering | | | 1.94 | |
| Dilution per share to new investors | | $ | 4.06 | |
A $1.00 increase (decrease) in the assumed public offering price of $[ ] per share would increase (decrease) our pro forma consolidated net tangible book value after this offering by $[ ] (in the case of $1.00 per share increase) or $([ ]) (in the case of a $1.00 per share decrease), and the dilution per share to new investors by $[ ] and $([ ]), respectively, in each case assumingAssuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expensesthe fee payable by us, but before theto United Best’s fee.
| · | a $1.00 increase in the assumed public offering price of $6.00 per share would increase (i) our pro forma consolidated net tangible book value after this offering by $3,750,000 ($4,166,667 less underwriter’s commission of $291,667 and fee to United Best of $125,000) and (ii) the dilution per share to new investors by $4.88; and |
| · | a $1.00 decrease in the assumed public offering price of $6.00 per share would decrease (i) our pro forma consolidated net tangible book value after this offering by $3,750,000 and (ii) the dilution per share to new investors by $3.23. |
The following table sets forth the number of shares of common stock purchased, the total consideration paid, or to be paid to us, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed public offering price of $[ ]$6.00 per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:us and the fee payable to United Best.
| | | Shares Purchased | | | Total Consideration | | | Average Price | |
| | | Number | | | Percent | | | Amount | | | Percent | | | Per Share | |
| Existing stockholders | | | 15,235,714 | | | | | | | $ | 15,048,639 | | | | | | | $ | 0.99 | |
| Shares issuable to noteholders immediately prior to closing of the offering. | | | 1,478,714 | | | | | | | | 4,140,000 | | | | | | | | 2.80 | |
| New investors in this offering | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | $ | | | | | | | | | | |
| | | Shares Purchased | | | Total Consideration | | | Average Price | |
| | | Number | | | Percent | | | Amount | | | Percent | | | Per Share | |
| Existing stockholders | | | 15,265,714 | | | | 71.5 | % | | $ | 17,074,157 | | | | 37 | % | | $ | 1.12 | |
| Shares issuable to noteholders immediately prior to closing of the offering | | | 1,923,809 | | | | 9 | % | | $ | 4,040,000 | | | | 9 | % | | | 2.10 | |
| New investors in this offering | | | 4,166,667 | | | | 19.5 | % | | | 25,000,000 | | | | 54 | % | | | 6.00 | |
| Total | | | 21,356,190 | | | | 100 | % | | $ | 46,114,157 | | | | 100 | % | | | | |
If the underwriters’ over-allotment option to purchase common stock is exercised in full, the pro forma consolidated net tangible book value after giving effect to this offering would be $[ ]$2.04 per share, and the dilution in pro forma consolidated net tangible book value per share to investors in this offering would be $[ ]$3.96 per share. Furthermore, the number of shares of common stock held by existing stockholders would be [ ],17,647,896, or [ ]% 79% of the aggregate number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors would be increased to [ ],4,791,667, or [ ]%21% of the aggregate number of shares of common stock outstanding after this offering.
MARKET PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock does not trade and is not quoted on any public market. We intend to applyhave applied to have our common stock listed on the NASDAQ Global Market or the NASDAQ Capital Market. We expect our listing to be effective prior to the date of this prospectus. No assurance can be given that our listing application will be approved.
Holders
As of the close of business on July 6, 2010,January 31, 2011, we had approximately 210212 shareholders of record of our common stock. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stockstock.
Securities authorized for issuance under equity compensation plans
We do not currently have any securities authorized for issuance under anyThe following table summarizes the equity compensation plans and we do not have any equity compensation plans.under which our securities may be issued as of September 30, 2010:
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted- average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans(excluding securities reflected in column (a)) | |
| Equity compensation plans approved by security holders | | | - | | | | — | | | | — | |
| Equity compensation plan not approved by security holders (1) | | | 400,000 | | | $ | (2 | ) | | | 1,756,218 | |
| Total | | | | | | | | | | | | |
(1) Our Board of Directors adopted the China SLP Filtration Technology, Inc. 2010 Stock Incentive Plan, or the 2010 Plan, on September 3, 2010. All our officers and key employees, directors and consultants, including those of our subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of our business, are eligible for participation in the 2010 Plan. Two Million One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) shares of our common stock (or such number of shares as shall equal ten percent of the shares of common outstanding on a fully diluted basis after giving effect to the offering and the conversion of the note) have been authorized and reserved for the 2010 Plan. We may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards under the 2010 Plan.
(2) On September 3, 2010, under the 2010 Plan and in connection with his appointment as Chief Financial Officer, the Board granted Eric Gan an option to purchase 400,000 shares at an exercise price equal to the public offering price of this offering. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those which we discuss under “Risk Factors” and elsewhere in this prospectus.
Overview
This section discusses and analyzes our results of operations and financial condition, including the results and condition of our operating company, Foshan, which have been consolidated with our own results for all periods presented. This discussion is intended to help you understand our financial results and the current facts and trends that may cause them to change, so that you may make informed judgments about our likely financial results in the future and, insofar as those results may affect our stock price and informed investment decisions.
This discussion should be read in conjunction with our audited financial statements and accompanying notes as of September 30, 2010 and for the year then ended.
References to 2010 and 2009 refer to the fiscal years ended September 30, 2010 and 2009, respectively.
General
We are a leading PRC-basedPRC based manufacturer of nonwoven fabrics in the PRC. In 2009, we ranked No. 1 in sales revenue in the PRC for polyester (PET) nonwoven fabrics according to a report issued by CNITA.
fabrics. We currently manufacture two types of PET nonwoven fabrics which are used in a wide range of products, including filtration products, road construction materials, home furnishings, automobile interior insulation and industrial packaging.
Our current PET products are sold primarily to PRC-based manufacturers which use our products as raw material componentcomponents for end-products they sell to their customers operating in the heavy industrial, automotive, construction and home furnishing industries.
customers. We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product line around which our long-term growth strategy is centered.
Based on lab tests which we conducted internally we believe that our PPS nonwoven fabric is heat resistant, corrosion-proofsuperior to other currently available high temperature filtration material because it is lighter, thicker, stronger, has higher air permeability and flame retardant,filtration efficiency and is usedsignificantly cheaper to manufacture dust filter bagsproduce. Due to the superior characteristics of our PPS product coupled with the demand created by these new regulations, we believe that our PPS material will become a market leader for pollutant dust removal and emissions controls in smoke stacks in coal-firedhigh temperature filtration applications. We expect to sell our PPS nonwoven products to operators of coal fired power plants, garbage incinerators and cement factories. As a result of the recent adoption of new, stringent environment regulations governing the discharge of carbon and other emissions by coal-fired power plants and other heavy industry plant operation, we believe that demand for our PPS nonwoven fabric products will be significant. Our independent market research indicates that over 80% of coal-fired power plants in China are not in compliance with current government regulations and are faced with the choice of either complying or being shut down. Bag filters made of our PPS materials offer these plant operators a cost effective method of meeting these new emission and dust pollutant standards in China.industrial plants.
We willintend to continue to manufacture and generate revenues from the sale of PET nonwoven fabric products,nonwovens but we expect that the sales of our PPS nonwoven fabrics towill 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 early 2011 with the completion of our first PPS filament production facilities. We also plan to add two more PPS production lines in the latter part of 2010 with the addition of four high tech production lines with annual production capacity of 4,800 tons,2011, which will bring our total overall production capacity to 12,80011,600 tons per year.
This discussion should be read in conjunction with our audited financial statements and accompanying notes as of September 30, 2009, and for the year then ended and the unaudited consolidated interim financial statements for the six months ended March 31, 2010.
References to 2009 and 2008 refer to the fiscal years ended September 30, 2009 and 2008, respectively.
Important Factors Affecting our Results of Operations
The most significant factors that willcould affect our financial condition, costs and results of operations in the future are:
| · | Our ability to execute on our business plan to commence production and sale of PPS nonwoven fabric using our manufacturing process; |
| · | The degree of effectiveness and market acceptance of our PPS nonwoven materials by coal fired power plants and other potential users as a filtration device for carbon and other emissions; and |
| · | The extent to which the PRC government enforces its recently adopted regulations relating to carbon and other pollutant emissions on coal fired power plant operators and other plant operators that operate facilities that are not currently in compliance with those regulations. |
Results of Operations
Comparison of Three Months Ended March 31, 2010 and March 31, 2009
The following table shows, for the periods indicated, information derived from our unaudited 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 beginning on page F-1 and the related notes thereto and other financial information included elsewhere in this prospectus.
| | | Three Months ended March 31, | |
| | | 2010 | | | 2009 | |
| | | Amount | | | | | | Percentage | | | Amount | | | | | | Percentage | |
| | | | | | (unaudited) | | | | | | | | | (unaudited) | | | | |
Net 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 expenses | | | 407,461 | | | | | | | | 9% | | | | 275,526 | | | | | | | | 12% | |
Operating income | | | 983,899 | | | | | | | | 21% | | | | 565,493 | | | | | | | | 26% | |
Interest income | | | 292 | | | | | | | | 0% | | | | - | | | | | | | | 0% | |
Other expenses | | | (390,355 | ) | | | | | | | 8% | | | | (76,286 | ) | | | | | | | 3% | |
Gain on disposal of fixed assets | | | 496 | | | | | | | | 0% | | | | 0 | | | | | | | | 0% | |
Total other income (expenses), net | | | (389,567 | ) | | | | | | | 8% | | | | (76,286 | ) | | | | | | | 3% | |
Income tax | | | - | | | | | | | | | | | | - | | | | | | | | | |
Net income | | $ | 594,332 | | | | | | | | 13% | | | $ | 489,207 | | | | | | | | 22% | |
Net Sales.Fluctuations in price of polyester: Net sales consist of revenue from sales of needle-punched PET nonwoven fabric and thermal calendared PET nonwoven fabric. 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 forPolyester resin is the same period of the prior year. The increase in net sales was largely attributable to increased manufacturing capacity and output resulting from the installation in February 2009 of a new production lineprincipal raw material used to manufacture needle-punched nonwoven fabric. Sales of needle-punched PET nonwoven products for the three month period ended March 31, 2010 were $1,942,811 compared to $220,718 for the same period of the prior year. In addition, sales of thermal calendared PET materials for the three month period ended March 31, 2010 were $2,308,801, compared to $1,739,612 for the same period of the prior year, representing an increase of $569,189, or 33%. This increase was primarily due to increased sales volume.
Cost of Sales. Cost of sales principally consists of the cost of raw materials, labor, and manufacturing overhead expenses. Our cost of sales for the three month period ended 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 withproductions and its price fluctuations affect our increased sales volume. 98.7 %business operations. For the year ended September 30, 2010, 98% of our raw materials consistconsisted of polyester, the cost of which increased with the price of crude oil. OurThe increase in the purchase price of our raw material expenses increased to 52%materials resulted in a reduction of salesgross profit by $0.97 million for the three month period ended March 31, 2010, compared to 41% of sales for the same period of the priorfiscal year reflecting a mix of higher pricing and higher volume of raw materials used in connection with our increased sales for the period ended March 31, 2010.
Labor costs were 6%Our ability to successfully commercialize our PPS manufacturing process: Our future growth and profitability will depend on our ability to successfully commercialize our PPS manufacturing process. To date, we have not sold any PPS nonwoven products but expect sales to commence after we commence production of sales for the three month period ended March 31, 2010 compared to 2% for the same period of year 2009. The primary reason for the increased labor cost was the addition of 17 employees to work on the new PET production line which commenced operatingPPS nonwoven material in February 2009 as well as wage increases resulting from the increased demand for labor.
Our 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 greater capacity utilization rates with the addition of our new production line in February 2009.
Gross Profit. Gross profit represent net sales less cost of sales. 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 2009. The increase in gross profit resulted primary from the increase in our net sales. 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 in 2009. This percentage decrease was primarily due to an increase in the price of raw materials associated with 2010 sales, primarily polyester, which experienced a price increase commensurate with the price of oil, as well as a mix of more expensive raw materials associated with 2010 sales.early 2011.
SG&A expenses. Selling expenses include salaries, advertising expenses, costThe effectiveness and market acceptance of manufacturing, rent,our new product offerings. Market perception and all expenses directly relatedacceptance of our PPS nonwoven materials by coal-fired power plants and other potential users as a filtration device for carbon and other emissions will largely dictate the rate at which our company will grow if at all.
Our ability to producingobtain additional financing. To continue to grow in the future, we will need to purchase more PPS production equipment which will require us to raise additional financing. As of the date of this prospectus, we believe the U.S. capital markets are facing many difficulties. Potential sources of additional financing may be unwilling or unable to provide us with the additional financing we need to fully carry out our expansion plans. If we are unable to obtain additional financing, we will fund our expansion with operating cash flow which may be inadequate to allow us to grow at our desired rate.
Degree of enforcement of new PRC Environmental Regulations. The degree to which the PRC government enforces its recently adopted regulations relating to carbon and selling our products. General expenses include general operating expensesother pollutant emissions by coal fired power plant operators and other plant operators that operate coal fired facilities that are directly relatednot currently in compliance with those regulations will have an impact on the demand for our PPS bag filters.
Possible financial exposure resulting from our failure to contribute housing provident fund: Under PRC regulations we are required to open housing funds accounts and make monthly contributions of at least 5% of each employee’s average monthly income in the previous year. We have not contributed housing funds for our employees because this practice has been permitted by local authorities. The accumulated unpaid amount was approximately RMB 1.80 million (approximately $273,560) as of January 24, 2011. If the local authorities began to enforce these regulations and we are forced to contribute to the general operationfunds, our net income for fiscal year 2010 would be reduced by $16,439 and retained earnings would be reduced by $231,648. The housing funds administrative authorities are permitted to impose a fine of not less than RMB10, 000 (approximately $1,471) and no more than RMB50,000 (approximately $7,353) which would further reduce our net income by the amount of the company, but excluding sellingfine.
Tax uncertainty. We believe that our taxable income and administrative expenses. Administrative expense includes executive salaries and other expenses relateddeductions were calculated pursuant to the overall administrationPRC tax laws, regulations and local tax authority enforcement practice. However, changes in PRC tax laws and regulations may have an adverse and retroactive impact on our financial position and results of operations. In addition, the local tax authority at Foshan may change its interpretation and enforcement of the company. Our selling, generalPRC tax laws and administrative expenses forregulations which could have an adverse and retroactive impact on our financial position and results of operations. The company is not able to predict any such changes, and thus we cannot reasonably estimate the three month period ended March 31, 2010 were $407,461, an increaseamount of $131,935, or approximately 48%, compared to $275,526 for the same period in 2009. The increase was primarily due to increase of $25,524 in export delivery expenses and $83,286 in additional professional expenses incurred in connection with the company’s planned financing.potential impact.
Other Expenses. Other expenses solely consistRecent Development
On January 31, 2011, we entered into note extension agreements with each holder of interest expense. Our 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 theour outstanding convertible notes to extend the maturity date of the notes from February 12, 2011 to June 30, 2011, except for Lumen Capital LP who holds a convertible note in the aggregate principal amount of $4,140,000.$100,000. We accreted non-cash related interest expense inexpect to repay Lumen Capital the principal amount of $304,950. Excluding$100,000 and accrued interest when the accretion of non-cash interest, our interest expense for this three-month period was the same as for the same period in 2009.note matures on February 12, 2011.
Net Income. Net income for the three months ended March 31, 2010 was $594,332, an increase of $105,125, or 21%, from net income of $489,207 for the three month period ended March 31, 2009. The increase was largely due to an increase in sales of our new needle-punched products.
ComparisonResults of Six Months Ended March 31, 2010 and March 31, 2009
The following table shows, for the periods indicated, information derived from our unaudited consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See our financial statements beginning on page F-1 and the related notes thereto and other financial information included elsewhere in this prospectus.
| | | Six Months ended March 31 | |
| | | 2010 | | | 2009 | |
| | | Amount | | | | | | Percentage | | | Amount | | | | | | Percentage | |
| | | | | | (unaudited) | | | | | | | | | (unaudited) | | | | |
| Net 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 expenses | | | 662,138 | | | | | | | | 7 | % | | | 758,442 | | | | | | | | 17 | % |
| Operating Income | | | 2,341,054 | | | | | | | | 24 | % | | | 875,989 | | | | | | | | 19 | % |
| Interest Income | | | 517 | | | | | | | | 0 | % | | | - | | | | | | | | 0 | % |
| Other Expenses | | | (452,387 | ) | | | | | | | 5 | % | | | (160,506 | ) | | | | | | | 4 | % |
Gain on disposal of fixed assets | | | 496 | | | | | | | | 0 | % | | | 16,263 | | | | | | | | 0 | % |
| Total other income (expenses), net | | | (451,374 | ) | | | | | | | 5 | % | | | (144,243 | ) | | | | | | | 3 | % |
| Income Tax | | | - | | | | | | | | | | | | - | | | | | | | | | |
| Net Income | | $ | 1,889,680 | | | | | | | | 19 | % | | $ | 731,746 | | | | | | | | 16 | % |
Net Sales
Net sales for the six month period ended March 31, 2010 were $9,847,025, an increase of $5,306,192,or 117%, from $4,540,833 for the same period of prior year. In February 2009, we installed a new production line to manufacture needle-punched nonwoven fabric. Sales of needle-punched products for the six month period ended March 31, 2010 were $4,300,022,compared to $220,718 for the same period of the prior year. In addition, sales of thermal calendared materials for the six month period ended March 31, 2010 were $5,559,365, an increase of $1,228,361, or 28%, compared to $4,331,204 for the same period of the prior year. The increase was primarily due to increased sales volume and greater manufacturing capacity.
Cost of Sales
Cost of sales for the six month period ended March 31, 2010 was $6,843,833, an increase of $3,937,431, or 135%, from $2,906,402 for the same period of the prior year. As a percentage of net sales cost of sales was 70% for the six month period ended March 31, 2010 compared to 64% for the same period in 2009. The increased cost of sales resulted from higher sales volume and raw material costs.
Raw material expenses increased to 56% of the sales for the six month period ended March 31, 2010, compared to 40% of sales for the same period in 2009, reflecting a mix of more expensive raw materials associated with 2010 sales. 98.7% of our raw materials consist of polyester the price of which fluctuates with the price of oil.
Labor expenses 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% of net sales for the six month period ended March 31, 2010, compared to 19% of net sales for the same period last year due to the increase of manufacturing capacity of the Company.
Gross Profit
Gross profit for the six month period ended March 31, 2010 was $3,003,192 and increase of $1,368,761, or 84%, from $1,634,431 for the same period last year. As a percentage of net sales, gross profit was 30% for the six month period ended March 31, 2010, compared to 36% for the same period last year. This decrease was primarily due to the increase in the purchase price of the raw materials associated with 2010 sales, which price increase was caused by fluctuations in the price of oil.
SG & A Expenses
Selling, general and administrative expenses for the six month period ended March 31, 2010 were $662,138, a decrease of $96,304, compared to $758,442 for the same period last year. This is mainly due to a decrease in office expense, which was $69,894 for the six months ended March 31, 2010, a decrease of $77,327 from $147,221 for the corresponding period in 2009.
Other Expenses
Other expenses, which consist solely of interest expenses, for the six month period ended March 31, 2010 was $452,387, compared to $160,506 for the same period last year. Interest expense as a percentage of net sales increased to 5% for the six month period ended March 31, 2010 from 4% for the same period of last year. The increase in interest expense was principally due to the outstanding 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 accretion on non-cash interest expense, interest expense for this six month period remained the same as last year, and, as a percentage of net sales, decreased to 1% from 4%.
Net Income
Net income for the six months ended March 31, 2010 was $1,889,680, an increase of $1,157,934, or 158%, from net income of $731,746 for the same period in 2009. The increase was mainly due to the increase in sales due to the sales generated from new needle-punched products.Operations
Comparison of Fiscal Years Ended September 30, 20092010 and 20082009
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 beginning on page F-1 and the related notes thereto and other financial information included elsewhere in this prospectus.
| | | Year Ended September 30, | |
| | | 2009 | | | 2008 | |
| | | Amount | | | Percentage | | | Amount | | | Percentage | |
| | | | | | | | | | | | | |
| Net Sales | | $ | 11,849,712 | | | | 100 | % | | $ | 11,611,719 | | | | 100 | % |
| Cost of Sales | | | 7,906,614 | | | | 67 | % | | | 8,123,804 | | | | 70 | % |
| Gross Profit | | | 3,943,098 | | | | 33 | % | | | 3,487,915 | | | | 30 | % |
| SG&A expense | | | 1,219,114 | | | | 10 | % | | | 792,366 | | | | 7 | % |
| Bad debt expense (recovery) | | | 11,497 | | | | 0 | % | | | (129,885 | ) | | | (1.0 | )% |
| Operating Income | | | 2,712,487 | | | | 21 | % | | | 2,825,434 | | | | 24 | % |
| Other Expenses (Income) | | | 266,835 | | | | 2 | % | | | 126,259 | | | | 1 | % |
| Income taxes | | | - | | | | | | | | | | | | - | |
| Net Income | | $ | 2,445,652 | | | | 18 | % | | $ | 2,699,175 | | | | 23 | % |
| | | Year Ended September 30, | |
| | | 2010 | | | 2009 | |
| | | Amount | | | % | | | Amount | | | % | |
| | | | | | | | | | | | | |
| Net sales | | $ | 19,952,422 | | | | 100 | | | $ | 11,849,712 | | | | 100 | |
| Cost of sales | | | 13,772,843 | | | | 69 | | | | 7,906,614 | | | | 67 | |
| Gross profit | | | 6,179,579 | | | | 31 | | | | 3,943,098 | | | | 33 | |
| SG&A expense | | | 2,272,881 | | | | 11 | | | | 1,219,114 | | | | 10 | |
| Bad debt expense (recovery) | | | - | | | | | | | | 11,497 | | | | 0 | |
| Operating income | | | 3,906,698 | | | | 20 | | | | 2,712,487 | | | | 23 | |
| | | | | | | | | | | | | | | | | |
| Other income (expenses) | | | (1,661,598 | ) | | | 8 | | | | 266,835 | | | | 2 | |
| Income taxes | | | 24,023 | | | | | | | | - | | | | | |
| Net income | | $ | 2,221,077 | | | | 11 | | | $ | 2,445,652 | | | | 21 | |
Net Sales
Net sales consisted of sales of needle punched PET nonwoven fabric and thermal calendared products. Our net sales for the year ended September 30, 2010 were $19,952,422, an increase of $8,102,710, or 68%, from prior year’s net sales of $11,849,712. The increase in net sales was largely attributable to higher sales volume of our newly launched needle-punched nonwoven fabric products. Sales of needle-punched PET products for 2010 were $8,618,407, an increase of $5,766,977, or 202%, compared to $2,851,430 for 2009. In addition, sales of thermal calendared PET materials for 2010 were $11,331,528, an increase of $2,543,161, or 29%, from $8,788,367 for 2009, which was mainly due to higher sales volume.
Cost of Sales
Cost of sales primarily consists of the cost of raw materials, labor and manufacturing overhead expenses.
Our cost of sales for 2010 was $13,772,843, an increase of $5,866,229, or 74%, from $7,906,614 for 2009. Cost of sales represented 69% of net sales for 2010 compared to 67% for 2009, reflecting the higher cost of our products sold in 2010 compared to 2009. Raw material cost increased to $10,937,772, an increase of $5,501,011 from $5,436,761 in 2009 of which production volume increase accounted for approximately 82%, or $4,525,506, and price increase contributed approximately 18%, or $975,505.
As a major component of our cost of sales, the price of raw materials increased in 2010 and contributed 18% of increased cost of sales. Improved demand for end use products in 2010 increased the price of polyester resin which is the principal raw material in our PET nonwoven fabric production. The rise in the price of polyester was more obvious in the later part of 2009. Given the recent rise of crude oil price and the fact that the global economy is recovering, we believe the price of our raw materials will stay at relatively high levels and will continue to adversely affect our PET product gross margin since our ability to pass the increased material cost to customers is limited.
Labor cost accounted for approximately 2% and 3% of the total cost of sales for 2010 and 2009 respectively, reflecting the Company’s effective labor cost control.
Net Sales
NetManufacturing overhead expenses were approximately 19% of total cost of sales increased $237,993, or 2%, to $11,849,712 from $11,611,719 in 2009for 2010, compared to 2008. In February27% of cost of sales for 2009 we installed areflecting greater capacity utilization rates with the addition of our new spun-bond needle-punched production line. The sales of new needle-punched products in 2009 were $2,842,101. The sales of products from the thermal calendaring production line in 2009 were $9,007,161, a decrease of $2,604,108 compared to $11,611,719 in 2008 due to the slowdownFebruary 2009. Manufacturing overhead represented approximately 13% and 16% of the world economy. The increase of new product sales offset by the decrease of existing products resulted in a net increase of $237,993 in total sales in fiscal year 2009.
Cost of Sales
Cost of sales was $7,906,614 in 2009, a decrease of $217,190, or 3%, from $8,123,804 in 2008. This decrease resulted from a decrease in raw material expenses from 49% of sales in 2008 to 47% of sales in fiscal year 2009, reflecting our use of less expensive raw materials associated with fiscal year 2009 sales. Labor expenses were 3% of sales in 2009 and were at about the same rate in 2008. Overhead expenses decreased from 16% of net sales infor 2010 and 2009, compared to 18% of net sales in 2008 due to the lower electricity expenses and repair and maintenance expenses.respectively.
Gross Profit
GrossOur gross profit was $3,943,098$6,179,579 in 2009,2010, an increase of $455,183,$2,236,481, or 13%57%, compared to $3,487,915from $3,943,098 in 2008.2009. The increase in gross profit resulted primarily from the year over year increase in our net sales. As a percentage of net sales, gross profit was 31% in 2010, compared to 33% in 2009 compared to 30% in 2008. This2009. The lower gross profit margin was primarily due to lowerincrease in raw material cost in 2010 from 2009, offset by improved production costs in 2009 comparedefficiency.
Selling, General and Administrative Expenses
Selling expenses include salaries, advertising expenses, rent, cost of manufacturing and all expenses directly related to 2008.producing and selling our products. General expenses include general operating expenses that are directly related to the general operation of the company, but excluding selling and administrative expenses. Administrative expenses include executive salaries and other expenses related to the overall administration of the company.
SG&A Expenses
Selling, general and administrative expenses were $2,272,881 in 2010, an increase of $1,053,767, or 87%, from $1,219,114 in 2009 an increase of $426,748, or 54%, from $792,366 in 2008; primarily due to (i) increases of $76,980$557,500 in legal and accounting fees; $175,036(ii) $310,840 in expenses incurred in our efforts to raise external financingcapital in the United States; $120,795and (iii) $170,308 in employee salaries and benefits; and $57,882 in transportation expenses due to the change in transportation company to better satisfy customers’ requirements. Additionally, we have increased our sales and marketing capacity to support the development of our new products and expansion into new geographic markets. As a result, selling, marketing and administrative expenses as a percentage of net sales increased from 6.8% in 2008 to 10.2% in 2009.stock-based compensation expense.
Other Income and Expenses
Other expensesincome in 2010 includes interest income and income from revaluation of the fair value of the Company’s derivative liabilities, while other income in 2009 solely consistconsists of interest income. Other expenses include primarily interest expense , which was $269,849of $1,988,832 in 2009,2010, an increase of $119,279,$1,718,983, or 79%637%, from $150,570$269,849 in 2008.2009. Interest expense as a percentage of net sales increased to 10% in 2010 from 2.3% in 2009 from 1.3% in 2008.2009. The increase in interest expense was principallymainly attributed to non-cash expenses recorded as a result of our adoption of derivative accounting rules under FASB ASC 815-40 to record the $4,140,000 of convertible loan notes. These accounting rules require us to record derivative liabilities (warrants) issued in conjunction with the privately placed bridge-loan notes which closed on February 12, 2010 and treat the expenses directly related to the debt financing as discount so that interest is periodically accreted from the discount to the gross amount of the notes issued at its maturity date. This non-cash accretion of interest accounted for $1,524,750, or 77%, of the total interest expense in 2010. Excluding accreted interest, interest expense for 2010 represents approximately 2% of our net sales in 2010.
Provisions under FASB ASC 815 also require us to measure at each reporting period the fair value of the warrants issuable in conjunction with the private placement of convertible notes closed in February 2010. The effect of the revaluation of warrants resulted in other income of $313,000 in 2010.
Income Tax
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 September 30, 2010 and September 30, 2009.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan 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 higher average amount50% discount on income tax.
The tax provision for fiscal year was $24,023. The company has recorded zero deferred tax assets or liabilities as of indebtedness outstandingSeptember 30, 2010 and September 30, 2009, net of tax allowance, because all other significant difference in 2009.tax basis and financial statement amounts are permanent differences.
Net Income
Net income was $2,445,652$2,221,077 in 2009,2010, a decrease of $253,523,$224,575, or 9%, from net income of $2,699,175$2,445,652 in 2008.2009. The decrease was due to an increase in general administrative expenses due to the increased costs incurred to seek external financing and an increase innon-cash interest expense duederived from the convertible notes financing transaction which closed in February 2010. Excluding a $1,524,750 non-cash interest expense relating to a higher average amountaccretion of indebtedness outstandingthe discounted convertible notes and $313,000 in 2009, slightly offsetincome from revaluation of warrants issued in conjunction with the notes, net income increased by higher sales.$987,175, or 40% from 2009.
Foreign Currency Translation Adjustments
Throughout 2009,2010, the RMB rose steadily against the US dollar. As a result of the appreciation of the RMB, we recognized a foreign currency translation lossgain of $57,078.$415,775. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition, but the fluctuation of the Renminbi may materially and adversely affect your investment if the current trend of appreciation of the RMB is reversed.
All of our revenue was generated and expenses were incurred in 2009the PRC and Hong Kong in 2010 and were denominated in Renminbi. Our income statement accounts in 2010 were translated at the annual average exchange rate of $1 to 6.83RMBRMB 6.8118 and the balance sheet items, except the equity accounts, were translated at the year-end rate of $1 to 6.83RMB.RMB 6.6912. The equity accounts were stated at their historical rate when the corresponding transactions occurred.
Net foreign currency translation losses were $57,078,gain was $415,775, or 0.05%2% of net sales, in 20092010 as compared with the previous year'syear’s net foreign currency translation gainlosses of $1,020,734,$57,078, or 8.8%0.5 % of net sales.
Liquidity and Capital Resources
The following table sets forth a summary of our net cash flow information for the periods indicated:
| | | Six Months Ended March 31, | | | Years Ended September 30, | | | Years Ended September 30, | |
| | | 2010 | | | 2009 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | |
| | | (Consolidated, unaudited) | | | (Consolidated, unaudited) | | | (Consolidated) | | | (Consolidated) | | | (Consolidated) | | | (Consolidated) | |
Net cash provided by operating activities | | $ | 1,553,423 | | | $ | 449,129 | | | $ | 2,700,162 | | | $ | 3,381,782 | | | $ | 4,411,689 | | | $ | 2,700,162 | |
| | | | | | | | | | |
Net cash (used in) investing activities | | $ | (1,389,582 | ) | | $ | (621,244 | ) | | $ | (1,158,033 | ) | | $ | (4,358,330 | ) | | $ | (5,230,563 | ) | | $ | (1,158,033 | ) |
| | | | | | | | | | |
Net cash provided by (used in) financing activities | | $ | 2,636,263 | | | $ | 928,128 | | | $ | (600,498 | ) | | $ | (92,974 | ) | | $ | 2,708,294 | | | $ | (600,498 | ) |
| | | | | | | | | | |
| Net cash inflow | | | $ | 1,997,653 | | | $ | 930,078 | |
We finance our business with cash flowsgenerated from operations and fromuse short-term bank loans. Weloans to fund capital expansion projects using our retained earnings from operations and with third party debt and equity financing.expenditures.
Working capital consists mainly of cash and equivalents, accounts receivable, advances to suppliers and inventory. Cash and equivalents, inventory and accounts receivable account for the majority of our working capital.
Our working capital requirements may be influenced by many factors, including our cash flow, competition, relationships with suppliers, and the availability of credit facilities and financing alternatives, none of which can be predicted with certainty.
At March 31,September 30, 2010, we had several bank loans for thein a total amount of $3.8 million (RMB26(RMB25.4 million) with Agriculture Bank of China, Foshan Branch. These loans are repayablewere repaid in December 2010. We haveSee Note 19 (“Subsequent Events”) to our consolidated financial statements for the highest credit rating for that bank.current status of these loans.
On February 12, 2010,we completed a financing transaction in which we raised grossreceived net proceeds of $4,140,000$3,409,813 through a private placement of convertible notes and warrants to certain accredited investors.
Operating Activities
For the six month periodfiscal year ended March 31,September 30, 2010, net cash provided by operating activities was approximately $1,553,423, compared to $449,129 for the same period of the prior year. There was$4,411,689, representing an increase of approximately $1,100,000 in net cash provided by operating activities for the six months ended March 31, 2010 from the same period of the prior year primarily due to the increase in net income.
For the fiscal year ended September 30, 2009, net cash provided by operating activities was $2,700,162, representing a decrease of $681,620,$1,711,527, or 20%63%, from $3,381,782$2,700,162 for the fiscal year ended September 30, 2008.2009. The decreaseincrease was due primarily to a decreasean increase in net income,sales, improved collection of credit sales, increase in receivables, advancesclients’ deposits and reduction of advance made to suppliers and inventory and a decrease in accounts payable and accrued liabilities.suppliers.
Investing Activities
For the six months ended March 31,During 2010, net cash used in investing activities was $1,389,582, compared to net cash used in investing activities$5,230,563, an increase of $621,244$4,072,530 from $1,158,033 for the same period of the prior year. The cash used in investing activities increased because deposits were made on a new product assembly line. The net cash used in investing activities for the same period of the prior year was due to the deposits for purchases of equipment and expenses relating to outfitting our facilities.
For the fiscal year ended September 30, 2009, net cash used in investing activities for 2009 was $1,158,033, a decrease of $3,200,297 from $4,358,330 for 2008.2009. The greater investment costs of 20082010 were due to our purchases of equipment and expenses relatingexpenditures related to outfitting our facilities.manufacturing facilities for new PPS production line.
Financing Activities
For the six months ended March 31, 2010, net cash provided by financing activities for the six month period ended March 31, 2010 was approximately $2,636,263, compared to $928,128 used for the same period of the prior year. The cash provided in the six month period ended March 31, 2010 was attributable to the note financing with net proceeds of approximately $3,400,000 offset by repayments of bank loans in the amount of $768,535. The cash flow from financing activities for the same period of 2009 was negative because we repaid $5,161,742 on bank loans which offset our borrowings of $4,233,614.
For the fiscal year ended September 30, 2009, net cash usedreceived in financing activities was approximately $600,498,$2,708,294, an increase of $507,524$3,308,792 compared with net cash used in financing activities of $92,974$600,498 for 2008.2009. Cash received in 2010 represents net proceeds received from private placement of convertible notes offset by repayments of short term borrowings. Cash used in 2009 represents repayments of short term borrowings. Cash used in 2008 represents dividend payments of $1,178,220 offset by net short term borrowings of $1,085,246
Cash used in 2008 represents cash dividend payments of $1,778,220 offset by net borrowings of $1,085,246.
Loans and Credit Facilities
The balance of our outstanding short-term bank loans on March 31, 2010 was approximately $3,800,000, compared with approximately $4,600,000 on March 31, 2009. The balance of our outstanding short-term bank loans as of September 30, 20092010 was approximately $4,600,000,$3,796,053, as compared with $5,200,000$4,578,409 as of September 30, 2008.2009. We repaid approximately $600,000$859,346 of short term bank loans in 2009.2010.
Other than as disclosed in the financial statements, we had no long term debt, capital lease obligations, operating leases or any other long term obligations as of March 31,September 30, 2010.
On February 12, 2010, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds for $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum and interest for six months in amount of $204,464 to be held in an escrow account.annum. The notes are convertible into shares of common stock at a 65% discount to the offering price upon consummation of a “qualified financing”. Thefinancing.” This offering contemplated by this prospectus is expected to be a “qualified financing.”
The notes were originally scheduled to mature on February 12, 2011. As discussed under “Recent Development” above, on January 31, 2011 we entered into note extension agreements with each of the note holders (other than Lumen Capital) to extend the maturity date of the notes to June 30, 2011. We plan to repay the note in the principal amount of $100,000 held by Lumen Capital on February 12, 2011.
The warrants become void if the notes automatically convert into common stock which is expected to occur upon consummation of this offering.offering in the US capital market. 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. Please see the section entitled “Private“Our Corporate History - Private Placement” beginning on page 4140 for a more complete discussion of the notes and warrants issued in the February 12, 2010 private placement.
Future Cash Commitments
Our planned expansion of our PPS manufacturing facilities in 20102011 will require significant investment capital. We intend to use the net proceeds of this offering (i) to repay a short term loan in the amount of $3.9 million which was used as well aspart of the proceeds frompurchase price of approximately $9.6 million for the private placement completedbuild-out and purchase of a new production line to manufacture PPS materials; and (ii) to purchase two additional production lines to manufacture PPS materials. The three new production lines are expected to increase our annual output by 3,600 tons of nonwoven materials to 11,600 tons of nonwoven material. The estimated cost of the build out and purchase of all three production lines is approximately $20,000,000 in February 2010 for this purpose.aggregate. In the future, we may need to raise additional capital if the proceeds from the two financings and our operating cash flows are inadequate to continue our capital expansion plans.
Restatement of Previously Issued Financial Statements
In connection with the review by the staff of the Division of Corporation Finance of the Securities and Exchange Commission of the Public Offering Registration Statement, an error in our interim financial statements was identified in that we failed to record on our financial statements a liability of $75,000 owed to each of United Best and Primary Capital ($150,000 in total) for advisory services rendered in connection with our private placement of convertible notes which closed on February 12, 2010. We also noted that a grant of 30,000 restricted shares of common stock in June 2010 to one of our directors was not reflected in the financial statements originally issued.
Accordingly, on November 24, 2010, immediately following the filing of the Current Report on Form 8-K, we filed (i) an amendment on Form 10-Q/A for the period ended June 30, 2010 containing restated interim financial statements for the three and nine month periods ended June 30, 2010 and (ii) an amendment on Form 10-Q/A for the period ended March 31, 2010, containing restated interim financial statements for the three and six month periods ended March 31, 2010.
The principal effects of the restatements are as follows:
| · | As of June 30, 2010, accrued liabilities increased by $150,000 and stockholders’ equity decreased by $150,000. Of this decrease, $150,000 is due to the recording of the $150,000 liability to United Best and Primary Capital. |
| · | As of March 31, 2010, accrued liabilities increased by $150,000 and stockholders’ equity decreased by $150,000. |
| · | We restated our selling, general and administrative expenses to reflect the fee of $150,000, which resulted in a reduction of income from operations, income before taxes, net income, and earnings per share for both the three months and six months ended March 31, 2010. |
| · | We restated our selling, general and administrative expenses to reflect the fee of $150,000 and stock-based compensation of $5,000, which resulted in a $5,000 and $155,000 reduction of income from operations, income before taxes, net income, and earnings per share for three and nine months ended June 30, 2010, respectively. |
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:
Method of Accounting
We maintain our general ledger and journals with the accrual method accounting for financial reporting purposes. Accounting policies adopted by us conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
Economic and political risks
Our operations are conducted in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
Our operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Revenue recognition
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and the seller’s price to the buyer is fixed or determinable and collectible.
Land use rights
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. EstimatedThe estimated useful lives range from 20 tolife is 50 years.
Property, plant and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of plant and equipment are as follows:
BuildingsBuilding and plant | 15-3520 years |
Machinery and equipment | 10 years |
| Office equipment and computers | 6-105 years |
Motor vehiclesVehicles | 6-8 years |
Other assets | 6-1010 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Quantitative and Qualitative Disclosures About Market Risk
Increases in the price of crude oil have a negative impact on the cost of our raw materials. Given the recent rise in the price of crude oil and the fact that the global economy is recovering, we expect that the price of our raw materials will stay at relatively high levels due to the relatively high price of crude oil which may adversely affect our gross margin for our PET products as our ability to pass on the increased material costs to customers is limited. During 2010, all of our raw materials were purchased in the PRC. Because the raw materials for our new PPS products are expected to be sourced from the United States and Japan, we anticipate that, beginning in 2011, over 50% of our raw materials will be purchased from suppliers in the United States and Japan. Accordingly, changes in the value of the RMB relative to the dollar and yen will affect our production costs and gross profit in 2011. However, we believe the RMB will continue to appreciate against the dollar based on the increasing pressure from the US government and so the impact of foreign currency conversion will be favorable to us. In addition, any increase in the dollar cost of oil would be offset by what we believe will be an appreciation of the RMB against the dollar.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition.
OUR CORPORATE HISTORY
Perpetual Technologies was organized as Molokai Enterprises, Inc., on November 27, 1996 under the laws of the State of Colorado. From 1996 to 2006, Molokai Enterprises Inc. had no active business operations. Molokai changed its domicile from Colorado to Delaware in April 2007 by merging with and into Perpetual Technologies, Inc., a Delaware corporation organized for that purpose on March 15, 2007. From March 15, 2007 until the February 12, 2010 share exchange transaction described below, Perpetual had no operations or substantial assets and was deemed to be a "blank check" or shell company.
On February 12, 2010, our company entered into two related and contemporaneous transactions pursuant to which the ownership of our company changed.
The first transaction involved the surrender and cancellation of 12,640,000 shares of common stock held by a number of our shareholders in exchange for $40,000 in cash paid by Joseph Nemelka, who was a director of our company at that time.
The second transaction involved a share exchange transaction between our company, Hong Hui Holdings Limited, or Hong Hui, and the shareholders of Hong Hui. At the time of the share exchange, Hong Hui owned, and currently still owns, all of the stock of Technic International Limited, or Technic, a Hong Kong holding company which, in turn, owns 100% of the stock of Foshan, the PRC operating company that conducts our current, active business operations. In the share exchange transaction, we acquired direct control of Hong Hui by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares of our common stock in exchange for all of the outstanding capital stock of Hong Hui. As a result of the share exchange transaction, we became the indirect, 100% shareholder of Technic and its wholly owned subsidiary, Foshan.
In connection with these transactions, our two former directors, Joseph Nemelka and Seth Winterton resigned and Li Jie and Chris Bickel, were appointed as our new directors. Our management was also changed as Li Jie was appointed as our Chief Executive Officer, Law Wawai was appointed as our President of Sales and a director, Shijun Zeng was appointed as our Chief Technology Officer and Wei Yang was appointed as our Corporate Secretary.replaced with Foshan’s management.
On February 12, 2010, our new board of directors approved (i) a one-for-five reverse split of our issued and outstanding common stock and (ii) the change of our name from Perpetual Technologies to China SLP Filtration Technology, Inc. Stockholders holding shares representing a majority of the votes entitled to be cast at a shareholders’ meeting consented in writing to these actions. The reverse split reduced the issued and outstanding shares of common stock from 75,818,571 to 15,235,714 shares. The reverse split and name change were effective on March 24, 2010.
Our current structure, after the reverse merger, is set forth in the diagram below:
Private Placement
On February 12, 2010, we completed a financing transaction in which we raised gross proceeds of $4,140,000 through a private placement of convertible notes and warrants to certain accredited investors.
The material agreements through which the private placement transactions were carried out, the transactions themselves, and the notes and warrants are described below. Full copies of the transaction documents for this private placement have been filed as exhibits to our Form 8-K dated February 12, 2010 on the SEC’s EDGAR database and the summary below is qualified in full by reference to such exhibits. In connection with the private placement, we engaged a placement agent and a financial advisor which received separate cash and equity-based compensation for their services. The financial advisor and placement agent are related parties. See sections entitled “Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants” beginning on page 5861 and “Certain Relationships and Related Transactions” beginning on page 7185 for additional information regarding compensation to the placement agent and financial advisor.
Note Purchase Agreement
On February 12, 2010, immediately following the closing of a share exchange transaction, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes, in the aggregate principal amount of $4,140,000, and warrants (which are exercisable only in certain events)events and will become void if this offering is consummated). The closing of the sale of the notes and warrants occurred on February 12, 2010. The terms of the notes and warrants are set forth below. The note purchase agreement contains representations, warranties and covenants which are customary for transactions of this nature.
Terms of the Notes
The notes have the following material terms:
Maturity: The notes were originally scheduled to mature after one year.on February 12, 2011. On January 31, 2011 we entered into note extension agreements with each of the note holders (other than Lumen Capital) to extend the maturity date of the notes to June 30, 2011. We plan to repay the note in the principal amount of $100,000 held by Lumen Capital on February 12, 2011. If principal is not paid on maturity then 150% of the principal amount is payable.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default. $204,464 out of the closing proceeds is being heldwas placed in escrow to cover most of the interest due in the first six months.
Conversion: In the event of the closing of this offering (or any other equity or series of related financings resulting in aggregate gross proceeds to the Companycompany of at least $20,000,000 (or such lesser amount as shall be approved in writing by the holder(s) of notes evidencing at least 50% of the principal amount of the notes then outstanding)), or a “qualified financing,” prior to the maturity date of the notes, the principal amount of the notes converts automatically into the securities sold in suchthat financing at a 65% discount to the offering price of such securities. At an assumed offering price of $6.00 per share, the notes will have a conversion price of $2.10 per share. The offering contemplated by this prospectusinterest on the notes is expected to be a “qualified offering” which will resultpayable in conversioncash and does not convert into shares of the notes.common stock.
Terms of the Warrants
Set forth below are the material terms of the warrants issued at the closing:
Exercisable: The warrants become void if this offering is consummated. In the event that this offering is not consummated, the warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing“financing” is consummated within five-year period after the issue date and become void if the notes automatically convert into common stock (which will occur if the offering contemplated by this prospectus is completed).prior to February 12, 2015.
Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
Limited Recourse Guaranty and Pledge Agreement
Our obligations under the note are guaranteed by Bestyield Group Limited, a BVI company controlled by Mr. Li, our chief executive officer, and Proudlead Limited, a BVI company controlled by Mr. Law, our President of Sales and a member of our Board of Directors, or the “management shareholders,” under a limited recourse guaranty which is secured by a pledge by the management shareholders of the 8,706,122 shares of our common stock received by the management shareholders in the reverse merger.
Registration Rights Agreement
Under the registration rights agreement, we agreed that if we file a registration statement in connection with a “qualified financing,” we will include in that registration statement for resale the securities issuable on conversion of the notes or the warrants, as the case may be, for an offering to be made on a continuous basis pursuant to Rule 415. The Resale Prospectus which forms a part
Accordingly, we are including 369,725 of this Registration Statement is being filed in satisfaction of our obligation to register the securities issued1,923,809 shares underlying the notes in the private placement.aggregate principal amount of $4,040,000 (assuming a public offering price of $6.00 per share) in our resale prospectus.
In the event the Securities and Exchange Commission,SEC pursuant to Rule 415, does not permit us to register all of the applicable registrable securities in the registration statement, we will use our best efforts to register the registrable securities that were not registered in the initial registration statement, as soon as the CommissionSEC permits us to do so.
In the case of an underwritten public offering, if the managing underwriter(s) or underwriter(s) reasonably objects to the inclusion of the registrable securities in any registration statement, then if we, after consultation with the managing underwriter, determine that the inclusion of such registrable securities would significantly harm the offering contemplated in such registration statement, and recommend inclusion in such registration statement of fewer or none of the registrable securities, then (x) the number of registrable securities included in the registration statement shall be reduced pro-rata among such holders (based upon the number of registrable securities requested to be included in the registration), or (y) none of the registrable securities shall be included in the registration statement. If securities are being offered for the account of other persons as well as us then the reduction shall not represent a greater fraction of the number of registrable securities than the fraction of similar reductions imposed on such other persons (other than the company).
If (a) we fail to file a registration statement within 30 days of a demand notice, the “demand file date” or (b) the registration statement is not effective within 180 days after filing (or, in the case of subsequent registration statements filed under Rule 415, 90 days after filing or 120 days in the event that registration statement receives a full review), we have agreed to pay the investors two percent (2%) of the aggregate principal amount of the notes for each month (or part thereof) that it is late (capped at 10%). No liquidated damages are payable with respect to any shares required to be omitted as a result of the operation of Rule 415.
BUSINESS
Overview
We are a leading manufacturer of nonwoven fabricsfabric in the PRC. In 2009, we ranked first in sales revenue in PRC forNonwovens are synthetic fabrics, such as felt or polyester, (PET) nonwoven fabrics according to a report issuedwhich are neither woven nor knitted, but instead made from long fibers, bonded together by CNITA.chemical, mechanical, heat or solvent treatment.
We currently manufacture two types of PET nonwoven fabrics: (i) PET filament spun-bond thermal calendared nonwoven fabric, which we began manufacturing in 2006; and (ii) PET filament spun-bond needle-punched geo-membrane and waterproof fabrics, which we began manufacturing in 2009.fabrics. Our PET nonwoven fabrics are used in a wide range of products, including filtration products, road construction materials, home furnishings, automobile interior insulation and industrial packaging.
We sell our nonwoven fabrics primarily to PRC-based manufacturers that incorporate our fabric products into end products which are sold to customers operating in the heavy industrial, automotive, construction and home furnishing industries. Given the broad range of applications for our products, we are not dependent on any single industry segmentsector or customer to generate revenues. We have many active customers and our two largest clients in 2010, were Dalian Jier Linke Geotextile Material Co., Ltd. and Chendu Sanya Building Material Co., Ltd. which accounted for approximately 19% of our revenues. Our two largest customers in 2009, Chengdu Sanya and Xiantao Ruixin, accounted only for approximately 18% of our revenues in 2009.
Although we intend to continue to generate considerable revenues from the sale of our existing PET nonwovens, the key component to our growth strategy is the successful commercialization and sale of polyphenylene-sulfide fiber, or PPS, nonwoven fabric. We have developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture PPS nonwoven fabric. PPS nonwoven fabric is a heat resistant, corrosion-proof and flame retardant nonwoven fabric and can be used in many different applications, including as the material for dust filter bags for pollutant dust removal in smoke stacks in coal-fired power plants, garbage incinerators and cement factories.factories. We believe therecently developed a manufacturing process that we use to manufacture ourpolyphenylene-sulfide fiber, or PPS nonwoven fabric, productswhich is proprietary.the key product line around which our long-term growth strategy is centered. We hold a number of authorized patentsbelieve that this manufacturing process is proprietary and have applied for a process patent application currently pending in the PRC and intend to apply for a process patent in North Americathe US and Europe.
While We believe that although PPS filtration materials have been used since 1979 in bag filters that are attached to smoke stacks in nearly 80%many of the coal-fired boilers operating in Europe and the United States, less than 10% of the coal fired power plants operating in the PRC are equipped with dust removal filtration bags and less than 10% of the filtration bags in use of bag filterswere made from PPS fabric is not widespread in China.fiber. (Source “China Power Industry”, issue 4, 2006, page 36.)
We believe that demand for PPS fabric will significantly increase in China as a result ofUnder recently adopted PRC environmental regulations that are being imposed uponon operators of coal-fired power plants, garbage incinerators and cement factories. Under these new, stricter regulations,factories, which came into effect in January 1, 2010, carbon and other emissions are required to be less than 50 milligrams per cubic meter by the end of 2010. Some of the larger, more developed cities for example Beijing and Tianjin, have adopted even more stringent rules requiring that emissions be between 20 andless than 30 milligrams per cubic meter. Water foam and static(Source "Electric Power," May, 2008.)
We believe, based on an article published in China Nonwoven & Industrial Textile (CNIT) in 2010, that less than 10% of the coal-boilers in China were equipped with dust removal techniques currently deployed by many smaller coal-fired power plantsfiltration bags and less than 10% of the filtration bags in China do not meet these new government regulations. Our independent market research indicates that over 80% of coal-fired power plants in Chinause are not in compliance with current government regulations and are faced with the choice of either complying or being shut down.made from PPS fiber.
Bag filters made from our PPS materialsFiltration bags offer these and other plant operators a cost effective methodway of meeting these new emission and dust pollutant standards in China. Ourthe PRC because the installation of bag filters is a significantly cheaper method of achieving compliance with these regulations than installing costly pollutant dust removal equipment such as engineered scrubbing systems, the installation of which would we believe be cost prohibitive for many of these smaller coal fired power plants and other polluters.
Based on laboratory tests which we conducted internally we believe that our PPS nonwoven fabric differs fromis superior to other high temperature filtration materials currently available types of PPS fabric currently because our productit is lighter, thicker, stronger, has higher air permeability and filtration efficiency and is significantly cheaper to produce. Although a prototype bag filter usingAs nonwovens are sold by weight our PPS material has not yet been deployed by any thermal power plant or other end user, our internal tests have demonstratedproduct will also be cheaper as it is lighter. Due to us the efficacysuperior characteristics of our PPS nonwoven product andcoupled with the demand created by these new regulations we believe that itour PPS material will ultimately replace other high temperature filterfiltration materials currently available in the market place, such as PTFE (or teflon)Teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and PSA. PSA and the demand for our PPS nonwovens will be significant.
Comparison-Our PPS Product to Other Filtration Materials
| | | Our PPS Product | | | PPS needle punching felting | | | Metamax needle punching felting | | | P84 needle punching felting | | | PTFE needle punching felting | |
Gram weight（g/m2）(1) | | | 450 | | | | 500 | | | | 500 | | | | 500 | | | | 800 | |
| Thickness (mm) (2) | | | 2.2 | | | | 1.8 | | | | 2 | | | | 2 | | | | 2.5 | |
| Air permeability (L/m2/s) (3) | | 300~400 | | | 200～300 | | | 200～400 | | | 200～300 | | | 200～300 | |
| Break strength (N/5cm)(4) | Vertical | | | 1400 | | | | 1250 | | | | 1300 | | | | 1100 | | | | 3260 | |
| | Horizontal | | | 1250 | | | | 1350 | | | | 1460 | | | | 1200 | | | | 3300 | |
Break elongate（%） (5) | Vertical | | | 25 | | | | 40 | | | | 50 | | | | 25 | | | | 10 | |
| | Horizontal | | | 30 | | | | 60 | | | | 55 | | | | 35 | | | | 15 | |
| Working temperature (6) | Continuous | | | 190 | | | | 190 | | | | 204 | | | | 260 | | | | 260 | |
| | Moment | | | 220 | | | | 220 | | | | 240 | | | | 280 | | | | 300 | |
| Price of fiber (in K USD$) (7) | | $ | 14.68 | | | $ | 20.56 | | | $ | 22.03 | | | $ | 55.80 | | | $ | 41.12 | |
| Materials saved (%) (8) | | | 0.0 | % | | | 10.0 | % | | | 10.0 | % | | | 10.0 | % | | | 43.8 | % |
| Filtration Efficiency (mg/cbm) (9) | | <30 | | | 50～100 | | | 50～100 | | | 50～100 | | | 50～100 | |
(1) Gram weight: (g/m2) means grams per meter squared. The higher the gram per meter squared weight, the heavier the fabric/material.
(2) Thickness (mm): the higher the millimeter figure, the thicker the material.
(3) Air permeability: (L/m2/s) means liters per meter squared per second. The more liters that pass per second, the higher the permeability of the fabric/material.
(4) Break strength: (N/5cm) is a unit of measure to demonstrate breakage strength. 1 N ≈ 0.1 KG so that N/5cm = .02. So, a 1400 value = 28. The higher the value the stronger the material.
(5) Break elongate (%) refers to the amount of stretching of a fabric/material before breakage expressed as a percentage. So, a 25% value indicates the material can be stretched 25% prior to breakage.
(6) Working temperature means the continuous operating temperature that a fabric/material can operate in.
(7) Price of fiber (in K USD$) = Price of the fabric/material expressed as K USD$ ($1,000) per metric ton.
(8) Materials saved (%) = Referencing the SLP PPS Product as the denominator, the amount of material that can be saved by utilizing the more efficient PPS material as compared to the other materials.
(9) Filtration Efficiency (mg/cbm) = milligrams per cubic meter. The ability of the fabric/material to eliminate airborne particles. This figure is the minimum size of particles.
We plan to begin commercial production of our PPS nonwoven fabric using our patent pending process in the latterearly part of 20102011 with the addition of four high techa high-tech production linesline with an annual output capacity of 4,8001,200 tons. We plan to use the proceeds from this offering to purchase two additional production lines with additional annual output capacity of 2,400 tons. Although prototype bag filters made of our PPS product have been tested in laboratories, they have not been tested on site by any potential end user and we do not expect to develop prototypes for testing by any end user prior to beginning commercial production.
OurOur manufacturing facility, which uses advanced manufacturing equipment imported from Germany, is located in Foshan City.City, Guangdong Province, PRC and occupies more than 10,000 square meters. We currently have three production lines for PET nonwovens. Two of these production lines are thermal calendared lines eachnonwovens with total annual capacity of 2,0008,000 tons of polyester filament, thermal calendared nonwoven fabric. The third production line is a needle-punched production line, with annual capacity of 4,000 tons of polyester filament, needle-punched, geo-membrane and waterproofing material.
Our Industry
We operate in the nonwoven segment of the technical textiles industry which is one of the fastest growing sectors of the textile industry worldwide.
Since 1985, the global market size of the technical textiles sector has grown at an average growth rate of 3.8% per year. Total consumption of technical textiles in 2008 reached 19.6 million tons and has been projected to reach 33.8 million tons in 2010 on a worldwide basis. (Source:(Source: Textile Lead).
InThe nonwoven fabric industry in the PRC is large and growing, driven primarily by China’s continued economic development. China output capacity has likewise enjoyed continuous expansion duringexperienced rapid economic and industrial growth in the past three decades, growing at an annual rate30 years. China’s output of 19.6%iron and steel, cement, coal, fertilizer and power generation all currently rank as first or second in the 1980s, 18.8%world (Source: US Department of Commerce and US Department of the Interior). China’s consumption of raw materials currently ranks second in the 1990sworld (Source: Report from the EIA Energy Information Administration). Due to outdated technology and 19.7% since 2000. equipment in China’s chemical, raw materials and energy industries, China has encountered problems of inefficient utilization of energy and resources, as well as heavy pollution due to accelerated urbanization. Reducing emission pollution has been a focus for the Chinese Central Government for several years and is expected to remain a focus moving forward. As China’s government imposes stricter policies on environmental protection, industrial gas and dust emission limits have become stricter. We believe this creates a significant market opportunity for the commercialization of our PPS nonwovens materials.
China now makesmanufactures about 20% of the world’sworld���s nonwovens and this market share is expected to reach 25% by 2015 according to statistics released by INDA (Association of the Nonwoven Fabrics Industry) in North America and EDANA (European Disposables and Nonwovens Association)Association) in Europe.
Currently in the PRC, there are an estimated to be 500-600 nonwovens manufacturers producing nonwovens on an estimated 1,000 to 1,500 lines. (Source:(Source: Chinese Technical Textiles and Nonwovens Industry, 2009).
Consumption of nonwovens in China likewise has been rapidly expanding at an annual growth rate of 11% since 1998 with demand coming primarily from the construction, clothing and automobiles industries.
We believe that there is a significant gap between the nonwovens industry in China and the nonwovens industry in Europe and the United States in terms of technical level, quality level, and competitiveness. China’s nonwovens market is still emerging and we believe has a large capacity to develop and expand and we believe that the following factors will contribute to growth in the nonwovens industry in China and our ability to grow as a company:
| · | Lack of market segments: Nonwoven products are used in a variety of applications. Existing markets are expanding and new markets are emerging. China’s nonwoven industry production capacities arecapacity is still concentrated on normal traditional products, such as polyester wadding, interlining, geo-textile, hygiene, packaging materials and normal filtration materials. Many companies lack clear market focus and are competing in the same market segments which have caused capacity concentration and fierce competition. |
| · | Strength for market and product development is not substantial: In China, market demand for the higher technology based PET spun-bond productsproduct is currently over 40 million squarecubic meters. These products are currently all imported, mainly from Freudenberg (Taiwan). The price for these products is over USD $5,000 per ton. Some of the domestic Chinese companies have been trying to develop these products but, to date no such products have been launched. If suchthese products are developed at a lower cost in the domestic market, then the Chinese domestic market for highly technical nonwovens will expand. |
| · | The size of private companies is small and those companies, therefore, lack international competitiveness: In 2008, average production capacity of spun-bond companies was 4,000 tons, and exact production capacity was 2,700 tons, leaving many producers unable to satisfy high volume customer orders.
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| · | Existing products are low-end: Currently, it is not possible to provide several products that are necessary to special applications within the domestic and international markets.
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We intend to capitalize on the deficiencies of the PRC's nonwovens industry that have historically made it difficult for Chinese nonwoven companies to thrive. Although we are significant in terms of capacity and output, as we increase and improve our technical capabilities, output capacity, research and development abilities and innovative capabilities, we believe that our company can effectively compete in both the international and domestic markets.
Our Growth Strategy
We believe that our leading market position, our ability to meet customer demand and our commitment to innovation positions us well for future growth. Our growth strategy centers around the following strategic initiatives:
| · | Commence production of our PPS nonwoven fabric product. We plan to commence production of PPS nonwoven fabric product using our proprietarypatent pending manufacturing process in the second halfearly part of 20102011 for sale to PRC-based operators of coal-fired power plants, garbage incinerators and other manufacturers that are not in complianceneed to comply with recently adopted PRC environmental regulations governingregulations. |
| · | Expand our manufacturing facilities. In order to commence production of PPS nonwoven fabric, we plan to significantly expand our manufacturing facilities and are currently installing a new production line to manufacture PPS nonwoven materials. We plan to acquire two new production lines with the dischargeproceeds of carbonthis offering. These three new production lines are expected to increase our total annual manufacturing capacity from 8,000 tons to 11,600 tons of nonwoven materials. |
| · | Develop, protect and other emissions. commercialize our proprietary technology. We hold a number of authorized patents and have a patent application currently pending in the PRC for our PPS nonwoven manufacturing process which we believe is entitled to patent protection. We intend to apply for a process patent for this process in North America and Europe. We intend to capitalize on our proprietary technology by developing and commercializing our products for numerous applications and believe our proprietary technology gives us a competitive advantage and acts as a barrier to entry for our competitors. |
| · | Commence marketing and sale of our PPS products to coal fired power plants. To capitalize on China’s “green movement” we plan to focus our sales efforts for our PPS nonwoven material on coal-fired power plants as we believe it is currently the most suitable and largest market for PPS filtration materials. The sales to the coal-fired power plants will be made directly using our existing sales team. We also expect to double the size of our outside sales force to cover the PPS products and market. |
Our Competitive Strengths
We believe our competitive strengths are as follows:
| · | We offer high quality products with low production costs. We manufacture our products using what we believe to be proprietary, low cost manufacturing processes with quality manufacturing equipment which allows us to offer PET and PPS nonwoven products which have lower operational and production costs than our competitors’ products. |
| · | We believe our PPS material is a superior product. We believe, based on laboratory tests which we conducted internally, that our PPS nonwoven fabric is superior to other currently available types of PPS fabric because it is lighter, thicker, stronger, has higher air permeability and filtration efficiency and significantly cheaper to produce and will ultimately replace other high temperature filter materials, such as PTFE (or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and PSA. |
| · | Expand our manufacturing facilities. We plan Similar to significantly expand our manufacturing facilities and acquire fourmost new production lines to manufacture PPS nonwoven material. This will increase our total annual manufacturing capacity from 8,000 to 12,800 tons of nonwoven material. We believe that the expansionproduct offerings, widespread market acceptance of our manufacturing capacity will allow us to meet the demand for our PPS nonwoven products by numerous plant operators which must become compliant with new PRC environmental regulations.
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| · | Develop, protect and commercialize our proprietary technology. Our PPS nonwoven fabric products are manufactured using a proprietary, continuous filament, spun-bond, needle-punched manufacturing process which we believe is entitled to patent protection. We hold a number of authorized patents and have a patent application currently pending the PRC for this process, and we intend to apply for a process patent in North America and Europe. We intend to capitalize on our proprietary technology by developing and commercializing our products for use in numerous applications and believe our proprietary technology gives us a competitive advantage and acts as a barrier to entry for our competitors. For the sales of the PPS nonwoven fabric material, we will focus our sales efforts on coal-fired boilers, located inside of coal-fired power plants. We will focus on the application in the coal-fireddust bag filters by coal fired power plants initially as thisand other intended users is currently the most suitable and largest market for PPS filtration materials. The sales to the coal-fired power plants will be made directly using our existing sales team and sales process described above. We expect to double the size of our outside sales force to cover the PPS products and market.uncertain before a product is launched.
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Our Competitive Strengths
We believe our competitive strengths are as follows:
| · | We offer high quality products with low production costs. We utilize high quality, proprietary manufacturing processes using advanced manufacturing equipment which allows us to offer PET and PPS nonwoven products which have lower operational and production costs than our competitors’ products.
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| · | Our proprietary manufacturing processes present a significant barrier to entry for our potential competitors. We hold a number of authorized patents and have a patent application currently pending in the PRC, including a process patent for the manufacture of PPS nonwovens, and we intend to apply for a process patent in North America and Europe for our PPS nonwoven manufacturing process. Additionally, we have made significant investments in research and development and we believe these proprietary processes could give us a competitive advantage over our competitors and act as a barrier to entryentry. |
| · | We are well positioned to capitalize on China’s “green” movement. The Chinese government recently imposed stricter regulates on carbon and other emissions by coal-fired power plants and other emitters of pollutants in China. We believe that the vast majority of coal-fired power plants in the PRC are not in compliance with current government requirements. Bag filters made of our PPS materials offer a cost effective method of meeting these new emission and dust pollutant standards in China.
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| · | We have efficient production and operations management. As a result of our advancedmanufacturing equipment and proprietary manufacturing processes, we believe that we exceed industry standards in productivity, reduction of variability and delivery lead time for our existing products. This results in fewer product warranty claims and greater customer satisfaction. |
Our Products and Market
We are a manufacturercurrently manufacture two types of polyester, or PET, nonwoven fabric products. Our existing nonwoven fabric product lines consist of normal polyester (PET)fabrics: (i) PET continuous filament spun-bond thermal calendared nonwoven fabricsfabric, which we began manufacturing in 2006; and polyester (PET)(ii) PET filament spun-bond needle-punched geo-membrane and waterproof materials. fabrics, which we began manufacturing in 2009.
In our operations and in this prospectus, we use a variety of technical terms to describe our products based on the second halfmanufacturing process used or raw material included in our products. Some of 2010, we expectthese terms are described below:
“Continuous filament” refers to commence productionstrands of polymer (plastic) that are continuous as opposed to chopped or cut to certain length.
“Spun Bond” refers to a process of melting polymer pellets melted producing continuous filaments that are cooled and commercializationstretched. The filaments are then cut and laid on a moving belt to form a web.
“Thermal Calendered” refers to a process for using heat to bond nonwoven fabric. A calendar is a machine consisting of our new PPScylinders or rolls that are stacked and heated to precise temperature. The nonwoven material is passed through (pressed) the cylinders and the polymer based material is bonded using heat and the partial melting of the polymer (plastic).
“Needlepunched” refers to a process where precision cut fibers are distributed onto and across a mesh substrate that is moving. The fibers are then needled (bound together mechanically) by an oscillating needle board (the needle board consists of thousands of evenly spaced needles). The fibers are mechanically bonded by barbed needles entangling the fibers. The density of the fabric is controlled by the number of needle boards used.
“Geo-membranes” refers to types of nonwoven fabric product line.
Nonwoven fabric productsthat are flat, flexible porous sheets produced by interlocking or entangling fibers or filaments or by perforating films mechanically, thermally or chemically. Theypermeable fabrics which are not made by weaving or knittingdesigned and do not require converting the fibersapplied to yarn. Nonwovens provide certain qualities similar to those foundbe permeable in textiles but at a significantly lower cost. Nonwoven fabrics can be limited life, single-use fabrics or very durable fabrics. Nonwoven fabrics provide specific functions such as absorbency, liquid repellency, resilience, stretch, softness, strength, flame retardancy, heat resistance, washability, cushioning, filtering, bacterial barrier and sterility. The desired properties are often combined to create fabrics suited for specific jobs, while achieving a good balance between product life and cost. They can mimic the appearance, texture and strength of a woven fabric and can be as bulky as the thickest padding. In combination with other materials theyone direction only. Geo membranes provide a spectrum of products with diverse properties, and are used alonewaterproof barrier that allows moisture to penetrate (drain) from one direction while limiting or as components of apparel, home furnishings, engineering, and industrial and consumer goods.eliminating the penetration (drainage) from the opposite direction.
Normal polyesterPolyester (PET) filament spun-bond thermal calendared nonwoven fabrics.
Our polyester (PET) filament spun-bond thermal calendared nonwoven fabric is made from polyester and performs effectively in high temperatures. It is anti-corrosive, has a long lifespan (between 1 to 2 years for filtration, 5 to 10 years for automotive applications, and 5 years for other applications) and maintains its shape and penetration. This nonwoven is used for filtration and water-drainage, packing and automobile interior decoration and insulation.
Polyester (PET) filament spun-bond needle-punched geo-membrane and waterproof materials.
Geo-membranes are the largest group of geo-synthetics in terms of volume and are used in geotechnical engineering, heavy construction, building and pavement construction, hydrogeology and environmental engineering. Geo-membranes are permeable fabrics which have the ability to separate, filter, reinforce, protect and/or drain. These products have a wide range of applications and are currently used with significant advantages in many civil engineering applications including the construction of roads, airfields, railroads, embankments, retaining structures, reservoirs, canals, dams, soil bank protection and coastal engineering.
Our geo-membrane products are made from polyester and are primarily used in the construction industry to improve soil strength and for roof waterproofing. Geo-membranes can be used as a cost-effective alternative to improve soil strength instead of the conventional manner of soil nailing which is a technique for stabilizing slopes and for constructing retaining walls from the top down. With the use of geo-membrane, steep slopes can be planted with vegetation to enhance the aesthetic value. In addition, our geo-membrane product line is used for roof waterproofing based on its excellent water resistant qualities and performance. PET geo-membrane waterproofing materials were popularized in Europe at the end of 1980 and account for over 40% of the market of waterproof materials. In China, in 2000, less than 20 million square meters of this kind of material were used, however, the volume has been increasing rapidly year over year. According to CNITA, the market volume of PET waterproofing materials increased to 70 million square meters in 2002 and it is estimated that the market will continue to increase rapidly in the coming years and will reach over 200 million square meters in 2010. At present, geo-membranes consume 20% of the total market of waterproofing materials in China. We expect to increase our sales of geo-membrane and waterproofing materials as the popularity for the use of waterproofing increases in China.
In February 2009, we installed a production line with annual capacity of 4,000 tons for the production of polyester (PET) filament, needle-punched, geo-membrane and waterproof materials
PPS nonwoven fabric products.product
Our growth strategy centers around the production and commercialization of our PPS nonwoven products which are manufactured using a proprietary continuous filament, spun-bond, needle-punched manufacturing process which we recently developed.
PPS nonwoven fiber is a specialized type of high temperature resistant nonwoven fabric. PPS materials are heat resistant, anti-corrosive and flame retardant and have many applications, including environmental protection and chemical filtration. PPS can be used to make bag filters for dust removal and emissions control for smoke stacks in coal-fired power plants, garbage incinerators and cement factories. PPS is also used to make protective clothing, heat-resistant fabric, insulating material, electrolysis membranes, friction pieces for brakes, filtering material for hot corrosive reagents, as well as special paper for the electronic industry.
While Although PPS filtration materials have been used since 1979 in bag filters that are attached to smoke stacks in nearly 80% of the coal-fired boilers operating in Europe and the United States, the use of bagbag filters made from PPS fabric hasis not gainedcurrently widespread market acceptance in China.(Source “China Power Industry”, issue 4, 2006, page 36 and http://www.resinda.com/product2.asp?brand_id=10&series_id=57)
The equipment and techniques for the production ofOur proprietary PPS have been available for several years. The major reason that production has been hindered is the lack of available raw material. PPS slices are produced in China in large quantities, however, the purity of PPS slices is too low for producing PPS filtration bags. PPS slices with low purity can be used to produce plastics; thus the PPS slice producers have no incentive to purify their products. Therefore, the industrial nonwoven manufacturers cannot acquire sufficiently pure raw materials to produce PPS filtration bags.
We have developed our ownmanufacturing process involves a PPS slice purification technique designed to get sufficiently pure raw materials to produce PPS filtration materials. WeAs part of this process we have developed innovative web formation techniques so that filaments can be used to increase strength and short fibers are no longer necessary. PPS nonwovens made from filaments are stronger than PPS nonwovens made from short fibers.
Our PPS material is produced by the filament spun-bond needle-punched method. Our product can bear temperatures of up to 2,300230 degrees Celsius and is resistant to degradation caused by exposure to acid, alkali or oxidization. In comparison to other PPS filterhigh temperature filtration materials, our product has a longer life (3 years at 190 - 230 degrees Celsius), is stronger (because we use filaments rather than short fibers), and has lower operation and production costs. We believe that this product promises to be the best filter bag material for high temperature, humid and chemical environments in the world.
We plan to install four production lines to begin commercial production of PPS using this process beginning in the later part of 2010. These four production lines will have an annual output capacity of 4,800 tons of PPS fiber.
Market Demand for PPS Products
To reduce air pollution in China, the Chinese government recentlyUnder PRC environmental regulations that became effective on January 1, 2010 and which are being imposed stricter rules on carbon and other emissions byoperators of coal-fired power plants, garbage incinerators and other emitters of pollutants. Under these regulations,cement factories, carbon and other emissions are required to be less than 50 milligrams per cubic meter by the end of 2010. Some of the larger, more developed cities, in Chinafor example Beijing and Tianjin, have adopted even more stringent rules requiring that emissions be between 20-30less than 30 milligrams per cubic meter. The emission standards(Source: "Electric Power” May, 2008).
We believe, based on an article published in North America and Europe are currently higher at 10-20 milligrams per cubic meter and 1-5 milligrams per cubic meter for waste incinerators. Water foam and staticChina Nonwoven & Industrial Textile (CNIT) in 2001, that less than 10% of the coal-boilers in China were equipped with dust removal techniques currently deployed by many smaller coal-fired power plantsfiltration bags and of the filtration bags in China do not meet these new government regulations. Our independent market research estimates that over 80% of coal-fired power plants in the PRCuse less than 10% are not in compliance with current government requirements and are faced with the choice of either devoting additional resources to complying or being shut down. Bag filters made offrom PPS materials offer a cost effective method of meeting these new and dust pollutant emission standards in China.fiber.
Initially, we intend to market our PPS nonwovens to the many coal-fired power plants in the PRC as we believe that this is the largest and most immediately accessible market for our PPS filtration materials and we believe that the demand for our PPS products will be substantial.materials. After we have established a foothold in that market, we intend to begin marketing our PPS nonwovens to cement factories and waste incinerators and steel factories.incinerators.
PTFE (or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and PSA are other materials that are also used to make needle-punched felt that is suitable for high temperature applications such as in bag filters for coal-fired power plants. In comparison to these other high temperature filter materials, we believe, based on laboratory testing, that our PPS nonwoven fabric is stronger, has lower production and operating costs, and has higher filtration efficiency. We have tested
Due to the characteristics of our PPS nonwoven fabric internally and, although a prototype bag filter using our material has not yet been deployedproduct coupled with the demand created by any end user,these new regulations, we believe that our PPS material has the potential towill ultimately replace theother high temperature filtration materials and products currently available in the market place, such as PTFE (or teflon), fiber glass, P84 (polyimide), PBI (polybenzimidazole fiber), PMIA and PSA and become a widely used filtration material for use in high temperature environments such as coal-fired power plants, garbage incinerators and cement factories.
China has the largest coal-fired power industry in the world. China has 620 million kilowatts of installed capacity – according to 2009 data. Given 50% (80% in US and Europe) of the facilities useAlthough prototype bag filters the consumptionmade of filtration materials is 0.25 square meters per kilowatt. In 2009, the demand of filtration materialsour PPS product have been tested in laboratories, they have not been tested on site by any potential end user and we do not expect to develop prototypes for 620 million kilowatts of installed capacity was 38,750 tons. Given the three year life of PPS material, there is ongoing demand of 12,917 tons for replacement annually. It is estimated that the installed capacity of coal-fired power plants will be 859 million kilowattstesting by theany end of 2010. This will create the demand for an additional 15,000 tons of PPS for new installations and an additional 15,000 tons for replacement annually (Source: China Power).user prior to beginning commercial production.
We have been supported by the Chinese SEPA (State Environmental Protection Agency) in the development and application of our PPS fabric for the coal fired power plants. Our PPS fabric utilized in the bag filter application is the recommended solution to the carbon emissions standard by the SEPA. Mr. Su Lei, one of our directors, is a government official within SEPA whoand has direct responsibility for implementing the recently introduced carbon emission standards at coal fired power plants. With the support of Mr. Su, we have introduced our material as the solution to the carbon emissions control problem to dozens of coal fired power plants in China. All of these meetings resulted in interest in our PPS fabric and the majority of the coal fired power plants we have met with have given us indications of specific purchasing interests as soon as we produce the PPS fabric material in our new facility.
Another source of demand for this PPS fabric is from the waste incineration industry. In the process of incineration, dioxin is generated. Currently activated carbons are used to absorb dioxin. Activated carbons that have already been used are sealed by concrete and buried underground. When PPS bags are used the waste treatment costs can be greatly reduced.
We also intend to market our PPS products to operators in the steel industry which is a major source of pollution. We believe that the demand for bag filters in the steel industry will be considerable. Steel output in China has exceeded 300 million tons. At Baosteel (the largest steel manufacturer in China) the total demand for filtration materials is 21 million square meters, most of which are chemical fiber filtration materials. Assuming a 3.5 year average lifespan of the filters, the annual demand for new and replacement filtration material is about 7 million square meters.
In recent years, the cement industry with the use of new dry method cement production lines, has become a targeted industry for high temperature emissions control and, consequently, the demand for bag filters is increasing. The newly built cement ovens with production output of 3,000 tons per day, 5,000 tons per day, and 10,000 tons per day have large demand for bag filters and demand for PPS filtration materials.
Aside from the environment protection sector, PPS fibers can also be used in chemical filtration which requires strong performance in anti-corrosion and high heat resistant applications.
Our Manufacturing Facility
and Production LinesOur manufacturing facility is located in Foshan City, Guangdong Province, PRC and has over 10,000 square meters of operating space on 33,074 square meters of land. Our land use rights for this facility expire in October 2052. We use advanced manufacturing equipment imported from Germany.
We currently operate three spun-bond production lines. Two of these production lines are thermal calendared lines with annual capacity of 4,000 tons of polyester filament, thermal calendared, nonwoven fabric. The third spun-bond line is a needle-punched production line which commenced operation in February 2009. This production line has an annual capacity of 4,000 tons of polyester filament, needle-punched, geo-membrane and waterproofing material. Currently we have total annual production capacity of 8,000 tons.
We are adding capacity to our existing manufacturing facility with a construction project to increase the factory size, which will house our new PPS lines. A new production line is currently being installed and is expected to be completed in February 2011. We plan to order and install four productiontwo additional PPS lines to begin commercial productionusing the proceeds of PPS using this process beginning in the later part of 2010.offering. These fourthree production lines will have an annual output capacity of 4,8003,600 tons of PPS nonwoven material. We have obtained approval from the local foreign trade and economic cooperation bureau to install these three new production lines for this total output capacity. To comply with PRC environmental regulations, we are required to obtain a construction commencement approval from the local environmental protection bureau for the installation of a new production line currently under construction before we begin installation.
Our Manufacturing Processes
Spun-bond. In this process, polymer pellets are introduced into an extruder which produces continuous filaments that are cooledOn November 9, 2010, we submitted the application for the construction commencement approval for the new production line under construction to the local environmental protection bureau and stretchedon November 10, 2010, we received comments from them requesting us to give them strength. The filaments are then laid on a moving belt to form a web that is then thermally bonded between two temperature controlled steel rolls. Some bonding rolls have a pattern that is embossed intocomplete the web. Spun-bonds are typically made from homopolymers such as polypropylene, polyester, or nylon. Some spun-bond materials are made from two polymer families creating a bicomponent fabric
Spun-laced Nonwovens. In this process, baled staple fiber is introduced to a carding machine to create a batt. The batt of unbonded fibers is then transferred via a mesh conveyor or perforated cylinders where it is processed through a high pressure water system that entangles the fibers to create the finished product. Fiber blends and finishes can vary depending on desired properties.
Needle-punched Nonwovens. In this process, baled staple fibers are introduced to a carding machine that distributes the fibers based on the desired basis weight. The batt of fiber is then needled by an oscillating needle board. The fibers are mechanically bonded by barbed needles entangling the fibers. The densityenvironment impact assessment of the fabricnew production line before submitting the application for the construction commencement approval. The environmental impact assessment is controlledcurrently being conducted by a third party authorized by the number of needle boards used.local environmental bureau. We anticipate that it will be completed within 120 days from commencement (on or before March 10, 2011), but we cannot assure that this will be the case. Once the environmental impact assessment is completed, we intend to resubmit the application for the construction commencement approval together with the environmental impact assessment to the local environmental protection bureau. We anticipate that the construction commencement approval will be issued within 60 days from the submission date but we cannot assure that this will be the case.
In addition, we are required a pollution emission permit for the disposal of waste gases, waste water, waste dust and other waste materials. We do not currently have a pollution emission permit but we are preparing the application for this permit and intend to submit the application after the new production line is completed. The process of obtaining this permit after the application has been submitted can take up to 5 months.
We cannot assure you that we will be able to obtain the construction commencement approval or the pollution emission permit in a timely manner or at all. Failure to obtain this approval and permit may subject us to fines or disrupt our operations and construction, which may materially and adversely affect our business, results of operations and financial condition. See “— Environmental Matters.”
Quality Control
We received the ISO9001-9002 Quality Management System Certification in 2003 and again in 2006.2009. We adopted what we believe to be the highest quality standards in the industry and maintain quality control and product quality at high levels. We have strictly embraced the ISO9001 Management System Standards in order to integrate our quality management process and enhance the management system and manufacturing process. We closely inspect our products to guarantee quality according to Q/NHJL1-2008 Enterprise Quality Standards and strictly control the manufacturing process and quality control before any products leave our factory.
Our Customers
We sell our existing products to over 200 customers primarily in the PRC, and internationally. also internationally, to manufacturers and converters, which incorporate our products into their finished goods.
In fiscal year 2010, approximately 84 of our net sales were to entities in the PRC and approximately 7% and approximately 9% were made to customers in North America and Europe and other regions, respectively. In fiscal year 2009, approximately 81% of our net sales were to entities in the PRC and approximately 6% and approximately 7% were made to entitiescustomers in North America and Europe, respectively. Chengdu Sanya,
Dalian Geolink Geotextile Material Co., Ltd., our largest customer, accounted for approximately 9%10.3% of our 2010 net sales. In fiscal year 2009, net sales to this customer accounted for 4.92% of our net sales.
Sales to our top 20 customers represented approximately 49%65% of our total 2009fiscal year 2010 net sales.
We sell our existing products primarily to manufacturers and converters, which incorporate our products into their finished goods.
The following chart shows our top ten customers in 2009:fiscal year 2010:
| Name | | Location | | Product type | | Application | | Revenue (USD$) | | | Percentage of Sales | |
| Chengdu Sanya | | Chengdu | | Geotextile | | Construction | | | 1,068,438 | | | | 9.01% | |
| Xiantao Ruixin | | Xiantao | | Geotextile | | Construction | | | 1,037,883 | | | | 8.75% | |
| Sichuan Tianqiang | | Sichuan | | Geotextile | | Construction | | | 706,286 | | | | 5.95% | |
| Geolink | | Dalian | | Geotextile | | Construction | | | 583,192 | | | | 4.92% | |
| Shenzhen Yaming Civil Engineering Equipment Co., | | Shenzhen | | PET | | Filtration | | | 570,567 | | | | 4.81% | |
| Pentair Water | | USA | | PET | | Filtration | | | 517,467 | | | | 4.36% | |
| Guangzhou Baiyun Meihao Filter Cleaner Factory | | Guangzhou | | PET | | Filtration | | | 435,380 | | | | 3.67% | |
| Shanghai Rundong Nonwoven Fabric Co., Ltd. | | Shanghai | | PET | | Filtration | | | 422,559 | | | | 3.56% | |
| Foshan Nanhai Yingsheng Trading Co., Ltd. | | Foshan | | PET | | Trading | | | 257,546 | | | | 2.17% | |
| Guangzhou Groundsill Basis Engineering Co., Ltd. | | Guangzhou | | PET | | Filtration | | | 227,259 | | | | 1.92% | |
| | | | | | | | | | | | | |
| Name | | Location | | Product Type | | Application | | Revenue (USD$) | | | Percentage of Sales | |
| Geolink Geotextile Material Co., Ltd | | Dalian | | Geotextile | | Construction | | | 2,054,787 | | | | 10.30 | % |
| Chendu Sanya Building Material Co., Ltd. | | Chengdu | | Geotextile | | Construction | | | 1,816,293 | | | | 9.10 | % |
| WuJiang Jing shan Fabric | | Suzhou | | PET | | Filtration | | | 1,731,611 | | | | 8.68 | % |
| Pentair Water Pool & Spa Inc. | | USA | | PET | | Filtration | | | 1,322,095 | | | | 6.63 | % |
| Zhuzhou Shidai | | Shanghai | | PET | | Construction | | | 1,047,566 | | | | 5.25 | % |
| Shanghai Rundong Nonwoven Fabric Co., Ltd. | | Shanghai | | PET | | Filtration | | | 856,147 | | | | 4.29 | % |
| Xiantao Ruixin | | Hubei | | Geotextile | | Construction | | | 760,395 | | | | 3.81 | % |
| Guangzhou Baiyun Meihao Filter Cleaner Factory | | Guangzhou | | PET | | Filtration | | | 560,284 | | | | 2.81 | % |
| Nordic Air Filtration A/S | | Denmark | | PET | | Filtration | | | 486,086 | | | | 2.44 | % |
| Nan Hai Ying Sheng Trading Ltd. | | Guangdong | | PET | | Filtration | | | 452,243 | | | | 2 | % |
In fiscal year 2009, approximately 81% of our net sales were to entities in the PRC and approximately 6% and approximately 7% were made to customers in North America and Europe, respectively.
Chengdu Sanya, our largest customer, accounted for approximately 9% of our fiscal year 2009 net sales.
Sales to our top 20 customers represented approximately 49% of our total fiscal year 2009 net sales.
The following chart shows our top ten customers in fiscal year 2009:
| Name | | Location | | Product Type | | Application | | Revenue (USD$) | | | Percentage of Sales | |
| Chendu Sanya building Material Co., Ltd. | | Chengdu | | Geotextile | | Construction | | | 1,068,438 | | | | 9.01 | % |
| Xiantao Ruixin | | Xiantao | | Geotextile | | Construction | | | 1,037,883 | | | | 8.75 | % |
| Sichuan Tianqiang | | Sichuan | | Geotextile | | Construction | | | 706,286 | | | | 5.95 | % |
| Geolink | | Dalian | | Geotextile | | Construction | | | 583,192 | | | | 4.92 | % |
| Shenzhen Yaming Civil Engineering Equipment Co., | | Shenzhen | | PET | | Filtration | | | 570,567 | | | | 4.81 | % |
| Pentair Water | | USA | | PET | | Filtration | | | 517,467 | | | | 4.36 | % |
| Guangzhou Baiyun Meihao Filter Cleaner Factory | | Guangzhou | | PET | | Filtration | | | 435,380 | | | | 3.67 | % |
| Shanghai Rundong Nonwoven Fabric Co., Ltd. | | Shanghai | | PET | | Filtration | | | 422,559 | | | | 3.56 | % |
| Foshan Nanhai Yingsheng Trading Co., Ltd. | | Foshan | | PET | | Trading | | | 257,546 | | | | 2.17 | % |
| Guangzhou Groundsill Basis Engineering Co., Ltd. | | Guangzhou | | PET | | Filtration | | | 227,259 | | | | 1.92 | % |
Raw Materials
The primary raw material that we use to manufacture most of our products is polyester resin. The price of polyester resin fluctuates based on capacity, demand and the price of crude oil.
Our major suppliers of raw materials are Foshan Chemical Fibers Co., Ltd., Kaiping Chunhui Co., Ltd., and Zhuhai Yuhua Polyester Co., Ltd. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on our business because other manufacturers with whom we conduct business would be able to fulfill our requirements. We do not have long term supply contracts with any of our suppliers of raw materials.
During 2007, 2008fiscal years 2010 and 2009, we paid approximately $4.2 million, $5.2approximately$10.9 million and $5.6 million, respectively, for the purchase of raw materials.
Our PPS product will be made from high quality polyphenylene sulfide resin, which we intend to purchase in the United States. Accordingly, the cost of this raw material will fluctuate with the value of the RMB against the dollar.
Sales and Marketing
Our nonwoven products are distributed in 20 provinces in the PRC. In 2003, we began selling our products in Europe, North America and South East Asia.
In 2009,fiscal year 2010, approximately 81%84% and 19%16% of our net sales revenues were generated from sales made in the PRC and internationally, respectively, compared to approximately 77%81% and 23%19%, respectively, in 2008.fiscal year 2009.
As of June 1,September 30, 2010, we employed eleven11 direct sales representatives, eight8 of whom are engineers who have advanced technical knowledge of our products and the applications for which they are used. Seven7 of these sales representatives are responsible for national sales and four4 are responsible for international sales. We plan to double the size of our sales force for the PPS product line in the next year to take advantages of anticipated market for our products. Representatives receive a salary plus commission of the revenues they generate.
Our sales process consists of identifying potential customers through cold calls, responses to marketing efforts, and customer references.referrals. Once a potential customer is identified, our sales people aid in identifying the prospect’s technical requirements and help the customer’s engineers to produce drawings of the finished products desired. Armed with this technical information, our sales personnel then quote pricing, production quantities, and lead times. Most of our customers are repeat customers and the sales force is also responsible for after-sale support, including quality assurances, dispute resolution, and relationship-building.
We promote our products primarily through exhibitions, internet advertising and marketing, and referrals from existing customers as well as suppliers.
We intend to capitalize on China’s “green” movement. We will focus our sales efforts for our PPS nonwoven fabric material on operators of coal- fired power plants as this is currently the most suitable and largest market for PPS filtration materials. The sales to the coal-fired power plants will be made directly using our existing sales team and sales process described above.
Research and Development
Our research and development department has what we believe to be one of the strongest research and development capabilities in the development of products, processes and equipment in the nonwovens industry in China.
As of June 1,September 30, 2010, our research and development staff consisted of 20 scientists, professional, engineering and technical personnel. Our research and development team is lead by Mr. Yao Mu, a senior engineer in the industry and the former president of Northwestern Polytechnical University.
Additionally, Mr. Zeng Shijun, our Chief Technology Officer is qualified as a senior engineer in the industry and oneWe spent approximately $200,000 for each of the co-designers of five patents held by Dalian Huayang Chemical Fiber Engineering technology Co., Ltd. Three of these five patents have been transferred to the company. last two fiscal years on research and development activities.
In addition, we believe that each of our senior managers possesses a comprehensive technical background. Mr. Li Jie, our chief executive officer and a senior engineer is a certified chemical engineer, the Associate President of the China Industrial Textile Association and is considered an expert in his field. His independent research has been funded by the Central Government. Mr. Ye Xi-Ping, Vice President of Production, is a senior engineer and certified automation engineer.
Intellectual Property
We have three utility model patents and one patent application:
| Name | | Applicant | | Patent Application Date | | Patent Application Number | | Basis for patent | | Status |
| | | | | | | | | | | |
| Polyphenylene sulfide nonwoven spunbond needle production method and device | | Foshan SLP Special Materials Company | | January 26, 2010 | | 2010101026602 | | Invention | | Pending |
| | | | | | | | | | | |
| Tube-type air distraction apparatus | | Dalian Huayang Chemical Fiber Engineering technology Co., Ltd | | March 12, 2009 | | 200920011528.3 | | Utility model | | Authorized |
| | | | | | | | | | | |
| New spinning box structure | | Dalian Huayang Chemical Fiber Engineering technology Co., Ltd | | March 12, 2009 | | 200920011529.8 | | Utility model | | Authorized |
| | | | | | | | | | | |
| Lapper | | Dalian Huayang Chemical Fiber Engineering technology Co., Ltd | | March 19, 2009 | | 200920012058.2 | | Utility model | | Authorized |
The three utility model patents were applied for and were originally owned by Dalian Huayang Chemical Fiber Engineering Technology Co., Ltd., or Dalian. Dalian has taken steps to transfer the three utility patents to Foshan and the State Intellectual Property in the PRC approved the transfer of these three utility patents from Dalian to Foshan on March 29, 2010.
The duration of utility model rights in the PRC is 10 years from the application date and the duration of invention rights in the PRC is 20 years from the application date.
Our patent application for our process invention is currently pending. No significant patents are expected to expire in the next five years. We expect that additional patent applications will be filed as more processes are developed and specific applications are identified.
We have the following registered trademark in the PRC:
| Trademark | | Registration Number | | Term of Validity |
Jinglong Nonwoven | | 3571234 | | October 21, 2005 to October 20, 2015 |
| Si Le Pu | | 7161478 | | September 28, 2010 to September 27, 2020 |
| Graphic | | 7162185 | | October 14, 2010 to October 13, 2020 |
We have the following additional trademark applications:application:
Trademark Application | | Application Number | | Application Date |
| S.L.P | | 7161477 | | January 12, 2009 |
Si Le Pu
| | 7161478 | | January 12, 2009 |
Graphic | | 7162185 | | January 12, 2009 |
To safeguard our proprietary knowledge, trade secrets, and technology, we rely heavily on trade secret protection and non-disclosure/confidentiality agreements with our employees, consultants and third party collaboration partners with access to our confidential information.
Competition
We primarily face domestic competition in our industry. Our main competitors in the PRC are Jiangxi Guoqiao Industrial Corporation Limited and Shaoxing Yaolong Spunbonded Nonwoven Technology Co., Ltd. We compete based on our reputation for quality, product innovation, performance, service and technical support.
Competitors in PPS nonwoven fabric industry will be other manufacturers of PPS material and other materials that are suitable to make bag filters in coal-fired power plants, garbage incinerators and cement plants and other potential end users.
Environmental Matters
As a manufacturer we are subject to a broad range of national, provincial and local laws and regulations relating to the pollution and protection of the environment. Among the many environmental laws applicable to us are laws relating to air emissions, wastewater discharges and the handling, disposal and release of solid and hazardous substances and wastes.
In addition, we are required to obtain a construction commencement approval and a completion examination approval for each of our three finishednew production lines. We are alsoadding capacity to our existing manufacturing facility with a construction project to increase the factory size, which will house our new PPS line(s). A new production line is currently being installed. The installation is expected to be completed in February 2011. We plan to order and install two additional PPS lines using the proceeds of this offering. We have obtained approval from the local foreign trade and economic cooperation bureau to install these three new production lines for this total output capacity. To comply with PRC environmental regulations, we are required to obtain a construction commencement approval from the local environmental protection bureau for onethe installation of oura new production lines that isline currently under construction. However,construction before we are inbegin installation.
On November 9, 2010, we submitted the process of obtaining each of the completion examination approvalsapplication for the three finished production lines, the construction commencement approval for the new production line under construction to the local environmental protection bureau and on November 10, 2010, we received comments from them requesting us to complete the pollution emission permitenvironment impact assessment of the new production line before submitting the application for the construction commencement approval. The environmental impact assessment is currently being conducted by a third party authorized by the local environmental bureau. We anticipate that it will be completed within 120 days from commencement (on or before March 10, 2011), but we cannot assure that this will be the case. Once the environmental impact assessment is completed, we intend to resubmit the application for the construction commencement approval together with the environmental impact assessment to the local environmental protection bureau. We anticipate that the construction commencement approval will be issued within 60 days from the submission date but we cannot assure that this will be the case.
In addition, we are required a pollution emission permit for the disposal of waste gases, waste water, waste dust and other waste materials. We do not currently have a pollution emission permit but we are preparing the application for this permit and intend to submit the application after the new production line is completed. The process of obtaining this permit after the application has been submitted can take up to 5 months.
We cannot assure you that we will be able to obtain the construction commencement approval or the pollution emission permit in a timely manner or at all. Failure to obtain such approvalsthis approval and permit may subject us to fines or disrupt our operations and construction, which may materially and adversely affect our business, results of operations and financial condition. As of June 7,December 31, 2010, no such penalties had been imposed on us.
Insurance
We maintain worker's insurance and social welfare insurance for our employees. Our operating subsidiary, Foshan, has not purchased social insurance for all of its employees.employees, as of January 24, 2011, the accumulated unpaid amount was approximately RMB 1.50 million (approximately $227,965). If the local labor authority orders us to do so,pay unpaid insurance premiums, we may become obligated to pay unpaid insurance premiumsdo so thereby increasing our labor costs. We provide life insurance to our executive officers.officers and D & O insurance for two of our independent directors. We do not presently maintain product liability insurance. We maintain property and equipment insurance, however, it does not cover the full value of our property and equipment, which leaves us exposed in the event of loss or damage to our properties or claims filed against us. Other than the above mentioned, we do not maintain any other business or liability insurance.
Employees
As of March 31,September 30, 2010, we had a total of 176 employees, including over 20 engineers. The following chart shows the number of our employees involved in the various aspects of our business:
| | Number of Employees | |
| Manufacturing | | | 109 | |
| Sales and Marketing | | | 11 | |
| Research and Development | | | 5 | |
| Administrative | | | 11 | |
| Finance | | | 4 | |
| Quality Control | | | 8 | |
| Equipment | | | 15 | |
| Logistics | | | 13 | |
Employee compensation is composed of a salary plus subsidies based on position, education level, length of service and performance.
PRC Government Regulations
Business license
A company that conducts business in the PRC must have a business license that usually prescribes a scope of business likely to be conducted. Our business license covers our present business to manufacture and sell nonwoven fabrics overseas and domestically. Prior to expanding our business beyond the scope of our business license, we are required to apply for and receive approval from the PRC government.
Employment laws
On June 29, 2007, the Standing Committee of the National People’s Congress of the PRC promulgated theLabor Contract Law of PRC, or the Labor Contract Law, which became effective as of January 1, 2008. On September 18, 2008, the PRC State Council issued the Implementing Rules for the PRC Labor Contract Law, which became effective as of the date of issuance. The Labor Contract Law and its implementing rules imposesimpose requirements concerning, among others, the types of contracts to be executed between an employer and its employees and establishesestablish time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. The Labor Contract Law and its implementation rules also impose greater liabilities on employers, require certain terminations to be based upon seniority rather than merit and significantly affect the cost of an employer’s decision to reduce its workforce. In addition, according to the Labor Contract Law and its implementing rules, if an employer intends to enforce the non-compete provision with its employees in the labor contracts or confidentiality agreements, it has to compensate its employees on a monthly basis during the term of the restriction period after the termination or ending of the labor contract. The Labor Contract Law also requires employers in most cases to provide a severance payment to their employees after their employment relationships are terminated. Due to the limited period of effectiveness of the Labor Contract Law and its implementing rules and the lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how it will impact our current employment policies and practices.
Environmental regulations
We are subject to various national and local environmental laws and regulations, including those governing the use, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Environmental Impact Assessment Law, the PRC Regulation on the Administration of Construction Project Environmental Protection, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.
In accordance with the PRC Environmental Impact Assessment Law and the PRC Regulation on the Administration of Construction Project Environmental Protection, we are required to obtain a construction commencement approval and a completion examination approval for each of our three finished production lines and we are also required to obtain a construction commencement approval from the local environmental protection bureau for one of our production lines that is currently under construction. We have received construction commencement approval and the completion examination approval for our three finished production lines. However, we have not obtained all requisite approvalsthe construction commencement approval for the new production line under construction and permitthe pollution emission permits from the local environmental protection bureau. See “Risk Factors —Risks Related
On November 9, 2010, we submitted the application for the construction commencement approval for the new production line under construction to Doing Business in China —The PRCthe local environmental protection lawsbureau and regulations require PRC companies, especially PRC manufacturing companies,on November 10, 2010, we received comments from them requesting us to complete the environment impact assessment of the new production line before submitting the application for the construction commencement approval. The environmental impact assessment is currently being conducted by a third party authorized by the local environmental bureau. We anticipate that it will be completed within 120 days from commencement (on or before March 10, 2011), but we cannot assure you that this will be the case. Once the environmental impact assessment is completed, we intend to resubmit the application for the construction commencement approval together with the environmental impact assessment to the local environmental protection bureau. We anticipate that the construction commencement approval will be issued within 60 days from the submission date but we cannot assure that this will be the case.
In addition, we are required a pollution emission permit for the disposal of waste gases, waste water, waste dust and other waste materials. We do not currently have a pollution emission permit but we are preparing the application for this permit and intend to submit the application after the new production line is completed. The process of obtaining this permit after the application has been submitted can take up to 5 months.
We cannot assure you that we will be able to obtain environmental approvals andthe construction commencement approval or the pollution emission permits for the commencement and completion of production lines.permit in a timely manner or at all. Failure to obtain the necessary environmental approvalsthis approval and permitspermit may subject us to fines or disrupt our operations and in some cases, may even result in the mandated cessation of production,construction, which may in turn impairmaterially and adversely affect our normal business, results of operations and expansion plans.financial condition.
The manufacturing facilities in which we operate are subject to the PRC’s environmental laws and requirements. We are required to and have obtained a Guangdong Province Pollution Discharge Certificate issued by Huizhou Environment Protection Bureau and we are responsible for the disposal of the waste in accordance with applicable environmental regulations. If we fail to comply with the provisions of the permit and environmental laws, we could be subject to sanctions by regulators, including the suspension or termination of its business license, which would result in the suspension or termination of our manufacturing operations.
Patent protection in China
The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets.
The PRC is also a signatory to most of the world’s major intellectual property conventions, including:
| | — | Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980); |
| | — | Paris Convention for the Protection of Industrial Property (March 19, 1985); |
| | — | Patent Cooperation Treaty (January 1, 1994); and |
| | — | The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (December 11, 2001). |
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2008 and 2010, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents, namely, patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file. Therefore, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
PRC law provides that anyone wishing to exploit the patent of another must enter into a written licensing contract with the patent holder and pay the patent holder a fee. One broad exception to this rule, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.
PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one or more times the license fee under a contractual license. The infringing party may be also fined by the Administration of Patent Management in an amount of up to four times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB200,000, or approximately $29,500.
Value added tax
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. When exporting goods, the exporter is entitled to a portion or all of the refund of VAT that it has already paid or borne. We are subject to the foresaid rules, and currently we are required to pay VAT at a rate of 17% in our sale or importation of goods while we are entitled to VAT refund at the rate of 16% for our exported goods. We do not enjoy any VAT deduction or exemption treatment.
Foreign currency exchange
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, securities investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitati7ons,limitations, which include approvals by the Ministry of Commerce, the SAFE and the National Development and Reform Commission. We currently do not hedge our exposure to fluctuations in currency exchange rates.
Mandatory statutory reserve and dividend distributions
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year for its general reserves until the cumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
Properties
Our manufacturing facility is located in Foshan City, Guangdong Province, PRC and has over 10,000 square meters of operating space on 33,074 square meters of land. Our land use right was granted by Nanhai State-Owned Land Resource Bureau in 2002 and expires in October 2052. If we want to continue to use the land after the expiration date, we must apply for an extension at least one year prior to the expiration of the granted land use right’s expiration.right.
All land in the PRC is owned by the state or rural collective economic organizations and cannot be sold to any individual or entity. Instead, the government grants or allocates land users a “state-owned land use right”right.”
Granted land use rights are provided by the government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term, generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory. Unlike the typical case in Western nations, granted land must be used for the specific purpose for which it was granted.
Allocated land use rights are generally provided by the government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. Allocated land can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings in which the ultimate outcome, in our judgment based on information currently available, would have a material adverse affect on our business, financial condition or operating results.
ADDITIONAL DISCLOSURE REGARDING CONVERSION
OF NOTES AND EXERCISE OF WARRANTS
As disclosed in more detail under “Our Corporate History-Private Placement” above, we issued convertible notes and warrants to certain accredited investors in a private placement which closed on February 12, 2010. The tables below present some additional information regarding the notes and warrants and their impact on this offering.
If this offering is completed, the notes will convert into shares of our common stock at a 65% discount to the public offering price. In the event this offering is not completed and the notes do not convert into common stock, we intend to repay the notes at maturity. The notes were originally scheduled to mature on February 12, 2011, but all noteholders, except Lumen Capital which is the holder of a note in the principal amount of $100,000, have agreed to extend the maturity date to June 30, 2011. We have paid the interest due on the notes for quarters ended March 31, June 30, September 30, 2010 and December 31, 2010. We believe that we will be able to obtain a credit line sufficient to pay off the principal and interest due on the notes at maturity. We cannot, however, assure you that this will be the case. See the risk factor entitled “If we cannot extend or renew our currently outstanding short-term loans or if our convertible notes are not converted before their maturity date, we will have to repay these loans with cash on hand or refinance them with another lender or else face a default and potential foreclosure upon the collateral we pledged.”
Table 1
The following is a table disclosing the total dollar value of the common stock underlying the convertible notes (using the number of underlying securities and the value for those securities on February 12, 2010, the date of the sale of the convertible notes).
| Value of common stock per share on February 12, 2010 (1) | | | 2.45 | |
| Conversion price per share of common stock underlying the convertible notes (2) | | $ | 0.86 | |
| Total number of shares of common stock issuable at conversion price of $0.86 on conversion of convertible notes in the aggregate principal amount of $4,040,000. | | | | |
| Gross value of 4,697,674 shares underlying the notes on February 12, 2010 at value of $2.45 per share | | $ | 11,509,301 | |
| Net value of 4,697,674 shares underlying the notes (3) | | $ | 8,026,046 | |
| (1) | This value per share was determined by the company after consultation with its financial advisors and is based on a valuation determined as follows: |
As of January 31, 2010, the company, with the assistance of its financial advisors, determined a valuation based on the company’s net profits for the current year and those projected for the next 12 months. The company made a comparable company analysis of 9 mid-cap publicly traded companies which had an average price earnings ratio of 24 times current year and one year of projected earnings. After discussions with potential underwriters, bearing in mind the nature of the company’s business, in particular the fact that the company had not yet commenced production of PPS products, the company accepted that it might to be able to complete a public offering in the current market based on a multiple of approximately 5 times current and projected earnings. Primary Capital then approached potential investors to determine the multiple at which they might be willing to invest in the company in a bridge financing prior to a contemplated public offering based on a multiple of approximately 5 times current and projected earnings. Primary Capital advised the company, that after discussions with potential investors, investors stated that in view of the liquidity risk, they might be willing to invest in a bridge financing at a 65% discount to the proposed 5 times earnings valuation.
Given the fact that as of the date of this valuation, the company was privately issuing convertible notes, the investors and the company agreed that, as of January 31, 2010, a pre-money (i.e. pre- bridge financing) multiple of 1.78 times current and projected net earnings was appropriate for a company that had not raised any capital in a public offering. Since this valuation was agreed to by the company and the investors, management viewed the convertible note financing as an “arms-length” transaction and treated the $2.45 per share pre-money valuation as the stock’s fair value in calculation of the fair value of the company’s warrants. Detailed computation is as below:
| Current and projected net profits | | $ | 20,000,000 | |
| Multiple | | | 1.78 | |
| Pre-bridge money valuation | | $ | 35,560,000 | |
| Common stock shares outstanding (pre-bridge and pre public offering) | | | 14,510,204 | |
| Valuation per share | | $ | 2.45 | |
| (2) | The notes convert into common stock at a 65% discount to the public offering price. However, for purposes of determining the value of the discount on February 12, 2010 we are using the value of the common stock on February 12, 2010 which was $2.45. Based on this the conversion price would be $0.86 per share. |
| (3) | The 4,697,674 shares issuable on conversion of the notes in the aggregate principal amount of $4,040,000 had a gross value on February 12, 2010 of $11,509,301. This represents a net value, after deducting cost basis of $3,483,255 (or $4,040,000 less $556,745 of interest payable on convertible notes in aggregate principal amount of $4,040,000) of $8,026,046. |
Table 2
The following table discloses the dollar amount of each payment (including the value of any payment that we have made or will be made in common stock) in connection with the private placement entered into on February 12, 2010 and the proposed public offering, to any selling stockholder (or any affiliate of a selling stockholder or any person with whom any selling shareholder has a contractual relationship) and to each finder or placement agent regarding the transaction (including any interest payments, liquidated damages, payments made to "finders" or "placement agents," and any other payments or potential payments).
| Fees to Primary Capital as placement agent | | $ | 397,000 | (1) |
| Shares issued to Primary Capital | | $ | 1,362,055 | (1) |
| Warrant to Primary Capital | | $ | 152,942 | (1) |
| Fees to United Best | | $ | 1,027,000 | (2) |
| Shares issued to United Best | | $ | 1,362,055 | (2) |
| Warrant to United Best | | $ | 152,942 | (2) |
| Liquidated Damages payable under Registration Rights Agreement | | $ | 404,000 | (3) |
| Interest payable to Noteholders | | | 556,745 | (4) |
| Shares issued to Noteholders | | $ | 8,026,046 | (5) |
| Total Payments made or which may be required to be made by the company to Selling Stockholders and other persons set forth above: | | $ | 13,440,785 | |
| (1) | Under the terms of a financial services agreement between Primary Capital and the company, Primary Capital was paid a commission of $202,000 at the closing and is also owed an additional $75,000 for services rendered in connection with the private placement. Primary Capital also entitled to be paid a $15,000 upon completion of this offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000. |
At the closing of the financing, Primary Capital received 290,755 shares of our common stock. Primary is also entitled to receive 265,186 shares on closing of the offering. Using a valuation equal of $2.45 (which equals the value of the shares of common stock on February 12, 2010) these 555,941 shares have a value of $1,362,055.
Primary Capital is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which shall occur upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which number represents 5% of the 1,923,809 shares of common stock issuable to the noteholders on conversion (assuming a public offering price of $6.00 per share)). However, for purposes of this table we have valued the 96,190 warrants using their “intrinsic value” of $1.59 per share (i.e. the difference between the value of the common stock as of February 12, 2010 of $2.45 less the strike price of $.86 (a 65% discount to the $2.45 value) which amounts to $152,942.
If the note conversion does not occur, Primary Capital will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. We have not assigned any value to any future transaction.
Under the terms of the financial services agreement, if any additional transaction is completed between the company and the investors prior to November 2011, Primary Capital is entitled to receive an additional fee equal to between three to four percent of the aggregate consideration paid by the investors depending on the size of the financing. We have not assigned any value to any such future transaction.
| (2) | Under the terms of a consulting agreement between United Best and the company, United Best was paid a commission of $202,000 at the closing of the financing. United Best is also owed an additional $75,000 for services rendered in connection with the financing. Under the consulting agreement, as amended, United Best is entitled to be paid on completion of this offering a success fee of $750,000 (which represents 3% of the assumed $25,000,000 in gross proceeds to be received by us in connection with this underwritten offering). |
At the closing of the transaction, United Best received 362,755 shares of our common stock for their services. United Best is also entitled to receive 193,186 shares on closing of the offering. Using a valuation equal to $2.45 these 555,941 shares have a value of $1,362,055.
In addition, United Best is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which shall occur upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which represents 5% of the 1,923,809 shares of common stock issuable to the noteholders on conversion (assuming a public offering price of $6.00 per share)). For purposes of this table we have valued the 96,190 warrants using their “intrinsic value” of $1.59 per share (i.e. the difference between the value of the common stock as of February 12, 2010 of $2.45 less the strike price of $.86 (a 65% discount to the $2.45 value) which amounts to $152,942.
If the note conversion does not occur, United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. We have not assigned any value to any future transaction.
| (3) | Under the registration rights agreement dated February 12, 2010 between the company and the noteholders, we are required, subject to the operation of Rule 415, to include in this registration statement for resale the shares underlying the notes. Accordingly, we are registering in a resale prospectus simultaneously herewith 369,725 of the 1,923,809 shares issuable on conversion of the convertible notes in the aggregate principal amount of $4,040,000. If the registration statement is not effective within 180 days after filing we have agreed to pay the investors two percent (2%) of the aggregate principal amount of the notes for each month (or part thereof) that it is late (capped at 10% or $404,000). No liquidated damages are payable with respect to any shares required to be omitted as a result of the operation of Rule 415. For purposes of this table we are using the maximum amount payable. We have no way of knowing whether we will be required to pay some or any of this amount. |
| (4) | Interest is payable quarterly at the rate of 10% per annum (increasing to 15% if there is a default). As more fully described in table 4 below, a total of $566,745.20 is payable with respect to the notes. Interest of $10,000 payable with respect to the note in the principal amount of $100,000 held by Lumen Capital is not included on this table. |
| (5) | The notes are convertible into shares of common stock at a discount of 65% of the public offering price. However, for purposes of this table we are valuing the shares underlying the common stock as of February 12, 2010 at a price of $2.45 per share. Accordingly, the $4,040,000 aggregate principal amount of the notes is convertible into 4,697,674 shares which have a gross value on February 12, 2010 of $11,509,301. This represents a net value, after deducting cost basis of $3,483,255 (or $4,040,000 less $556,745 of interest), of $8,026,046. |
Table 3
The following table sets forth the gross proceeds from the issuance of the notes to the selling stockholders and net proceeds received by us.
Gross proceeds from sale of the convertible notes: | | $4,140,000 | |
Payments in connection with the transaction that we made: | | | |
Placement agent and advisory fees (1) | | $404,000 | |
Legal fees (for the reverse merger and the private financing) (2) | | $329,537 | |
Transfer Agent fees | | $1,650 | |
Total Payments made by us : | | $735,187 | |
Net Proceeds to us (3) | | $3,200,349 | |
| Gross proceeds from sale of the convertible notes (1): | | $ | 4,040,000 | |
| Payments in connection with the transaction that we made: | | | | |
| Placement agent and advisory fees payable in connection with the closing of the financing (2) | | $ | 554,000 | |
| Legal fees for the financing (3) | | $ | 326,187 | |
| Documentation Fees | | $ | 5,000 | |
| Total Payments by us: | | $ | 885,187 | |
| Balance (net of above expenses) (4) | | $ | 3,154,813 | |
| | | | | |
| Total payments made or which may be required to be made by the Company to Selling Stockholders and other persons as set forth in Table 2 | | $ | 13,440,785 | |
| Net loss to company from transaction (5) | | $ | (9,731,972 | ) |
(1)Excludes the note in the principal amount of $100,000 issued to one of the investors which is being repaid on February 12, 2012 and will not convert into shares of common stock.
(2) Represents fees of $202,000 paid to each of Primary Capital as placement agent and United Best as foreign advisor in connection with the reverse merger, and they are eachplacement agent fees. Each of them is entitled to receive an additional $75,000 for their services. Primary Capital is also entitled to be paid a $15,000 upon completion of this offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000 which number is not included in the $554,000. (United Best is also entitled to be paid a success fee of $750,000 or 3% of the gross proceeds received by the company on closing of the public offering.)
(2)(3) This amount includes the payment of legal fees for services rendered in connection with the completion of the reverse merger.financing.
(3)(4) $204,464 is beingwas held in escrow to pay the interest due on the Notesnotes during the first 6 months.
(5) Represents $3,154,813 less $13,440,785 (but adding back placement agent and advisory fees payable in connection with the closing of the financing of $554,000 which are included in the $13,440,785).
Table 4
The following is a table disclosing the interest payments required to be made to the selling stockholdersnote holders during the life of the convertible notes.
Interest is payable quarterly at the rate of 10% per annum increasing to 15% if there is a default. $204,464 is being held in escrow out of the closing proceeds from the private placement to be applied towards the first six months interest.
| Date | | Interest Payment Amounts | | | Interest Payment Amounts | |
| 3/31/2010 | | $ | 53,309.60 | | | $ | 53,309.60 | |
| 6/30/2010 | | $ | 103,216.44 | | | $ | 103,216.44 | |
| 9/30/2010 | | $ | 104,350.68 | | | $ | 104,350.68 | |
| 12/31/2010 | | $ | 104,350.68 | | | $ | 104,350.68 | |
| 2/14/2011 | | $ | 48,772.60 | | |
| | | $ | 1,178.08 | |
| | | 99,616.44 | |
| | | | 100,723.29 | |
| Total: | | $ | 414,000.00 | | | $ | | (1) |
| (1) | This amount includes $10,000 of interest on the $100,000 note held by Lumen Capital which is being repaid on February 12, 2012. |
Quarterly interest payments payable with respect to the quarters ended March 31, 2010, June 30, 2010 September 30, 2010, and December 31, 2010 have been made.
Table 5
The following table sets forth the total possible profit the selling shareholders could realize as a result of any conversion discount for the common stock underlying the convertible notes, with the following information disclosed separately.
| The value per share of the common stock on February 12, 2010, the date of the sale of the convertible notes | | | 2.45 | (1) |
| The conversion price per share of common stock on February 12, 2010, the date of the sale of the convertible notes | | $ | 0.86 | (2) |
| The total shares underlying the convertible notes with an aggregate principal amount of $4,040,000 | | | 4,697,674 | (3) |
| The combined gross value of the 4,697,674 shares underlying the convertible note, calculated by using $2.45 the value per share on the date of the sale of the convertible note | | | 11,509,301 | (1) |
The total possible discount to the value as of February 12, 2010 (the date of the sale of the convertible note), calculated by subtracting $3,483,255 (the total conversion price on the date of the sale of the convertible note ($4,040,000) less $556,745 of interest paid or payable) from $11,509,301 (the combined value of the 4,697,674 shares of common stock underlying the convertible notes on February 12, 2010) | | $ | 8,026,046 | |
| (1) | For purposes of this calculation we have used a valuation of $2.45 per share. |
| (2) | The notes are convertible at a 65% discount to the proposed public offering price. For purposes of this table we are using a conversion price of $.86 which represents a 65% discount to the $2.45 per share value as of February 12, 2010. |
| (3) | Based on a conversion price of $0.86 the notes convert into 4,697,674 shares. The interest payable on the notes does not convert into shares of common stock. |
Table 6
The following is a table disclosing (i) the gross proceeds paid to us by the selling stockholders in connection with the financing transaction on February 12, 2010, (ii) the payments made by us in that transaction, (iii) the net loss to us from the transaction and (iv) the aggregate potential profit realizable by the selling stockholders in that transaction as a result of a 65% discount price relating to the conversion price of the notes and the discounted exercise price of the warrants issued to the placement agent and financial advisor in connection with the financing transaction:
| | | Amount | |
| Gross proceeds paid to us: | | $ | 4,040,000 | (1) |
| All payments that have been made by or that may be required to be made by us as set forth in Table 2: | | $ | 13,440,785 | |
| Net loss to company from the transaction: | | $ | (9,731,974 | ) |
| Total possible profit assuming conversion of the notes at $0.86 and resale of the 4,697,674 shares underlying the notes at price of $2.45 per share. | | $ | 8,026,046 | |
| Total possible profit by United Best assuming exercise of the 240,698 warrants at $.86 and resale of the 240,698 shares underlying the warrants at $2.45 per share. | | $ | 382,710 | |
| Total possible profit by United Best from the sale of the 555,941 shares at the price of $2.45 per share. | | $ | 1,362,055 | |
| Total possible profit by Primary Capital assuming exercise of the warrants issued to at $.86 and resale of the 240,698 shares underlying the warrants at $2.45. | | $ | 382,710 | |
| Total possible profit by Primary Capital from the sale of the 555,941 shares at the assumed offering price of $2.45 per share. | | $ | 1,362,055 | |
| Combined total possible profit | | $ | 11,515,576 | |
| Percentage of (x) $21,466,831 ((i) the total amount of all possible payments ($13,440,785) and (ii) the total possible discount to the value of the common stock underlying the convertible notes at the time of sale on February 12, 2010 ($8,026,046)) divided by (y) the cash proceeds to the company from the sale of the convertible notes after payment of cash expenses ($3,154,813). | | | 680 | % |
(1) Excludes the note in the principal amount of $100,000 issued to one of the investors which is being repaid on February 12, 2012 and will not convert into shares of common stock.
Table 7
The following is a table disclosing the aggregate amount of possible profit which could be realized by the noteholders if following the automatic conversionvalue on February 12, 2010 of the convertible notes on closingwarrants issued to the placement agent and the financial advisor. The warrants are exercisable for shares of the public offering they sold the underlying common stock at the public offering price. We issued notes in the aggregate principal amount of $4,140,000. The notes are convertible into common stock at a discount of 65% of the public offering price. ForHowever for purposes of this calculation we have assumedare using the $2.45 valuation for the common stock and calculating the exercise price at $.86 per share.
| Value on February 12, 2010 of common stock underlying warrants | | $ | 2.45 | |
| Exercise price per share of common stock underlying the warrants (65% discount) | | $ | .86 | |
Total number of shares of common stock issuable on conversion of notes (with an aggregate principal amount of $4,040,000) at a conversion price of $.86 | | | 4,697,674 | |
Number of shares underlying warrants issued to placement agent and financial advisor (10%) (assumes conversion of notes with an aggregate principal amount of $4,040,000) | | | 469,767 | |
| Total market price of the 469,767 shares underlying the warrants (using $2.45 value per share) | | $ | 1,150,929 | |
| Total exercise price of 469,767 shares underlying the warrants | | $ | 404,000 | |
| Total value the 469,767 shares underlying the warrants | | $ | | |
Table 8
The following is a table comparing (i) the number of shares of common stock currently outstanding, (ii) the number of shares of common stock currently outstanding held by persons other than the selling stockholders, affiliates of the Company and affiliates of the selling stockholders, (iii) the number of shares registered by the selling stockholders (or their affiliates) in prior registration statements , (iv) the number of shares underlying the notes being registered for resale in this Registration Statement (assuming a public offering price of $[ ]$6.00 per share.share; (v) the number of shares issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the resale prospectus; (vi) the number of shares underlying warrants issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the resale prospectus; and (vii) the number of other shares being registered by the selling stockholders.
Assumed public offering price of common stock | | | |
Conversion price per share of common stock underlying the convertible notes (65% discount to public offering price) | | | |
TotalThe number of shares of common stock issuable at conversion price of [ ] on conversion of all of convertible notes incurrently outstanding prior to the aggregate principal amount of $4,140,000.public offering | | | 15,265,714 | |
Total market priceThe number of shares of common stock currently outstanding held by persons other than the selling stockholders, affiliates of the [ ] shares underlyingCompany and affiliates of the convertible notes using $[ ] market priceselling stockholders | | | 1,136,633 | |
Total conversion priceThe number of shares registered by the selling stockholders (or their affiliates) in prior registration statements | | | 0 | |
The number of shares underlying the convertible notes being registered for resale in the resale prospectus (assuming a public offering price of $6.00 per share and a conversion price of $2.10 per share) (1) | | $4,140,000 | 369,725 | |
Total profit from an assumed saleThe number of [ ] shares at market price of $[ ]issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the resale prospectus (1) | | | 0 | |
| The number of other shares being registered by the selling stockholders in the resale prospectus (1) | | | 0 | |
| The number of shares underlying warrants issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the resale prospectus (1) . | | | 0 | |
(1) The resale prospectus relates to the sale by the selling stockholders identified in that prospectus of up to 369,725 shares of our common stock comprising 369,725 of the 1,923,809 shares issuable on conversion of the outstanding convertible notes in the aggregate principal amount of $4,040,000 issued in February 2010. A convertible note in the principal amount of $100,000 is being repaid on February 12, 2011 and will not be converted into common stock. The note purchase agreement dated February 12, 2010, pursuant to which the noteholders acquired the convertible notes, is filed as exhibit 10.2 to this registration statement. Under the registration rights agreement dated February 12, 2010 between the company and the noteholders, we are required, subject to the operation of Rule 415, to include in this registration statement for resale the shares underlying the notes.
In the share exchange or “reverse merger” transaction, we acquired control of Hong Hui which owns all of the stock of Technic, which in turn owns of all of the stock of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares our of common stock in exchange for all of the outstanding capital stock of Hong Hui. One of the Hong Hui stockholders with whom we completed the share exchange was Newise Holdings Limited, a British Virgin Islands company, which received 2,321,633 of our shares. Newise Holdings Limited is controlled by Li Jun, one of our directors. In February 2010, 673,877 of these 2,321,633 shares were sold to Primary Capital and 100,000 were sold to Mr. Ming Liu.
| (1) | The noteholders have agreed not to sell the shares underlying the notes for a period of 90 days following the date of this prospectus. |
Except as set forth above other than the issuance and sale of the notes and the warrants to the noteholders, and the cash and equity based compensation paid to the placement agent and financial advisor, we have not in the past three years engaged in any securities transaction with any of the selling stockholders, any affiliates of the selling stockholders, or, after due inquiry and investigation, to the knowledge of the our management, any person with whom any selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons).
In addition, other than in connection with the contractual obligations set forth in (i) the note purchase agreements and related agreement entered into by us, on the one hand and each of the selling stockholders on the other hand, (ii) the notes and the warrants and (iii) the security documents entered into in connection with the financing transaction, we do not have any agreement or arrangement with the selling stockholders with respect to the performance of any current or future obligations.
Investors’ Warrants
At the closing of the private placement of the notes, the note investors were issued warrants which become exercisable only in certain events. The warrants will be void and of no force and effect if the notes convert into common stock, which would occur automatically at the closing of the offering contemplated by this prospectus.
The warrants are exercisable only if a “financing” is consummated after February 12, 2011 (or the date the notes become due pursuant to a default, if earlier) and prior to February 12, 2015. A “financing” means the first sale of stock (or securities convertible into stock) in a capital raising transaction with gross proceeds of at least $2,000,000.
The warrants will be exercisable to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the “financing.” The warrants are exercisable at the price at which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. Accordingly, because we cannot determine at this point whether the warrants will become exercisable, the exercise price, the number of shares for which the warrants will be exercisable, or what the market price for the common stock at the time of any possible sale, we cannot calculate the possible profits that the investors would achieve on exercise and sale of the warrants.
Financial Services Agreements and Related Warrants
United Best
United Best, our foreign advisor controlled by Mr. Li Jun, one of our directors, provided financial services in connection with our reverse merger with Hong Hui completed on February 12, 2010. These services included advising the company on structuring the reverse merger, assisting the company in retaining service providers such as accountants, PRC and US attorneys to effect the reverse merger and working with those service providers to facilitate the completion of the reverse merger. Additionally, United Best is listed as a selling stockholder inwill assist the Resale Prospectus. Company with on-going communications and coordinating the relationships with service providers during the NASDAQ listing process.
Under the terms of a consulting agreement between United Best and the company (the “Consulting Agreement”) United Best was paid a feecommission of $202,000 at the closing of the reverse merger.convertible notes financing. United Best is also owed an additional $75,000 for services rendered in connection with that transaction. Additionally, under the reverse merger. consulting agreement, as amended, United Best is entitled to be paid on completion of this offering a success fee of $750,000 (which represents 3% of the $25,000,000 gross proceeds to be received by us in connection with the underwritten offering (assuming a public offering of $6.00 per share).
At the closing of the reverse merger,convertible notes financing, United Best received 362,755 shares of our common stock for theirits services. None of those 362,755 shares held by United Best are being registered in the Resale Prospectus. is also entitled to receive an additional 193,186 shares of closing of this offering.
In addition, as partial consideration for providing these financialconsulting services, United Best is entitled to receive, on conversion of the notes issueissued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase that number of96,190 shares of common stock equal to(which represents 5% of the number1,923,809 shares of securitiescommon stock issued to the note holders on conversion (assuming a public offering of $6.00 per share)), exercisable at the price of $2.10 per share (i.e. the price at which the notes converted.convert assuming a public offering of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable uponon conversion of the notes and consummation of this offering. If the note conversion does not occur, United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. The shares underlying these warrants are being registered in the Resale Prospectus. Newise Holdings, a company also controlled by Li Jun, is also listed as a selling stockholder in the Resale Prospectus. Additionally, under the Consulting Agreement, as amended, United Best, our foreign advisor, is entitled to a fee of 3% of the proceeds to be received by us in connection with the underwritten offering.
Primary Capital
Primary Capital also provided financial services in connection with the private placement and reverse merger.merger which closed on February 12, 2010. The services provided and to be provided by Primary Capital is listed as a selling stockholder ininclude the Resale Prospectus. following:
| · | assisting the company in preparing a detailed business plan, financial model and power point presentation; |
| · | negotiating and structuring the reverse merger; |
| · | acting as placement agent for the February 12, 2010 note financing; |
| · | recommending to the company a qualified auditor, securities attorney and investor relations firm, and assisting the company with negotiating the terms of their respective engagements; |
| · | advising the company on strategies to increase shareholder value; |
| · | assisting the company and its investor relations firm in organizing, and participating with the company in, investor road shows and investor conference calls; |
| · | recommending investor conferences in the US and Europe to be attended by the company and a representative of Primary Capital; |
| · | identifying strategic relationships and joint venture partners; |
| · | identifying and recommending persons to serve on the company’s Board of Directors; |
| · | identifying and rendering advice regarding potential acquisitions, including the valuation of the acquisition and financing for the acquisition; |
| · | assisting the company in connection with its listing on a U.S. stock exchange; |
| · | reviewing and commenting on the company’s SEC filings associated with the company’s transactions; and |
| · | advising company regarding its obligations as a U.S. public company. |
Under the terms of a financial services agreement between Primary Capital and the company, Primary Capital was paid a fee of $202,000 at the closing of the February 2010 private financing.financing Primary Capital was paid a commission of $202,000. Primary Capital is also owed an additional $75,000 for services rendered in connection with the private placementplacement. Primary Capital is also entitled to receive $15,000 on completion of the offering and reverse merger. $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000.
At the closing of the reverse merger,financing, Primary Capital received 290,755 shares of our common stock. AllPrimary is also entitled to receive 265,186 shares of those shares are being registered incommon stock on the Resale Prospectus. closing of this offering.
In addition, as partial consideration for providing these financial services Primary Capital is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase that number96,190 shares of common stock (which number is equal to 5% of the 1,923,809 number of securitiesshares of common stock being issued to the noteholders on conversion,conversion), exercisable at $2.10 (which equals the price at which the notes converted.convert assuming a public offering of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable upon conversion of the notes and consummation of this offering. If the note conversion does not occur, Primary Capital will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. The shares underlying these are
Shares being registered in the Resale Prospectus.
The following is a table disclosing the aggregate amount of possible profit which could be realized by the placement agent and the financial advisor (who are selling stockholders in the Resale Prospectus) if following the automatic conversion of the convertible notes on closing of the public offering they were issued the warrants described above and exercised and sold the underlying common stock at the public offering price. The warrants are exercisable for shares of common stock at a discount of 65% of the public offering price. For purposes of this calculation we have assumed a public offering price of $[ ] per share.
Assumed public offering price of common stock | | | |
Exercise price per share of common stock underlying the warrants (65% discount to public offering price) | | | |
Total number of shares of common stock issuable on conversion of notes at a conversion price of $[ ] | | | |
Number of warrants to be issued (10%) | | | |
Total market price of the [ ] shares underlying the warrants (using $[ ] market price) | | | |
Total exercise price of [ ] shares underlying the warrants | | | |
Total profit on resale of the [ ] shares underlying the warrants | | | |
Prospectus
The following is a table disclosing (i) the gross proceeds paid to us in connection with the financing transaction, (ii) the payments made by us, (iii) the resulting net proceeds and (iv) the aggregate potential profit realizable by the selling stockholders as a result of 65% discounts to the public offering price relating to the conversion price of the Notes and the discounted exercise price of the warrants issued to the placement agent and financial advisor in connection with the financing transaction:
| | | Amount | | | % of Net Proceeds | |
| Gross proceeds paid to us: | | $ | | | | | - | |
| All payments that have been made by us: | | $ | 735,187 | | | | - | |
Net proceeds to us (l) : | | $ | 3,200,349 | | | | 100 | % |
| Total possible profit assuming conversion of the notes at $[ ] and resale of the [ ] shares underlying the notes at the assumed public offering price of $[ ] per share. | | $ | | | | | | % |
| Total possible profit assuming exercise price of the financials advisor warrants at $[ ] and resale of the [ ] shares underlying the warrants at the assumed public offering price of $[ ] per share. | | $ | | | | | | % |
| (1) | An additional $202,464 is being held in escrow to be applied towards the interest payments due on the notes during the first six months. |
The following is a table comparing (i) the number of shares of common stock currently outstanding, (ii) the number of shares of common stock currently outstanding held by persons other than the selling stockholders, affiliates of the Company and affiliates of the selling stockholders, (iii) the number of shares registered by the selling stockholders (or their affiliates) in prior registration statements , (iv) the number of shares underlying the notes being registered for resale in this Registration Statement (assuming a public offering price of $[ ] per share) and (v) the number of shares issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the Resale Prospectus; and (vi) the number of other shares being registered by the selling stockholders.
The number of shares of common stock currently outstanding prior to the public offering | | | 15,235,714 | |
The number of shares of common stock currently outstanding held by persons other than the selling stockholders, affiliates of the Company and affiliates of the selling stockholders
| | | 3,482,449 | |
The number of shares registered by the selling stockholders (or their affiliates) in prior registration statements | | | 0 | |
The number of shares underlying the notes being registered for resale in the Resale Prospectus (assuming a public offering price of $[ ] per share) (2)
| | | | |
The number of shares issued to the placement agent and financial advisor for services rendered in connection with the private placement that are being registered in the Resale Prospectus (2)
| | | 1,112,489 | |
The number of other shares being registered by the selling stockholders in the Resale Prospectus (l)(2)
| | | 1,699,767 | |
(1) Includes 964,632 shares issued to Primary Capital for services rendered in connection with the private placement and [ ] shares underlying warrants issued to United Best and Primary Capital for services.
(2) The Resale Prospectusprospectus relates to the sale by the selling stockholders identified in thatthe prospectus of up to [ ]369,725 shares of our common stock comprising: comprising 369,725 of the 1,923,809 shares issuable on conversion of the convertible notes in the aggregate amount of $4,040,000 issued in February 2010. A convertible note in the principal amount of $100,000 will be repaid on February 12, 2011 and will not be converted into shares of common stock. The note purchase agreement dated February 12, 2010, pursuant to which the noteholders acquired the convertible notes, is filed as exhibit 10.2 to this registration statement. A form of note extension agreement, dated January 31, 2011, which extended the maturity date of the outstanding convertible notes in the principal amount of $4,040,000 from February 12, 2011 to June 30, 2011, is filed as exhibit 10.21 to this registration statement. Under the registration rights agreement dated February 12, 2010 between the company and the noteholders, we are required, subject to the operation of Rule 415, to include in this registration statement for resale the shares underlying the notes.
· | 2,664,389 shares of outstanding common stock held by selling stockholders; and |
· | [ ] shares of common stock that the selling stockholders will acquire on conversion of outstanding convertible notes; and |
· | [ ] shares underlying the warrants issued to the placement agent and financial advisor |
In the share exchange or “reverse merger” transaction, we acquired control of Hong Hui which owns all of the stock of Technic, which in turn owns of all of the stock of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares our of common stock in exchange for all of the outstanding capital stock of Hong Hui. One of the Hong Hui stockholders with whom we completed the share exchange was Newise Holdings, a British Virgin Islands company, which received 2,321,633 of our shares. Newise Holdings is controlled by Li Jun, one of our directors. Newise Holdings is a selling stockholder in the resale prospectus. In May 2010, 673,877 of these 2,321,633 shares were sold to Primary Capital and 100,000 were sold to Mr. Ming Liu.
Except as set forth above other than the issuance and sale of the notes and the warrants to the noteholders, and the cash and equity based compensation paid to the placement agent and financial advisor, we have not in the past three years engaged in any securities transaction with any of the selling stockholders, any affiliates of the selling stockholders, or, after due inquiry and investigation, to the knowledge of the our management, any person with whom any selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons).
In addition, other than in connection with the contractual obligations set forth in (i) the note purchase agreements and related agreement entered into by us, on the one hand and each of the selling stockholders on the other hand, (ii) the notes and the warrants and (iii) the security documents entered into in connection with the financing transaction, we do not have any agreement or arrangement with the selling stockholders with respect to the performance of any current or future obligations.
SHARES ELIGIBLE FOR FUTURE SALE
This is an offering of __________4,166,667 shares of our common stock. As of July 7, 2010,January 31, 2011, there were 15,235,714(i) 15,265,714 shares of common stock issued and outstanding and (ii) convertible notes in the aggregate principal amount of $4,040,000 convertible into [ ]1,923,809 shares of common stock (assuming a public offering price of $[ ]$6.00 per share) reserved for issuance upon conversionshare and the repayment of convertible notesa note in the aggregate principal amount of $4,140,000 which are immediately convertible$100,000 on February 12, 2011) and (iii) warrants to purchase [ ]192,380 shares of our common stock expected to be issued to the placement agent and financial advisor. There are no outstanding options.advisor at the closing of this offering. Following this offering (giving effect to (i) the conversion of all of the convertible notes on the closing of the publicthis offering and (ii) the issuance at the closing of this offering of 193,186 shares to United Best and 265,186 shares to Primary Capital, but excluding any shares issuable pursuant to the exercise of the over-allotment option), there will be _________21,814,562 shares of common stock outstanding. Of these [ ]369,725 shares are being registered simultaneously herewith in a resale prospectus dated as of the date of the Resale Prospectus.prospectus. None of our outstanding shares will be eligible for resale under Rule 144 until February 12, 2011.
In June 2010, we entered into lock-up agreements with officers and directors and beneficial owners of more than 5% of our common stock. See “Underwriting – Lock-up Agreements.”
In addition, in June 2010, we entered into lock-up agreements with the selling stockholders listed in the resale prospectus dated as of the date hereof pursuant to which the selling stockholders have agreed not to sell any of the shares of common stock for a period of 90 days following the date of the public offering.
Rule 144
Under Rule 144, a person who has beneficially owned restricted shares of our common stock or warrants for at least six months is entitled to sell his, her or its securities provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale, (2) we are subject to the Exchange Act reporting requirements for at least 90 days before the sale and (3) if the sale occurs prior to satisfaction of a one-year holding period, we provide current information at the time of sale.
Persons who have beneficially owned restricted shares of our common stock or warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:
| | · | 1% of the total number of securities of the same class then outstanding, which will equal approximately 214,038 shares immediately after this offering; or |
| | · | the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.
Sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144. The selling stockholders will not be governed by the foregoing restrictions when selling their shares pursuant to the resale prospectus.
As we are a former “shell” company, persons who wish to sell our securities have also to satisfy the additional requirements of Rule 144(i) which provides that those securities may be sold, subject to the other requirements of Rule 144, after one year has elapsed from the date that the issuer filed "Form 10 information" with the Commission (in our case February 12, 2011) provided that we have filed all reports and other materials required to be filed by section 13 of the Exchange Act during the preceding 12 months.
Registration Rights
Other than the registration rights set forth in (i) the registration rights agreement entered into on February 12, 2010 with the investors in the private placement under which we are obligated, subject to the operation of Rule 415, to register for resale all of shares issued on conversion of the notes, and (ii) the registration rights side agreement entered into on February 12, 2010 with the sellingcertain stockholders who had acquired their shares prior to the reverse merger, under which we are obligated, subject to the operation of Rule 415, to register for resale 52,001 shares and(however, in the event of a Rule 415 comment, these shares would be cut back first), (iii) the agreements entered into with Primary Capital and United Best, under which we are obligated, subject to the operation of Rule 415, to register for resale the 653,510 shares received by Primary Capital and United Best under such agreements, (iv) oral agreements entered into with Li Jun and Ming Liu, we have no other obligation to register under the Securities Act any of our shares of common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on July 7, 2010,January 31, 2011, certain information with respect to the beneficial ownership of our common stock, by (i) each stockholder whom we know to own beneficially more than 5% of our common stock, (ii) each director, (iii) our chief executive officer and each other executive officer whose cash compensation for the most recent fiscal year exceeded $100,000 and (iv) all executive officers and directors as a group. The table reflects the ownership of our equity securities by the foregoing parties after the 1-for-5 reverse stock split which occurred on March 24, 2010.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Except as indicated below, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to our common stock shown as beneficially owned by them. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement, or (4) the automatic termination of a trust, discretionary account or similar arrangement.
Unless otherwise indicated, the address for each listed stockholder is: c/o China SLP Filtration Technology, Inc., Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC.
Name and Address of Shareholder | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2) | | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2)(3) | |
| | | Before Offering | | | Before Offering | | | Post Offering | | | Post Offering | |
| Owners of More Than 5% Of Class | | | | | | | | | | | | |
| Bestyield Group Limited (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Proudlead Limited (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Li Jun (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Newise Holdings Limited (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Pilot Link International Limited (7) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| High Swift Limited (8) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| China Investment Management, Inc (9). | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Primary Capital, LLC (10) | | | 1,326,008 | | | | 8.6 | % | | | 1,326,008 | | | | 6 | % |
| | | | | | | | | | | | | | | | | |
| Directors and Executive Officers | | | | | | | | | | | | | | | | |
| Li Jie (Chief Executive Officer and a Director) (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Law Wawai (President of Sales and a Director) (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Eric Gan (Chief Financial Officer) (13) | | | - | | | | - | % | | | - | | | | - | % |
| Li Jun (Director) (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Richard M. Cohen (Director) (12) | | | 30,000 | | | | * | | | | 30,000 | | | | * | % |
| Chris Bickel (Director) (11) | | | - | | | | - | | | | - | | | | - | % |
| Su Lie (Director) | | | - | | | | - | | | | - | | | | - | % |
| | | | | | | | | | | | | | | | | |
| Directors and executive officers as a group (7 persons) | | | 14,129,081 | | | | | | | | 14,129,081 | | | | | % |
Name and Address of Shareholder | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2) | | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2) | |
| | | | | | | | | | | | | |
| | | Before Offering | | | Before Offering | | | Post Offering | | | Post Offering | |
Owners of More Than 5% of Class | | | | | | | | | | | | |
| Bestyield Group Limited (3) | | | 4,353,061 | | | | 28.6 | % | | | | | | | | % |
| Proudlead Limited (4) | | | 4,353,061 | | | | 28.6 | % | | | | | | | | % |
| Li Jun (5) | | | 1,910,511 | | | | 12.5 | % | | | | | | | % |
| Newise Holdings (5) | | | 1,547,756 | | | | 10.2 | % | | | | | | | % |
| Pilot Link International Limited (6) | | | 1,668,673 | | | | 11 | % | | | | | | | % |
| High Swift Limited (7) | | | 1,088,265 | | | | 7.1 | % | | | | | | | % |
| Primary Capital, LLC (8) (10) | | | 964,632 | | | | 6.3 | % | | | | | | | % |
| | | | | | | | | | | | | | | | | |
| Directors and Executive Officers | | | | | | | | | | | | | | | | |
| Li Jie (Chief Executive Officer and a Director) (3) | | | 4,353,061 | | | | 28.6 | % | | | | | | | % |
| Law Wawai (President of Sales and a Director) (4) | | | 4,353,061 | | | | 28.6 | % | | | | | | | % |
| Zeng Shijun (Chief Technology Officer) | | | - | | | | - | | | | | | | | | |
| Li Jun (Director) (5) (10) | | | 1,910,511 | | | | 12.5 | % | | | | | | | % |
| Richard M. Cohen (Director) (11) | | | - | | | | - | | | | | | | | | |
| Chris Bickel (Director) (9) (10) | | | - | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Directors and executive officers as a group (6 persons) | | | 10,616,633 | | | | 69.7 | % | | | | | | | | % |
(1) As of the close of business on July 7, 2010,January 31, 2011, there were 15,235,71415,265,714 shares of our common stock outstanding. Following the closing of this offering there will be 21,814,562 shares of common stock issued and outstanding.
(2) In determining beneficial ownership of the common stock, the number of shares shown includes shares which the beneficial owner may acquire within 60 days of July 7, 2010January 31, 2011 upon exercise of convertible securities, warrants or options. There are no such securities outstanding. In accordance with Rule 13d-3 in determining the percentage of common stock owned by a person on July 7, 2010,January 31, 2011 (a) the numerator is the number of shares of the class beneficially owned by such person, including shares which the beneficial owner may acquire within 60 days upon conversion or exercise of the warrants and other convertible securities, and (b) the denominator is the sum of (i) the total shares of that class outstanding on July 7, 2010,January 31, 2011, and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of other securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(3) Following completion of the offering there will a total of 21,814,562 shares of common stock outstanding, including (i) 15,265,714 shares of common stock currently outstanding, (ii) 1,923,809 shares issuable on conversion of the notes, (iii) 4,166,667 shares to be issued in the offering, and (iv) and 193,186 shares to be issued to United Best and 265,186 shares to be issued to Primary Capital on closing of the offering.
(4) Bestyield Group is a BVI company controlled by Mr. Li Jie, our chief executive officer. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management, Inc., Song Huaying, Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a “group” and the beneficial ownership by the group of 14,099,081 shares of common stock. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Bestyield Group. Mr. Li has soleshared voting power with respect to the shares.shares held by the group. Bestyield has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(4)(5) Proudlead is a BVI company controlled by Law Wawai, our president of sales and a director. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Proudlead. Mr. Law has soleshared voting power with respect to the shares.shares held by the group. Proudlead has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(5) Represents 1,547,756 shares held by(6) Newise Holdings Limited is a BVI company controlled by Li Jun, one of our directors. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,547,756 shares held by Newise Holdings Limited as well as 362,755 shares beneficially owned by United Best. Mr. JunLi has soleshared voting and dispositive power with respect to the shares held by Newise Holdings. In addition, under the termsgroup. On closing of an agreement between Foshan andthis offering United Best a company controlled by Mr. Jun, United Best received, as a transaction fee following the closing of the reverse merger, 362,755is also entitled to receive an additional 193,186 shares of our common stock. Mr. Jun has sole votingstock and dispositive power with respecta warrant to thepurchase 96,190 shares held by United Best. at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(6)(7) Pilot Link International is a BVI company controlled by Li Shiyi and Wei Yang, PRC residents. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,668,673 shares held directly by Pilot Link. Li Shiyi and Wei Yang have shared voting and dispositive power with respect to the shares.shares held by the group.
(8) High Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. Mr.The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,088,265 shares held directly by High Swift. Han Hung Yuk has soleshared voting power and dispositive power with respect to the shares.shares held by the group.
(8) Primary Capital(9) China Investment Management, Inc. is a BVI company controlled by Song Huaying, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the beneficial owner of 964,632 shares.“group” disclosed in the Schedule 13D includes 725,510 shares held directly by China Investment Management, Inc. Song Huaying has shared voting and dispositive power with respect to the shares held by group.
(10) Primary Capital received, at the closing of the share exchange agreement, 290,755 shares of our common stock and on April 20,in February 2010 Primary Capital purchased 673,877 shares from Newise Holdings.Holdings Limited. John Leo has sole voting and dispositive power with respect to the shares held by Primary Capital. Primary Capital’sCapital’s address is 80 Wall Street, 5th Floor, New York, New York 10005. On closing of this offering, Primary Capital is also entitled to receive an additional 265,186 shares of common stock and a warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(9)(11) Chris Bickel is President of Primary Capital. Mr. Bickel does not have voting or dispositive power over the shares held by Primary Capital. Mr. Bickel’sBickel’s business address is 80 Wall Street, 5th Floor, New York, New York 10005.
(10) Does not include the shares underlying the warrants issued to Primary Capital and United Best as such shares are not deemed to be currently beneficially owned.
(11)(12) Richard M. Cohen is a Director of the Company,our director, and his business address is 3 Park Avenue, 16th Floor, New York, New York 10016. In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen on September 3, 2010 was granted 30,000 shares of restricted stock, two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant, in the event Mr. Cohen continues to be a director on those dates.
(13) On September 3, 2010, Mr. Gan was granted an option to purchase 400,000 shares of common stock at an exercise price equal to the public offering price. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. As the option is not currently exercisable, none of the shares underlying the option are included in the table.
MANAGEMENT
Executive Officers and Directors
The following table sets forth information concerning our current directors and executive officers:
Directors and Executive Officers | | Position/Title | | Age |
| | | | | |
| Li Jie | | Chief Executive Officer and a Director | | 55 |
| | | | | |
| Law Wawai | | President of Sales and a Director | | 45 |
| | | | | |
Zeng ShijunEric Gan | | Chief TechnologyFinancial Officer | | 48 |
| | | | | |
| Chris Bickel | | Director | | 47 |
| | | | | |
| Li Jun | | Director | | 47 |
| | | | | |
| Richard M. Cohen | | Director | | 59 |
| | | | |
| Su Lei | | Director | | 46 |
Except for Messrs. Chris Bickel, and Richard M. Cohen and Eric Gan, all of our officers and directors are residents of the PRC. In addition, substantially all of our assets are located in the PRC. As a result, it may be difficult or impossible for investorsyou to effect service of process within the United States uponon our company or any of them or to enforce court judgments obtained against them in the United States courts. We have been advised by our PRC counsel that there is uncertainty as to whether the courts of the PRC would (1) recognize or enforce judgments of U.S. courts obtained against our officers or directors or the experts named in this prospectus based on the civil liability provisions of the securities laws of the U.S. or any state in the U.S., or (2) entertain original actions brought in the PRC against our officers or directors or the experts named in this prospectus based on the securities laws of the U.S. or any state in the U.S.
The following is a summary of the biographical information of our directors and officers:
Li Jie.Jie Mr. Li was elected director and appointed as our Chief Executive Officer on February 12, 2010. Mr. Li has served as Chief Executive Officer and Managing Director of Foshan SLP Special Materials Co., Ltd. since its inception in 2000. He also serves as Director General of the China Industrial Textile Committee. From 1980 to 2000, he served as R&D director of Dalian Synthetic Fiber Research Institute. From 1970 to 1980 he worked at Dalian Hongguang Chemical Factory. From September 1976 to July 1980 Mr. Li Studied Chemical Fiber Technique at Dalian Light Industry School and received a bachelor’s degree in Engineering. From 1995 to 1998 he studied economic management at Chinese Academy of Social Sciences and received his master’s degree. From 2000 to 2003, he also studied for an MBA at Southwest International University. We believe that Mr. Li’s knowledge of all aspects of our business and his in-depth understanding of our operations, combined with his years of experience in the nonwovens industry, position him well to serve as our Chairman and Chief Executive Officer. Mr. Li received a bachelor’s degree in Engineering for Chemical Fiber Technique at Dalian Light Industrial School. He received a Masters degree from Chinese Academy of Social Sciences where he studied economic management. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Law Wawai. Mr. Law was elected as a director and appointed as presidentPresident of salesSales on February 12, 2010. From 1997 to February 2010, Mr. Law served as director and general manager of Nanhai Wanzhi Trading Co. From 1987 to 1997, he was sales manger Nanhai Polyester Factor. From 1983 to 1987, he studied business management at Nanhai Television University and received his bachelor’s degree in 1987. We believe that Mr. Wawai’sLaw’s knowledge of all aspects of the nonwovens business and his in-depth understanding of its operations position him well to serve as a director. Mr. Law received his bachelor’s degree in business management from Nanhai Television University. Mr. Law is not, and has not been within the last five years, a director of any other publicly traded company.
Zeng ShijunEric Gan , was appointed as our Chief TechnologyFinancial Officer on February 12,in August 2010. He has workedFrom July 1999 to August 2010 Mr. Gan was a Senior Financial Consultant at The Goetzman Group, a company which provides staffing solutions in all areas of finance and accounting. His assignments while at The Goetzman Group included (i) acting as deputyinterim chief financial officer for Rino International Inc. Inc. from January 2007 to September 2007; (ii) acting as interim general accounting manager for Dalian Hua Yang Engineer Co., Ltd. since 1992. He worked asPhysicals Formula from March 2008 to September 2008; and (iii) overseeing the Sarbanes- Oxley compliance project manager for Dalian Synthetic Fiber Research InstituteSmart & Final from 1984January 2005 to 1991. HeMay 2005. Mr. Gan received his bachelor’s degreeMaster of Arts from DalianFudan University, Shanghai in June 1989 and received his Masters in Accounting from the University of TechnologySouthern California in 1984. He received a postgraduate degree in economy management from the China Social Scientific University in 1998.December 1995.
Chris Bickel. Mr. Bickel was elected as a director on February 12, 2010. Since October 2009, Mr. Bickel has served as President of Primary Capital and is responsible for business development in China. Primary Capital acted as placement agent for the Company’s February 2010 private placement. From 2005 to October 2009, Mr. Bickel was an investment banker at Rosewood Capital Group, LLC (previously an affiliate of Primary Capital and now a branch office ) during which time his investment banking team provided a full range of investment banking, due diligence and business advisory services to private China based companies interested in accessing the USU.S. capital markets and being listed in the US,U.S., as well as advisory services to US based investment banking firms interested in identifying investment banking clients in China. Mr. Bickel was instrumental in originating and financing of a number of PRC companies that are listed on the NASDAQ or whose shares are quoted on the OTCBB. From 2001 through 2004, Mr. Bickel served as Chairman and CEO of Sino UJE Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products. Mr. Bickel was also employed by Spectris Inc. from 1983 to 1996. As an employee of Spectris, Mr. Bickel was involved with and managed the nonwoven sector of its business. Spectris was engaged in providing engineered products for use in nonwovens production. We believe that Mr. Bickel’s extensive past experience in providing business advisory services to private China based companies interested in accessing the USU.S. capital markets, including Rino International Corp. and Sino Gas International Holdings, Inc., and helping those companies become successfully listed as well as his over ten years’ experience in the nonwoven market and knowledge with manufacturing practice and the overall market make him an eminentlya suitable candidate to serve on our board of directors. Mr. Bickel is not, and has not been within the last five years, a director of any other publicly traded company.
Li Jun.Jun was elected as a director in February 2010. Mr. Li is the owner and manager of Shanghai Primary Capital Management Co., Ltd., a business advisory firm incorporated in Shanghai China, which he started in 2010. (Shanghai Primary Capital Management Co., Ltd. is not affiliated with Primary Capital.) He provides advisory services to China business owners seeking capital and advisory services related to listing their company on United States stock exchanges. He has over twenty years of experience working in China in various fields and in various capacities. Mr. Li founded Shanghai Rosewood Investment Consulting Co., Ltd in 2005 and participated in four listing and financing transactions in which China based companies received funding from USU.S. based investors and listed on in the US.U.S. From 2001 through 2008, Mr. Li has been the Managing Director of SINO UJE, Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products throughout Asia. From 1994 through 2000, Mr. Li was employed by Nanchang Minerals Machinery Imp and Exp Co., Ltd initially as a salesman, followed by promotions to department director and vice president. From 1987 through 1994, Mr. Li served as an instructor at the University of Military Science and Technology and he retired as a Major from the Chinese People’s Liberation Army. From 1980 through 1987 Mr. Li studied at Shanghai Jiaotong University whereAlthough he received his Bachelor’s and his Master’s degree of Science. Wehas not been previously engaged in the nonwovens business, we believe that Mr. Li’s business acumen and his extensive past experience in providing business advisory services to private China based companies interested in accessing the USU.S. capital markets and helping those companies obtain become successfully listed make him an eminently suitable candidate to serve on our board of directors. Mr. Li received his Bachelor’s and his Master’s degree of Science from Shanghai Jiaotong University. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Richard M. Cohen. Mr. Cohen was elected as a director in June, 2010. Since 1996, Mr. Cohen has been the President of Richard M. Cohen Consultants, a financial services consulting company that accepts engagements from public and private companies to assist with their corporate governance and corporate finance needs. From 1984 through 1992, Mr. Cohen was an investment banker at both Henry Ansbacher and Furman Selz, where he specialized in mergers & acquisitions, public equity offerings, and restructurings. From 1980 through 1983, Mr. Cohen was a Vice President of corporate development at Macmillan, Inc. Mr. Cohen is a Certified Public Accountant (New York State) and began his career at Arthur Andersen. He received a B.S. from The University of Pennsylvania (Wharton) in 1973 and an M.B.A. from Stanford University in 1975. WeAlthough he has not been previously engaged in the nonwovens business we believe that Mr. Cohen’s business acumen and his experience in providing business advisory services to private companies to assist with their corporate governance and corporate finance needs coupled with his experience serving as a director of a number of publicly traded companies make him an eminently suitable candidate to serve on our board of directors. Mr. Cohen currently serves as a director of Helix BioMedix ( OTCBB:(OTCBB:HXBM), Rodman and Renshaw ( NASDQ:(NASDQ:RODM) and, CorMedix (OTCBB:CRMD), and Dune Energy, Inc., (AMEX: DNE), for which he served as Chief Financial Officer from November 2003 to April 2005.
Su Lei was elected as a director in August 2010. Mr. Su currently serves as the Associate Director of Information of the State Environmental Protection Agency in China, a position he has held since 2001. Mr. Su has successively acted as Principal Staff Member, Associated Director and Director of China Environmental Protection Industrial Association since September 2001. He also currently serves as the Director of the Working Committee of China Green Star, a position he has held since 2002. China Green Star is a non-profit organization under China's Environmental Protection Association which focuses on promoting the interests of the environmental protection industry. We believe that Mr. Su’s position and experience with the State Environmental Protection Agency and his understanding of public policy matters make him well suited to serve on our board of directors. Mr. Su received a bachelor’s degree in the Electronic Engineering from China Air Force Missile Institute, and he is now a senior engineer in Environment Management.
All of our directors serve on the board until our next annual meeting of the stockholders, and until their successors have been elected and qualified or until their earlier resignation or removal.
Our executive officers serve at the discretion of the board of directors, subject to the terms of any employment agreement they have with the Company. Mr. Bickel is serving on the Board as a designee of Primary Capital. Under the terms of its financial services agreement with the company Primary Capital is entitled to designate one board member and one observer until February 11, 2012.
Family Relationships
There are no family relationships among our directors and executive officers.officers, except the Eric Gan, our chief financial officer, is the brother in law of Li Jun, one of our directors. There is no arrangement or understanding between or among our executive officers and directors pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| | · | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| | · | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| | · | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
| | · | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| | · | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| | · | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Board Independence
In order to be listed on NASDAQ, Global Market ora company is required to meet certain corporate governance requirements, including, with certain exceptions, the NASDAQ Capital Market,requirement to have a board of directors the majority of our directorswhose members are required to be “independent” within the meaning of NASDAQ rules.
As a “controlled company” we are exempt from the applicable national exchange and SEC rules. Werequirements of the NASDAQ Marketplace Rules (i) to have not yet determined whether a majority of ourindependent board members; (ii) for independent director oversight of executive officer compensation and (iii) for independent director oversight of director nomination. As a controlled company, we remain subject to the NASDAQ audit committee requirements and the requirement that independent directors fallregularly meet in executive session.
Under NASDAQ Marketplace Rules a company is considered a "controlled company" if greater than 50% of its voting power is held by an individual, a group or another company. In order for a group to exist for purposes of this rule, the stockholders forming the group are required to publicly file a notice that they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management Inc., Song Huaying, and Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a group with respect to their holdings in the Company.
The Company has disclosed its status as a “controlled company” in its annual report on Form 10-K for the fiscal year ended September 30, 2010 filed on January 3, 2011 and the basis for determining that it is a controlled company.
The Board has determined that three of its six current members, namely Messrs. Chris Bickel, Su Lie and Richard M. Cohen, are “independent” within the applicable definitionmeaning of “independent” but we intend to ensure that a majority of our directors fall within such definition at the time ourNASDAQ listing application is filed.standards.
Director Contracts
In JuneMay 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement, effective on closing of the offering, Mr. Cohen iswill be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). In addition, pursuant to anthe Company’s equity incentive plan, to be adopted by the company, Mr. Cohen is required to be grantedwas awarded 30,000 shares of restricted stocktwo thirds of which are subject to restrictions on transfer and are subject to forfeiture with one third vesting on the daterestrictions lapsing as to one-third of grant, one third vestingthe shares on the first anniversary of the date of grant and oneas to one- third vesting on the second anniversary of the date of grant date within the restricted stock ceasing to vest as of the date he ceasesevent Mr. Cohen continues to be a director.director on those dates. In addition, the Company will reimburse the director for pre-approved reasonable business-related expenses incurred in good faith in the performance of the Director’sdirector’s duties for the Company.
Committees
The Board currently has three standing committees: Audit Committee, Compensation Committee and Nominating Committee. Each member of these committees is “independent” as defined by NASDAQ and SEC rules and each of these committees has a written charter approved by the Board. Committee members are appointed by the Board based on the recommendation of the Nominating Committee, except that members of the Nominating Committee are appointed by the independent members of the Board. The current members of the committees are as follows:
| Director | | Audit | | Compensation | | Nominating |
| Jie Li | | | | | | |
| Law Wawai | | | | | | |
| Li Jun | | | | | | |
| Chris Bickel | | ü | | ü | | ü |
| Richard M. Cohen | | ü | | ü | | ü |
| Su Lei | | ü | | | | |
Audit Committee; Audit Committee Financial Expert
Our boardThe Audit Committee, established in September 2010, currently consists of directors currently acts as our audit committee. In order to be listed on NASDAQ Global Marketthree members, Su Lei, Chris Bickel, and the NASDAQ Capital Market, we are required to establish an audit committee comprised entirelyRichard M. Cohen, its Chairman. The Board has determined that each of “independent directors” including at least one director meeting the definition of “financial expert”them is independent within the meaning of the NASDAQ listing standards and applicable national exchangeSEC regulations, and that each member has the financial literacy required by the NASDAQ listing standards.
The Board also has determined that Mr. Cohen is qualified as an "audit committee financial expert" within the meaning of applicable SEC rules. We intend to establish an audit committee meeting these requirements in connection with our listing application. When established,regulations and has the audit committee will be responsible for: (i) overseeing the corporate accounting and related financial sophistication required by NASDAQ listing standards.
The function of the Audit Committee, as more fully set forth in its charter, is to (i) oversee our financial statements, our financial reporting practices;process and our system of internal control over financial reporting; (ii) recommendingrecommend the selection of our registered public accounting firm; (iii) reviewingreview the extent of non-audit services to be performed by the auditors; and (iv) reviewingreview the disclosures made in our periodic financial reports.
Compensation Committee
The Compensation Committee, established in September 2010, consists of two members Chris Bickel and Richard M. Cohen. The Board has determined that each of them is independent within the meaning of the NASDAQ listing standards. The functions of the Compensation Committee, as more fully set forth in its charter, are to oversee our compensation policies generally, evaluate senior executive performance, oversee and determine compensation for senior executives and review and recommend to the Board actions regarding director compensation.
Nominating Committee
The Nominating Committee, established in September 2010, currently consists of two members, Chris Bickel and Richard M. Cohen. The Board has determined that each of Messrs. Bickel and Cohen is independent within the meaning of the NASDAQ listing standards.
As more fully set forth in its charter, the primary responsibilities of the Nominating Committee are to: (i) develop and recommend to the Board criteria for selecting qualified director candidates; (ii) identify, review and evaluate individuals qualified to become Board members; (iii) consider committee member qualifications, appointment and removal; and (iv) assist the Board in its annual reviews of the performance of the Board, each committee and management. The Committee has the exclusive authority to make recommendations to the Board for approval for the election of new members to the Board.
To fulfill its responsibilities and duties the Nominating Committee is required to, among other things (i) evaluate the current composition of the Board of Directors and its committees, and determine future requirements for director candidates; (ii) determine the Board’s criteria for selecting new directors, including desired board skills and attributes, and actively seek prospective individuals qualified to become board members; (iii) adopt and maintain a policy concerning the director nomination process; (iv) adopt a policy concerning the consideration of director candidates recommended by stockholders and consider stockholder nominees for election to the Board; (v) evaluate and propose nominations for election to the Board; and (vi) review and make recommendations to the Board concerning membership of Board committees.
The Committee does not assign specific weights to particular criteria. Rather, the Nominating Committee believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.
The Nominating Committee will consider director nominees recommended for consideration by the stockholders. To have a person considered by the Nominating Committee for recommendation to the Board as a director nominee a stockholder should write to the Corporate Secretary, specifying the nominee's name and qualifications for Board membership and providing confirmation of the nominee's consent to serve as a director. Following verification that the person submitting the recommendation is a stockholder of the Company, all properly submitted recommendations will be brought to the attention of the Nominating Committee at a regularly scheduled Committee meeting.
If a stockholder properly recommends a director nominee, the Nominating Committee will give due consideration to that nominee and will use the same criteria used for evaluating other director nominees, in addition to considering the information relating to the director nominee provided by the stockholder.
Stockholders also may nominate directors for election at our annual meeting of stockholders by following the provisions set forth in our bylaws. The deadline for stockholder nominations is set forth in our by laws. Stockholders and other parties interested in communicating directly with the Board of Directors may do so by writing to: China SLP Filtration Technology, Inc., Attention: Board of Directors, Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC. Pursuant to a process approved by the Board, the Corporate Secretary reviews all correspondence received by us and addressed to members of the Board and regularly forwards to the Board a summary of such correspondence and copies of all correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the Board or Board committees or otherwise requires the Board's attention. Directors may at any time review a log of all correspondence received by us that is addressed to members of the Board and request copies of any such correspondence.
Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the Audit Committee to address such matters.
Compensation Committee Interlocks and Insider Participation
We do not presently have a compensation committee. OurAll current members of the Compensation Committee are independent directors. None of the past or present members of our Compensation Committee are present or past employees or officers of ours or any of our subsidiaries. No member of the Compensation Committee has had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended. None of our executive officers serves on the board of directors currently acts as our compensation committee. In connection with our listing application we intend to establish aor compensation committee comprised entirely of independent directors. In addition, each of the members of the compensation committee will be a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act. The compensation committee will carry out its responsibilities pursuant to a written charter to be adopted.company that has an executive officer that serves on our Board or Compensation Committee.
Nominating Committee79
We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee. In connection with our listing application we intend to establish a nominating committee comprised entirely of independent directors. The nominating committee will carry out its responsibilities pursuant to a written charter to be adopted.
Code of Ethics
We strive to foster a culture of honesty, integrity and accountability.
We have not yet adopted a code of ethics butapplicable to all employees, including all officers, and including our independent directors, who are not employees of the company, with regard to their company -related activities. The code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. In addition, the code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; reporting code violations; and maintaining accountability for adherence to the code.
Waivers of the Code for executive officers and directors may be granted only by the Board. Amendments to the Code must be approved by the Board. We intend to do so in connection withprovide disclosure of any such amendments or waivers on our application for listing on the NASDAQ Global Marketwebsite (www.silepu.com) within four business days of any such amendment or the NASDAQ Capital Market.waiver.
EXECUTIVE COMPENSATION
The following is a summary of the compensation we paid to each of our former chief“named executive officers,officers” (as such term is defined in Item 402 of Regulation S-K) for each of the last two fiscal years ended September 30, 20092010 and 2008.2009. No executive officer received compensation in excess of $100,000 for any of those two years.
Name and Principal Position | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| Li Jie | | | 2010 | | 44,117 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | 44,117 | |
| (CEO(1) | | | 2009 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | |
| | | | | | | | | | | | | | | | | | | | | |
| Seth Winterton | | 2009 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | | 2010 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | |
| (former CEO(1) | | 2008 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | |
| (former CEO)(2) | | | 2009 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joseph Nemelka | | 2009 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | |
| (former CEO)(2) | | 2008 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | |
| Eric Gan (3) | | | 2010 | | 18,000 | | -0- | | -0- | | 90,310 | | -0- | | -0- | | -0- | | 108,310 | |
| | | | 2009 | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | | -0- | |
| (1) | Jie Li was appointed Chief Executive Officer in February 2010. |
| (2) | Seth Winterton served as Chief Executive Officer of Perpetual Technologies from December 29, 2008 until February 12, 2010. |
(2)(3) | Joseph Nemelka servedEric Gan was appointed Chief Financial Officer on August 4, 2010. Mr. Gan is paid an annual salary of $120,000. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option shall vest and be exercisable as Chief Executive Officerfollows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. This amount of Perpetual Technologiesthe option award set forth in the table represents the grant date fair value computed in accordance with Accounting Standards Codification, or ASC, Topic 718, and does not reflect whether our named executive officer has actually realized a financial benefit from January 2008 until December 29, 2008.the award. For information on the assumptions used to calculate the value of the awards, we refer you to Note 14 “Equity and stock based compensation” to our consolidated financial statements for the fiscal year ended September 30, 2010 included elsewhere in this prospectus. In accordance with SEC rules, the amount shown excludes the impact of estimated forfeitures related to service-based vesting conditions. |
The following is a summary of the compensation paid by our operating subsidiary Foshan to Li Jie, its President and Chief Executive Officer, for the last two fiscal years ended September 30, 20092010 and 2008,2009, respectively. No executive officer of Foshan received compensation in excess of $100,000 for any of these two years.
Name and Principal Position | | Fiscal Year | | Salary ($)(1) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
| Li Jie | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (President and Chief | | 2009 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
| Executive Officer ) | | 2008 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
Name and Principal Position | | Fiscal Year | | Salary ($)(1) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
| Li Jie | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (President and Chief | | 2010 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
| Executive Officer ) | | 2009 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
(1) The relevant exchange rates for fiscal years ended September 20092010 and 20082009 are $1 to RMB 6.8 and RMB 6.8, respectively.
| | | OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |
| | | OPTION AWARDS | | | | | | | | | | | | | STOCK AWARDS | |
Name (a) | | Number of Securities Underlying Unexercised and Earned options (#) (b) | | | Number of Securities Underlying Unexercised Unearned Options (#) (c) | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) | | | Option Exercise Price ($) (e) | | | Option Expiration Date ($) (f) | | | Number of Shares or Units of Stock that have not Vested (#) (g) | | | Market Value of Shares of Units of Stock that Have not Vested ($) (h) | | | Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i) | | | Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) (j) | |
| Li Jie | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Seth Winterton | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Eric Gan | | | -0- | | | | -0- | | | | 400,000 | | | | (1 | ) | | | (2 | ) | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| (1) | On September 3, 2010, Eric Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares vests immediately on the termination date. |
| (2) | The option will expire on September 3, 2015. |
Employment Agreement
On November 20, 2008, Mr. Li entered into an employment agreement with the CompanyFoshan to serve as our President and Chief Executive Officer. Under the agreement, Mr. Li is to be paid a salary of $15,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 days notice.
On November 20, 2008, Mr. Zeng entered into an employment agreement with the Company to serve as our Chief Technology Officer. Under the agreement, Mr. Zeng is to be paid a salary of $5,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 day notice.
On January 1, 2010, Mr. Law entered into an employment agreement with the CompanyFoshan to serve as our President of Sales. Under the agreement, Mr. Law is to be paid a salary of $5,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 day notice.
Effective August 5, 2010, Mr. Gan entered into an employment agreement with the Company to serve as Chief Financial Officer. The term is for three years unless sooner terminated as provided in the agreement. Under the agreement Mr. Gan has agreed to perform such duties as shall be consistent with the position of Chief Financial Officer subject to the supervision and direction of the Board. Under the agreement Mr. Gan will receive an annual salary of $120,000 payable in 12 equal payment payable on the 15th day of each month beginning on August 15, 2010). However, prior to the completion of the offering contemplated by this prospectus, Mr. Gan will receive a salary of $6,000 per month (receiving $10,000 for the month during which the Company completes its initial public offering and thereafter). In addition to his annual salary, Mr. Gan will be reimbursed for all reasonable expenses including travel expense between United States and China and will be provided with housing expense during the term of his employment. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
2010 Stock Incentive Plan
On September 3, 2010, we adopted the 2010 Plan. All officers and key employees, directors of, and consultants to the Company and its subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its subsidiaries and affiliates are eligible for participation in the 2010 Plan. Two Million One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) (or such number as shall be equal to 10% of the outstanding shares on a fully diluted basis after the offering and the conversion of the notes) shares of common stock have been authorized and reserved for the 2010 Plan and any shares that may become available for issuance under awards under the 2010 Plan as a result of expiration or forfeiture. Under the 2010 Plan, the company may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards. The 2010 Plan is administered by our Compensation Committee.
The purpose of the 2010 Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company to offer eligible participants stock-based incentives in the Company to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders.
The Compensation Committee does not currently have a set formula for determining who will receive awards and what the amounts of the awards will be and when such awards will be made. The Compensation Committee can make an award in its discretion at any time as consistent with the terms of the 2010 Plan. Long-term equity incentives are intended to reward and will be awarded to eligible participants who help achieve our overall corporate goals and meet their individual employee objectives.
Outstanding Equity Awards
On September 3, 2010, as required by the terms of his agreement with the Company entered into in May 2010, the Board awarded Richard Cohen 30,000 shares of restricted stock two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates.
On September 3, 2010, under the 2010 Plan and in connection with his appointment as Chief Financial Officer, the Board granted Eric Gan an option to purchase 400,000 shares at an exercise price equal to the public offering price of this offering. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
Except for the foregoing there are no option exercises, options outstanding or restricted stock grants as of the date of this prospectus.
Compensation of Directors
We paid noThe table below sets forth the compensation to our formerof the directors Joseph Nemelka and Seth Winterton, during the last completed fiscal year ended September 30, 2009.year:
As of the date of this prospectus, we have not made any payments to any of our current directors for services rendered in their capacity as directors of the company.DIRECTOR COMPENSATION
Name (a) | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | Option Awards ($) (d) | | | Non-Equity Incentive Plan Compensation ($) (e) | | | Nonqualified Deferred Compensation Earnings ($) (f) | | | All Other Compensation ($) (g) | | | Total ($) (h) | |
| Law Wawai | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Chris Bickel | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Li Jun | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Richard M. Cohen (1) | | | -0- | | | | 180,000 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 180,000 | |
| Su Lei | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
(1) In JuneMay 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen is arequired to be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). Under an oral agreement Mr. Cohen has agreed with us that the payment of the monthly retainer will commence on closing of this offering. We have not made any payments of this retainer as of the date of this prospectus. In addition, pursuant to an equity incentive plan to be adopted by the Company2010 Plan, on September 3, 2010, Mr. Cohen is towas granted 30,000 restricted shares, two-thirds of restricted stockwhich are subject to restrictions on transfer and to forfeiture, with one third vesting on the daterestrictions lapsing as to one-third of grant, one third vestingthe shares, on the first anniversary of the date of grant, and one third vestingas to one-third, on the second anniversary of the date of grant date within the restricted stock ceasing to vest as of the date he ceasesevent Mr. Cohen continues to be a director.director on those dates. In addition, the Company will reimburse the directorMr. Cohen for pre-approved reasonable business-related expenses incurred in good faith in the performance of the director’s duties for the Company. The amount set forth in the table above under “Option Awards” represents the grant date fair value of the award computed in accordance with ASC Topic 718.
Except as set forth above as of the date of this prospectus, we have no formal or informal arrangements or agreements to compensate our directors for services they provide as directors. We plan to implement a compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.
None of the directors of Foshan, our PRC-based operating company, are presently being compensated for their service as directors.
Li Jun, our director, is an officer and controlling stockholder of United Best, our foreign advisor. See section entitled “Certain Relationships and Related Transactions” beginning on p 71.page 85.
Additional Narrative Disclosure
We have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified defined benefit plans, supplemental executive retirement plans, tax qualified defined contribution plans and non-qualified defined contribution plans.
There are no contracts agreements, plans or arrangements, whether written or oral, that provide for payment to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer or a change in control or the company or a change in the executive officers responsibilities following a change in control, with respect to each named executive officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, since October 1, 2007,2008, the Company was not a party to any transaction (where the amount involved exceeded the lesser of $120,000 or 1% of the average of our assets for the last two fiscal years) in which an director, executive officer, holder of more than five percent of our common stock, or any member of the immediate family of any such person have or will have a direct or indirect material interest and no such transactions are currently proposed.
Primary Capital is a beneficial owner of more than 5% of our common stock. Mr. Bickel is also the President of Primary Capital. Chris Bickel is a director of our company. Mr. Bickel also the Presidentcompany serving as a designee of Primary Capital.
Primary Capital provided financial services in connection with the private placement and reverse merger which closed on February 12, 2010. The services provided and to be provided by Primary Capital include the following:
| · | assisting the Company in preparing a detailed business plan, financial model and power point presentation; |
| · | negotiating and structuring the reverse merger; |
| · | acting as placement agent for the February 12, 2010 note financing; |
| · | recommending to the Company a qualified auditor, securities attorney and investor relations firm, and assisting the Company with negotiating the terms of their respective engagements; |
| · | advising the Company on strategies to increase shareholder value; |
| · | assisting the Company and its investor relations firm in organizing, and participating with the Company in, investor road shows and investor conference calls; |
| · | recommending investor conferences in the US and Europe to be attended by the Company and a representative of Primary Capital; |
| · | identifying strategic relationships and joint venture partners; |
| · | identifying and recommending persons to serve on the Company’s Board of Directors; |
| · | identifying and rendering advice regarding potential acquisitions, including the valuation of the acquisition and financing for the acquisition; |
| · | assisting the Company in connection with its listing on a U.S. stock exchange; |
| · | reviewing and commenting on the Company’s SEC filings associated with the Company’s transactions; and |
| · | advising Company regarding its obligations as a U.S. public company. |
United Best, our foreign advisor controlled by Mr. Li Jun, one of our directors, provided financial services in connection with our reverse merger with Hong Hui completed on February 12, 2010. These services included advising the company on structuring the reverse merger, assisting the company in retaining service providers such as accountants, PRC and US attorneys to effect the reverse merger and working with those service providers to facilitate the completion of the reverse merger. Additionally, United Best will assist the Company with on-going communications and coordinating the relationships with service providers during the NASDAQ listing process.
Under the terms of thea financial services agreement dated November 17, 2009, as amended, between Primary Capital and the company, Primary Capital was paid a feecommission of $202,000 at the closing of the February 2010 private financing. Primary Capital is also owed an additional $75,000 for services rendered in connection with the reverse merger and private placement. Primary Capital is also entitled to receive $15,000 on completion of the offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000.
At the closing of the private financing, Primary Capital received 290,755 shares of our common stock. Primary is also entitled to receive 265,186 shares of common stock on the closing of this offering.
In addition, for providing these financial services Primary Capital is entitled to receive, on conversion of the notes issued to the investors in ourthe February 2010 private placement Primary Capital(which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which number is entitledequal to receive a warrant with the terms described above in the section entitled “Financial Services Agreements and Related Warrants” At the closing5% of the reverse merger transaction, Primary Capital also received 290,7551,923,809 shares of our common stock with certain anti-dilution protection. In particular, if prior to February 12, 2011 we issue any shares of our common stock (or any securities convertible into or exercisable for our common stock, other than certain securities issued to employees, directorsthe noteholders on conversion), exercisable at $2.10 (which equals the price at which the notes converted and assumes an initial public offering price of $6.00 per share). Unlike the like), theninvestor warrants, these warrants will not terminate but instead become exercisable upon conversion of the notes and consummation of this offering. If the note conversion does not occur, Primary Capital will be issued suchreceive a five-year warrant to purchase that number of additional shares of our common stock (the “Adjustment Shares”) which, when addedequal to 5% of the common stock underlying the warrants issued to the 290,755 shares (plus any previously issued Adjustment Shares), will total 2.5% ofinvestors in the shares of our common stock then outstanding, determined on a fully-diluted basis.private financing exercisable at the same price at which those investor warrants are exercisable.
Li Jun is a director and is a beneficial owner of more than 5% of our common stock. Mr. Li is an officer and controlling stockholder of United Best. Best, our foreign advisor, provided financial services in connection with the private financing.
Under the terms of ana consulting agreement between United Best and the company, (the “Consulting Agreement”), United Best was paid a feecommission of $202,000 at the closing of the reverse merger and private financing. United Best is also owed an additional $75,000 for services rendered in connection with the reverse merger. In addition, on conversion offinancing. Additionally, under the notes issued in our February 2010 private placement,consulting agreement, as amended, United Best is entitled to receivebe paid fee on completion of this offering a warrant with the terms described above in the section entitled “Financial Service Agreements and Related Warrants.” At the closingsuccess of the reverse merger transaction, United Best also received 362,755 shares of our common stock with certain anti-dilution protection. In particular, if prior to February 12, 2011, we issue any shares of our common stock (or any securities convertible into or exercisable for our common stock), (other than certain securities issued to employees directors and the like) then United Best will be issued such number of shares of our common stock which, when added to the 362,755, will total 2.5% of our shares then outstanding, determined on a fully-diluted basis. Additionally, under the Consulting Agreement, as amended, United Best, our foreign advisor, is entitled to a fee of$750,000 (which represents 3% of the $25,000,000 in gross proceeds to be received by us in connection with the underwritten offering.offering, assuming an initial public offering price of $6.00 per share).
At the closing of the private financing, United Best received 362,755 shares of our common stock for their services. United Best is also entitled to receive an additional 193,186 shares on closing of this offering.
In addition, as partial consideration for providing these financial services, United Best is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which represents 5% of the number of shares of common stock issued to the note holders on conversion), exercisable at the price of $2.10 per share (i.e. the price at which the notes converted based on the assumed initial public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable on conversion of the notes and consummation of this offering. If the note conversion does not occur, United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable.
For additional information about the nature of the services provided to the company by each of Primary Capital and United Best under their respective agreements, reference is make to “Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants - Financial Services Agreements and Related Warrants” beginning on page 61.
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As shareholders of Hong Hui, (i) Bestyield Group, a company controlled by Mr. Li, our chief executive officer, received 4,353,061 shares, (ii) Proudlead, a company controlled by Mr. Law, our president of sales and a director, received 4,353,061 shares and (iii) Newise Holdings Limited, a company controlled by Mr. Li Jun one of our directors received 2,321,633 shares.
Under a limited recourse guaranty agreement dated as of February 12, 2010, Bestyield Group and Proudlead agreed to guaranty the company’s obligations under the notes issued in the February 2010 private placement. That guaranty is secured by a pledge of the 8,706,122 shares of common stock received by them in the reverse merger
In each of June 2007 and in February 2008 and May 2008, Joseph Nemelka, a former officer and director, advanced funds to the company in the total aggregate amount of $15,000. The advances were due on demand and bearsbore interest at 8% per annum. This indebtedness was forgiven in February 2010 prior to the reverse merger. In addition, Mr. Nemelka purchased a convertible promissory note in the aggregate principal amount of $100,000 in the February private placement.
Our board of directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Except for the foregoing, no executive officer, director or director any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to the Company at any time since the beginning of the Company’s last fiscal year.
DESCRIPTION OF SECURITIES
The following is a summary description of our capital stock and certain provisions of our certificate of incorporation and by-laws, copies of which have been filed as exhibits to this prospectus. The following discussion is qualified in its entirety by reference to such exhibits.
General
We are authorized to issue 200,000,000 shares of common stock, par value $.001 per share, and 10,000,000 shares of blank-check preferred stock, par value $.001 per share.
Immediately following the closing of this offering, ________________21,814,562 shares of common stock will be issued and outstanding (excluding shares issuable upon exercise of the over-allotment option). In addition, [ ]192,380 shares may be purchased upon the exercise of placement agent warrants, _______208,333 shares may be purchased upon the exercise of underwriter’s warrants and no400,000 shares are subject toissuable on exercise of outstanding stock options.
Common Stock
Each share of our common stock has one vote on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. In the event we are liquidated, the holders of common stock will share equally in any balance of our assets available for distribution to them after satisfaction of creditors and preferred shareholders. The holders of our common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as, and if declared by the board of directors from funds legally available.
Preferred Stock
In addition to the 200,000,000 shares of common stock, we are authorized to issue 10,000,000 shares of preferred stock. Shares of our preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance of any shares thereof.
The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable the holder to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common stock. Although the board of directors is required to make any determination to issue such stock based on its judgment as to the best interests of our stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law.
Notes and Warrants
On February 12, 2010, immediately following the closing of the share exchange agreement, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes, in the aggregate principal amount of $4,140,000, and warrants (which are exercisable only in certain events). The closing of the sale of the notes and warrants occurred on February 12, 2010. The terms of the notes, as amended, and warrants is set forth below. The note purchase agreement contains representations, warranties and covenants which are customary for transactions of this nature.
The notes have the following material terms:
Maturity: The notes were originally scheduled to mature after one year.on February 12, 2011. On January 31, 2011 we entered into note extension agreements with each of the holders of the notes (other than Lumen Capital) to extend the maturity date to June 30, 2011. If the principal is not paid on maturity then 150% of the principal amount shall be payable. We plan to repay the note held by Lumen Capital in the principal amount of $100,000 on February 12, 2011.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default. $204,464 out of the closing proceeds is being held in escrow to cover most of the first six months interest.
Conversion: In the event of the closing of any equity or series of related financings resulting inthis offering, the $4,040,000 aggregate gross proceeds to the Company of at least $20,000,000 (or such lesser amount as shall be approved in writing by the holder(s) of notes evidencing at least 50% of the principal amount of the notes then outstanding), a “qualified financing,” prior to the maturity date of the notes, the principal amount of the notes convertsoutstanding shall convert automatically into the securities sold in such financing1,923,809 shares of common stock at a conversion price of $2.10 per share (which represents a 65% discount to the assumed offering price of such securities. The offering described in this prospectus is expected to be a “qualified financing.”$6.00 per share).
The warrants have the following material terms:
Exercisable: The warrants will become void if the notes automatically convert into common stock (which will be the case if the offering contemplated by this prospectus closes). The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date and become void if the notes automatically convert into common stock.date.
Number of Shares: The warrants represent the right to purchase 8% of the total number of shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.“financing.”
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
Underwriter’s Warrants
We have also agreed to issue to Brean Murray, Carret & Co., LLC, and/or its designees, a warrant to purchase a number of shares of common stock equal to an aggregate of 5% of the shares of common stock sold in the offering, excluding over-allotments, if any. The warrant will have an exercise price equal to 125% of the offering price of the shares of common stock sold in this offering and be exercisable for four years commencing one year after the effective date of the registration statement. Pursuant to the rules of the Financial Industry Regulatory, Inc., or FINRA (formerly the NASD), and in particular Rule 5110,5110(g)(1), the warrant (and underlying shares) issued to Brean Murray, Carret & Co., LLC, mayshall not be sold during the offering, or sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of delivery and payment for the shares offered; provided, however, that the warrant (and underlying shares) may be transferred to officerseffectiveness or partnerscommencement of sales of the representatives and members of the underwriting syndicate and their officers or partnerspublic offering, except as long as the warrant (and underlying shares) remain subject to the lockup.provided in Rule 5110(g)(2).
Financials Advisor Warrants
For a description of the warrants issued to the financials advisors in connection with the private placement, and the reverse merger, see the section above entitled “Financial Services Agreements“Certain Relationships and Related Warrants”Transactions,” beginning on page 60.85.
Exchange Listing
We intend to applyhave applied for listing of our common stock on the NASDAQ Global Market or the NASDAQ Capital Market under the symbol “ .”“SLPC.”
Recent Stockholder Actions
On February 12, 2010, immediately prior to the closing of the share exchange agreement, shareholders holding 2,528,000 of the 2,600,000 shares of our then outstanding common stock agreed to surrender their shares for cancellation in payment by Joe Nemelka of an aggregate amount of $40,000, pursuant to stock purchase agreements entered into between Joe Nemelka and each such holder. Under the share exchange agreement we issued an aggregate of 14,510,204 shares of common stock to the stockholders of Hong Hui. In addition, immediately following the closing of the share exchange agreement we issued 362,755 and 290,755 shares of our common stock to United Best and Primary Capital, respectively, as a transaction fee in connection with the closing of the reverse merger and private financing. In addition there are 72,000 shares held by 210 round lot shareholders. Accordingly, as of February 12, 2010 following the closing of all of these transactions, there were 15,235,714 shares of common stock issued and outstanding.
As more fully described in an Information Statement on Schedule 14C (which was mailed to our stockholders on March 3, 2010), on February 12, 2010, the board of directors and the holders of majority of our outstanding shares entitled to vote thereon approved the change the name of the Companycompany to China Filtration Technology, Inc. and 1-for-5 reverse stock split of our shares of common stock.
These corporate actions became effective on the filing with the Secretary of State of Delaware of a certificate of amendment to our certificate of incorporation which was filed on March 24, 2010.
On June 1, 2010 the corporate name was changed to China SLP Filtration Technology, Inc.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general summary of certain material U.S. federal income tax consequences to an investor of the acquisition, ownership and disposition of our common stock purchased by an investor pursuant to this offering. As used in this discussion, “we”, “our” and “us” refers to China SLP Filtration Technology, Inc. This discussion applies only to investors that will hold each share of our common stock issued and purchased pursuant to this offering as a “capital asset” (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to an investor in light of that investor’s particular circumstances. In addition, this discussion does not address (a) U.S. federal non-income tax laws, such as estate or gift tax laws, (b) state, local or non-U.S. tax consequences, or (c) the special tax rules that may apply to certain investors, including, without limitation, banks, insurance companies, financial institutions, broker-dealers, taxpayers that have elected mark-to-market accounting, taxpayers subject to the alternative minimum tax provisions of the Code, tax-exempt entities, governments or agencies or instrumentalities thereof, regulated investment companies, real estate investment trusts, U.S. persons whose functional currency is not the U.S. dollar, certain former U.S. citizens or long-term residents of the United States, or investors that acquire, hold, or dispose of our common stock as part of a straddle, hedge, wash sale, constructive sale or conversion transaction or other integrated transaction. Additionally, this discussion does not consider the tax treatment of entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or of persons who hold our common stock through such entities. The tax treatment of a partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. Thus, partnerships, other pass-through entities (and partners in such partnerships or owners of such other pass-through entities) should consult their own tax advisors.
This discussion is based on current provisions of the Code, its legislative history, U.S. Treasury regulations promulgated under the Code, judicial opinions, and published rulings and procedures of the U.S. Internal Revenue Service (“IRS”), all as in effect on the date of this prospectus. These authorities are subject to differing interpretations or to change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed below, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
As used in this discussion, the term “U.S. person” means a person that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized (or treated as created or organized) in or under the laws of the United States or of any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (B) it has in effect a valid election to be treated as a U.S. person under applicable U.S. Treasury regulations. As used in this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is a U.S. person, and the term “non-U.S. holder” means a beneficial owner of our common stock (other than an entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a U.S. person.
THIS DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX TREATY.
U.S. Holders
Taxation of Distributions
A U.S. holder will be required to include in gross income as ordinary income the amount of any dividend paid on the shares of our common stock. A distribution on such shares will be treated as a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain from the sale or other taxable disposition of the common stock and will be treated as described under “Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
Any dividends we pay to a U.S. holder that is treated as a taxable corporation for U.S. federal income tax purposes generally will qualify for the dividends-received deduction if the applicable holding period and other requirements are satisfied. With certain exceptions, if the applicable holding period and other requirements are satisfied, dividends we pay to a non-corporate U.S. holder will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains for tax years beginning on or before December 31, 2010, after which the tax rate applicable to dividends is scheduled to return to the tax rate applicable to ordinary income.
If PRC taxes apply to any dividends paid to a U.S. holder on our common stock, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
In general, a U.S. holder must treat any gain or loss recognized upon a sale, taxable exchange, or other taxable disposition of our common stock as capital gain or loss. Any such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for the common stock so disposed of exceeds one year, and otherwise as short-term capital gain or loss. In general, a U.S. holder will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis in the common stock so disposed of. Long-term capital gain recognized by a non-corporate U.S. holder will generally be subject to a maximum tax rate of 15 percent for tax years beginning on or before December 31, 2010, after which the maximum long-term capital gains tax rate is scheduled to increase to 20 percent. The deduction of capital losses is subject to various limitations.
If PRC taxes apply to any gain from the disposition of our common stock by a U.S. holder, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
New Legislation Regarding Medicare Tax
For taxable years beginning after December 31, 2012, certain U.S. holders that are individuals, estates or trusts will be subject to a 3.8% tax on all or a portion of their "net investment income," which may include all or a portion of their dividends and net gains from the sale or other disposition of our common stock. If you are a U.S. holder that is an individual, estate or trust, you should consult your tax advisor regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our common stock.
Non-U.S. Holders
Taxation of Distributions
In general, any distribution we make to a non-U.S. holder, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute a dividend for U.S. federal income tax purposes. Unless we are treated as an “80/20 company” for U.S. federal income tax purposes, as described below, any dividend paid to a non-U.S. holder with respect to shares of our common stock that is not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, as described below, generally will be subject to U.S. federal withholding tax at a rate of 30 percent of the gross amount of the dividend, unless such non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN). Any distribution not constituting a dividend will be treated first as reducing the non-U.S. holder’s adjusted tax basis in its shares of our common stock (but not below zero) and, to the extent such distribution exceeds the non-U.S. holder’s adjusted tax basis, as gain from the sale or other taxable disposition of the common stock, which will be treated as described under “Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
There is a possibility that we may qualify as an “80/20 company” for U.S. federal income tax purposes. In general, a U.S. corporation is an 80/20 company if at least 80 percent of its gross income earned directly or from subsidiaries during an applicable testing period is “active foreign business income.” The 80 percent test is applied on a periodic basis. If we qualify as an 80/20 company, a percentage of any dividend paid by us generally will not be subject to U.S. federal withholding tax. You should consult with your own tax advisors regarding the amount of any such dividend subject to withholding tax in this circumstance. It should also be noted that there are currently legislative proposals to amend the rules pertaining to 80/20 companies.
Dividends we pay to a non-U.S. holder that are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States (and, if certain income tax treaties apply, are attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder) generally will not be subject to U.S. withholding tax, provided such non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated individual or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be specified by an applicable income tax treaty).
Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale, exchange or other disposition of common stock, unless:
| | · | the gain is effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, under certain income tax treaties, is attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder); |
| | · | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met, and is not eligible for relief under an applicable income tax treaty; or |
| | · | we are or have been a “United States real property holding corporation” (“USRPHC”) for U.S. federal income tax purposes at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of, and, generally, in the case where our common stock is regularly traded on an established securities market, the non-U.S. holder has owned, directly or indirectly, more than 5 percent of the common stock disposed of, at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of. |
There can be no assurance that our common stock will be treated as regularly traded on an established securities market for this purpose.
Unless an applicable tax treaty provides otherwise, gain described in the first and third bullet points above generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated tax rates applicable to U.S. persons. Any gains described in the first bullet point above of a non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30 percent rate (or a lower applicable tax treaty rate). Any U.S. source capital gain of a non-U.S. holder described in the second bullet point above (which may be offset by U.S. source capital losses during the taxable year of the disposition) generally will be subject to a flat 30 percent U.S. federal income tax (or a lower applicable tax treaty rate).
In connection with the third bullet point above, we generally will be classified as a USRPHC if the fair market value of our “United States real property interests” equals or exceeds 50 percent of the sum of the fair market value of our worldwide real property interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes. We believe that we currently are not a USRPHC, and we do not anticipate becoming a USRPHC (although no assurance can be given that we will not become a USRPHC in the future).
Information Reporting and Backup Withholding
Other than with respect to U.S. holders who are “exempt recipients,” we generally must report annually to the IRS and to each holder the amount of dividends and certain other distributions we pay to such holder on our common stock and the amount of tax, if any, withheld with respect to those distributions. In the case of a non-U.S. holder, copies of the information returns reporting those distributions and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. Information reporting is also generally required with respect to proceeds from the sales and other dispositions of our common stock to or through the U.S. office (and in certain cases, the foreign office) of a broker.
In addition, backup withholding of U.S. federal income tax, currently at a rate of 28 percent, generally will apply to distributions made on our common stock to, and the proceeds from sales and other dispositions of our common stock by, a non-corporate U.S. holder who:
| | · | fails to provide an accurate taxpayer identification number; |
| | · | is notified by the IRS that backup withholding is required; or |
| | · | in certain circumstances, fails to comply with applicable certification requirements. |
A non-U.S. holder generally may eliminate the requirement for information reporting (other than with respect to distributions, as described above) and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. holder’s or a non-U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedure for obtaining an exemption from backup withholding in their particular circumstances.
Recently Enacted Legislation Relating to Foreign Accounts
On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act into law. Effective for payments made after December 31, 2012, this law imposes a 30% U.S. federal withholding tax on distributions and the gross proceeds of sale in respect of our shares of common stock to a foreign financial institution or non-financial foreign entity, unless (i) in the case of a foreign financial institution, such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) and to withhold on certain payments and (ii) in the case of a non-financial foreign entity, such entity provides the withholding agent with a certification identifying the direct and indirect U.S. owners of the entity. Under certain circumstances, a non-U.S. shareholder might be eligible for refunds or credits of such taxes. Prospective investors should consult with their own tax advisor regarding the possible implications of this recently enacted legislation on the ownership and disposition of our common stock.
MATERIAL PRC INCOME TAX CONSIDERATIONS
The following discussion summarizes the material PRC income tax considerations relating to the ownership of our common stock following the consummation of this offering.
Resident Enterprise Treatment
Under Enterprise Income Tax Law of the PRC (“EIT Law”) that became effective on January 1, 2008, enterprises are classified as “resident enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its implementing rules, enterprisesEnterprises established outside of China whose “de facto management bodies” are located in China are considered “residentPRC “tax resident enterprises” and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. AccordingIn addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation rules to the implementing rules of the EITEnterprise Income Tax Law, a “de facto management body” refers tois defined as a managing body that in practice exerciseshas material and overall management and control over the productionmanufacturing and business operations, personnel accounting and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
The EIT Law and the interpretation of many of its provisions, including the definition of “resident enterprise,” are unclear. It is also uncertain how the PRC tax authorities would interpret and implement the EIT Law and its implementing rules. Our management is substantially based in the PRC and expected to be based in the PRC in the future, although two of our executive officers and one of our directors are not PRC nationals. It remains uncertain whether the PRC tax authorities would determine that we are a “resident enterprise” or a “non-resident enterprise.”
Given the short history of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a non-PRC company such as us. Our management is substantially based in the PRC and expected to be based in the PRC in the future, although two of our executive officers and one of our directors are not PRC nationals. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable tax consequences could follow. First, we could be subject to the enterprise income tax at a rate of 25% on our global taxable income.income, as well as PRC enterprise tax reporting obligations. Second, although under the New EIT Law providesand its implementing rules dividends paid to us from our PRC subsidiary would qualify as “tax-exempted income”, we cannot assure you that dividend income between “qualifiedsuch dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises”enterprises for PRC EIT purposes. Finally, it is exempt from income tax. Itpossible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise shareholders or a potential withholding tax of 20% for non-PRC individual shareholders is unclear whether theimposed on dividends we receive would constitute dividend income between “qualified resident enterprises”pay to them and would therefore qualify for tax exemption.with respect to gains derived by our non-PRC shareholders from transferring our shares. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. We are actively monitoring the “resident enterprise” classification rules and are evaluating appropriate organization changes to avoid this treatment, to the extent possible.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. However, since it is not anticipated that we would receive dividends or generate other income in the near future, we are not expected to have any income that would be subject to the 25% enterprise income tax on global income in the near future. We will consult with the PRC tax authorities and make any necessary tax payment if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a resident enterprise under the EIT Law, and if we were to have income in the future.
Dividends From PRC Operating Companies
If we are not treated as resident enterprises under the EIT Law, then dividends that we receive may be subject to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will normally be applicable to investors that are “non-resident enterprises,” or non-resident investors, which (i) have establishments or premises of business inside the PRC, and (ii) the income in connection with their establishment or premises of business is sourced from the PRC or the income is earned outside the PRC but has actual connection with their establishments or places of business inside the PRC, and (B) an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
As described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, on a case-by-case basis. We are a holding company and substantially all of our income may be derived from dividends. Thus, if we are considered as a “non-resident enterprise” under the EIT Law and the dividends paid to us are considered income sourced within the PRC, such dividends received may be subject to the income tax described in the foregoing paragraph.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. As indicated above, however, we are not expected to be paid any dividends in the near future. We will consult with the PRC tax authorities and make any necessary tax withholding if, in the future, we were to be paid any dividends and we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a non-resident enterprise under the EIT Law.
Dividends that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of Our Common Stock
If dividends payable to (or gains recognized by) our non-resident investors are treated as income derived from sources within the PRC, then the dividends that non-resident investors receive from us and any such gain on the sale or transfer of our common stock, may be subject to taxes under PRC tax laws.
Under the EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of common stock by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.
The dividends paid by us to non-resident investors with respect to our common stock, or gain non-resident investors may realize from sale or the transfer of our common stock, may be treated as PRC-sourced income and, as a result, may be subject to PRC tax at a rate of 10%. In such event, we also may be required to withhold a 10% PRC tax on any dividends paid to non-resident investors. In addition, non-resident investors in our common stock may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock after the consummation of the offering if such non-resident investors and the gain satisfy the requirements under the EIT Law and its implementing rules. However, under the EIT Law and its implementing rules, we would not have an obligation to withhold income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
If we were to pay any dividends in the future, we would again consult with the PRC tax authorities and if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we must withhold PRC tax on any dividends payable by us under the EIT Law, we will make any necessary tax withholding on dividends payable to our non-resident investors. If non-resident investors as described under the EIT Law (including U.S. investors) realized any gain from the sale or transfer of our common stock and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying 10% PRC income tax on the gain from the sale or transfer of our common stock. As indicated above, under the EIT Law and its implementing rules, we would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
PenaltiesLock-Up Agreements
In June 2010, we entered into lock-up agreements with officers and directors and beneficial owners of more than 5% of our common stock. See “Underwriting – Lock-up Agreements.”
In addition, in June 2010, we entered into lock-up agreements with the selling stockholders listed in the resale prospectus dated as of the date hereof pursuant to which the selling stockholders have agreed not to sell any of the shares of common stock for Failure to Pay Applicable PRC Income Taxa period of 90 days following the date of the public offering.
Non-resident investors in us may be responsible for paying PRC tax atRule 144
Under Rule 144, a rate of 10% on any gain realized from the sale or transferperson who has beneficially owned restricted shares of our common stock afteror warrants for at least six months is entitled to sell his, her or its securities provided that (1) such person is not deemed to have been one of our affiliates at the consummationtime of, this offering if such non-resident investors andor at any time during the gain satisfy the requirements under the EIT Law and its implementing rules, as described above.
Accordingthree months preceding, a sale, (2) we are subject to the EIT Law and its implementing rules, the PRC Tax Administration Law (the “Tax Administration Law”) and its implementing rules, the Provisional MeasuresExchange Act reporting requirements for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (the “Administration Measures”) and other applicable PRC laws or regulations (collectively the “Tax Related Laws”), where any gain derived by non-resident investors fromat least 90 days before the sale or transferand (3) if the sale occurs prior to satisfaction of a one-year holding period, we provide current information at the time of sale.
Persons who have beneficially owned restricted shares of our common stock isor warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any income tax three-month period only a number of securities that does not exceed the greater of:
| · | 1% of the total number of securities of the same class then outstanding, which will equal approximately 214,038 shares immediately after this offering; or |
| · | the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
provided, in each case, that we are subject to the PRC,Exchange Act periodic reporting requirements for at least three months before the sale.
Sales by affiliates must also comply with the manner of sale, current public information and such non-resident investors fail to file any tax return or pay tax in this regardnotice provisions of Rule 144. The selling stockholders will not be governed by the foregoing restrictions when selling their shares pursuant to the Tax Related Laws, theyresale prospectus.
As we are a former “shell” company, persons who wish to sell our securities have also to satisfy the additional requirements of Rule 144(i) which provides that those securities may be sold, subject to certain fines, penalties or punishments, including without limitation: (1) if a non-resident investor failsthe other requirements of Rule 144, after one year has elapsed from the date that the issuer filed "Form 10 information" with the Commission (in our case February 12, 2011) provided that we have filed all reports and other materials required to file a tax return and present the relevant information in connection with tax payments, the competent tax authorities shall order it to do so within the prescribed time limit and may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax return or fails to pay all or partbe filed by section 13 of the amount of tax payable,Exchange Act during the non-resident investor shall be required to pay the unpaid tax amount payable, a surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue amount, beginning from the day the deferral begins), and a fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor fails to file a tax return or pay the tax within the prescribed time limit according to the order by the PRC tax authorities, the PRC tax authorities may collect and check information about the income items of the non-resident investor in the PRC and other payers (the “Other Payers”) who will pay amounts to such non-resident investor, and send a “Notice of Tax Issues” to the Other Payers to collect and recover the tax payable and impose overdue fines on such non-resident investor from the amounts otherwise payable to such non-resident investor by the Other Payers; (4) if a non-resident investor fails to pay the tax payable within the prescribed time limit as ordered by the PRC tax authorities, a fine may be imposed on the non-resident investor ranging from 50% to 500% of the unpaid tax payable; and the PRC tax authorities may, upon approval by the director of the tax bureau (or sub-bureau) of, or higher than, the county level, take the following compulsory measures: (i) notify in writing the non-resident investor’s bank or other financial institution to withhold from the account thereof for payment of the amount of tax payable, and (ii) detain, seal off, or sell by auction or on the market the non-resident investor’s commodities, goods or other property in a value equivalent to the amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount of tax payable or surcharge for overdue tax payment, and can not provide a guarantee to the tax authorities, the tax authorities may notify the frontier authorities to prevent the non-resident investor or their legal representative from leaving the PRC.preceding 12 months.
UNDERWRITINGRegistration Rights
SubjectOther than the registration rights set forth in (i) the registration rights agreement entered into on February 12, 2010 with the investors in the private placement under which we are obligated, subject to the termsoperation of Rule 415, to register for resale all of shares issued on conversion of the notes, and conditions(ii) the registration rights side agreement entered into on February 12, 2010 with certain stockholders who had acquired their shares prior to the reverse merger, under which we are obligated, subject to the operation of Rule 415, to register for resale 52,001 shares (however, in the underwriting agreement, dated event of a Rule 415 comment, these shares would be cut back first), 2010,(iii) the agreements entered into with Primary Capital and United Best, under which we are obligated, subject to the operation of Rule 415, to register for resale the 653,510 shares received by Primary Capital and between us, Brean Murray, Carret & Co.United Best under such agreements, (iv) oral agreements entered into with Li Jun and Ming Liu, we have no other obligation to register under the Securities Act any of our shares of common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on January 31, 2011, certain information with respect to the beneficial ownership of our common stock, by (i) each stockholder whom we know to own beneficially more than 5% of our common stock, (ii) each director, (iii) our chief executive officer and each other executive officer whose cash compensation for the most recent fiscal year exceeded $100,000 and (iv) all executive officers and directors as a group. The table reflects the ownership of our equity securities by the foregoing parties after the 1-for-5 reverse stock split which occurred on March 24, 2010.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Except as indicated below, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to our common stock shown as beneficially owned by them. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement, or (4) the automatic termination of a trust, discretionary account or similar arrangement.
Unless otherwise indicated, the address for each listed stockholder is: c/o China SLP Filtration Technology, Inc., LLC, who is acting asShishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC.
Name and Address of Shareholder | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2) | | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2)(3) | |
| | | Before Offering | | | Before Offering | | | Post Offering | | | Post Offering | |
| Owners of More Than 5% Of Class | | | | | | | | | | | | |
| Bestyield Group Limited (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Proudlead Limited (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Li Jun (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Newise Holdings Limited (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Pilot Link International Limited (7) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| High Swift Limited (8) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| China Investment Management, Inc (9). | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Primary Capital, LLC (10) | | | 1,326,008 | | | | 8.6 | % | | | 1,326,008 | | | | 6 | % |
| | | | | | | | | | | | | | | | | |
| Directors and Executive Officers | | | | | | | | | | | | | | | | |
| Li Jie (Chief Executive Officer and a Director) (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Law Wawai (President of Sales and a Director) (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Eric Gan (Chief Financial Officer) (13) | | | - | | | | - | % | | | - | | | | - | % |
| Li Jun (Director) (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Richard M. Cohen (Director) (12) | | | 30,000 | | | | * | | | | 30,000 | | | | * | % |
| Chris Bickel (Director) (11) | | | - | | | | - | | | | - | | | | - | % |
| Su Lie (Director) | | | - | | | | - | | | | - | | | | - | % |
| | | | | | | | | | | | | | | | | |
| Directors and executive officers as a group (7 persons) | | | 14,129,081 | | | | | | | | 14,129,081 | | | | | % |
(1) As of the book-running management and representativeclose of underwritersbusiness on January 31, 2011, there were 15,265,714 shares of our common stock outstanding. Following the closing of this offering each underwriter has agreed to purchase from usthere will be 21,814,562 shares of common stock issued and we have severally agreed to sell,outstanding.
(2) In determining beneficial ownership of the common stock, the number of shares shown includes shares which the beneficial owner may acquire within 60 days of January 31, 2011 upon exercise of convertible securities, warrants or options. In accordance with Rule 13d-3 in determining the percentage of common stock owned by a person on a firm commitment basis,January 31, 2011 (a) the numerator is the number of shares of the class beneficially owned by such person, including shares which the beneficial owner may acquire within 60 days upon conversion or exercise of the warrants and other convertible securities, and (b) the denominator is the sum of (i) the total shares of that class outstanding on January 31, 2011, and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of other securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(3) Following completion of the offering there will a total of 21,814,562 shares of common stock set forth below,outstanding, including (i) 15,265,714 shares of common stock currently outstanding, (ii) 1,923,809 shares issuable on conversion of the notes, (iii) 4,166,667 shares to be issued in the offering, and (iv) and 193,186 shares to be issued to United Best and 265,186 shares to be issued to Primary Capital on closing of the offering.
(4) Bestyield Group is a BVI company controlled by Mr. Li Jie, our chief executive officer. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management, Inc., Song Huaying, Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a “group” and the beneficial ownership by the group of 14,099,081 shares of common stock. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Bestyield Group. Mr. Li has shared voting power with respect to the shares held by the group. Bestyield has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(5) Proudlead is a BVI company controlled by Law Wawai, our president of sales and a director. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Proudlead. Mr. Law has shared voting power with respect to the shares held by the group. Proudlead has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(6) Newise Holdings Limited is a BVI company controlled by Li Jun, one of our directors. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,547,756 shares held by Newise Holdings Limited as well as 362,755 shares beneficially owned by United Best. Mr. Li has shared voting and dispositive power with respect to the shares held by the group. On closing of this offering United Best is also entitled to receive an additional 193,186 shares of common stock and a warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(7) Pilot Link International is a BVI company controlled by Li Shiyi and Wei Yang, PRC residents. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,668,673 shares held directly by Pilot Link. Li Shiyi and Wei Yang have shared voting and dispositive power with respect to the shares held by the group.
(8) High Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,088,265 shares held directly by High Swift. Han Hung Yuk has shared voting and dispositive power with respect to the shares held by the group.
(9) China Investment Management, Inc. is a BVI company controlled by Song Huaying, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 725,510 shares held directly by China Investment Management, Inc. Song Huaying has shared voting and dispositive power with respect to the shares held by group.
(10) Primary Capital received, at the closing of the share exchange agreement, 290,755 shares of common stock and in February 2010 Primary Capital purchased 673,877 shares from Newise Holdings Limited. John Leo has sole voting and dispositive power with respect to the shares held by Primary Capital. Primary Capital’s address is 80 Wall Street, 5th Floor, New York, New York 10005. On closing of this offering, Primary Capital is also entitled to receive an additional 265,186 shares of common stock and a warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(11) Chris Bickel is President of Primary Capital. Mr. Bickel does not have voting or dispositive power over the shares held by Primary Capital. Mr. Bickel’s business address is 80 Wall Street, 5th Floor, New York, New York 10005.
(12) Richard M. Cohen is our director, and his business address is 3 Park Avenue, 16th Floor, New York, New York 10016. In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen on September 3, 2010 was granted 30,000 shares of restricted stock, two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant, in the event Mr. Cohen continues to be a director on those dates.
(13) On September 3, 2010, Mr. Gan was granted an option to purchase 400,000 shares of common stock at an exercise price equal to the public offering price, lessprice. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the underwriting discountevent that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. As the option is not currently exercisable, none of the shares underlying the option are included in the table.
MANAGEMENT
Executive Officers and Directors
The following table sets forth information concerning our current directors and executive officers:
Directors and Executive Officers | | Position/Title | | Age |
| | | | |
| Li Jie | | Chief Executive Officer and a Director | | 55 |
| | | | |
| Law Wawai | | President of Sales and a Director | | 45 |
| | | | |
| Eric Gan | | Chief Financial Officer | | 48 |
| | | | |
| Chris Bickel | | Director | | 47 |
| | | | |
| Li Jun | | Director | | 47 |
| | | | |
| Richard M. Cohen | | Director | | 59 |
| | | | |
| Su Lei | | Director | | 46 |
Except for Messrs. Chris Bickel, Richard M. Cohen and Eric Gan, all of our officers and directors are residents of the PRC. In addition, substantially all of our assets are located in the PRC. As a result, it may be difficult or impossible for you to effect service of process within the United States on our company or any of them or to enforce court judgments obtained against them in the United States courts. We have been advised by our PRC counsel that there is uncertainty as to whether the courts of the PRC would (1) recognize or enforce judgments of U.S. courts obtained against our officers or directors or the experts named in this prospectus based on the civil liability provisions of the securities laws of the U.S. or any state in the U.S., or (2) entertain original actions brought in the PRC against our officers or directors or the experts named in this prospectus based on the securities laws of the U.S. or any state in the U.S.
The following is a summary of the biographical information of our directors and officers:
Li Jie was elected director and appointed as our Chief Executive Officer on February 12, 2010. Mr. Li has served as Chief Executive Officer and Managing Director of Foshan SLP Special Materials Co., Ltd. since its inception in 2000. He also serves as Director General of the China Industrial Textile Committee. From 1980 to 2000, he served as R&D director of Dalian Synthetic Fiber Research Institute. We believe that Mr. Li’s knowledge of all aspects of our business and his in-depth understanding of our operations, combined with his years of experience in the nonwovens industry, position him well to serve as our Chairman and Chief Executive Officer. Mr. Li received a bachelor’s degree in Engineering for Chemical Fiber Technique at Dalian Light Industrial School. He received a Masters degree from Chinese Academy of Social Sciences where he studied economic management. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Law Wawai was elected as a director and appointed as President of Sales on February 12, 2010. From 1997 to February 2010, Mr. Law served as director and general manager of Nanhai Wanzhi Trading Co. From 1987 to 1997, he was sales manger Nanhai Polyester Factor. We believe that Mr. Law’s knowledge of all aspects of the nonwovens business and his in-depth understanding of its operations position him well to serve as a director. Mr. Law received his bachelor’s degree in business management from Nanhai Television University. Mr. Law is not, and has not been within the last five years, a director of any other publicly traded company.
Eric Gan was appointed as our Chief Financial Officer in August 2010. From July 1999 to August 2010 Mr. Gan was a Senior Financial Consultant at The Goetzman Group, a company which provides staffing solutions in all areas of finance and accounting. His assignments while at The Goetzman Group included (i) acting as interim chief financial officer for Rino International Inc. Inc. from January 2007 to September 2007; (ii) acting as interim general accounting manager for Physicals Formula from March 2008 to September 2008; and (iii) overseeing the Sarbanes- Oxley compliance project for Smart & Final from January 2005 to May 2005. Mr. Gan received his Master of Arts from Fudan University, Shanghai in June 1989 and received his Masters in Accounting from the University of Southern California in December 1995.
Chris Bickel was elected as a director on February 12, 2010. Since October 2009, Mr. Bickel has served as President of Primary Capital and is responsible for business development in China. Primary Capital acted as placement agent for the Company’s February 2010 private placement. From 2005 to October 2009, Mr. Bickel was an investment banker at Rosewood Capital Group, LLC (previously an affiliate of Primary Capital and now a branch office ) during which time his investment banking team provided a full range of investment banking, due diligence and business advisory services to private China based companies interested in accessing the U.S. capital markets and being listed in the U.S., as well as advisory services to US based investment banking firms interested in identifying investment banking clients in China. Mr. Bickel was instrumental in originating and financing of a number of PRC companies that are listed on the NASDAQ or whose shares are quoted on the OTCBB. From 2001 through 2004, Mr. Bickel served as Chairman and CEO of Sino UJE Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products. Mr. Bickel was also employed by Spectris Inc. from 1983 to 1996. As an employee of Spectris, Mr. Bickel was involved with and managed the nonwoven sector of its business. Spectris was engaged in providing engineered products for use in nonwovens production. We believe that Mr. Bickel’s extensive past experience in providing business advisory services to private China based companies interested in accessing the U.S. capital markets, including Rino International Corp. and Sino Gas International Holdings, Inc., and helping those companies become successfully listed as well as his over ten years’ experience in the nonwoven market and knowledge with manufacturing practice and the overall market make him a suitable candidate to serve on our board of directors.
Li Jun was elected as a director in February 2010. Mr. Li is the owner and manager of Shanghai Primary Capital Management Co., Ltd., a business advisory firm incorporated in Shanghai China, which he started in 2010. (Shanghai Primary Capital Management Co., Ltd. is not affiliated with Primary Capital.) He provides advisory services to China business owners seeking capital and advisory services related to listing their company on United States stock exchanges. He has over twenty years of experience working in China in various fields and in various capacities. Mr. Li founded Shanghai Rosewood Investment Consulting Co., Ltd in 2005 and participated in four listing and financing transactions in which China based companies received funding from U.S. based investors and listed on in the U.S. From 2001 through 2008, Mr. Li has been the Managing Director of SINO UJE, Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products throughout Asia. From 1994 through 2000, Mr. Li was employed by Nanchang Minerals Machinery Imp and Exp Co., Ltd initially as a salesman, followed by promotions to department director and vice president. From 1987 through 1994, Mr. Li served as an instructor at the University of Military Science and Technology and he retired as a Major from the Chinese People’s Liberation Army. Although he has not been previously engaged in the nonwovens business, we believe that Mr. Li’s business acumen and his extensive past experience in providing business advisory services to private China based companies interested in accessing the U.S. capital markets and helping those companies become successfully listed make him an eminently suitable candidate to serve on our board of directors. Mr. Li received his Bachelor’s and his Master’s degree of Science from Shanghai Jiaotong University. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Richard M. Cohen was elected as a director in June, 2010. Since 1996, Mr. Cohen has been the President of Richard M. Cohen Consultants, a financial services consulting company that accepts engagements from public and private companies to assist with their corporate governance and corporate finance needs. From 1984 through 1992, Mr. Cohen was an investment banker at both Henry Ansbacher and Furman Selz, where he specialized in mergers & acquisitions, public equity offerings, and restructurings. From 1980 through 1983, Mr. Cohen was a Vice President of corporate development at Macmillan, Inc. Mr. Cohen is a Certified Public Accountant (New York State) and began his career at Arthur Andersen. He received a B.S. from The University of Pennsylvania (Wharton) in 1973 and an M.B.A. from Stanford University in 1975. Although he has not been previously engaged in the nonwovens business we believe that Mr. Cohen’s business acumen and his experience in providing business advisory services to private companies to assist with their corporate governance and corporate finance needs coupled with his experience serving as a director of a number of publicly traded companies make him an eminently suitable candidate to serve on our board of directors. Mr. Cohen currently serves as a director of Helix BioMedix (OTCBB:HXBM), Rodman and Renshaw (NASDQ:RODM), CorMedix (OTCBB:CRMD), Dune Energy, Inc. (AMEX: DNE), for which he served as Chief Financial Officer from November 2003 to April 2005.
Su Lei was elected as a director in August 2010. Mr. Su currently serves as the Associate Director of Information of the State Environmental Protection Agency in China, a position he has held since 2001. Mr. Su has successively acted as Principal Staff Member, Associated Director and Director of China Environmental Protection Industrial Association since September 2001. He also currently serves as the Director of the Working Committee of China Green Star, a position he has held since 2002. China Green Star is a non-profit organization under China's Environmental Protection Association which focuses on promoting the interests of the environmental protection industry. We believe that Mr. Su’s position and experience with the State Environmental Protection Agency and his understanding of public policy matters make him well suited to serve on our board of directors. Mr. Su received a bachelor’s degree in the Electronic Engineering from China Air Force Missile Institute, and he is now a senior engineer in Environment Management.
All of our directors serve on the board until our next annual meeting of the stockholders, and until their successors have been elected and qualified or until their earlier resignation or removal.
Our executive officers serve at the discretion of the board of directors, subject to the terms of any employment agreement they have with the Company. Mr. Bickel is serving on the Board as a designee of Primary Capital. Under the terms of its financial services agreement with the company Primary Capital is entitled to designate one board member and one observer until February 11, 2012.
Family Relationships
There are no family relationships among our directors and executive officers, except the Eric Gan, our chief financial officer, is the brother in law of Li Jun, one of our directors. There is no arrangement or understanding between or among our executive officers and directors pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| · | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| · | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| · | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
| · | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| · | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| · | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Board Independence
In order to be listed on NASDAQ, a company is required to meet certain corporate governance requirements, including, with certain exceptions, the requirement to have a board of directors the majority of whose members are “independent” within the meaning of NASDAQ rules.
As a “controlled company” we are exempt from the requirements of the NASDAQ Marketplace Rules (i) to have a majority of independent board members; (ii) for independent director oversight of executive officer compensation and (iii) for independent director oversight of director nomination. As a controlled company, we remain subject to the NASDAQ audit committee requirements and the requirement that independent directors regularly meet in executive session.
Under NASDAQ Marketplace Rules a company is considered a "controlled company" if greater than 50% of its voting power is held by an individual, a group or another company. In order for a group to exist for purposes of this rule, the stockholders forming the group are required to publicly file a notice that they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management Inc., Song Huaying, and Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a group with respect to their holdings in the Company.
The Company has disclosed its status as a “controlled company” in its annual report on Form 10-K for the fiscal year ended September 30, 2010 filed on January 3, 2011 and the basis for determining that it is a controlled company.
The Board has determined that three of its six current members, namely Messrs. Chris Bickel, Su Lie and Richard M. Cohen, are “independent” within the meaning of NASDAQ listing standards.
Director Contracts
In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement, effective on closing of the offering, Mr. Cohen will be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). In addition, pursuant to the Company’s equity incentive plan, Mr. Cohen was awarded 30,000 shares of restricted two thirds of which are subject to restrictions on transfer and are subject to forfeiture with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant and as to one- third on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates. In addition, the Company will reimburse the director for pre-approved reasonable business-related expenses incurred in good faith in the performance of the director’s duties for the Company.
Committees
The Board currently has three standing committees: Audit Committee, Compensation Committee and Nominating Committee. Each member of these committees is “independent” as defined by NASDAQ and SEC rules and each of these committees has a written charter approved by the Board. Committee members are appointed by the Board based on the recommendation of the Nominating Committee, except that members of the Nominating Committee are appointed by the independent members of the Board. The current members of the committees are as follows:
| Director | | Audit | | Compensation | | Nominating |
| Jie Li | | | | | | |
| Law Wawai | | | | | | |
| Li Jun | | | | | | |
| Chris Bickel | | ü | | ü | | ü |
| Richard M. Cohen | | ü | | ü | | ü |
| Su Lei | | ü | | | | |
Audit Committee; Audit Committee Financial Expert
The Audit Committee, established in September 2010, currently consists of three members, Su Lei, Chris Bickel, and Richard M. Cohen, its Chairman. The Board has determined that each of them is independent within the meaning of the NASDAQ listing standards and applicable SEC regulations, and that each member has the financial literacy required by the NASDAQ listing standards.
The Board also has determined that Mr. Cohen is qualified as an "audit committee financial expert" within the meaning of applicable SEC regulations and has the accounting and related financial sophistication required by NASDAQ listing standards.
The function of the Audit Committee, as more fully set forth in its charter, is to (i) oversee our financial statements, our financial reporting process and our system of internal control over financial reporting; (ii) recommend the selection of our registered public accounting firm; (iii) review the extent of non-audit services to be performed by the auditors; and (iv) review the disclosures made in our periodic financial reports.
Compensation Committee
The Compensation Committee, established in September 2010, consists of two members Chris Bickel and Richard M. Cohen. The Board has determined that each of them is independent within the meaning of the NASDAQ listing standards. The functions of the Compensation Committee, as more fully set forth in its charter, are to oversee our compensation policies generally, evaluate senior executive performance, oversee and determine compensation for senior executives and review and recommend to the Board actions regarding director compensation.
Nominating Committee
The Nominating Committee, established in September 2010, currently consists of two members, Chris Bickel and Richard M. Cohen. The Board has determined that each of Messrs. Bickel and Cohen is independent within the meaning of the NASDAQ listing standards.
As more fully set forth in its charter, the primary responsibilities of the Nominating Committee are to: (i) develop and recommend to the Board criteria for selecting qualified director candidates; (ii) identify, review and evaluate individuals qualified to become Board members; (iii) consider committee member qualifications, appointment and removal; and (iv) assist the Board in its annual reviews of the performance of the Board, each committee and management. The Committee has the exclusive authority to make recommendations to the Board for approval for the election of new members to the Board.
To fulfill its responsibilities and duties the Nominating Committee is required to, among other things (i) evaluate the current composition of the Board of Directors and its committees, and determine future requirements for director candidates; (ii) determine the Board’s criteria for selecting new directors, including desired board skills and attributes, and actively seek prospective individuals qualified to become board members; (iii) adopt and maintain a policy concerning the director nomination process; (iv) adopt a policy concerning the consideration of director candidates recommended by stockholders and consider stockholder nominees for election to the Board; (v) evaluate and propose nominations for election to the Board; and (vi) review and make recommendations to the Board concerning membership of Board committees.
The Committee does not assign specific weights to particular criteria. Rather, the Nominating Committee believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.
The Nominating Committee will consider director nominees recommended for consideration by the stockholders. To have a person considered by the Nominating Committee for recommendation to the Board as a director nominee a stockholder should write to the Corporate Secretary, specifying the nominee's name and qualifications for Board membership and providing confirmation of the nominee's consent to serve as a director. Following verification that the person submitting the recommendation is a stockholder of the Company, all properly submitted recommendations will be brought to the attention of the Nominating Committee at a regularly scheduled Committee meeting.
If a stockholder properly recommends a director nominee, the Nominating Committee will give due consideration to that nominee and will use the same criteria used for evaluating other director nominees, in addition to considering the information relating to the director nominee provided by the stockholder.
Stockholders also may nominate directors for election at our annual meeting of stockholders by following the provisions set forth in our bylaws. The deadline for stockholder nominations is set forth in our by laws. Stockholders and other parties interested in communicating directly with the Board of Directors may do so by writing to: China SLP Filtration Technology, Inc., Attention: Board of Directors, Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC. Pursuant to a process approved by the Board, the Corporate Secretary reviews all correspondence received by us and addressed to members of the Board and regularly forwards to the Board a summary of such correspondence and copies of all correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the Board or Board committees or otherwise requires the Board's attention. Directors may at any time review a log of all correspondence received by us that is addressed to members of the Board and request copies of any such correspondence.
Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the Audit Committee to address such matters.
Compensation Committee Interlocks and Insider Participation
All current members of the Compensation Committee are independent directors. None of the past or present members of our Compensation Committee are present or past employees or officers of ours or any of our subsidiaries. No member of the Compensation Committee has had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended. None of our executive officers serves on the cover pageboard of directors or compensation committee of a company that has an executive officer that serves on our Board or Compensation Committee.
Code of Ethics
We strive to foster a culture of honesty, integrity and accountability.
We have a code of ethics applicable to all employees, including all officers, and including our independent directors, who are not employees of the company, with regard to their company -related activities. The code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. In addition, the code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; reporting code violations; and maintaining accountability for adherence to the code.
Waivers of the Code for executive officers and directors may be granted only by the Board. Amendments to the Code must be approved by the Board. We intend to provide disclosure of any such amendments or waivers on our website (www.silepu.com) within four business days of any such amendment or waiver.
EXECUTIVE COMPENSATION
The following is a summary of the compensation we paid to each of our “named executive officers” (as such term is defined in Item 402 of Regulation S-K) for each of the last two fiscal years ended September 30, 2010 and 2009. No executive officer received compensation in excess of $100,000 for any of those two years.
Name and Principal Position | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| Li Jie | | 2010 | | 44,117 | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | 44,117 | |
| (CEO(1) | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Seth Winterton | | 2010 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| (former CEO)(2) | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Eric Gan (3) | | 2010 | | 18,000 | | | -0- | | -0- | | | 90,310 | | -0- | | | -0- | | -0- | | | 108,310 | |
| | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| (1) | Jie Li was appointed Chief Executive Officer in February 2010. |
| (2) | Seth Winterton served as Chief Executive Officer of Perpetual Technologies from December 29, 2008 until February 12, 2010. |
| (3) | Eric Gan was appointed Chief Financial Officer on August 4, 2010. Mr. Gan is paid an annual salary of $120,000. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. This amount of the option award set forth in the table represents the grant date fair value computed in accordance with Accounting Standards Codification, or ASC, Topic 718, and does not reflect whether our named executive officer has actually realized a financial benefit from the award. For information on the assumptions used to calculate the value of the awards, we refer you to Note 14 “Equity and stock based compensation” to our consolidated financial statements for the fiscal year ended September 30, 2010 included elsewhere in this prospectus. In accordance with SEC rules, the amount shown excludes the impact of estimated forfeitures related to service-based vesting conditions. |
The following is a summary of the compensation paid by our operating subsidiary Foshan to Li Jie, its President and Chief Executive Officer, for the last two fiscal years ended September 30, 2010 and 2009, respectively. No executive officer of Foshan received compensation in excess of $100,000 for any of these two years.
Name and Principal Position | | Fiscal Year | | Salary ($)(1) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
| Li Jie | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (President and Chief | | 2010 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
| Executive Officer ) | | 2009 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
(1) The relevant exchange rates for fiscal years ended September 2010 and 2009 are $1 to RMB 6.8 and RMB 6.8, respectively.
| | | OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |
| | | OPTION AWARDS | | | | | | | | | | | | | STOCK AWARDS | |
Name (a) | | Number of Securities Underlying Unexercised and Earned options (#) (b) | | | Number of Securities Underlying Unexercised Unearned Options (#) (c) | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) | | | Option Exercise Price ($) (e) | | | Option Expiration Date ($) (f) | | | Number of Shares or Units of Stock that have not Vested (#) (g) | | | Market Value of Shares of Units of Stock that Have not Vested ($) (h) | | | Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i) | | | Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) (j) | |
| Li Jie | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Seth Winterton | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Eric Gan | | | -0- | | | | -0- | | | | 400,000 | | | | (1 | ) | | | (2 | ) | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Underwriter | (1) | NumberOn September 3, 2010, Eric Gan was granted an option to purchase up to 400,000 shares of
Common Stock
| |
Brean Murray, Carret & Co., LLC | | | |
| | | |
| | | |
Total | | | common stock at an exercise price equal to the initial public offering price. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares vests immediately on the termination date. |
| (2) | The option will expire on September 3, 2015. |
Employment Agreement
On November 20, 2008, Mr. Li entered into an employment agreement with Foshan to serve as our President and Chief Executive Officer. Under the agreement, Mr. Li is to be paid a salary of $15,000 per month beginning on the closing date of the public offering. The underwriters haveagreement can be terminated by either party by giving 30 days notice.
On January 1, 2010, Mr. Law entered into an employment agreement with Foshan to serve as our President of Sales. Under the agreement, Mr. Law is to be paid a salary of $5,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 day notice.
Effective August 5, 2010, Mr. Gan entered into an employment agreement with the Company to serve as Chief Financial Officer. The term is for three years unless sooner terminated as provided in the agreement. Under the agreement Mr. Gan has agreed to perform such duties as shall be consistent with the position of Chief Financial Officer subject to the supervision and direction of the Board. Under the agreement Mr. Gan will receive an annual salary of $120,000 payable in 12 equal payment payable on the 15th day of each month beginning on August 15, 2010). However, prior to the completion of the offering contemplated by this prospectus, Mr. Gan will receive a salary of $6,000 per month (receiving $10,000 for the month during which the Company completes its initial public offering and thereafter). In addition to his annual salary, Mr. Gan will be reimbursed for all reasonable expenses including travel expense between United States and China and will be provided with housing expense during the term of his employment. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase allup to 400,000 shares of common stock offered by this prospectus (other than those coveredat an exercise price equal to the initial public offering price. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the over-allotment option described below), if any are purchased. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the common stock are subject to the passing upon certain legal matters by counsel and certain conditions such as confirmation of the accuracy of representations and warranties by us about our financial condition and operations and other matters.
Commissions and Discounts
The following table shows the underwriting fees toCompany without cause, 160,000 shares shall be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
| | No
Exercise
| | | Full
Exercise
| |
Per share | | $ | | | | $ | | |
Total | | $ | | | | $ | | |
United Best, our foreign advisor, will receive a fee of $ ($ if the over-allotment option is exercised in full), which is in addition to the underwriting discounts and commissions in the above table. We estimate that the total fees and expenses payable by us, excluding underwriting discounts and commissions, and the fee payable to United Best will be approximately million.
Pricing of Securities
The underwriters have advised us that they propose to offer the shares to the public at $ per share. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $ per share. The underwriters may allow, and the dealers may reallow, a concession of not more than $ per share on sales to certain other brokers and dealers. After this offering, these figures may be changed by the underwriters.
Over-allotment Option
We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of additional shares of common stock from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares of common stock covered by the option at the public offering price that appearsvested immediately on the cover page of this prospectus, less the same underwriting discount as set forth above. The underwriters have severally agreed that to the extent the over-allotment option is exercised they will each purchase a number of additional shares of common stock proportionate to the underwriter's initial amount reflected in the table above.termination date.
2010 Stock Incentive Plan
On September 3, 2010, we adopted the 2010 Plan. All officers and key employees, directors of, and consultants to the Company and its subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its subsidiaries and affiliates are eligible for participation in the 2010 Plan. Two Million One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) (or such number as shall be equal to 10% of the outstanding shares on a fully diluted basis after the offering and the conversion of the notes) shares of common stock have been authorized and reserved for the 2010 Plan and any shares that may become available for issuance under awards under the 2010 Plan as a result of expiration or forfeiture. Under the 2010 Plan, the company may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards. The 2010 Plan is administered by our Compensation Committee.
The purpose of the 2010 Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company to offer eligible participants stock-based incentives in the Company to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders.
The Compensation Committee does not currently have a set formula for determining who will receive awards and what the amounts of the awards will be and when such awards will be made. The Compensation Committee can make an award in its discretion at any time as consistent with the terms of the 2010 Plan. Long-term equity incentives are intended to reward and will be awarded to eligible participants who help achieve our overall corporate goals and meet their individual employee objectives.
Outstanding Equity Awards
On September 3, 2010, as required by the terms of his agreement with the Company entered into in May 2010, the Board awarded Richard Cohen 30,000 shares of restricted stock two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates.
On September 3, 2010, under the 2010 Plan and in connection with his appointment as Chief Financial Officer, the Board granted Eric Gan an option to purchase 400,000 shares at an exercise price equal to the public offering price of this offering. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
Except for the foregoing there are no option exercises, options outstanding or restricted stock grants as of the date of this prospectus.
Compensation of Directors
The table below sets forth the compensation of the directors during the last completed fiscal year:
DIRECTOR COMPENSATION
Name (a) | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | Option Awards ($) (d) | | | Non-Equity Incentive Plan Compensation ($) (e) | | | Nonqualified Deferred Compensation Earnings ($) (f) | | | All Other Compensation ($) (g) | | | Total ($) (h) | |
| Law Wawai | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Chris Bickel | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Li Jun | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Richard M. Cohen (1) | | | -0- | | | | 180,000 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 180,000 | |
| Su Lei | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
(1) In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen is required to be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). Under an oral agreement Mr. Cohen has agreed with us that the payment of the monthly retainer will commence on closing of this offering. We have not made any payments of this retainer as of the date of this prospectus. In addition, pursuant to the 2010 Plan, on September 3, 2010, Mr. Cohen was granted 30,000 restricted shares, two-thirds of which are subject to restrictions on transfer and to forfeiture, with the restrictions lapsing as to one-third of the shares, on the first anniversary of the date of grant, and as to one-third, on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates. In addition, the Company will reimburse Mr. Cohen for pre-approved reasonable business-related expenses incurred in good faith in the performance of the director’s duties for the Company. The amount set forth in the table above under “Option Awards” represents the grant date fair value of the award computed in accordance with ASC Topic 718.
Except as set forth above as of the date of this prospectus, we have no formal or informal arrangements or agreements to compensate our directors for services they provide as directors. We plan to implement a compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.
None of the directors of Foshan, our PRC-based operating company, are presently being compensated for their service as directors.
Li Jun, our director, is an officer and controlling stockholder of United Best, our foreign advisor. See section entitled “Certain Relationships and Related Transactions” beginning on page 85.
Additional Narrative Disclosure
We have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified defined benefit plans, supplemental executive retirement plans, tax qualified defined contribution plans and non-qualified defined contribution plans.
There are no contracts agreements, plans or arrangements, whether written or oral, that provide for payment to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer or a change in control or the company or a change in the executive officers responsibilities following a change in control, with respect to each named executive officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, since October 1, 2008, the Company was not a party to any transaction (where the amount involved exceeded the lesser of $120,000 or 1% of the average of our assets for the last two fiscal years) in which an director, executive officer, holder of more than five percent of our common stock, or any member of the immediate family of any such person have or will have a direct or indirect material interest and no such transactions are currently proposed.
Primary Capital is a beneficial owner of more than 5% of our common stock. Mr. Bickel is also the President of Primary Capital. Chris Bickel is a director of our company serving as a designee of Primary Capital.
Primary Capital provided financial services in connection with the private placement and reverse merger which closed on February 12, 2010. The services provided and to be provided by Primary Capital include the following:
| · | assisting the Company in preparing a detailed business plan, financial model and power point presentation; |
| · | negotiating and structuring the reverse merger; |
| · | acting as placement agent for the February 12, 2010 note financing; |
| · | recommending to the Company a qualified auditor, securities attorney and investor relations firm, and assisting the Company with negotiating the terms of their respective engagements; |
| · | advising the Company on strategies to increase shareholder value; |
| · | assisting the Company and its investor relations firm in organizing, and participating with the Company in, investor road shows and investor conference calls; |
| · | recommending investor conferences in the US and Europe to be attended by the Company and a representative of Primary Capital; |
| · | identifying strategic relationships and joint venture partners; |
| · | identifying and recommending persons to serve on the Company’s Board of Directors; |
| · | identifying and rendering advice regarding potential acquisitions, including the valuation of the acquisition and financing for the acquisition; |
| · | assisting the Company in connection with its listing on a U.S. stock exchange; |
| · | reviewing and commenting on the Company’s SEC filings associated with the Company’s transactions; and |
| · | advising Company regarding its obligations as a U.S. public company. |
United Best, our foreign advisor controlled by Mr. Li Jun, one of our directors, provided financial services in connection with our reverse merger with Hong Hui completed on February 12, 2010. These services included advising the company on structuring the reverse merger, assisting the company in retaining service providers such as accountants, PRC and US attorneys to effect the reverse merger and working with those service providers to facilitate the completion of the reverse merger. Additionally, United Best will assist the Company with on-going communications and coordinating the relationships with service providers during the NASDAQ listing process.
Under the terms of a financial services agreement between Primary Capital and the company, Primary Capital was paid a commission of $202,000 at the closing of the February 2010 private financing. Primary Capital is also owed an additional $75,000 for services rendered in connection with the private placement. Primary Capital is also entitled to receive $15,000 on completion of the offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000.
At the closing of the private financing, Primary Capital received 290,755 shares of our common stock. Primary is also entitled to receive 265,186 shares of common stock on the closing of this offering.
In addition, for providing these financial services Primary Capital is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which number is equal to 5% of the 1,923,809 shares of common stock issued to the noteholders on conversion), exercisable at $2.10 (which equals the price at which the notes converted and assumes an initial public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable upon conversion of the notes and consummation of this offering. If the note conversion does not occur, Primary Capital will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable.
Li Jun is a director and is a beneficial owner of more than 5% of our common stock. Mr. Li is an officer and controlling stockholder of United Best, our foreign advisor, provided financial services in connection with the private financing.
Under the terms of a consulting agreement between United Best and the company, United Best was paid a commission of $202,000 at the closing of the financing. United Best is also owed an additional $75,000 for services rendered in connection with the financing. Additionally, under the consulting agreement, as amended, United Best is entitled to be paid fee on completion of this offering a success of $750,000 (which represents 3% of the $25,000,000 in gross proceeds received by us in connection with the underwritten offering, assuming an initial public offering price of $6.00 per share).
At the closing of the private financing, United Best received 362,755 shares of our common stock for their services. United Best is also entitled to receive an additional 193,186 shares on closing of this offering.
In addition, as partial consideration for providing these financial services, United Best is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which represents 5% of the number of shares of common stock issued to the note holders on conversion), exercisable at the price of $2.10 per share (i.e. the price at which the notes converted based on the assumed initial public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable on conversion of the notes and consummation of this offering. If the note conversion does not occur, United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable.
For additional information about the nature of the services provided to the company by each of Primary Capital and United Best under their respective agreements, reference is make to “Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants - Financial Services Agreements and Related Warrants” beginning on page 61.
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As shareholders of Hong Hui, (i) Bestyield Group, a company controlled by Mr. Li, our chief executive officer, received 4,353,061 shares, (ii) Proudlead, a company controlled by Mr. Law, our president of sales and a director, received 4,353,061 shares and (iii) Newise Holdings Limited, a company controlled by Mr. Li Jun one of our directors received 2,321,633 shares.
Under a limited recourse guaranty agreement dated as of February 12, 2010, Bestyield Group and Proudlead agreed to guaranty the company’s obligations under the notes issued in the February 2010 private placement. That guaranty is secured by a pledge of the 8,706,122 shares of common stock received by them in the reverse merger
In each of June 2007 and in February 2008 and May 2008, Joseph Nemelka, a former officer and director, advanced funds to the company in the total aggregate amount of $15,000. The advances were due on demand and bore interest at 8% per annum. This indebtedness was forgiven in February 2010 prior to the reverse merger. In addition, Mr. Nemelka purchased a convertible promissory note in the aggregate principal amount of $100,000 in the February private placement.
Our board of directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Except for the foregoing, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to the Company at any time since the beginning of the Company’s last fiscal year.
DESCRIPTION OF SECURITIES
The following is a summary description of our capital stock and certain provisions of our certificate of incorporation and by-laws, copies of which have been filed as exhibits to this prospectus. The following discussion is qualified in its entirety by reference to such exhibits.
General
We are authorized to issue 200,000,000 shares of common stock, par value $.001 per share, and 10,000,000 shares of blank-check preferred stock, par value $.001 per share.
Immediately following the closing of this offering, 21,814,562 shares of common stock will be issued and outstanding (excluding shares issuable upon exercise of the over-allotment option). In addition, 192,380 shares may be purchased upon the exercise of placement agent warrants, 208,333 shares may be purchased upon the exercise of underwriter’s warrants and 400,000 shares are issuable on exercise of outstanding options.
Common Stock
Each share of our common stock has one vote on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. In the event we are liquidated, the holders of common stock will share equally in any balance of our assets available for distribution to them after satisfaction of creditors and preferred shareholders. The holders of our common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as, and if declared by the board of directors from funds legally available.
Preferred Stock
In addition to the 200,000,000 shares of common stock, we are authorized to issue 10,000,000 shares of preferred stock. Shares of our preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance of any shares thereof.
The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable the holder to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common stock. Although the board of directors is required to make any determination to issue such stock based on its judgment as to the best interests of our stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law.
Notes and Warrants
On February 12, 2010, immediately following the closing of the share exchange agreement, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes, in the aggregate principal amount of $4,140,000, and warrants (which are exercisable only in certain events). The closing of the sale of the notes and warrants occurred on February 12, 2010. The terms of the notes, as amended, and warrants is set forth below. The note purchase agreement contains representations, warranties and covenants which are customary for transactions of this nature.
The notes have the following material terms:
Maturity: The notes were originally scheduled to mature on February 12, 2011. On January 31, 2011 we entered into note extension agreements with each of the holders of the notes (other than Lumen Capital) to extend the maturity date to June 30, 2011. If the principal is not paid on maturity then 150% of the principal amount shall be payable. We plan to repay the note held by Lumen Capital in the principal amount of $100,000 on February 12, 2011.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default.
Conversion: In the event of the closing of this offering, the $4,040,000 aggregate principal amount of the notes then outstanding shall convert automatically into 1,923,809 shares of common stock at a conversion price of $2.10 per share (which represents a 65% discount to the assumed offering price of $6.00 per share).
The warrants have the following material terms:
Exercisable: The warrants will become void if the notes automatically convert into common stock (which will be the case if the offering contemplated by this prospectus closes). The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date.
Number of Shares: The warrants represent the right to purchase 8% of the total number of shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the “financing.”
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
Underwriter’s Warrants
We have also agreed to issue to Brean Murray, Carret & Co., LLC, and/or its designees, as a warrant to purchase a number of shares of common stock equal to an aggregate of 5% of the shares of common stock sold in the offering, excluding over-allotments, if any. The warrant will have an exercise price equal to 125% of the offering price of the shares of common stock sold in this offering and be exercisable for four years commencing one year after the effective date of the registration statement. Pursuant to the rules of the Financial Industry Regulatory, Authority, Inc., or FINRA (formerly the NASD), and in particular Rule 5110,5110(g)(1), the warrant (and underlying shares) issued to Brean Murray, Carret & Co., LLC, mayshall not be sold during the offering, or sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of deliveryeffectiveness or commencement of sales of the public offering, except as provided in Rule 5110(g)(2).
Financials Advisor Warrants
For a description of the warrants issued to the financials advisors in connection with the private placement, see the section above entitled “Certain Relationships and Related Transactions,” beginning on page 85.
Exchange Listing
We have applied for listing of our common stock on the NASDAQ Capital Market under the symbol “SLPC.”
Recent Stockholder Actions
On February 12, 2010, immediately prior to the closing of the share exchange agreement, shareholders holding 2,528,000 of the 2,600,000 shares of our then outstanding common stock agreed to surrender their shares for cancellation in payment by Joe Nemelka of an aggregate amount of $40,000, pursuant to stock purchase agreements entered into between Joe Nemelka and each such holder. Under the share exchange agreement we issued an aggregate of 14,510,204 shares of common stock to the stockholders of Hong Hui. In addition, immediately following the closing of the share exchange agreement we issued 362,755 and 290,755 shares of our common stock to United Best and Primary Capital, respectively, as a transaction fee in connection with the closing of the private financing. In addition there are 72,000 shares held by 210 round lot shareholders. Accordingly, as of February 12, 2010 following the closing of all of these transactions, there were 15,235,714 shares of common stock issued and outstanding.
As more fully described in an Information Statement on Schedule 14C (which was mailed to our stockholders on March 3, 2010), on February 12, 2010, the board of directors and the holders of majority of our outstanding shares entitled to vote thereon approved the change the name of the company to China Filtration Technology, Inc. and 1-for-5 reverse stock split of our shares of common stock.
These corporate actions became effective on the filing with the Secretary of State of Delaware of a certificate of amendment to our certificate of incorporation which was filed on March 24, 2010.
On June 1, 2010 the corporate name was changed to China SLP Filtration Technology, Inc.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general summary of certain material U.S. federal income tax consequences to an investor of the acquisition, ownership and disposition of our common stock purchased by an investor pursuant to this offering. As used in this discussion, “we”, “our” and “us” refers to China SLP Filtration Technology, Inc. This discussion applies only to investors that will hold each share of our common stock issued and purchased pursuant to this offering as a “capital asset” (generally, property held for investment) within the shares offered; provided, however,meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address all aspects of U.S. federal income taxation that the warrant (and underlying shares) may be transferredrelevant to officersan investor in light of that investor’s particular circumstances. In addition, this discussion does not address (a) U.S. federal non-income tax laws, such as estate or partners ofgift tax laws, (b) state, local or non-U.S. tax consequences, or (c) the representatives and members of the underwriting syndicate and their officers or partners as long as the warrant (and underlying shares) remainspecial tax rules that may apply to certain investors, including, without limitation, banks, insurance companies, financial institutions, broker-dealers, taxpayers that have elected mark-to-market accounting, taxpayers subject to the lockup.alternative minimum tax provisions of the Code, tax-exempt entities, governments or agencies or instrumentalities thereof, regulated investment companies, real estate investment trusts, U.S. persons whose functional currency is not the U.S. dollar, certain former U.S. citizens or long-term residents of the United States, or investors that acquire, hold, or dispose of our common stock as part of a straddle, hedge, wash sale, constructive sale or conversion transaction or other integrated transaction. Additionally, this discussion does not consider the tax treatment of entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or of persons who hold our common stock through such entities. The tax treatment of a partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. Thus, partnerships, other pass-through entities (and partners in such partnerships or owners of such other pass-through entities) should consult their own tax advisors.
This discussion is based on current provisions of the Code, its legislative history, U.S. Treasury regulations promulgated under the Code, judicial opinions, and published rulings and procedures of the U.S. Internal Revenue Service (“IRS”), all as in effect on the date of this prospectus. These authorities are subject to differing interpretations or to change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed below, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
As used in this discussion, the term “U.S. person” means a person that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized (or treated as created or organized) in or under the laws of the United States or of any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (B) it has in effect a valid election to be treated as a U.S. person under applicable U.S. Treasury regulations. As used in this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is a U.S. person, and the term “non-U.S. holder” means a beneficial owner of our common stock (other than an entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a U.S. person.
THIS DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX TREATY.
U.S. Holders
Taxation of Distributions
A U.S. holder will be required to include in gross income as ordinary income the amount of any dividend paid on the shares of our common stock. A distribution on such shares will be treated as a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain from the sale or other taxable disposition of the common stock and will be treated as described under “Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
Any dividends we pay to a U.S. holder that is treated as a taxable corporation for U.S. federal income tax purposes generally will qualify for the dividends-received deduction if the applicable holding period and other requirements are satisfied. With certain exceptions, if the applicable holding period and other requirements are satisfied, dividends we pay to a non-corporate U.S. holder will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains for tax years beginning on or before December 31, 2010, after which the tax rate applicable to dividends is scheduled to return to the tax rate applicable to ordinary income.
If PRC taxes apply to any dividends paid to a U.S. holder on our common stock, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
In general, a U.S. holder must treat any gain or loss recognized upon a sale, taxable exchange, or other taxable disposition of our common stock as capital gain or loss. Any such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for the common stock so disposed of exceeds one year, and otherwise as short-term capital gain or loss. In general, a U.S. holder will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis in the common stock so disposed of. Long-term capital gain recognized by a non-corporate U.S. holder will generally be subject to a maximum tax rate of 15 percent for tax years beginning on or before December 31, 2010, after which the maximum long-term capital gains tax rate is scheduled to increase to 20 percent. The deduction of capital losses is subject to various limitations.
If PRC taxes apply to any gain from the disposition of our common stock by a U.S. holder, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
New Legislation Regarding Medicare Tax
For taxable years beginning after December 31, 2012, certain U.S. holders that are individuals, estates or trusts will be subject to a 3.8% tax on all or a portion of their "net investment income," which may include all or a portion of their dividends and net gains from the sale or other disposition of our common stock. If you are a U.S. holder that is an individual, estate or trust, you should consult your tax advisor regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our common stock.
Non-U.S. Holders
Taxation of Distributions
In general, any distribution we make to a non-U.S. holder, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute a dividend for U.S. federal income tax purposes. Unless we are treated as an “80/20 company” for U.S. federal income tax purposes, as described below, any dividend paid to a non-U.S. holder with respect to shares of our common stock that is not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, as described below, generally will be subject to U.S. federal withholding tax at a rate of 30 percent of the gross amount of the dividend, unless such non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN). Any distribution not constituting a dividend will be treated first as reducing the non-U.S. holder’s adjusted tax basis in its shares of our common stock (but not below zero) and, to the extent such distribution exceeds the non-U.S. holder’s adjusted tax basis, as gain from the sale or other taxable disposition of the common stock, which will be treated as described under “Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
There is a possibility that we may qualify as an “80/20 company” for U.S. federal income tax purposes. In general, a U.S. corporation is an 80/20 company if at least 80 percent of its gross income earned directly or from subsidiaries during an applicable testing period is “active foreign business income.” The 80 percent test is applied on a periodic basis. If we qualify as an 80/20 company, a percentage of any dividend paid by us generally will not be subject to U.S. federal withholding tax. You should consult with your own tax advisors regarding the amount of any such dividend subject to withholding tax in this circumstance. It should also be noted that there are currently legislative proposals to amend the rules pertaining to 80/20 companies.
Dividends we pay to a non-U.S. holder that are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States (and, if certain income tax treaties apply, are attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder) generally will not be subject to U.S. withholding tax, provided such non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated individual or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be specified by an applicable income tax treaty).
Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale, exchange or other disposition of common stock, unless:
| · | the gain is effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, under certain income tax treaties, is attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder); |
| · | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met, and is not eligible for relief under an applicable income tax treaty; or |
| · | we are or have been a “United States real property holding corporation” (“USRPHC”) for U.S. federal income tax purposes at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of, and, generally, in the case where our common stock is regularly traded on an established securities market, the non-U.S. holder has owned, directly or indirectly, more than 5 percent of the common stock disposed of, at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of. |
There can be no assurance that our common stock will be treated as regularly traded on an established securities market for this purpose.
Unless an applicable tax treaty provides otherwise, gain described in the first and third bullet points above generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated tax rates applicable to U.S. persons. Any gains described in the first bullet point above of a non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30 percent rate (or a lower applicable tax treaty rate). Any U.S. source capital gain of a non-U.S. holder described in the second bullet point above (which may be offset by U.S. source capital losses during the taxable year of the disposition) generally will be subject to a flat 30 percent U.S. federal income tax (or a lower applicable tax treaty rate).
In connection with the third bullet point above, we generally will be classified as a USRPHC if the fair market value of our “United States real property interests” equals or exceeds 50 percent of the sum of the fair market value of our worldwide real property interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes. We believe that we currently are not a USRPHC, and we do not anticipate becoming a USRPHC (although no assurance can be given that we will not become a USRPHC in the future).
Information Reporting and Backup Withholding
Other than with respect to U.S. holders who are “exempt recipients,” we generally must report annually to the IRS and to each holder the amount of dividends and certain other distributions we pay to such holder on our common stock and the amount of tax, if any, withheld with respect to those distributions. In the case of a non-U.S. holder, copies of the information returns reporting those distributions and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. Information reporting is also generally required with respect to proceeds from the sales and other dispositions of our common stock to or through the U.S. office (and in certain cases, the foreign office) of a broker.
In addition, backup withholding of U.S. federal income tax, currently at a rate of 28 percent, generally will apply to distributions made on our common stock to, and the proceeds from sales and other dispositions of our common stock by, a non-corporate U.S. holder who:
| · | fails to provide an accurate taxpayer identification number; |
| · | is notified by the IRS that backup withholding is required; or |
| · | in certain circumstances, fails to comply with applicable certification requirements. |
A non-U.S. holder generally may eliminate the requirement for information reporting (other than with respect to distributions, as described above) and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. holder’s or a non-U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedure for obtaining an exemption from backup withholding in their particular circumstances.
Recently Enacted Legislation Relating to Foreign Accounts
On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act into law. Effective for payments made after December 31, 2012, this law imposes a 30% U.S. federal withholding tax on distributions and the gross proceeds of sale in respect of our shares of common stock to a foreign financial institution or non-financial foreign entity, unless (i) in the case of a foreign financial institution, such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) and to withhold on certain payments and (ii) in the case of a non-financial foreign entity, such entity provides the withholding agent with a certification identifying the direct and indirect U.S. owners of the entity. Under certain circumstances, a non-U.S. shareholder might be eligible for refunds or credits of such taxes. Prospective investors should consult with their own tax advisor regarding the possible implications of this recently enacted legislation on the ownership and disposition of our common stock.
MATERIAL PRC INCOME TAX CONSIDERATIONS
The following discussion summarizes the material PRC income tax considerations relating to the ownership of our common stock following the consummation of this offering.
Resident Enterprise Treatment
Under Enterprise Income Tax Law of the PRC (“EIT Law”) that became effective on January 1, 2008, enterprises are classified as “resident enterprises” and “non-resident enterprises.” Enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC “tax resident enterprises” and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Given the short history of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a non-PRC company such as us. Our management is substantially based in the PRC and expected to be based in the PRC in the future, although two of our executive officers and one of our directors are not PRC nationals. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable tax consequences could follow. First, we could be subject to the enterprise income tax at a rate of 25% on our global taxable income, as well as PRC enterprise tax reporting obligations. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiary would qualify as “tax-exempted income”, we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC EIT purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise shareholders or a potential withholding tax of 20% for non-PRC individual shareholders is imposed on dividends we pay to them and with respect to gains derived by our non-PRC shareholders from transferring our shares. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. We are actively monitoring the “resident enterprise” classification rules and are evaluating appropriate organization changes to avoid this treatment, to the extent possible.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. However, since it is not anticipated that we would receive dividends or generate other income in the near future, we are not expected to have any income that would be subject to the 25% enterprise income tax on global income in the near future. We will consult with the PRC tax authorities and make any necessary tax payment if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a resident enterprise under the EIT Law, and if we were to have income in the future.
Dividends From PRC Operating Companies
If we are not treated as resident enterprises under the EIT Law, then dividends that we receive may be subject to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will normally be applicable to investors that are “non-resident enterprises,” or non-resident investors, which (i) have establishments or premises of business inside the PRC, and (ii) the income in connection with their establishment or premises of business is sourced from the PRC or the income is earned outside the PRC but has actual connection with their establishments or places of business inside the PRC, and (B) an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
As described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, on a case-by-case basis. We are a holding company and substantially all of our income may be derived from dividends. Thus, if we are considered as a “non-resident enterprise” under the EIT Law and the dividends paid to us are considered income sourced within the PRC, such dividends received may be subject to the income tax described in the foregoing paragraph.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. As indicated above, however, we are not expected to be paid any dividends in the near future. We will consult with the PRC tax authorities and make any necessary tax withholding if, in the future, we were to be paid any dividends and we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a non-resident enterprise under the EIT Law.
Dividends that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of Our Common Stock
If dividends payable to (or gains recognized by) our non-resident investors are treated as income derived from sources within the PRC, then the dividends that non-resident investors receive from us and any such gain on the sale or transfer of our common stock, may be subject to taxes under PRC tax laws.
Under the EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of common stock by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.
The dividends paid by us to non-resident investors with respect to our common stock, or gain non-resident investors may realize from sale or the transfer of our common stock, may be treated as PRC-sourced income and, as a result, may be subject to PRC tax at a rate of 10%. In such event, we also may be required to withhold a 10% PRC tax on any dividends paid to non-resident investors. In addition, non-resident investors in our common stock may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock after the consummation of the offering if such non-resident investors and the gain satisfy the requirements under the EIT Law and its implementing rules. However, under the EIT Law and its implementing rules, we would not have an obligation to withhold income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
If we were to pay any dividends in the future, we would again consult with the PRC tax authorities and if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we must withhold PRC tax on any dividends payable by us under the EIT Law, we will make any necessary tax withholding on dividends payable to our non-resident investors. If non-resident investors as described under the EIT Law (including U.S. investors) realized any gain from the sale or transfer of our common stock and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying 10% PRC income tax on the gain from the sale or transfer of our common stock. As indicated above, under the EIT Law and its implementing rules, we would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
Lock-Up Agreements
In June 2010, we entered into lock-up agreements with officers and directors and beneficial owners of more than 5% of our common stock. See “Underwriting – Lock-up Agreements.”
In addition, in June 2010, we entered into lock-up agreements with the selling stockholders listed in the resale prospectus dated as of the date hereof pursuant to which the selling stockholders have agreed not to sell any of the shares of common stock for a period of 90 days following the date of the public offering.
Rule 144
Under Rule 144, a person who has beneficially owned restricted shares of our common stock or warrants for at least six months is entitled to sell his, her or its securities provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale, (2) we are subject to the Exchange Act reporting requirements for at least 90 days before the sale and (3) if the sale occurs prior to satisfaction of a one-year holding period, we provide current information at the time of sale.
Persons who have beneficially owned restricted shares of our common stock or warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:
| · | 1% of the total number of securities of the same class then outstanding, which will equal approximately 214,038 shares immediately after this offering; or |
| · | the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.
Sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144. The selling stockholders will not be governed by the foregoing restrictions when selling their shares pursuant to the resale prospectus.
As we are a former “shell” company, persons who wish to sell our securities have also to satisfy the additional requirements of Rule 144(i) which provides that those securities may be sold, subject to the other requirements of Rule 144, after one year has elapsed from the date that the issuer filed "Form 10 information" with the Commission (in our case February 12, 2011) provided that we have filed all reports and other materials required to be filed by section 13 of the Exchange Act during the preceding 12 months.
Registration Rights
Other than the registration rights set forth in (i) the registration rights agreement entered into on February 12, 2010 with the investors in the private placement under which we are obligated, subject to the operation of Rule 415, to register for resale all of shares issued on conversion of the notes, and (ii) the registration rights side agreement entered into on February 12, 2010 with certain stockholders who had acquired their shares prior to the reverse merger, under which we are obligated, subject to the operation of Rule 415, to register for resale 52,001 shares (however, in the event of a Rule 415 comment, these shares would be cut back first), (iii) the agreements entered into with Primary Capital and United Best, under which we are obligated, subject to the operation of Rule 415, to register for resale the 653,510 shares received by Primary Capital and United Best under such agreements, (iv) oral agreements entered into with Li Jun and Ming Liu, we have no other obligation to register under the Securities Act any of our shares of common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on January 31, 2011, certain information with respect to the beneficial ownership of our common stock, by (i) each stockholder whom we know to own beneficially more than 5% of our common stock, (ii) each director, (iii) our chief executive officer and each other executive officer whose cash compensation for the most recent fiscal year exceeded $100,000 and (iv) all executive officers and directors as a group. The table reflects the ownership of our equity securities by the foregoing parties after the 1-for-5 reverse stock split which occurred on March 24, 2010.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Except as indicated below, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to our common stock shown as beneficially owned by them. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement, or (4) the automatic termination of a trust, discretionary account or similar arrangement.
Unless otherwise indicated, the address for each listed stockholder is: c/o China SLP Filtration Technology, Inc., Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC.
Name and Address of Shareholder | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2) | | | Amount and Nature of Beneficial Ownership | | | Percent of Class (1) (2)(3) | |
| | | Before Offering | | | Before Offering | | | Post Offering | | | Post Offering | |
| Owners of More Than 5% Of Class | | | | | | | | | | | | |
| Bestyield Group Limited (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Proudlead Limited (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Li Jun (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Newise Holdings Limited (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| Pilot Link International Limited (7) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| High Swift Limited (8) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | | % |
| China Investment Management, Inc (9). | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Primary Capital, LLC (10) | | | 1,326,008 | | | | 8.6 | % | | | 1,326,008 | | | | 6 | % |
| | | | | | | | | | | | | | | | | |
| Directors and Executive Officers | | | | | | | | | | | | | | | | |
| Li Jie (Chief Executive Officer and a Director) (4) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Law Wawai (President of Sales and a Director) (5) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Eric Gan (Chief Financial Officer) (13) | | | - | | | | - | % | | | - | | | | - | % |
| Li Jun (Director) (6) | | | 14,099,081 | | | | 92.4 | % | | | 14,099,081 | | | | 64.6 | % |
| Richard M. Cohen (Director) (12) | | | 30,000 | | | | * | | | | 30,000 | | | | * | % |
| Chris Bickel (Director) (11) | | | - | | | | - | | | | - | | | | - | % |
| Su Lie (Director) | | | - | | | | - | | | | - | | | | - | % |
| | | | | | | | | | | | | | | | | |
| Directors and executive officers as a group (7 persons) | | | 14,129,081 | | | | | | | | 14,129,081 | | | | | % |
(1) As of the close of business on January 31, 2011, there were 15,265,714 shares of our common stock outstanding. Following the closing of this offering there will be 21,814,562 shares of common stock issued and outstanding.
(2) In determining beneficial ownership of the common stock, the number of shares shown includes shares which the beneficial owner may acquire within 60 days of January 31, 2011 upon exercise of convertible securities, warrants or options. In accordance with Rule 13d-3 in determining the percentage of common stock owned by a person on January 31, 2011 (a) the numerator is the number of shares of the class beneficially owned by such person, including shares which the beneficial owner may acquire within 60 days upon conversion or exercise of the warrants and other convertible securities, and (b) the denominator is the sum of (i) the total shares of that class outstanding on January 31, 2011, and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of other securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(3) Following completion of the offering there will a total of 21,814,562 shares of common stock outstanding, including (i) 15,265,714 shares of common stock currently outstanding, (ii) 1,923,809 shares issuable on conversion of the notes, (iii) 4,166,667 shares to be issued in the offering, and (iv) and 193,186 shares to be issued to United Best and 265,186 shares to be issued to Primary Capital on closing of the offering.
(4) Bestyield Group is a BVI company controlled by Mr. Li Jie, our chief executive officer. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management, Inc., Song Huaying, Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a “group” and the beneficial ownership by the group of 14,099,081 shares of common stock. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Bestyield Group. Mr. Li has shared voting power with respect to the shares held by the group. Bestyield has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(5) Proudlead is a BVI company controlled by Law Wawai, our president of sales and a director. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 4,353,061 shares held by Proudlead. Mr. Law has shared voting power with respect to the shares held by the group. Proudlead has guaranteed our obligations to the investors under our outstanding convertible notes issued in February 2010. All of these shares have been pledged to secure the performance of that guaranty.
(6) Newise Holdings Limited is a BVI company controlled by Li Jun, one of our directors. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,547,756 shares held by Newise Holdings Limited as well as 362,755 shares beneficially owned by United Best. Mr. Li has shared voting and dispositive power with respect to the shares held by the group. On closing of this offering United Best is also entitled to receive an additional 193,186 shares of common stock and a warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(7) Pilot Link International is a BVI company controlled by Li Shiyi and Wei Yang, PRC residents. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,668,673 shares held directly by Pilot Link. Li Shiyi and Wei Yang have shared voting and dispositive power with respect to the shares held by the group.
(8) High Swift Limited is a BVI company controlled by Han Hung Yuk, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 1,088,265 shares held directly by High Swift. Han Hung Yuk has shared voting and dispositive power with respect to the shares held by the group.
(9) China Investment Management, Inc. is a BVI company controlled by Song Huaying, a PRC resident. Its address is PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. The beneficial ownership by the “group” disclosed in the Schedule 13D includes 725,510 shares held directly by China Investment Management, Inc. Song Huaying has shared voting and dispositive power with respect to the shares held by group.
(10) Primary Capital received, at the closing of the share exchange agreement, 290,755 shares of common stock and in February 2010 Primary Capital purchased 673,877 shares from Newise Holdings Limited. John Leo has sole voting and dispositive power with respect to the shares held by Primary Capital. Primary Capital’s address is 80 Wall Street, 5th Floor, New York, New York 10005. On closing of this offering, Primary Capital is also entitled to receive an additional 265,186 shares of common stock and a warrant to purchase 96,190 shares at an exercise price of $2.10 per share (based on an assumed public offering price of $6.00).
(11) Chris Bickel is President of Primary Capital. Mr. Bickel does not have voting or dispositive power over the shares held by Primary Capital. Mr. Bickel’s business address is 80 Wall Street, 5th Floor, New York, New York 10005.
(12) Richard M. Cohen is our director, and his business address is 3 Park Avenue, 16th Floor, New York, New York 10016. In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen on September 3, 2010 was granted 30,000 shares of restricted stock, two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant, in the event Mr. Cohen continues to be a director on those dates.
(13) On September 3, 2010, Mr. Gan was granted an option to purchase 400,000 shares of common stock at an exercise price equal to the public offering price. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. As the option is not currently exercisable, none of the shares underlying the option are included in the table.
MANAGEMENT
Executive Officers and Directors
The following table sets forth information concerning our current directors and executive officers:
Directors and Executive Officers | | Position/Title | | Age |
| | | | |
| Li Jie | | Chief Executive Officer and a Director | | 55 |
| | | | |
| Law Wawai | | President of Sales and a Director | | 45 |
| | | | |
| Eric Gan | | Chief Financial Officer | | 48 |
| | | | |
| Chris Bickel | | Director | | 47 |
| | | | |
| Li Jun | | Director | | 47 |
| | | | |
| Richard M. Cohen | | Director | | 59 |
| | | | |
| Su Lei | | Director | | 46 |
Except for Messrs. Chris Bickel, Richard M. Cohen and Eric Gan, all of our officers and directors are residents of the PRC. In addition, substantially all of our assets are located in the PRC. As a result, it may be difficult or impossible for you to effect service of process within the United States on our company or any of them or to enforce court judgments obtained against them in the United States courts. We have been advised by our PRC counsel that there is uncertainty as to whether the courts of the PRC would (1) recognize or enforce judgments of U.S. courts obtained against our officers or directors or the experts named in this prospectus based on the civil liability provisions of the securities laws of the U.S. or any state in the U.S., or (2) entertain original actions brought in the PRC against our officers or directors or the experts named in this prospectus based on the securities laws of the U.S. or any state in the U.S.
The following is a summary of the biographical information of our directors and officers:
Li Jie was elected director and appointed as our Chief Executive Officer on February 12, 2010. Mr. Li has served as Chief Executive Officer and Managing Director of Foshan SLP Special Materials Co., Ltd. since its inception in 2000. He also serves as Director General of the China Industrial Textile Committee. From 1980 to 2000, he served as R&D director of Dalian Synthetic Fiber Research Institute. We believe that Mr. Li’s knowledge of all aspects of our business and his in-depth understanding of our operations, combined with his years of experience in the nonwovens industry, position him well to serve as our Chairman and Chief Executive Officer. Mr. Li received a bachelor’s degree in Engineering for Chemical Fiber Technique at Dalian Light Industrial School. He received a Masters degree from Chinese Academy of Social Sciences where he studied economic management. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Law Wawai was elected as a director and appointed as President of Sales on February 12, 2010. From 1997 to February 2010, Mr. Law served as director and general manager of Nanhai Wanzhi Trading Co. From 1987 to 1997, he was sales manger Nanhai Polyester Factor. We believe that Mr. Law’s knowledge of all aspects of the nonwovens business and his in-depth understanding of its operations position him well to serve as a director. Mr. Law received his bachelor’s degree in business management from Nanhai Television University. Mr. Law is not, and has not been within the last five years, a director of any other publicly traded company.
Eric Gan was appointed as our Chief Financial Officer in August 2010. From July 1999 to August 2010 Mr. Gan was a Senior Financial Consultant at The Goetzman Group, a company which provides staffing solutions in all areas of finance and accounting. His assignments while at The Goetzman Group included (i) acting as interim chief financial officer for Rino International Inc. Inc. from January 2007 to September 2007; (ii) acting as interim general accounting manager for Physicals Formula from March 2008 to September 2008; and (iii) overseeing the Sarbanes- Oxley compliance project for Smart & Final from January 2005 to May 2005. Mr. Gan received his Master of Arts from Fudan University, Shanghai in June 1989 and received his Masters in Accounting from the University of Southern California in December 1995.
Chris Bickel was elected as a director on February 12, 2010. Since October 2009, Mr. Bickel has served as President of Primary Capital and is responsible for business development in China. Primary Capital acted as placement agent for the Company’s February 2010 private placement. From 2005 to October 2009, Mr. Bickel was an investment banker at Rosewood Capital Group, LLC (previously an affiliate of Primary Capital and now a branch office ) during which time his investment banking team provided a full range of investment banking, due diligence and business advisory services to private China based companies interested in accessing the U.S. capital markets and being listed in the U.S., as well as advisory services to US based investment banking firms interested in identifying investment banking clients in China. Mr. Bickel was instrumental in originating and financing of a number of PRC companies that are listed on the NASDAQ or whose shares are quoted on the OTCBB. From 2001 through 2004, Mr. Bickel served as Chairman and CEO of Sino UJE Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products. Mr. Bickel was also employed by Spectris Inc. from 1983 to 1996. As an employee of Spectris, Mr. Bickel was involved with and managed the nonwoven sector of its business. Spectris was engaged in providing engineered products for use in nonwovens production. We believe that Mr. Bickel’s extensive past experience in providing business advisory services to private China based companies interested in accessing the U.S. capital markets, including Rino International Corp. and Sino Gas International Holdings, Inc., and helping those companies become successfully listed as well as his over ten years’ experience in the nonwoven market and knowledge with manufacturing practice and the overall market make him a suitable candidate to serve on our board of directors.
Li Jun was elected as a director in February 2010. Mr. Li is the owner and manager of Shanghai Primary Capital Management Co., Ltd., a business advisory firm incorporated in Shanghai China, which he started in 2010. (Shanghai Primary Capital Management Co., Ltd. is not affiliated with Primary Capital.) He provides advisory services to China business owners seeking capital and advisory services related to listing their company on United States stock exchanges. He has over twenty years of experience working in China in various fields and in various capacities. Mr. Li founded Shanghai Rosewood Investment Consulting Co., Ltd in 2005 and participated in four listing and financing transactions in which China based companies received funding from U.S. based investors and listed on in the U.S. From 2001 through 2008, Mr. Li has been the Managing Director of SINO UJE, Ltd., a Hong Kong based company which is a distributor of medical and industrial instrumentation and technology products throughout Asia. From 1994 through 2000, Mr. Li was employed by Nanchang Minerals Machinery Imp and Exp Co., Ltd initially as a salesman, followed by promotions to department director and vice president. From 1987 through 1994, Mr. Li served as an instructor at the University of Military Science and Technology and he retired as a Major from the Chinese People’s Liberation Army. Although he has not been previously engaged in the nonwovens business, we believe that Mr. Li’s business acumen and his extensive past experience in providing business advisory services to private China based companies interested in accessing the U.S. capital markets and helping those companies become successfully listed make him an eminently suitable candidate to serve on our board of directors. Mr. Li received his Bachelor’s and his Master’s degree of Science from Shanghai Jiaotong University. Mr. Li is not, and has not been within the last five years, a director of any other publicly traded company.
Richard M. Cohen was elected as a director in June, 2010. Since 1996, Mr. Cohen has been the President of Richard M. Cohen Consultants, a financial services consulting company that accepts engagements from public and private companies to assist with their corporate governance and corporate finance needs. From 1984 through 1992, Mr. Cohen was an investment banker at both Henry Ansbacher and Furman Selz, where he specialized in mergers & acquisitions, public equity offerings, and restructurings. From 1980 through 1983, Mr. Cohen was a Vice President of corporate development at Macmillan, Inc. Mr. Cohen is a Certified Public Accountant (New York State) and began his career at Arthur Andersen. He received a B.S. from The University of Pennsylvania (Wharton) in 1973 and an M.B.A. from Stanford University in 1975. Although he has not been previously engaged in the nonwovens business we believe that Mr. Cohen’s business acumen and his experience in providing business advisory services to private companies to assist with their corporate governance and corporate finance needs coupled with his experience serving as a director of a number of publicly traded companies make him an eminently suitable candidate to serve on our board of directors. Mr. Cohen currently serves as a director of Helix BioMedix (OTCBB:HXBM), Rodman and Renshaw (NASDQ:RODM), CorMedix (OTCBB:CRMD), Dune Energy, Inc. (AMEX: DNE), for which he served as Chief Financial Officer from November 2003 to April 2005.
Su Lei was elected as a director in August 2010. Mr. Su currently serves as the Associate Director of Information of the State Environmental Protection Agency in China, a position he has held since 2001. Mr. Su has successively acted as Principal Staff Member, Associated Director and Director of China Environmental Protection Industrial Association since September 2001. He also currently serves as the Director of the Working Committee of China Green Star, a position he has held since 2002. China Green Star is a non-profit organization under China's Environmental Protection Association which focuses on promoting the interests of the environmental protection industry. We believe that Mr. Su’s position and experience with the State Environmental Protection Agency and his understanding of public policy matters make him well suited to serve on our board of directors. Mr. Su received a bachelor’s degree in the Electronic Engineering from China Air Force Missile Institute, and he is now a senior engineer in Environment Management.
All of our directors serve on the board until our next annual meeting of the stockholders, and until their successors have been elected and qualified or until their earlier resignation or removal.
Our executive officers serve at the discretion of the board of directors, subject to the terms of any employment agreement they have with the Company. Mr. Bickel is serving on the Board as a designee of Primary Capital. Under the terms of its financial services agreement with the company Primary Capital is entitled to designate one board member and one observer until February 11, 2012.
Family Relationships
There are no family relationships among our directors and executive officers, except the Eric Gan, our chief financial officer, is the brother in law of Li Jun, one of our directors. There is no arrangement or understanding between or among our executive officers and directors pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| · | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| · | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| · | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
| · | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| · | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| · | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Board Independence
In order to be listed on NASDAQ, a company is required to meet certain corporate governance requirements, including, with certain exceptions, the requirement to have a board of directors the majority of whose members are “independent” within the meaning of NASDAQ rules.
As a “controlled company” we are exempt from the requirements of the NASDAQ Marketplace Rules (i) to have a majority of independent board members; (ii) for independent director oversight of executive officer compensation and (iii) for independent director oversight of director nomination. As a controlled company, we remain subject to the NASDAQ audit committee requirements and the requirement that independent directors regularly meet in executive session.
Under NASDAQ Marketplace Rules a company is considered a "controlled company" if greater than 50% of its voting power is held by an individual, a group or another company. In order for a group to exist for purposes of this rule, the stockholders forming the group are required to publicly file a notice that they are acting as a group (e.g., Schedule 13D). On December 29, 2010, a group consisting Bestyield Group Limited, Jie Li, Proudlead Limited, Law Wawai, Pilot Link International Limited, High Swift Limited, China Investment Management Inc., Song Huaying, and Newise Holdings Limited and Li Jun filed a Schedule 13D disclosing the existence of a group with respect to their holdings in the Company.
The Company has disclosed its status as a “controlled company” in its annual report on Form 10-K for the fiscal year ended September 30, 2010 filed on January 3, 2011 and the basis for determining that it is a controlled company.
The Board has determined that three of its six current members, namely Messrs. Chris Bickel, Su Lie and Richard M. Cohen, are “independent” within the meaning of NASDAQ listing standards.
Director Contracts
In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement, effective on closing of the offering, Mr. Cohen will be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). In addition, pursuant to the Company’s equity incentive plan, Mr. Cohen was awarded 30,000 shares of restricted two thirds of which are subject to restrictions on transfer and are subject to forfeiture with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant and as to one- third on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates. In addition, the Company will reimburse the director for pre-approved reasonable business-related expenses incurred in good faith in the performance of the director’s duties for the Company.
Committees
The Board currently has three standing committees: Audit Committee, Compensation Committee and Nominating Committee. Each member of these committees is “independent” as defined by NASDAQ and SEC rules and each of these committees has a written charter approved by the Board. Committee members are appointed by the Board based on the recommendation of the Nominating Committee, except that members of the Nominating Committee are appointed by the independent members of the Board. The current members of the committees are as follows:
| Director | | Audit | | Compensation | | Nominating |
| Jie Li | | | | | | |
| Law Wawai | | | | | | |
| Li Jun | | | | | | |
| Chris Bickel | | ü | | ü | | ü |
| Richard M. Cohen | | ü | | ü | | ü |
| Su Lei | | ü | | | | |
Audit Committee; Audit Committee Financial Expert
The Audit Committee, established in September 2010, currently consists of three members, Su Lei, Chris Bickel, and Richard M. Cohen, its Chairman. The Board has determined that each of them is independent within the meaning of the NASDAQ listing standards and applicable SEC regulations, and that each member has the financial literacy required by the NASDAQ listing standards.
The Board also has determined that Mr. Cohen is qualified as an "audit committee financial expert" within the meaning of applicable SEC regulations and has the accounting and related financial sophistication required by NASDAQ listing standards.
The function of the Audit Committee, as more fully set forth in its charter, is to (i) oversee our financial statements, our financial reporting process and our system of internal control over financial reporting; (ii) recommend the selection of our registered public accounting firm; (iii) review the extent of non-audit services to be performed by the auditors; and (iv) review the disclosures made in our periodic financial reports.
Compensation Committee
The Compensation Committee, established in September 2010, consists of two members Chris Bickel and Richard M. Cohen. The Board has determined that each of them is independent within the meaning of the NASDAQ listing standards. The functions of the Compensation Committee, as more fully set forth in its charter, are to oversee our compensation policies generally, evaluate senior executive performance, oversee and determine compensation for senior executives and review and recommend to the Board actions regarding director compensation.
Nominating Committee
The Nominating Committee, established in September 2010, currently consists of two members, Chris Bickel and Richard M. Cohen. The Board has determined that each of Messrs. Bickel and Cohen is independent within the meaning of the NASDAQ listing standards.
As more fully set forth in its charter, the primary responsibilities of the Nominating Committee are to: (i) develop and recommend to the Board criteria for selecting qualified director candidates; (ii) identify, review and evaluate individuals qualified to become Board members; (iii) consider committee member qualifications, appointment and removal; and (iv) assist the Board in its annual reviews of the performance of the Board, each committee and management. The Committee has the exclusive authority to make recommendations to the Board for approval for the election of new members to the Board.
To fulfill its responsibilities and duties the Nominating Committee is required to, among other things (i) evaluate the current composition of the Board of Directors and its committees, and determine future requirements for director candidates; (ii) determine the Board’s criteria for selecting new directors, including desired board skills and attributes, and actively seek prospective individuals qualified to become board members; (iii) adopt and maintain a policy concerning the director nomination process; (iv) adopt a policy concerning the consideration of director candidates recommended by stockholders and consider stockholder nominees for election to the Board; (v) evaluate and propose nominations for election to the Board; and (vi) review and make recommendations to the Board concerning membership of Board committees.
The Committee does not assign specific weights to particular criteria. Rather, the Nominating Committee believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.
The Nominating Committee will consider director nominees recommended for consideration by the stockholders. To have a person considered by the Nominating Committee for recommendation to the Board as a director nominee a stockholder should write to the Corporate Secretary, specifying the nominee's name and qualifications for Board membership and providing confirmation of the nominee's consent to serve as a director. Following verification that the person submitting the recommendation is a stockholder of the Company, all properly submitted recommendations will be brought to the attention of the Nominating Committee at a regularly scheduled Committee meeting.
If a stockholder properly recommends a director nominee, the Nominating Committee will give due consideration to that nominee and will use the same criteria used for evaluating other director nominees, in addition to considering the information relating to the director nominee provided by the stockholder.
Stockholders also may nominate directors for election at our annual meeting of stockholders by following the provisions set forth in our bylaws. The deadline for stockholder nominations is set forth in our by laws. Stockholders and other parties interested in communicating directly with the Board of Directors may do so by writing to: China SLP Filtration Technology, Inc., Attention: Board of Directors, Shishan Industrial Park, Nanhai District, Foshan City, Guangdong Province PRC. Pursuant to a process approved by the Board, the Corporate Secretary reviews all correspondence received by us and addressed to members of the Board and regularly forwards to the Board a summary of such correspondence and copies of all correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the Board or Board committees or otherwise requires the Board's attention. Directors may at any time review a log of all correspondence received by us that is addressed to members of the Board and request copies of any such correspondence.
Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the Audit Committee to address such matters.
Compensation Committee Interlocks and Insider Participation
All current members of the Compensation Committee are independent directors. None of the past or present members of our Compensation Committee are present or past employees or officers of ours or any of our subsidiaries. No member of the Compensation Committee has had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended. None of our executive officers serves on the board of directors or compensation committee of a company that has an executive officer that serves on our Board or Compensation Committee.
Code of Ethics
We strive to foster a culture of honesty, integrity and accountability.
We have a code of ethics applicable to all employees, including all officers, and including our independent directors, who are not employees of the company, with regard to their company -related activities. The code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. In addition, the code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; reporting code violations; and maintaining accountability for adherence to the code.
Waivers of the Code for executive officers and directors may be granted only by the Board. Amendments to the Code must be approved by the Board. We intend to provide disclosure of any such amendments or waivers on our website (www.silepu.com) within four business days of any such amendment or waiver.
EXECUTIVE COMPENSATION
The following is a summary of the compensation we paid to each of our “named executive officers” (as such term is defined in Item 402 of Regulation S-K) for each of the last two fiscal years ended September 30, 2010 and 2009. No executive officer received compensation in excess of $100,000 for any of those two years.
Name and Principal Position | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| Li Jie | | 2010 | | 44,117 | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | 44,117 | |
| (CEO(1) | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Seth Winterton | | 2010 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| (former CEO)(2) | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Eric Gan (3) | | 2010 | | 18,000 | | | -0- | | -0- | | | 90,310 | | -0- | | | -0- | | -0- | | | 108,310 | |
| | | 2009 | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | | -0- | | | -0- | |
| (1) | Jie Li was appointed Chief Executive Officer in February 2010. |
| (2) | Seth Winterton served as Chief Executive Officer of Perpetual Technologies from December 29, 2008 until February 12, 2010. |
| (3) | Eric Gan was appointed Chief Financial Officer on August 4, 2010. Mr. Gan is paid an annual salary of $120,000. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date. This amount of the option award set forth in the table represents the grant date fair value computed in accordance with Accounting Standards Codification, or ASC, Topic 718, and does not reflect whether our named executive officer has actually realized a financial benefit from the award. For information on the assumptions used to calculate the value of the awards, we refer you to Note 14 “Equity and stock based compensation” to our consolidated financial statements for the fiscal year ended September 30, 2010 included elsewhere in this prospectus. In accordance with SEC rules, the amount shown excludes the impact of estimated forfeitures related to service-based vesting conditions. |
The following is a summary of the compensation paid by our operating subsidiary Foshan to Li Jie, its President and Chief Executive Officer, for the last two fiscal years ended September 30, 2010 and 2009, respectively. No executive officer of Foshan received compensation in excess of $100,000 for any of these two years.
Name and Principal Position | | Fiscal Year | | Salary ($)(1) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
| Li Jie | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (President and Chief | | 2010 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
| Executive Officer ) | | 2009 | | | 44,117 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 44,117 | |
(1) The relevant exchange rates for fiscal years ended September 2010 and 2009 are $1 to RMB 6.8 and RMB 6.8, respectively.
| | | OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |
| | | OPTION AWARDS | | | | | | | | | | | | | STOCK AWARDS | |
Name (a) | | Number of Securities Underlying Unexercised and Earned options (#) (b) | | | Number of Securities Underlying Unexercised Unearned Options (#) (c) | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) | | | Option Exercise Price ($) (e) | | | Option Expiration Date ($) (f) | | | Number of Shares or Units of Stock that have not Vested (#) (g) | | | Market Value of Shares of Units of Stock that Have not Vested ($) (h) | | | Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i) | | | Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) (j) | |
| Li Jie | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Seth Winterton | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Eric Gan | | | -0- | | | | -0- | | | | 400,000 | | | | (1 | ) | | | (2 | ) | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| (1) | On September 3, 2010, Eric Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares vests immediately on the termination date. |
| (2) | The option will expire on September 3, 2015. |
Employment Agreement
On November 20, 2008, Mr. Li entered into an employment agreement with Foshan to serve as our President and Chief Executive Officer. Under the agreement, Mr. Li is to be paid a salary of $15,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 days notice.
On January 1, 2010, Mr. Law entered into an employment agreement with Foshan to serve as our President of Sales. Under the agreement, Mr. Law is to be paid a salary of $5,000 per month beginning on the closing date of the public offering. The agreement can be terminated by either party by giving 30 day notice.
Effective August 5, 2010, Mr. Gan entered into an employment agreement with the Company to serve as Chief Financial Officer. The term is for three years unless sooner terminated as provided in the agreement. Under the agreement Mr. Gan has agreed to perform such duties as shall be consistent with the position of Chief Financial Officer subject to the supervision and direction of the Board. Under the agreement Mr. Gan will receive an annual salary of $120,000 payable in 12 equal payment payable on the 15th day of each month beginning on August 15, 2010). However, prior to the completion of the offering contemplated by this prospectus, Mr. Gan will receive a salary of $6,000 per month (receiving $10,000 for the month during which the Company completes its initial public offering and thereafter). In addition to his annual salary, Mr. Gan will be reimbursed for all reasonable expenses including travel expense between United States and China and will be provided with housing expense during the term of his employment. In addition, on September 3, 2010, Mr. Gan was granted an option to purchase up to 400,000 shares of common stock at an exercise price equal to the initial public offering price. The option shall vest and be exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
2010 Stock Incentive Plan
On September 3, 2010, we adopted the 2010 Plan. All officers and key employees, directors of, and consultants to the Company and its subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its subsidiaries and affiliates are eligible for participation in the 2010 Plan. Two Million One Hundred Eighty Six Thousand Two Hundred Eighteen (2,186,218) (or such number as shall be equal to 10% of the outstanding shares on a fully diluted basis after the offering and the conversion of the notes) shares of common stock have been authorized and reserved for the 2010 Plan and any shares that may become available for issuance under awards under the 2010 Plan as a result of expiration or forfeiture. Under the 2010 Plan, the company may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards. The 2010 Plan is administered by our Compensation Committee.
The purpose of the 2010 Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company to offer eligible participants stock-based incentives in the Company to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders.
The Compensation Committee does not currently have a set formula for determining who will receive awards and what the amounts of the awards will be and when such awards will be made. The Compensation Committee can make an award in its discretion at any time as consistent with the terms of the 2010 Plan. Long-term equity incentives are intended to reward and will be awarded to eligible participants who help achieve our overall corporate goals and meet their individual employee objectives.
Outstanding Equity Awards
On September 3, 2010, as required by the terms of his agreement with the Company entered into in May 2010, the Board awarded Richard Cohen 30,000 shares of restricted stock two-thirds of which are subject to restrictions on transfer and are subject to forfeiture, with the restrictions lapsing as to one-third of the shares on the first anniversary of the date of grant, and as to one-third on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates.
On September 3, 2010, under the 2010 Plan and in connection with his appointment as Chief Financial Officer, the Board granted Eric Gan an option to purchase 400,000 shares at an exercise price equal to the public offering price of this offering. The option vests and is exercisable as follows; 160,000 shares will vest and become exercisable on July 31, 2011; 120,000 shares will vest and become exercisable on July 31, 2012; 120,000 shares will vest and become exercisable on July 31, 2013. In the event that the employment is terminated within 12 months from the employment agreement date by the Company without cause, 160,000 shares shall be vested immediately on the termination date.
Except for the foregoing there are no option exercises, options outstanding or restricted stock grants as of the date of this prospectus.
Compensation of Directors
The table below sets forth the compensation of the directors during the last completed fiscal year:
DIRECTOR COMPENSATION
Name (a) | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | Option Awards ($) (d) | | | Non-Equity Incentive Plan Compensation ($) (e) | | | Nonqualified Deferred Compensation Earnings ($) (f) | | | All Other Compensation ($) (g) | | | Total ($) (h) | |
| Law Wawai | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Chris Bickel | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Li Jun | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Richard M. Cohen (1) | | | -0- | | | | 180,000 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 180,000 | |
| Su Lei | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
(1) In May 2010, we entered into a director’s agreement with Richard M. Cohen, which agreement was effective with his election to the Board. Under the terms of that agreement Mr. Cohen is required to be paid an annual retainer of $24,000 for serving as a director (with $2,000 payable at the beginning of each month). Under an oral agreement Mr. Cohen has agreed with us that the payment of the monthly retainer will commence on closing of this offering. We have not made any payments of this retainer as of the date of this prospectus. In addition, pursuant to the 2010 Plan, on September 3, 2010, Mr. Cohen was granted 30,000 restricted shares, two-thirds of which are subject to restrictions on transfer and to forfeiture, with the restrictions lapsing as to one-third of the shares, on the first anniversary of the date of grant, and as to one-third, on the second anniversary of the date of grant in the event Mr. Cohen continues to be a director on those dates. In addition, the Company will reimburse Mr. Cohen for pre-approved reasonable business-related expenses incurred in good faith in the performance of the director’s duties for the Company. The amount set forth in the table above under “Option Awards” represents the grant date fair value of the award computed in accordance with ASC Topic 718.
Except as set forth above as of the date of this prospectus, we have no formal or informal arrangements or agreements to compensate our directors for services they provide as directors. We plan to implement a compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.
None of the directors of Foshan, our PRC-based operating company, are presently being compensated for their service as directors.
Li Jun, our director, is an officer and controlling stockholder of United Best, our foreign advisor. See section entitled “Certain Relationships and Related Transactions” beginning on page 85.
Additional Narrative Disclosure
We have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified defined benefit plans, supplemental executive retirement plans, tax qualified defined contribution plans and non-qualified defined contribution plans.
There are no contracts agreements, plans or arrangements, whether written or oral, that provide for payment to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer or a change in control or the company or a change in the executive officers responsibilities following a change in control, with respect to each named executive officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, since October 1, 2008, the Company was not a party to any transaction (where the amount involved exceeded the lesser of $120,000 or 1% of the average of our assets for the last two fiscal years) in which an director, executive officer, holder of more than five percent of our common stock, or any member of the immediate family of any such person have or will have a direct or indirect material interest and no such transactions are currently proposed.
Primary Capital is a beneficial owner of more than 5% of our common stock. Mr. Bickel is also the President of Primary Capital. Chris Bickel is a director of our company serving as a designee of Primary Capital.
Primary Capital provided financial services in connection with the private placement and reverse merger which closed on February 12, 2010. The services provided and to be provided by Primary Capital include the following:
| · | assisting the Company in preparing a detailed business plan, financial model and power point presentation; |
| · | negotiating and structuring the reverse merger; |
| · | acting as placement agent for the February 12, 2010 note financing; |
| · | recommending to the Company a qualified auditor, securities attorney and investor relations firm, and assisting the Company with negotiating the terms of their respective engagements; |
| · | advising the Company on strategies to increase shareholder value; |
| · | assisting the Company and its investor relations firm in organizing, and participating with the Company in, investor road shows and investor conference calls; |
| · | recommending investor conferences in the US and Europe to be attended by the Company and a representative of Primary Capital; |
| · | identifying strategic relationships and joint venture partners; |
| · | identifying and recommending persons to serve on the Company’s Board of Directors; |
| · | identifying and rendering advice regarding potential acquisitions, including the valuation of the acquisition and financing for the acquisition; |
| · | assisting the Company in connection with its listing on a U.S. stock exchange; |
| · | reviewing and commenting on the Company’s SEC filings associated with the Company’s transactions; and |
| · | advising Company regarding its obligations as a U.S. public company. |
United Best, our foreign advisor controlled by Mr. Li Jun, one of our directors, provided financial services in connection with our reverse merger with Hong Hui completed on February 12, 2010. These services included advising the company on structuring the reverse merger, assisting the company in retaining service providers such as accountants, PRC and US attorneys to effect the reverse merger and working with those service providers to facilitate the completion of the reverse merger. Additionally, United Best will assist the Company with on-going communications and coordinating the relationships with service providers during the NASDAQ listing process.
Under the terms of a financial services agreement between Primary Capital and the company, Primary Capital was paid a commission of $202,000 at the closing of the February 2010 private financing. Primary Capital is also owed an additional $75,000 for services rendered in connection with the private placement. Primary Capital is also entitled to receive $15,000 on completion of the offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000.
At the closing of the private financing, Primary Capital received 290,755 shares of our common stock. Primary is also entitled to receive 265,186 shares of common stock on the closing of this offering.
In addition, for providing these financial services Primary Capital is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which number is equal to 5% of the 1,923,809 shares of common stock issued to the noteholders on conversion), exercisable at $2.10 (which equals the price at which the notes converted and assumes an initial public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable upon conversion of the notes and consummation of this offering. If the note conversion does not occur, Primary Capital will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable.
Li Jun is a director and is a beneficial owner of more than 5% of our common stock. Mr. Li is an officer and controlling stockholder of United Best, our foreign advisor, provided financial services in connection with the private financing.
Under the terms of a consulting agreement between United Best and the company, United Best was paid a commission of $202,000 at the closing of the financing. United Best is also owed an additional $75,000 for services rendered in connection with the financing. Additionally, under the consulting agreement, as amended, United Best is entitled to be paid fee on completion of this offering a success of $750,000 (which represents 3% of the $25,000,000 in gross proceeds received by us in connection with the underwritten offering, assuming an initial public offering price of $6.00 per share).
At the closing of the private financing, United Best received 362,755 shares of our common stock for their services. United Best is also entitled to receive an additional 193,186 shares on closing of this offering.
In addition, as partial consideration for providing these financial services, United Best is entitled to receive, on conversion of the notes issued to the investors in the February 2010 private placement (which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which represents 5% of the number of shares of common stock issued to the note holders on conversion), exercisable at the price of $2.10 per share (i.e. the price at which the notes converted based on the assumed initial public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable on conversion of the notes and consummation of this offering. If the note conversion does not occur, United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable.
For additional information about the nature of the services provided to the company by each of Primary Capital and United Best under their respective agreements, reference is make to “Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants - Financial Services Agreements and Related Warrants” beginning on page 61.
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As shareholders of Hong Hui, (i) Bestyield Group, a company controlled by Mr. Li, our chief executive officer, received 4,353,061 shares, (ii) Proudlead, a company controlled by Mr. Law, our president of sales and a director, received 4,353,061 shares and (iii) Newise Holdings Limited, a company controlled by Mr. Li Jun one of our directors received 2,321,633 shares.
Under a limited recourse guaranty agreement dated as of February 12, 2010, Bestyield Group and Proudlead agreed to guaranty the company’s obligations under the notes issued in the February 2010 private placement. That guaranty is secured by a pledge of the 8,706,122 shares of common stock received by them in the reverse merger
In each of June 2007 and in February 2008 and May 2008, Joseph Nemelka, a former officer and director, advanced funds to the company in the total aggregate amount of $15,000. The advances were due on demand and bore interest at 8% per annum. This indebtedness was forgiven in February 2010 prior to the reverse merger. In addition, Mr. Nemelka purchased a convertible promissory note in the aggregate principal amount of $100,000 in the February private placement.
Our board of directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Except for the foregoing, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to the Company at any time since the beginning of the Company’s last fiscal year.
DESCRIPTION OF SECURITIES
The following is a summary description of our capital stock and certain provisions of our certificate of incorporation and by-laws, copies of which have been filed as exhibits to this prospectus. The following discussion is qualified in its entirety by reference to such exhibits.
General
We are authorized to issue 200,000,000 shares of common stock, par value $.001 per share, and 10,000,000 shares of blank-check preferred stock, par value $.001 per share.
Immediately following the closing of this offering, 21,814,562 shares of common stock will be issued and outstanding (excluding shares issuable upon exercise of the over-allotment option). In addition, 192,380 shares may be purchased upon the exercise of placement agent warrants, 208,333 shares may be purchased upon the exercise of underwriter’s warrants and 400,000 shares are issuable on exercise of outstanding options.
Common Stock
Each share of our common stock has one vote on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. In the event we are liquidated, the holders of common stock will share equally in any balance of our assets available for distribution to them after satisfaction of creditors and preferred shareholders. The holders of our common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as, and if declared by the board of directors from funds legally available.
Preferred Stock
In addition to the 200,000,000 shares of common stock, we are authorized to issue 10,000,000 shares of preferred stock. Shares of our preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance of any shares thereof.
The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable the holder to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common stock. Although the board of directors is required to make any determination to issue such stock based on its judgment as to the best interests of our stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law.
Notes and Warrants
On February 12, 2010, immediately following the closing of the share exchange agreement, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes, in the aggregate principal amount of $4,140,000, and warrants (which are exercisable only in certain events). The closing of the sale of the notes and warrants occurred on February 12, 2010. The terms of the notes, as amended, and warrants is set forth below. The note purchase agreement contains representations, warranties and covenants which are customary for transactions of this nature.
The notes have the following material terms:
Maturity: The notes were originally scheduled to mature on February 12, 2011. On January 31, 2011 we entered into note extension agreements with each of the holders of the notes (other than Lumen Capital) to extend the maturity date to June 30, 2011. If the principal is not paid on maturity then 150% of the principal amount shall be payable. We plan to repay the note held by Lumen Capital in the principal amount of $100,000 on February 12, 2011.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default.
Conversion: In the event of the closing of this offering, the $4,040,000 aggregate principal amount of the notes then outstanding shall convert automatically into 1,923,809 shares of common stock at a conversion price of $2.10 per share (which represents a 65% discount to the assumed offering price of $6.00 per share).
The warrants have the following material terms:
Exercisable: The warrants will become void if the notes automatically convert into common stock (which will be the case if the offering contemplated by this prospectus closes). The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date.
Number of Shares: The warrants represent the right to purchase 8% of the total number of shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the “financing.”
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
Underwriter’s Warrants
We have also agreed to issue to Brean Murray, Carret & Co., LLC, and/or its designees, a warrant to purchase a number of shares of common stock equal to an aggregate of 5% of the shares of common stock sold in the offering, excluding over-allotments, if any. The warrant will have an exercise price equal to 125% of the offering price of the shares of common stock sold in this offering and be exercisable for four years commencing one year after the effective date of the registration statement. Pursuant to the rules of the Financial Industry Regulatory, Inc., or FINRA (formerly the NASD), and in particular Rule 5110(g)(1), the warrant (and underlying shares) issued to Brean Murray, Carret & Co., LLC, shall not be sold during the offering, or sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the public offering, except as provided in Rule 5110(g)(2).
Financials Advisor Warrants
For a description of the warrants issued to the financials advisors in connection with the private placement, see the section above entitled “Certain Relationships and Related Transactions,” beginning on page 85.
Exchange Listing
We have applied for listing of our common stock on the NASDAQ Capital Market under the symbol “SLPC.”
Recent Stockholder Actions
On February 12, 2010, immediately prior to the closing of the share exchange agreement, shareholders holding 2,528,000 of the 2,600,000 shares of our then outstanding common stock agreed to surrender their shares for cancellation in payment by Joe Nemelka of an aggregate amount of $40,000, pursuant to stock purchase agreements entered into between Joe Nemelka and each such holder. Under the share exchange agreement we issued an aggregate of 14,510,204 shares of common stock to the stockholders of Hong Hui. In addition, immediately following the closing of the share exchange agreement we issued 362,755 and 290,755 shares of our common stock to United Best and Primary Capital, respectively, as a transaction fee in connection with the closing of the private financing. In addition there are 72,000 shares held by 210 round lot shareholders. Accordingly, as of February 12, 2010 following the closing of all of these transactions, there were 15,235,714 shares of common stock issued and outstanding.
As more fully described in an Information Statement on Schedule 14C (which was mailed to our stockholders on March 3, 2010), on February 12, 2010, the board of directors and the holders of majority of our outstanding shares entitled to vote thereon approved the change the name of the company to China Filtration Technology, Inc. and 1-for-5 reverse stock split of our shares of common stock.
These corporate actions became effective on the filing with the Secretary of State of Delaware of a certificate of amendment to our certificate of incorporation which was filed on March 24, 2010.
On June 1, 2010 the corporate name was changed to China SLP Filtration Technology, Inc.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general summary of certain material U.S. federal income tax consequences to an investor of the acquisition, ownership and disposition of our common stock purchased by an investor pursuant to this offering. As used in this discussion, “we”, “our” and “us” refers to China SLP Filtration Technology, Inc. This discussion applies only to investors that will hold each share of our common stock issued and purchased pursuant to this offering as a “capital asset” (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to an investor in light of that investor’s particular circumstances. In addition, this discussion does not address (a) U.S. federal non-income tax laws, such as estate or gift tax laws, (b) state, local or non-U.S. tax consequences, or (c) the special tax rules that may apply to certain investors, including, without limitation, banks, insurance companies, financial institutions, broker-dealers, taxpayers that have elected mark-to-market accounting, taxpayers subject to the alternative minimum tax provisions of the Code, tax-exempt entities, governments or agencies or instrumentalities thereof, regulated investment companies, real estate investment trusts, U.S. persons whose functional currency is not the U.S. dollar, certain former U.S. citizens or long-term residents of the United States, or investors that acquire, hold, or dispose of our common stock as part of a straddle, hedge, wash sale, constructive sale or conversion transaction or other integrated transaction. Additionally, this discussion does not consider the tax treatment of entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or of persons who hold our common stock through such entities. The tax treatment of a partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. Thus, partnerships, other pass-through entities (and partners in such partnerships or owners of such other pass-through entities) should consult their own tax advisors.
This discussion is based on current provisions of the Code, its legislative history, U.S. Treasury regulations promulgated under the Code, judicial opinions, and published rulings and procedures of the U.S. Internal Revenue Service (“IRS”), all as in effect on the date of this prospectus. These authorities are subject to differing interpretations or to change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed below, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
As used in this discussion, the term “U.S. person” means a person that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized (or treated as created or organized) in or under the laws of the United States or of any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (B) it has in effect a valid election to be treated as a U.S. person under applicable U.S. Treasury regulations. As used in this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is a U.S. person, and the term “non-U.S. holder” means a beneficial owner of our common stock (other than an entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a U.S. person.
THIS DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX TREATY.
U.S. Holders
Taxation of Distributions
A U.S. holder will be required to include in gross income as ordinary income the amount of any dividend paid on the shares of our common stock. A distribution on such shares will be treated as a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain from the sale or other taxable disposition of the common stock and will be treated as described under “Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
Any dividends we pay to a U.S. holder that is treated as a taxable corporation for U.S. federal income tax purposes generally will qualify for the dividends-received deduction if the applicable holding period and other requirements are satisfied. With certain exceptions, if the applicable holding period and other requirements are satisfied, dividends we pay to a non-corporate U.S. holder will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains for tax years beginning on or before December 31, 2010, after which the tax rate applicable to dividends is scheduled to return to the tax rate applicable to ordinary income.
If PRC taxes apply to any dividends paid to a U.S. holder on our common stock, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
In general, a U.S. holder must treat any gain or loss recognized upon a sale, taxable exchange, or other taxable disposition of our common stock as capital gain or loss. Any such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for the common stock so disposed of exceeds one year, and otherwise as short-term capital gain or loss. In general, a U.S. holder will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis in the common stock so disposed of. Long-term capital gain recognized by a non-corporate U.S. holder will generally be subject to a maximum tax rate of 15 percent for tax years beginning on or before December 31, 2010, after which the maximum long-term capital gains tax rate is scheduled to increase to 20 percent. The deduction of capital losses is subject to various limitations.
If PRC taxes apply to any gain from the disposition of our common stock by a U.S. holder, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and such U.S. holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.
New Legislation Regarding Medicare Tax
For taxable years beginning after December 31, 2012, certain U.S. holders that are individuals, estates or trusts will be subject to a 3.8% tax on all or a portion of their "net investment income," which may include all or a portion of their dividends and net gains from the sale or other disposition of our common stock. If you are a U.S. holder that is an individual, estate or trust, you should consult your tax advisor regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our common stock.
Non-U.S. Holders
Taxation of Distributions
In general, any distribution we make to a non-U.S. holder, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute a dividend for U.S. federal income tax purposes. Unless we are treated as an “80/20 company” for U.S. federal income tax purposes, as described below, any dividend paid to a non-U.S. holder with respect to shares of our common stock that is not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, as described below, generally will be subject to U.S. federal withholding tax at a rate of 30 percent of the gross amount of the dividend, unless such non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN). Any distribution not constituting a dividend will be treated first as reducing the non-U.S. holder’s adjusted tax basis in its shares of our common stock (but not below zero) and, to the extent such distribution exceeds the non-U.S. holder’s adjusted tax basis, as gain from the sale or other taxable disposition of the common stock, which will be treated as described under “Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.
There is a possibility that we may qualify as an “80/20 company” for U.S. federal income tax purposes. In general, a U.S. corporation is an 80/20 company if at least 80 percent of its gross income earned directly or from subsidiaries during an applicable testing period is “active foreign business income.” The 80 percent test is applied on a periodic basis. If we qualify as an 80/20 company, a percentage of any dividend paid by us generally will not be subject to U.S. federal withholding tax. You should consult with your own tax advisors regarding the amount of any such dividend subject to withholding tax in this circumstance. It should also be noted that there are currently legislative proposals to amend the rules pertaining to 80/20 companies.
Dividends we pay to a non-U.S. holder that are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States (and, if certain income tax treaties apply, are attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder) generally will not be subject to U.S. withholding tax, provided such non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated individual or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be specified by an applicable income tax treaty).
Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale, exchange or other disposition of common stock, unless:
| · | the gain is effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, under certain income tax treaties, is attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder); |
| · | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met, and is not eligible for relief under an applicable income tax treaty; or |
| · | we are or have been a “United States real property holding corporation” (“USRPHC”) for U.S. federal income tax purposes at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of, and, generally, in the case where our common stock is regularly traded on an established securities market, the non-U.S. holder has owned, directly or indirectly, more than 5 percent of the common stock disposed of, at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holder’s holding period for the common stock disposed of. |
There can be no assurance that our common stock will be treated as regularly traded on an established securities market for this purpose.
Unless an applicable tax treaty provides otherwise, gain described in the first and third bullet points above generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated tax rates applicable to U.S. persons. Any gains described in the first bullet point above of a non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30 percent rate (or a lower applicable tax treaty rate). Any U.S. source capital gain of a non-U.S. holder described in the second bullet point above (which may be offset by U.S. source capital losses during the taxable year of the disposition) generally will be subject to a flat 30 percent U.S. federal income tax (or a lower applicable tax treaty rate).
In connection with the third bullet point above, we generally will be classified as a USRPHC if the fair market value of our “United States real property interests” equals or exceeds 50 percent of the sum of the fair market value of our worldwide real property interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes. We believe that we currently are not a USRPHC, and we do not anticipate becoming a USRPHC (although no assurance can be given that we will not become a USRPHC in the future).
Information Reporting and Backup Withholding
Other than with respect to U.S. holders who are “exempt recipients,” we generally must report annually to the IRS and to each holder the amount of dividends and certain other distributions we pay to such holder on our common stock and the amount of tax, if any, withheld with respect to those distributions. In the case of a non-U.S. holder, copies of the information returns reporting those distributions and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. Information reporting is also generally required with respect to proceeds from the sales and other dispositions of our common stock to or through the U.S. office (and in certain cases, the foreign office) of a broker.
In addition, backup withholding of U.S. federal income tax, currently at a rate of 28 percent, generally will apply to distributions made on our common stock to, and the proceeds from sales and other dispositions of our common stock by, a non-corporate U.S. holder who:
| · | fails to provide an accurate taxpayer identification number; |
| · | is notified by the IRS that backup withholding is required; or |
| · | in certain circumstances, fails to comply with applicable certification requirements. |
A non-U.S. holder generally may eliminate the requirement for information reporting (other than with respect to distributions, as described above) and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. holder’s or a non-U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedure for obtaining an exemption from backup withholding in their particular circumstances.
Recently Enacted Legislation Relating to Foreign Accounts
On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act into law. Effective for payments made after December 31, 2012, this law imposes a 30% U.S. federal withholding tax on distributions and the gross proceeds of sale in respect of our shares of common stock to a foreign financial institution or non-financial foreign entity, unless (i) in the case of a foreign financial institution, such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) and to withhold on certain payments and (ii) in the case of a non-financial foreign entity, such entity provides the withholding agent with a certification identifying the direct and indirect U.S. owners of the entity. Under certain circumstances, a non-U.S. shareholder might be eligible for refunds or credits of such taxes. Prospective investors should consult with their own tax advisor regarding the possible implications of this recently enacted legislation on the ownership and disposition of our common stock.
MATERIAL PRC INCOME TAX CONSIDERATIONS
The following discussion summarizes the material PRC income tax considerations relating to the ownership of our common stock following the consummation of this offering.
Resident Enterprise Treatment
Under Enterprise Income Tax Law of the PRC (“EIT Law”) that became effective on January 1, 2008, enterprises are classified as “resident enterprises” and “non-resident enterprises.” Enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC “tax resident enterprises” and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Given the short history of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a non-PRC company such as us. Our management is substantially based in the PRC and expected to be based in the PRC in the future, although two of our executive officers and one of our directors are not PRC nationals. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable tax consequences could follow. First, we could be subject to the enterprise income tax at a rate of 25% on our global taxable income, as well as PRC enterprise tax reporting obligations. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiary would qualify as “tax-exempted income”, we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC EIT purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise shareholders or a potential withholding tax of 20% for non-PRC individual shareholders is imposed on dividends we pay to them and with respect to gains derived by our non-PRC shareholders from transferring our shares. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. We are actively monitoring the “resident enterprise” classification rules and are evaluating appropriate organization changes to avoid this treatment, to the extent possible.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. However, since it is not anticipated that we would receive dividends or generate other income in the near future, we are not expected to have any income that would be subject to the 25% enterprise income tax on global income in the near future. We will consult with the PRC tax authorities and make any necessary tax payment if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a resident enterprise under the EIT Law, and if we were to have income in the future.
Dividends From PRC Operating Companies
If we are not treated as resident enterprises under the EIT Law, then dividends that we receive may be subject to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will normally be applicable to investors that are “non-resident enterprises,” or non-resident investors, which (i) have establishments or premises of business inside the PRC, and (ii) the income in connection with their establishment or premises of business is sourced from the PRC or the income is earned outside the PRC but has actual connection with their establishments or places of business inside the PRC, and (B) an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
As described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, on a case-by-case basis. We are a holding company and substantially all of our income may be derived from dividends. Thus, if we are considered as a “non-resident enterprise” under the EIT Law and the dividends paid to us are considered income sourced within the PRC, such dividends received may be subject to the income tax described in the foregoing paragraph.
As of the date of this prospectus, there has not been a definitive determination as to the “resident enterprise” or “non-resident enterprise” status of us. As indicated above, however, we are not expected to be paid any dividends in the near future. We will consult with the PRC tax authorities and make any necessary tax withholding if, in the future, we were to be paid any dividends and we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we are a non-resident enterprise under the EIT Law.
Dividends that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of Our Common Stock
If dividends payable to (or gains recognized by) our non-resident investors are treated as income derived from sources within the PRC, then the dividends that non-resident investors receive from us and any such gain on the sale or transfer of our common stock, may be subject to taxes under PRC tax laws.
Under the EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of common stock by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.
The dividends paid by us to non-resident investors with respect to our common stock, or gain non-resident investors may realize from sale or the transfer of our common stock, may be treated as PRC-sourced income and, as a result, may be subject to PRC tax at a rate of 10%. In such event, we also may be required to withhold a 10% PRC tax on any dividends paid to non-resident investors. In addition, non-resident investors in our common stock may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock after the consummation of the offering if such non-resident investors and the gain satisfy the requirements under the EIT Law and its implementing rules. However, under the EIT Law and its implementing rules, we would not have an obligation to withhold income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
If we were to pay any dividends in the future, we would again consult with the PRC tax authorities and if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we must withhold PRC tax on any dividends payable by us under the EIT Law, we will make any necessary tax withholding on dividends payable to our non-resident investors. If non-resident investors as described under the EIT Law (including U.S. investors) realized any gain from the sale or transfer of our common stock and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying 10% PRC income tax on the gain from the sale or transfer of our common stock. As indicated above, under the EIT Law and its implementing rules, we would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our common stock from and after the consummation of this offering.
Penalties for Failure to Pay Applicable PRC Income Tax
Non-resident investors in us may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock after the consummation of this offering if such non-resident investors and the gain satisfy the requirements under the EIT Law and its implementing rules, as described above.
According to the EIT Law and its implementing rules, the PRC Tax Administration Law (the “Tax Administration Law”) and its implementing rules, the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (the “Administration Measures”) and other applicable PRC laws or regulations (collectively the “Tax Related Laws”), where any gain derived by non-resident investors from the sale or transfer of our common stock is subject to any income tax in the PRC, and such non-resident investors fail to file any tax return or pay tax in this regard pursuant to the Tax Related Laws, they may be subject to certain fines, penalties or punishments, including without limitation: (1) if a non-resident investor fails to file a tax return and present the relevant information in connection with tax payments, the competent tax authorities shall order it to do so within the prescribed time limit and may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax return or fails to pay all or part of the amount of tax payable, the non-resident investor shall be required to pay the unpaid tax amount payable, a surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue amount, beginning from the day the deferral begins), and a fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor fails to file a tax return or pay the tax within the prescribed time limit according to the order by the PRC tax authorities, the PRC tax authorities may collect and check information about the income items of the non-resident investor in the PRC and other payers (the “Other Payers”) who will pay amounts to such non-resident investor, and send a “Notice of Tax Issues” to the Other Payers to collect and recover the tax payable and impose overdue fines on such non-resident investor from the amounts otherwise payable to such non-resident investor by the Other Payers; (4) if a non-resident investor fails to pay the tax payable within the prescribed time limit as ordered by the PRC tax authorities, a fine may be imposed on the non-resident investor ranging from 50% to 500% of the unpaid tax payable; and the PRC tax authorities may, upon approval by the director of the tax bureau (or sub-bureau) of, or higher than, the county level, take the following compulsory measures: (i) notify in writing the non-resident investor’s bank or other financial institution to withhold from the account thereof for payment of the amount of tax payable, and (ii) detain, seal off, or sell by auction or on the market the non-resident investor’s commodities, goods or other property in a value equivalent to the amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount of tax payable or surcharge for overdue tax payment, and can not provide a guarantee to the tax authorities, the tax authorities may notify the frontier authorities to prevent the non-resident investor or their legal representative from leaving the PRC.
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement, dated , 2011, by and between us, Brean Murray, Carret & Co., LLC, who is acting as the book-running management and representative of underwriters of this offering, each underwriter has agreed to purchase from us and we have severally agreed to sell, on a firm commitment basis, the number of shares of common stock set forth below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus.
| Underwriter | | Number of Common Stock | |
| Brean Murray, Carret & Co., LLC | | | | |
| | | | |
| Total | | | | |
The underwriters have agreed to purchase all shares of common stock offered by this prospectus (other than those covered by the over-allotment option described below), if any are purchased. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the common stock are subject to the passing upon certain legal matters by counsel and certain conditions such as confirmation of the accuracy of representations and warranties by us about our financial condition and operations and other matters.
Commissions and Discounts
The following table shows the underwriting fees to be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
| | No Exercise | | | Full Exercise | |
| Per share | | $ | | | | $ | | |
| Total | | $ | | | | $ | | |
We have also agreed to reimburse Brean Murray, Carret & Co., LLC up to $70,000 for legal services provided by outside counsel and up to $55,000 for other reasonable and customary out-of-pocket expenses incurred by Brean Murray, Carret & Co., LLC.
United Best, our foreign advisor, will receive a fee of $ ($ if the over-allotment option is exercised in full), which is in addition to the underwriting discounts and commissions in the above table. We estimate that the total fees and expenses payable by us, excluding underwriting discounts and commissions, and the fee payable to United Best will be approximately million.
Pricing of Securities
The underwriters have advised us that they propose to offer the shares to the public at $ per share. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $ per share. The underwriters may allow, and the dealers may reallow, a concession of not more than $ per share on sales to certain other brokers and dealers. After this offering, these figures may be changed by the underwriters.
The initial public offering price for shares of our common stock offered by this prospectus was negotiated by us and the underwriters. The factors considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, our past and present operations, our historical results of operations, our prospectus for future earnings, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of this offering and other relevant factors. There can be no assurance that the initial public offering price of shares of our common stock will correspond to the price at which our shares will trade in the public market subsequent to this offering or that an active public market for our common stock will develop and continue after this offering.
Over-allotment Option
We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of additional shares of common stock from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares of common stock covered by the option at the public offering price that appears on the cover page of this prospectus, less the same underwriting discount as set forth above. The underwriters have severally agreed that to the extent the over-allotment option is exercised they will each purchase a number of additional shares of common stock proportionate to the underwriter's initial amount reflected in the table above.
Underwriter’s Warrants
We have also agreed to issue to Brean Murray, Carret & Co., LLC, and/or its designees as warrant to purchase a number of shares of common stock equal to an aggregate of 5% of the shares of common stock sold in the offering, excluding over-allotments, if any. The warrant will have an exercise price equal to 125% of the offering price of the shares of common stock sold in this offering. The warrant will be exercisable for four years commencing one year after the effective date of the registration statement, and will therefore cease to be exercisable five years after the effective date of the registration statement. Pursuant to the rules of the Financial Industry Regulatory Authority, Inc., or FINRA (formerly the NASD), and in particular Rule 5110 (g)(1), the warrant (and underlying shares) issued to Brean Murray, Carret & Co., LLC, may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such warrant by any person for a period of 180 days immediately following the effective date of the registration statement, except as provided in FINRA Rule 5110 (g)(2).
Lock-Up Agreements
We and each of our directors, executive officers, 5% shareholders and other existing stockholders are subject to lock-up agreements that, subject to certain exceptions, prohibit us and them from, (1) offering, pledging, announcing the intention to sell, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant to purchase, making any short sale or otherwise transferring or disposing of, directly or indirectly, any shares of our common stock or any securities convertible into, exercisable or exchangeable for or that represent the right to receive our shares of common stock, whether now owned or hereafter acquired, or (2) entering into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our shares of common stock, whether any such transaction described in clause (1) or (2) foregoing is to be settled by delivery of shares of common stock or such other securities, in cash or otherwise, for a period of at least 90 days following the effective date of the registration statement without the prior written consent of the underwriters' representative.
The lock-up period in all of the lock-up agreements is subject to extension if (1) during the last 17 days of the lock-up period, we release earnings results or material news or a material event relating to us occurs, or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which cases the restrictions imposed in these lock-up agreements shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.event, unless the underwriters’ representative waives the extension in writing.
The underwriters' represetative may agree at its discretion and at any time or from time to time, without notice, to release all or any portion of the shares subject to the lock-up agreements described above.
Other Terms
The underwriting agreement provides for indemnification by and among us andWe have agreed to indemnify the underwriters against specifiedcertain liabilities, including civil liabilities under the Securities Act, and for contribution by us and the underwritersor to contribute to payments that the underwriters may be required to be made withmake in respect toof those liabilities.
We have been advisedagreed that, upon successful completion of this offering, for a period of twelve (12) months from the closing of this offering, we will grant Brean Murray, Carret & Co., LLC the right of participation to act as, in our discretion, lead underwriter or minimally as a co-manager with at least 50.0% of the economics, or, in the opinioncase of a three-underwriter or -placement agent transaction, 33.0% of the Securitieseconomics, for each and Exchange Commission, indemnificationevery future public and private equity and public debt offering of liabilities under the Securities Act is against public policy as expressed inCompany (or any successor to or subsidiary of the Securities Act, and is therefore, unenforceable.Company) during such twelve (12) month period.
Price Stabilization, Short Positions, Passive Market-Making
In connection with this offering, the underwriters may engage in activities that stabilize, maintain, or otherwise affect the price of our shares of common stock, including:
| | · | stabilizing transactions; |
| | · | purchases to cover positions created by short sales; |
| | · | imposition of penalty bids; |
| | · | covering transactions; and |
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our shares of common stock while this offering is in progress. These transactions may also include making short sales of our shares of common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering. Short sales may be “covered short sales,” which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked short sales,” which are short positions in excess of that amount. The effect of these transactions may be to stabilize or maintain the market price of our securities at a level above that which might otherwise prevail in the open market.
The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which they may purchase shares through the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.
The underwriters also may impose a penalty bid, which occurs when a particular underwriter repays to the underwriters’ represetativerepresentative a portion of the underwriting discount received by it because the underwriter’s has repurchased shares sold by or for the account of that underwriter in stabilizing or short-covering transactions.
As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on NASDAQ Global Market or the NASDAQ Capital Market, in the over-the-counter market, or otherwise.
In addition, in connection with this offering, certain of the underwriters (and selling group members) may engage in passive market-making transactions in our common stock on NASDAQ Global Market or the NASDAQ Capital Market or in the over-the-counter market prior to the pricing and completion of this offering. Passive market-making consists of displaying bids on NASDAQ Global Market or the NASDAQ Capital Market or in the over-the-counter market no higher than the bid prices of independent market makers and making purchases at prices no higher than these independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker’s average daily trading volume in the common stock during a specified period and must be discontinued when such limit is reached. Passive market-making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If passive market-making is commenced, it may be discontinued at any time. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of our securities.
Other Matters
A prospectus in electronic format may be made available on a website maintained by the representative of the underwriters and may also be made available on a website maintained by other underwriters. The underwriters may agree to allocate a number of shares for sale to its online brokerage account holders. Internet distributions will be allocated by the representative of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations. In connection with the offering, the underwriters or syndicate members may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
The underwriters have informed us that they do not expect to confirm sales of common stock offered by this prospectus to accounts over which they exercise discretionary authority.
Selling Restrictions
General
No action has been or will be taken by us or by any underwriter in any jurisdiction except in the United States that would permit a public offering of our common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us and our common stock in any country or jurisdiction where action for that purpose is required. Accordingly, our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other material or advertisements in connection with this offering may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. The foregoing restrictions do not apply to stabilization transactions.
United Kingdom
In the United Kingdom, the common stock offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at paragraph (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any common stock offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the section 85 of the Financial Services and Markets Act 2000 (as amended) (“FSMA”); and (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the common stock offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of the FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Order”), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than £500,000 (if more than 20 members) or otherwise £5 million) or an unincorporated association or partnership (with net assets of not less than £5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom.
European Economic Area
In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, no offer of our common stock has been made or will be made to the public in that Relevant Member State, except that, with effect from and including such date, an offer of our common stock may be made to the public in the Relevant Member State at any time:
| | · | to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
| | · | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; |
| | · | to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or |
| | · | in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an “offer of our common stock to the public” in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any common stock to be offered so as to enable an investor to decide to purchase any common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Switzerland
This document does not constitute a prospectus within the meaning of Art. 652a of the Swiss Code of Obligations. Our common stock may not be sold directly or indirectly in or into Switzerland except in a manner which will not result in a public offering within the meaning of the Swiss Code of Obligations. Neither this document nor any other offering materials relating to our common stock may be distributed, published or otherwise made available in Switzerland except in a manner which will not constitute a public offer of our common stock in Switzerland.
Hong Kong
Our common stock may not be offered or sold by means of any document other than: (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), (ii) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance. No advertisement, invitation or other document relating our common stock may be issued, whether in Hong Kong or elsewhere, where such document is directed at, or the contents are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the laws of Hong Kong), other than with respect to such common stock that are intended to be disposed of only to persons outside of Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules thereunder.
People’s Republic of China
This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph, PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our common stock may not be circulated or distributed, nor may our common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares of common stock are subscribed or purchased under Section 275 by a relevant person which is:
| · | a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
| · | a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the common stock under Section 275 except: (i) to an institutional investor or to a relevant person, or to any person pursuant to an offer that is made on terms that such rights or interest are acquired at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets; (ii)where no consideration is given for the transfer; or (iii) by operation of law. |
Israel
The common stock offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The common stock may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the common stock or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale, directly or indirectly, to the public of the common stock offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
LEGAL MATTERS
The validity of the shares sold by us under this prospectus will be passed upon by Guzov Ofsink, LLC, New York, New York. Pillsbury Winthrop Shaw Pittman, LLP, Washington, D.C. and Global Law Office, China, will pass upon certain legal matters for the underwriters. Legal matters as to PRC law will be passed upon for us by Han Kun Law Firm. Pillsbury Winthrop Shaw Pittman LLP may rely upon Global Law Office with respect to matters governed by PRC law.
With respect to certain matters involving the enforcement of foreign judgments in the PRC and the bringing of original actions in the PRC predicated solely on the federal securities laws of the United States, Han Kun Law Firm, has given us certain advice.
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are a company incorporated under the laws of the State of Delaware in the United States. However, all of our business, assets and operations are located in China. In addition, a substantial majority of our directors and officers reside outside of the United States. As a result, it may be difficult for United States investors to effect service of process within the United States upon us or such persons or to enforce against us or them, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any State thereof.
Han Kun Law Offices, our counsel as to Chinese law, has advised us that there is uncertainty as to whether the courts of China would (1) recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any State thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any State thereof.
Han Kun Law Offices has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in the United States.
We have appointed Vcorp Services, LLC as our agent to receive service of process with respect to any action brought against us in a court in the United States.
EXPERTS
Child Van Wagoner & Bradshaw, PLLC, independent registered public accountants, located in Utah, have audited our financial statements included in this registration statement to the extent and for the periods set forth in their report. We have relied on such reports given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934. You may read and copy any materials we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public through the SEC’s website at http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
1. Unaudited Condensed Consolidated Financial Statements of China SLP Filtration Technology, Inc. as of March 31,September 30, 2010 and March 31, 2009 and for the three month and six month periods ended March 31, 2010 and 2009. | | |
| | | |
i. | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2010 and March 31, 2009 | | F-2 |
| | | |
ii. | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended March 31, 2010 and March 31, 2009 | | F-3 |
| | | |
iii. | Unaudited Condensed Consolidated Statements of Cash Flows for the three and six months ended March 31, 2010 and March 31, 2009 | | F-4 |
| | | |
iv. | Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity | | F-5 |
| | | |
v | Notes to Unaudited Consolidated Financial Statements | | F-6 |
| | | |
2. Audited Consolidated Financial Statements of Technic International Ltd as of September 30, 2009 and 2008 and for the years ended September 30, 20092010 and 20082009 | | F-1 |
| | | | |
| i. | Report of Independent Registered Public Accounting Firm | | F-14F-2 |
| | | | |
ii.ii | Consolidated Balance Sheets as of September 30, 20092010 and 20082009 | | F-15F-3 |
| | | | |
iv.iii | Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended September 30, 20092010 and 20082009 | | F-16F-4 |
| | | | |
| iv | Consolidated Statements of Changes In Stockholders’ Equity for the years ended September 30, 2010 and 2009 | | F-5 |
| | | |
| v | Consolidated Statements of Cash Flows for the years ended September 30, 20092010 and 20082009 | | F-17F-6 |
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vi.vi | Notes to Consolidated Statement of Stockholders' Equity for the years ended September 30, 2009 and 2008Financial Statements | | F-18F-7 |
| | | | |
vii. | Notes to2. Unaudited Pro Forma Consolidated Financial Statements | | F-19 |
CHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
| | | March 31, | | | September 30, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (audited) | |
| ASSETS | | | | | | |
| | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 6,092,334 | | | $ | 3,297,648 | |
| Accounts receivable – Net | | | 1,914,786 | | | | 1,424,835 | |
| Advance to suppliers | | | 1,341,121 | | | | 685,551 | |
| Inventory | | | 1,022,404 | | | | 1,197,289 | |
| Prepaid expenses and other current assets | | | 189,535 | | | | 45,656 | |
| Total Current Assets | | | 10,560,180 | | | | 6,650,979 | |
| | | | | | | | | |
| Deposits | | | 1,946,280 | | | | - | |
| Property and equipment – Net | | | 10,130,508 | | | | 10,711,865 | |
| Receivable from related party | | | 213,035 | | | | 773,672 | |
| Land use rights – Net | | | 530,364 | | | | 537,350 | |
| Total Assets | | $ | 23,380,367 | | | $ | 18,673,866 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Short term loan | | $ | 3,803,327 | | | $ | 4,578,409 | |
| Accounts payable and accrued liabilities | | | 371,247 | | | | 410,114 | |
| Client's deposits | | | - | | | | 75,176 | |
| Taxes payable | | | 17,154 | | | | 726 | |
| Warrants liabilities | | | 1,052,000 | | | | - | |
| Convertible notes payable $4,140,000, net of discount $2,134,793 | | | 2,005,207 | | | | - | |
| | | | | | | | | |
| Total Current Liabilities | | | 7,248,935 | | | | 5,064,425 | |
| | | | | | | | | |
| Total Liabilities | | | 7,248,935 | | | | 5,064,425 | |
| Stockholder's Equity | | | | | | | | |
| | | | | | | | | |
| Common stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and 14,510,214 shares issued and outstanding at March 31, 2010 and September 30, 2009 | | | 15,236 | | | | 14,510 | |
| Additional paid-in Capital | | | 8,205,582 | | | | 7,548,752 | |
| Retained earnings | | | 6,390,212 | | | | 4,500,532 | |
| Accumulated other comprehensive income | | | 1,520,402 | | | | 1,545,647 | |
| Total Stockholder's Equity | | | 16,131,432 | | | | 13,609,441 | |
| | | | | | | | | |
| Total Liabilities and Stockholder's Equity | | $ | 23,380,367 | | | $ | 18,673,866 | |
See accompanying notes to financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31 | | | March 31 | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Net Sales | | $ | 4,628,671 | | | $ | 2,214,940 | | | $ | 9,847,025 | | | $ | 4,540,833 | |
| Cost of Sales | | | 3,237,311 | | | | 1,373,921 | | | | 6,843,833 | | | | 2,906,402 | |
| Gross Profit | | | 1,391,360 | | | | 841,019 | | | | 3,003,192 | | | | 1,634,431 | |
| Selling, General and Administration expenses | | | 407,461 | | | | 275,526 | | | | 662,138 | | | | 758,442 | |
| Income from Operations | | | 983,899 | | | | 565,493 | | | | 2,341,054 | | | | 875,989 | |
| | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Interest Income | | | 292 | | | | - | | | | 517 | | | | - | |
| Interest Expense | | | (390,355 | ) | | | (76,286 | ) | | | (452,387 | ) | | | (160,506 | ) |
| Gain on disposal of fixed assets | | | 496 | | | | - | | | | 496 | | | | 16,263 | |
| Total other income (expenses) | | | (389,567 | ) | | | (76,286 | ) | | | (451,374 | ) | | | (144,243 | ) |
| Income before IncomeTaxes | | | 594,332 | | | | 489,207 | | | | 1,889,680 | | | | 731,746 | |
| Income tax provision | | | - | | | | - | | | | - | | | | - | |
| Net Income | | $ | 594,332 | | | $ | 489,207 | | | $ | 1,889,680 | | | $ | 731,746 | |
| | | | | | | | | | | | | | | | | |
| Other Comprehensive Income | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | | (23,939 | ) | | | 14,446 | | | | (25,245 | ) | | | (90,836 | ) |
| Total Comphrensive Income | | $ | 570,393 | | | $ | 503,653 | | | $ | 1,864,435 | | | $ | 640,910 | |
| | | | | | | | | | | | | | | | | |
| Net Income Per Common Share of Common Stock: | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.13 | | | $ | 0.05 | |
| Weighted-Average Shares of Common Stock 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 | |
See accompanying notes to financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| | | Six Months Ended March 31 | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Cash Flow from Operating Activities: | | | | | | |
| Net income | | $ | 1,889,680 | | | $ | 731,746 | |
| Adjustments to reconcile net income to net cash flow provided by operating activities: | | | | | | | | |
| Depreciation | | | 569,358 | | | | 352,070 | |
| Amortization | | | 6,217 | | | | 6,204 | |
| Non-cash interest charges | | | 304,950 | | | | - | |
| Gain from disposal of fixed assets | | | (496 | ) | | | (16,263 | ) |
| Change in operating assets and liabilities: | | | - | | | | - | |
| Accounts receivable | | | (491,997 | ) | | | (273,923 | ) |
| Advance to suppliers | | | (656,586 | ) | | | 892,933 | |
| Inventory | | | 173,173 | | | | (124,682 | ) |
| Prepaid expenses and other current assets | | | (143,956 | ) | | | (477,649 | ) |
| Accounts payable & accrued liabilities | | | (38,281 | ) | | | (542,930 | ) |
| Clients' deposits | | | (75,069 | ) | | | (93,257 | ) |
| Taxes payable | | | 16,430 | | | | (5,120 | ) |
| Net cash provided by (used in) operating activities | | | 1,553,423 | | | | 449,129 | |
| | | | | | | | | |
| Cash Flow from Investing Activities: | | | | | | | | |
| Addition-property and equipment, land use right | | | (3,333 | ) | | | (835,922 | ) |
| Deposits for purchase of equipment | | | (1,946,280 | ) | | | - | |
| Proceeds from disposal of fixed assets | | | 496 | | | | 16,263 | |
| Proceeds from related party receivable | | | 559,535 | | | | 198,415 | |
| Net cash (used in) provided by investing activities | | | (1,389,582 | ) | | | (621,244 | ) |
| | | | | | | | | |
| Cash Flow from Financing Activities: | | | | | | | | |
| Repayment of loans | | | (768,535 | ) | | | (5,161,742 | ) |
| Proceeds from loans | | | 3,404,798 | | | | 4,233,614 | |
| Net cash provided by (used) in financing activities | | | 2,636,263 | | | | (928,128 | ) |
| | | | | | | | | |
| Effects of Exchange Rates on Cash | | | (5,418 | ) | | | (19,962 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 2,794,686 | | | | (1,120,205 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of year | | | 3,297,648 | | | | 2,367,570 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 6,092,334 | | | $ | 1,247,365 | |
| | | | | | | | | |
| Supplemental information of cash flows | | | | | | | | |
| Cash paid for interest | | $ | 85,329 | | | $ | 58,909 | |
| Cash paid for income taxes | | $ | - | | | $ | - | |
See accompanying notes to financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | 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 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,889,680 | | | | (25,245 | ) | | | 1,864,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE, March 31, 2010 | | | 15,235,714 | | | $ | 15,236 | | | | - | | | $ | - | | | $ | 8,205,582 | | | $ | 6,390,212 | | | $ | 1,520,402 | | | $ | 16,131,432 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
1. | Nature of Business and Organization History: |
China SLP Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc. (the “Company” or “we”) was incorporated under the laws of the State of Delaware in March, 2007. Prior to the reverse merger we had no operations or substantial assets.
Hong Hui Holdings Limited (“Hong Hui”) was formed in January, 2010 in the territory of the British Virgin Islands as a holding company by the shareholders of Technic International Inc. (“Technic”). Upon formation, each shareholders transferred his ownership of Technic to Hong Hui.
Technic was incorporated under the laws of Hong Kong as a holding company that owns 100% equity interest of Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin Long was established in 2000 under the laws of China. In September 2005, Jin Long became a wholly-owned foreign enterprise (“WOFE). In November 2008, Jin Long changed its name to Foshan S.L.P. Special Materials Co., Ltd (“Foshan SLP”).
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 been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination.
Through the operations of Foshan SLP, we engage in the manufacturing and sale, research and development of nonwovens.
2. | Basis of presentation and principles of consolidation: |
These interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all the disclosures as required for annual financial statements under generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended September 30, 2009.
Operating results for the six-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2010 or for any other period.
3. | Summary of significant accounting policies: |
These interim consolidated financial statements follow the same accounting policies and methods of application as the Company's most recent annual financial statements.
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
| | | March 31, | | | September 30, | |
| As of | | 2010 | | | 2009 | |
| Accounts receivable | | $ | 1,951,619 | | | $ | 1,461,721 | |
| Less: Allowance for doubtful accounts | | | (36,833 | ) | | | (36,886 | ) |
| | | | | | | | | |
| Accounts receivable – Net | | $ | 1,914,786 | | | $ | 1,424,835 | |
As of March 31, 2010 and September 30, 2009, customer accounts receivable balances exceeding 10% of the total balance are as follows:
| | | March 31, 2010 | |
| Customers: | | Amount | | | Percentage | |
| Wu jiang jingshan | | $ | 338,704 | | | | 17 | % |
| Dalian Ji er | | | 440,766 | | | | 23 | % |
| Shang hai run dong | | | 239,591 | | | | 12 | % |
| San Ya | | | 210,877 | | | | 11 | % |
| | | September 30,2009 | |
| Customers: | | Amount | | | Percentage | |
| Wu jiang jingshan | | $ | 434,556 | | | | 30 | % |
| Shen zhen Ya ming water | | | 185,625 | | | | 13 | % |
| Xiantao ruixin | | | 181,260 | | | | 13 | % |
As of March 31, 2010 and September 30, 2009, respectively, advances to suppliers consisted of deposits on account with several key raw materials suppliers to secure preferential pricing of raw materials. The deposits also are used to ensure timely delivery of materials purchased.
| | | March 31, | | | September 30, | |
| As of | | 2010 | | | 2009 | |
| Raw materials | | $ | 85,239 | | | $ | 40,126 | |
| Work in progress | | | 240,386 | | | | 50,443 | |
| Finished goods | | | 696,779 | | | | 1,106,720 | |
| | | | | | | | | |
| | | $ | 1,022,404 | | | $ | 1,197,289 | |
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
7. | Property and equipment: |
| As of | | March 31,
2010 | |
| | | | | | Accumulated | | | Net book | |
| | | Cost | | | depreciation | | | value | |
| Building and plant | | $ | 2,958,252 | | | $ | 592,938 | | | $ | 2,365,314 | |
| Machinery | | | 11,158,514 | | | | 3,585,441 | | | | 7,573,073 | |
| Office equipment and other equipment | | | 770,547 | | | | 669,760 | | | | 100,787 | |
| Vehicles | | | 139,553 | | | | 48,219 | | | | 91,334 | |
| | | $ | 15,026,866 | | | $ | 4,896,358 | | | $ | 10,130,508 | |
| As of | | September 30,
2009 | |
| | | | | | Accumulated | | | Net book | |
| | | Cost | | | depreciation | | | value | |
| Building and plant | | $ | 2,958,978 | | | $ | 526,654 | | | $ | 2,432,324 | |
| Machinery | | | 11,174,517 | | | | 3,096,112 | | | | 8,078,405 | |
| Office equipment and other equipment | | | 771,829 | | | | 668,448 | | | | 103,381 | |
| Vehicles | | | 139,753 | | | | 41,998 | | | | 97,755 | |
| | | $ | 15,045,077 | | | $ | 4,333,212 | | | $ | 10,711,865 | |
For the three 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 three months ended March 31, 2009, depreciation expense of $158,525 was included in cost of sales and $16,035 was included in selling, marketing, and administrative expenses, for a total of $174,560.
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.
For the six months ended March 31, 2009, depreciation expense of $318,986 was included in cost of sales and $33,084 was included in selling, marketing, and administrative expenses, for a total of $352,070.
As of March 31, 2010, we have deposits of $1,946,280 with equipment providers to ensure timely fulfillment of our purchase contracts to build new product assembly lines.
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
| | | March 31 ,2010 | | | September 30 ,2009 | |
| | USD | | | USD | |
| Cost | | $ | 621,817 | | | $ | 622,578 | |
| Less: accumulated amortization | | | (91,453 | ) | | | (85,228 | ) |
| | | $ | 530,364 | | | $ | 537,350 | |
For the three months ended March 31, 2010 and 2009, amortization expense was $3,114 and $3,110, respectively.
For the six months ended March 31, 2010 and 2009, amortization expense was $6,217 and $6,204, respectively.
The Company has several loans with Agricultural Bank of China, Foshan Branch and these loans are due in September 2010. The interest on the outstanding balance is payable every month at rates ranging from 5.93% to 7.75% per annum.
11. | Convertible note payable: |
On February 12, 2010, immediately following the closing of a share exchange agreement we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants. In addition to the finance cost of approximately $730,000, 654,510 common stock were issued to placement agents. The notes have the following material terms:
Maturity: The notes mature after one year. If principal is not is not paid on maturity then 150% of the principal amount shall be payable.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default. $204,464 is being held in escrow from the closing proceeds and was recorded as prepaid expense..
Conversion: In the event of the closing of any equity or series of related financings resulting in aggregate gross proceeds to the Company of at least $20,000,000 (or such lesser amount as shall be approved in writing by the holder(s) of notes evidencing at least 50% of the principal amount of the notes then outstanding), a “qualified financing,” prior to the maturity date of the notes, the principal amount of the notes converts automatically into the securities sold in such financing at a 65% discount to the offering price of such securities.
Besides the stated interest expense at 10% per annum, interest expenses are recorded to accrete the note to its balance of $4,140,000 due on February 2011.
12. | Related party transactions: |
| | | March 31, | | | September 30, | |
Amount due from related parties | | 2010 | | | 2009 | |
| Advance to former shareholders (a) | | $ | 212,329 | | | $ | 259,538 | |
| Advance to current shareholders (b) | | | 706 | | | | 1,413 | |
| Advance to director (c) | | | - | | | | 73,246 | |
| Subtotal | | | 213,035 | | | | 334,197 | |
| Receivable from related companies (d) | | | - | | | | 439,475 | |
| | | $ | 213,035 | | | $ | 773,672 | |
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - Expressed in US dollars)
| (a) | Advance to former shareholders: |
The advance to former shareholders includes advances to three of the former shareholders. The advance is non-interest bearing and due on demand.
| (b) | Advance to current shareholders: |
The advance to current shareholders includes advances to current shareholders. The advance is non-interest bearing and due on demand.
| (c) | Receivable from related companies |
The receivable from related companies includes Foshan SLP owned its parents company and loans are non-interest bearing and due on demand.
The Company advised shareholders of action taken to approve a change in our corporate name to China SLP Filtration Technology, Inc., which action was approved on April 22, 2010 by the board of directors and on April 22, 2010 by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted.
The name change will become effective on the filing of a certificate of amendment to our certificate of incorporation with the Secretary of State of Delaware, which filing will occur at least 20 days after the date of the mailing of this Information Statement to our shareholders.
Earnings (loss) per share for the six months ended March 31, 2010 and 2009 is computed by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.
The number of shares outstanding is used in calculation of basic and diluted earnings per share as below.
| | | Three Months ended March 31, 2010 | | | Three Months ended March 31, 2009 | |
| Numerator for basic and diluted EPS | | | | | | |
| - Net income from continuing operations | | | 594,332 | | | | 489,207 | |
| Denominator for basic and diluted EPS | | | | | | | | |
| Weighted average shares of common stock outstanding shares – basic | | | 14,897,143 | | | | 14,510,204 | |
| Weighted average shares of common stock outstanding shares – diluted | | | 15,798,367 | | | | 14,510,204 | |
| EPS– basic and diluted | | | 0.04 | | | | 0.03 | |
| | | Six Months ended March 31, 2010 | | | Six Months ended March 31, 2009 | |
| Numerator for basic and diluted EPS | | | | | | | | |
| - Net income from continuing operations | | | 1,889,680 | | | | 731,746 | |
| Denominator for basic and diluted EPS | | | | | | | | |
| Weighted average shares of common stock outstanding shares – basic | | | 14,701,547 | | | | 14,510,204 | |
| Weighted average shares of common stock outstanding shares – diluted | | | 15,147,208 | | | | 14,510,204 | |
| EPS– basic and diluted | | | 0.13 | | | | 0.05 | |
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
15. | Accounting for Warrants |
The warrants issued in conjunction with the convertible notes have the following material terms:
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing is consummated within five-year period after the issue date and become void if the notes automatically convert into common stock.
Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
The Company analyzed the warrants and the conversion features in the notes to assess whether they meet the definition of a derivative under the guidance set forth by ASC Topic 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to ASC Topic 815 to treat the warrants as derivative liabilities. Management also evaluated whether the warrants meet the scope exception set forth by 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 ASC Topic 815. The provisions in ASC Topic 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
Management concluded that the warrants issued in conjunction with the private placement of convertible notes in February 2010 to certain accredited investors should be treated as a derivative liability and the derivative accounting rules under ASC Topic 815-40 were adopted to record the warrants. Fair market value of the warrants were measured using the Black-Scholes pricing model at the issuance date and recorded as warrants liabilities. Change in the fair value of the warrants is recorded in other income or loss in the statement of operations in the future reporting periods. The change in warrant value from February 2010 to March 31, 2010 was not material.
As a result of adopting accounting treatment of ASC Topic 815-40, $1,052,000 was recorded as warrants liabilities based on 1,218,857 shares entitled under the warrants and the valuation inputs as provided in the table as follows.
| February 2010 Financing Warrants - Valuation Inputs | |
| | | February 12 and March 31, | |
| Attribute | | 2010 | |
| Stock Price | | $ | 2.45 | |
| Risk Free Interest Rate | | | 2.25 | % |
| Volatility | | | 90.00 | % |
| Exercise Price | | $ | 2.45 | |
| Dividend Yield | | | 0 | % |
| Contractual Life (Years) | | | 1 | |
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
16. | Recent accounting pronouncements |
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 GAAP 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.
TECHNIC INTERNATIONAL LTD.
September 30, 2009
Index to Consolidated Financial Statements Contents Page(s)
Consolidated Balance Sheets as of September 30, 2009 and 20082010 | | | F-14 | F-22 |
| | | | | |
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended September 30, 2009 and 2008i. | | | F-15 | |
| | | | |
Consolidated Statements of Cash Flows for the Years Ended September 30, 2009 and 2008 | | | F-16 | |
| | | | |
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2009 and 2008 | | | F-17 | |
| | | | |
| Notes to Unaudited Pro Forma Consolidated Financial Statements | | | F-18 | F-25 |
|
Douglas W. Child, CPA
Marty D. Van Wagoner, CPA
J. Russ Bradshaw, CPA
William R. Denney, CPA
Russell E. Anderson, CPA
Scott L. Farnes
1284 W. Flint Meadow Dr. #D
Kaysville, Utah 84037
Telephone 801.927.1337
Facsimile 801.927.1344
5296 S. Commerce Dr. #300
Salt Lake City, Utah 84107
Telephone 801.281.4700
Facsimile 801.281.4701
Suite A, 5/F
Max Share Centre
373 King’s Road
North Point, Hong Kong
Telephone 852.21.555.333
Facsimile 852.21.165.222
www.cpaone.net
| | | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Technic International Ltd.China SLP Filtration Technology, Inc.
No. 5 Junye S. Rd., Area C. Shishan Science & Technology Industrial Park, Nanhai District
Foshan City, Guandong, China
We have audited the accompanying consolidated balance sheets of Technic International Ltd.China SLP Filtration Technology, Inc. (the Company) as of September 30, 20092010 and 2008,2009, and the related consolidated statements of incomeoperations and comprehensive income, changes in shareholders’stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company'scompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Technic International Ltd.China SLP Filtration Technology, Inc. as of September 30, 2010 and 2009, and 2008, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Child, Van Wagoner & Bradshaw, PLLC Salt Lake City, Utah December 1, 200922, 2010 |
TECHNIC INTERNATIONAL LTD.
Consolidated Balance SheetsCHINA SLP FILTRATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
| | | September 30, | | | September 30, | |
| | | 2010 | | | 2009 | |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 5,295,301 | | | $ | 3,297,648 | |
| Accounts receivable – Net | | | 2,207,073 | | | | 1,424,835 | |
| Advance to suppliers | | | - | | | | 685,551 | |
| Inventory | | | 1,564,537 | | | | 1,197,289 | |
| Prepaid expenses and other current assets | | | 585,385 | | | | 45,656 | |
| Total Current Assets | | | 9,652,296 | | | | 6,650,979 | |
| | | | | | | | | |
| Deposits | | | 4,906,370 | | | | - | |
| Property and equipment – Net | | | 10,961,234 | | | | 10,711,865 | |
| Receivable from related party | | | - | | | | 773,672 | |
| Land use rights – Net | | | 535,480 | | | | 537,350 | |
| Total Assets | | $ | 26,055,380 | | | $ | 18,673,866 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Short term loan | | $ | 3,796,053 | | | $ | 4,578,409 | |
| Accounts payable and accrued liabilities | | | 742,384 | | | | 410,114 | |
| Clients' deposits | | | 286,700 | | | | 75,176 | |
| Other payable - related party | | | 160,673 | | | | - | |
| Taxes payable | | | 31,406 | | | | 726 | |
| Warrants liabilities | | | 739,000 | | | | - | |
| Convertible notes payable $4,140,000, net of discount | | | 3,225,007 | | | | - | |
| | | | | | | | | |
| Total Current Liabilities | | | 8,981,223 | | | | 5,064,425 | |
| | | | | | | | | |
| Total Liabilities | | | 8,981,223 | | | | 5,064,425 | |
| Stockholders' Equity | | | | | | | | |
| Preferred stock, $0.001 par value, 10,000,000 authorized, 0 share issued and outstanding; common stock, $0.001 par value, 40,000,000 shares authorized, 15,265,714 and 14,510,204 shares issued and outstanding at September 30, 2010 and September 30, 2009 | | | 15,266 | | | | 14,510 | |
| Additional paid-in capital | | | 8,375,860 | | | | 7,548,752 | |
| Retained earnings | | | 6,721,609 | | | | 4,500,532 | |
| Accumulated other comprehensive income | | | 1,961,422 | | | | 1,545,647 | |
| Total Stockholders' Equity | | | 17,074,157 | | | | 13,609,441 | |
| | | | | | | | | |
| Total Liabilities and Stockholder's Equity | | $ | 26,055,380 | | | $ | 18,673,866 | |
| | | September 30 | | | September 30 | |
| | | 2009 | | | 2008 | |
| Assets | | | | | | |
| | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 3,297,648 | | | $ | 2,367,570 | |
| Accounts receivable – Net | | | 1,424,835 | | | | 963,203 | |
| Advance to suppliers | | | 685,551 | | | | 398,152 | |
| Advance to suppliers - related parties | | | - | | | | 614,265 | |
| Inventory | | | 1,197,289 | | | | 846,575 | |
| Prepaid expenses and other current assets | | | 45,656 | | | | 374,252 | |
| Total current assets | | | 6,650,979 | | | | 5,564,017 | |
| | | | | | | | | |
| Receivable from related parties | | | 773,672 | | | | 462,165 | |
| Property and equipment – Net | | | 10,711,865 | | | | 6,297,389 | |
| Construction in progress | | | - | | | | 4,487,029 | |
| Land use rights – Net | | | 537,350 | | | | 552,772 | |
| | | | | | | | | |
| Total Assets | | $ | 18,673,866 | | | $ | 17,363,372 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| | | | | | | | | |
| Current liabilities | | | | | | | | |
| Short-term loans | | $ | 4,578,409 | | | $ | 5,207,385 | |
| Accounts payable and accrued liabilities | | | 410,114 | | | | 810,712 | |
| Clients' deposits | | | 75,176 | | | | 94,081 | |
| Taxes payable | | | 726 | | | | 30,327 | |
| Total current liabilities | | | 5,064,425 | | | | 6,142,505 | |
| | | | | | | | | |
| Shareholders' equity | | | | | | | | |
| Common stock, $.1215 par value, 10,000 shares authorized, issued, and outstanding | | | 1,215 | | | | 1,215 | |
| Additional paid in capital | | | 7,562,047 | | | | 7,562,047 | |
| Retained earnings | | | 4,500,532 | | | | 2,054,880 | |
| Accumulated other comprehensive income | | | 1,545,647 | | | | 1,602,725 | |
| Total shareholders' equity | | | 13,609,441 | | | | 11,220,867 | |
| | | | | | | | | |
| Total Liabilities and Shareholders' Equity | | $ | 18,673,866 | | | $ | 17,363,372 | |
See the accompanying notes to consolidated financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
TECHNIC INTERNATIONAL LTD.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Consolidated Statements of Income and Comprehensive Income (Loss)
(Expressed in US dollars)
| | | Year Ended September 30, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Net Sales | | $ | 19,952,422 | | | $ | 11,849,712 | |
| Cost of Sales | | | 13,772,843 | | | | 7,296,327 | |
| Cost of Sales - Related Party | | | - | | | | 610,287 | |
| Gross Profit | | | 6,179,579 | | | | 3,943,098 | |
| | | | | | | | | |
| Selling, General and Administration Expenses | | | 2,286,066 | | | | 1,219,114 | |
| Bad Debt (Recovery) Expense | | | (13,185 | ) | | | 11,497 | |
| Income from Operations | | | 3,906,698 | | | | 2,712,487 | |
| | | | | | | | | |
| Other Income (expense) | | | | | | | | |
| | | | | | | | | |
| Interest Income | | | 14,341 | | | | 3,014 | |
| | | | | | | | | |
| Interest Expense | | | (1,988,832 | ) | | | (269,849 | ) |
| Loss on Disposal of Fixed Assets | | | (107 | ) | | | - | |
| Changes in Fair Value of Warrants | | | 313,000 | | | | - | |
| | | | | | | | | |
| Total Other Income (expenses) | | | (1,661,598 | ) | | | (266,835 | ) |
| | | | | | | | | |
| Income before Income Taxes | | | 2,245,100 | | | | 2,445,652 | |
| | | | | | | | | |
| Income Tax Provision | | | 24,023 | | | | - | |
| Net Income | | $ | 2,221,077 | | | $ | 2,445,652 | |
| | | | | | | | | |
| Other Comprehensive Income: | | | | | | | | |
| | | | | | | | | |
| Foreign Currency Translation Adjustments | | | 415,775 | | | | (57,078 | ) |
| Total Comprehensive Income | | $ | 2,636,852 | | | $ | 2,388,574 | |
| | | | | | | | | |
| Net Income Per Common Share: | | | | | | | | |
| Basic | | $ | 0.15 | | | $ | 0.17 | |
| Diluted | | $ | 0.15 | | | $ | 0.17 | |
| | | | | | | | | |
| Weighted-Average Common Shares Outstanding: | | | | | | | | |
| Basic | | | 14,979,390 | | | | 14,510,204 | |
| Diluted | | | 16,227,061 | | | | 14,510,204 | |
| | | Year ended September 30 | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Sales | | $ | 11,849,712 | | | $ | 11,611,719 | |
| | | | | | | | | |
| Cost of sales | | | 7,296,327 | | | | 7,409,624 | |
| Cost of sales - related party | | | 610,287 | | | | 714,180 | |
| | | | | | | | | |
| Gross margin | | | 3,943,098 | | | | 3,487,915 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | | 1,219,114 | | | | 792,366 | |
| Bad debt (Recovery) expense | | | 11,497 | | | | (129,885 | ) |
| | | | 1,230,611 | | | | 662,481 | |
| | | | | | | | | |
| Operating income | | | 2,712,487 | | | | 2,825,434 | |
| | | | | | | | | |
| Other expenses (income): | | | | | | | | |
| Interest income | | | (3,014 | ) | | | (24,311 | ) |
| Interest expense | | | 269,849 | | | | 150,570 | |
| | | | 266,835 | | | | 126,259 | |
| | | | | | | | | |
| Net income before income taxes | | | 2,445,652 | | | | 2,699,175 | |
| | | | | | | | | |
| Income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net income | | | 2,445,652 | | | | 2,699,175 | |
| | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustments | | | (57,078 | ) | | | 1,020,734 | |
| | | | | | | | | |
| Total comprehensive income | | $ | 2,388,574 | | | $ | 3,719,909 | |
| | | | | | | | | |
| Earnings per share - basic and diluted | | $ | 244.57 | | | $ | 269.92 | |
| | | | | | | | | |
| Basic and diluted shares outstanding | | | 10,000 | | | | 10,000 | |
See accompanying notes to consolidated financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
TECHNIC INTERNATIONAL LTD.Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | Additional | | | | | | Other | | | Total | |
| | | Common Stock | | | Paid-in | | | Retained | | | Comprehensive | | | Stockholders' | |
| | | Shares | | | Amount | | | Capital | | | Earnings (Deficit) | | | Income | | | Equity | |
| BALANCE, September 30, 2008 | | | 14,510,204 | | | $ | 14,510 | | | $ | 7,548,752 | | | $ | 2,054,880 | | | $ | 1,602,725 | | | $ | 11,220,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | - | | | | - | | | | - | | | | 2,445,652 | | | | - | | | | 2,445,652 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | (57,078 | ) | | | (57,078 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE, September 30, 2009 | | | 14,510,204 | | | $ | 14,510 | | | $ | 7,548,752 | | | $ | 4,500,532 | | | $ | 1,545,647 | | | $ | 13,609,441 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares effectively issued to former shareholders – 2/12/2010 | | | 2,600,000 | | | | 2,600 | | | | (2,600 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cancellation of stock in recapitalization | | | (2,528,000 | ) | | | (2,528 | ) | | | 2,528 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued to placement agents in conjunction with convertible note | | | 653,510 | | | | 654 | | | | 656,902 | | | | - | | | | - | | | | 657,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted common stock issued – compensation | | | 30,000 | | | | 30 | | | | 79,968 | | | | - | | | | - | | | | 79,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee stock options | | | | | | | | | | | 90,310 | | | | - | | | | - | | | | 90,310 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | - | | | | - | | | | - | | | | 2,221,077 | | | | - | | | | 2,221,077 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 415,775 | | | | 415,775 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE, September 30, 2010 | | | 15,265,714 | | | $ | 15,266 | | | $ | 8,375,860 | | | $ | 6,721,609 | | | $ | 1,961,422 | | | $ | 17,074,157 | |
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
(Expressed in US dollars)
| | | Year Ended September 30, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Cash Flow from Operating Activities: | | | | | | |
| Net income | | $ | 2,221,077 | | | $ | 2,445,652 | |
| Adjustments to reconcile net income to net cash | | | | | | | | |
| flow provided by (used in) operating activities: | | | | | | | | |
| Depreciation | | | 1,166,260 | | | | 929,995 | |
| Amortization | | | 12,499 | | | | 12,458 | |
| Bad debt allowance | | | (13,185 | ) | | | 11,497 | |
| Non-cash interest charges | | | 1,524,750 | | | | - | |
| Non-cash equity-based expense | | | 170,308 | | | | - | |
| Changes in warrants valuation | | | (313,000 | ) | | | - | |
| Interest capitalized to CIP | | | (13,177 | ) | | | - | |
| Loss(gain) from disposal of fixed assets | | | 107 | | | | - | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (726,921 | ) | | | (477,736 | ) |
| Advance to suppliers | | | 687,009 | | | | (289,192 | ) |
| Advance to suppliers - related parties | | | - | | | | 610,287 | |
| Inventory | | | (336,983 | ) | | | (354,825 | ) |
| Prepaid expenses and other current assets | | | (529,261 | ) | | | 326,225 | |
| Accounts payable & accrued liabilities | | | 325,798 | | | | (466,410 | ) |
| Clients' deposits | | | 206,285 | | | | (18,383 | ) |
| | | | | | | | | |
| Taxes payable | | | 30,123 | | | | (29,406 | ) |
| | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 4,411,689 | | | | 2,700,162 | |
| | | | | | | | | |
| Cash Flow from Investing Activities: | | | | | | | | |
| | | | | | | | | |
| Addition-property, equipment, and land use rights | | | (1,185,582 | ) | | | (844,419 | ) |
| Payments to related parties receivable | | | - | | | | (313,614 | ) |
| | | | | | | | | |
| Deposits for purchase of equipment | | | (4,819,447 | ) | | | - | |
| Proceeds from disposal of fixed assets | | | - | | | | - | |
| Proceeds from related party receivable | | | 774,466 | | | | - | |
| Net cash (used in) provided by investing activities | | | (5,230,563 | ) | | | (1,158,033 | ) |
| | | | | | | | | |
| Cash Flow from Financing Activities: | | | | | | | | |
| | | | | | | | | |
| Repayment of loans | | | (859,346 | ) | | | (600,498 | ) |
| | | | | | | | | |
| Due to related parties payable | | | 157,827 | | | | - | |
| | | | | | | | | |
| Proceeds from notes issued | | | 3,409,813 | | | | - | |
| | | | | | | | | |
| Net cash provided by (used) in financing activities | | | 2,708,294 | | | | (600,498 | ) |
| | | | | | | | | |
| Effects of Exchange Rates on Cash | | | 108,233 | | | | (11,553 | ) |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 1,997,653 | | | | 930,078 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning of year | | | 3,297,648 | | | | 2,367,570 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 5,295,301 | | | $ | 3,297,648 | |
| | | | | | | | | |
| Supplemental information of cash flows | | | | | | | | |
| Cash paid for interest | | $ | 478,111 | | | $ | 269,849 | |
| Cash paid for income taxes | | $ | 24,023 | | | $ | - | |
| | | Year ended September 30 | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Cash flow from operating activities: | | | | | | |
| Net income | | $ | 2,445,652 | | | $ | 2,699,175 | |
| Adjustments to reconcile net income to net cash flow provided by operating activities: | | | | | | | | |
| Depreciation | | | 929,995 | | | | 785,729 | |
| Amortization | | | 12,458 | | | | 11,996 | |
| Provision (recovery) for doubtful accounts | | | 11,497 | | | | (129,885 | ) |
| | | | | | | | | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (477,736 | ) | | | 126,149 | |
| Advance to suppliers | | | (289,192 | ) | | | 238,160 | |
| Advance to suppliers - related parties | | | 610,287 | | | | (587,651 | ) |
| Inventory | | | (354,825 | ) | | | 107,495 | |
| Prepaid expenses and other current assets | | | 326,225 | | | | 50,857 | |
| Accounts payable & accrued liabilities | | | (466,410 | ) | | | 333,060 | |
| Clients' deposits | | | (18,383 | ) | | | (270,658 | ) |
| Taxes payable | | | (29,406 | ) | | | 17,355 | |
| Net cash provided by operating activities | | | 2,700,162 | | | | 3,381,782 | |
| | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | |
| Proceeds from related parties receivable | | | - | | | | 410,236 | |
| Payments to related parties receivable | | | (313,614 | ) | | | - | |
| Acquisition of property and equipment | | | (844,419 | ) | | | (475,941 | ) |
| Investment in construction in progress | | | - | | | | (4,292,625 | ) |
| Net cash (used in) provided by investing activities | | | (1,158,033 | ) | | | (4,358,330 | ) |
| | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | |
| Proceeds from short-term loans | | | - | | | | 1,408,961 | |
| Payments on short-term loans | | | (600,498 | ) | | | (323,715 | ) |
| Cash dividends paid | | | - | | | | (1,178,220 | ) |
| Net cash used in financing activities | | | (600,498 | ) | | | (92,974 | ) |
| | | | | | | | | |
| Effects of exchange rates on cash | | | (11,553 | ) | | | 326,912 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 930,078 | | | | (742,610 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of year | | | 2,367,570 | | | | 3,110,180 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 3,297,648 | | | $ | 2,367,570 | |
| | | | | | | | | |
| Supplemental information of cash flows | | | | | | | | |
| Cash paid for interest | | $ | 269,849 | | | $ | 150,570 | |
| Cash paid for income taxes | | $ | - | | | $ | - | |
See accompanying notes to consolidated financial statements
TECHNIC INTERNATIONAL LTD.
Consolidated Statements of Changes in Shareholders' Equity
(Expressed in US dollars)
| | | | | | | | | Other | | | | | | | |
| | | Common Stock | | | Additional Paid-in | | | Comprehensive | | | | | | | |
| | | No. of Shares | | | Amount | | | Capital | | | Income | | | Retained Earnings | | | Total | |
| Balance, September 30, 2007 | | | 10,000 | | | $ | 1,215 | | | $ | 7,562,047 | | | $ | 581,991 | | | $ | 533,925 | | | $ | 8,679,178 | |
| Net income | | | | | | | | | | | | | | | | | | | 2,699,175 | | | | 2,699,175 | |
| Cash dividend paid | | | | | | | | | | | | | | | | | | | (1,178,220 | ) | | | (1,178,220 | ) |
| Foreign currency translation adjustments | | | | | | | | | | | | | | | 1,020,734 | | | | | | | | 1,020,734 | |
| Balance, September 30, 2008 | | | 10,000 | | | | 1,215 | | | | 7,562,047 | | | | 1,602,725 | | | | 2,054,880 | | | | 11,220,867 | |
| Net income | | | | | | | | | | | | | | | | | | | 2,445,652 | | | | 2,445,652 | |
| Foreign currency translation adjustments | | | | | | | | | | | | | | | (57,078 | ) | | | | | | | (57,078 | ) |
| Balance, September 30, 2009 | | | 10,000 | | | $ | 1,215 | | | $ | 7,562,047 | | | $ | 1,545,647 | | | $ | 4,500,532 | | | $ | 13,609,441 | |
See accompanying notes to consolidated financial statementsCHINA SLP FILTRATION TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
| 1. | Nature of business:Business and Organization History |
Technic International Ltd.China SLP Filtration Technology, Inc., formerly named Perpetual Technologies, Inc. (the “Company”, or ”We”) was incorporated under the laws of the State of Delaware in March 2007. Prior to a reverse merger completed on February 12, 2010, we had no operations or substantial assets.
Hong Kong. The Company has no business activities and itHui Holdings Limited (“Hong Hui”) was formed in January 2010 in the territory of the British Virgin Islands as a holding company by the shareholders of Technic International Inc. (“Technic”). Upon the formation, each shareholder transferred their ownership of Technic to Hong Hui. As a result of this transaction, Technic became a wholly-foreign owned enterprise under PRC law. This acquisition was accounted for as a transfer of entities under common control.
Technic International Ltd. (“Technic”) was incorporated in September 2005 under the laws of Hong Kong as a holding company that owns 100% equity interest of Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin Long was established in the year 2000 under the laws of China. In September 2005, Jin Long became the wholly-owned subsidiary of the Company.foreign enterprise (“WOFE). In November 2008,April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co., LtdLtd. (“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 principaltransaction is accounted for as a reverse acquisition, except that no goodwill or other intangible should be recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business activitycombination.
On March 24, 2010 the Company effected a 1 for 5 reverse stock split of SLP includes productionits outstanding common stock. The effect of the reverse split is retrospectively shown in all periods presented.
Through operation of Foshan, we engage in manufacturing, marketing and sale, research and development of polyester spunbondedspun-bonded nonwoven fabrics, polyester needle-punchedneedle-punch nonwovens, and related further process products,spun-laced nonwovens, polylactic acid nonwovens, and special functions nonwovens ( flame retardant, anti-static, oil & water repellent, etc).
| 2. | SummaryBasis of significant accounting policies:Presentation and Principles of Consolidation |
The accompanying consolidated financialbalance sheets as of September 30, 2010 and as of September 30, 2009, the consolidated statements of income and comprehensive income for the years ended September 30, 2010 and 2009, the consolidated statements of cash flow for the years ended September 30, 2010 and 2009, and the consolidated statements of changes in stockholders’ equity for the same periods are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This basis differs from that used in the statutory accounts of our subsidiary in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in China. All necessary adjustments have been made to present the consolidated financial statements in accordance with U.S. GAAP. The significant accounting policies are as follows:
| 3. | (a) | PrinciplesSummary of consolidation:Significant Accounting Policies |
Principles of consolidation
The consolidated financial statements include theall accounts of the Company and its wholly-owned subsidiary.subsidiaries. All material intercompany accounts and transactions have been eliminated.are eliminated in the consolidation.
Preparing financial statements requires management to make estimates and assumptions that affect the reportedreporting amounts of assets, liabilities, revenue and expenses.expenses reported. Examples include estimates of valuation of accounts receivable, inventories, and useful life of property and equipment, etc.and derivative liabilities. Actual results and outcomes may differ from those estimates.
| (c) | Cash and cash equivalents: |
Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits held by banks. As of September 30, 2009,2010, 99% of the cash and cash equivalents were placed with banks in China.China, which is uninsured. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government.
F-19Allowance for doubtful accounts
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
2. | Significant accounting policies (continued): |
| (d) | Allowance for doubtful accounts: |
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubledtrouble accounts, historical experience, and other currently available evidence.
Inventory consists of raw materials, work-in-progress and finished goods and is valued at the lower of cost or market, using the average cost method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates any obsolete or idle inventory or a reduction in utility below carrying value, we reduce our inventory to a new cost basis.
| (f) | Property and equipment: |
Property and equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated life of the asset,assets, ranging from 5 to 20 years. The annual depreciation rates are as follows:
Asset | | Useful lives |
| | |
| Building and plant | | 20 years |
| Machinery | | 10 years |
| Office equipment and computers | | 5 years |
| Vehicles | | 10 years |
Capitalized interest is recorded in property and equipment for construction-in-progress using the average interest rate over the construction period. Capitalized interest for the year ended September 30, 2010 was $13,414. During fiscal year 2009, no interest was capitalized.
Land use rights
According to the laws of China, the government owns all of the land in China. Companies or individuals are authorized to use the land only through land use rights granted by the Chinese government. Accordingly, the Company paid in advance for land use rights. Prepaid land use rights are being amortized and recorded as amortization expenses using the straight-line method over the use terms of the lease, which is 50 years.
| (h) | Construction in progress: |
Construction in progress
Construction in progress represents the cost of constructing buildings and manufacturing facilities for the new needle-punchedPolyphenylene sulfide (“PPS”) nonwoven fabric production line. The major cost includes materials, labor and overhead.
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
| 2. | Significant accounting policies (continued): |
The Company adopted the provisions of FASB ASC 350 Intangibles – Goodwill and Other Assets. Goodwill and indefinite lived intangible assets are not amortized, but are reviewed annually for impairment, or more frequently, if indications of possible impairment exist. The Company has no indefinite lived intangible assets.
| (j) | Impairment of long-lived assets: |
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting periods, the Company has not identified any indicators that would require testing for impairment.
Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by its customers, the price is fixed or determinable as stated on the sales contract, and collectability is reasonably assured. Customers do not have a general right of return or warranty on products shipped. There are no post-shipment obligations, price protection, or bill and hold arrangements.
| (l) | Product development costs: |
Product development expenses
Product development costs are expensed as incurred, and the Company had noexpensed approximately $185,000 and $200,000 in product development expenses for 20092010 and 2008.2009.
Advertising costs are expensed as incurred. The Company incurred $5,679$14,339 and $3,955$5,679 in advertising costs for the years ended September 30, 20092010 and 2008.2009.
| (n) | Shipping and handling costs: |
Shipping and handling costs
Shipping and handling costs related to costs of raw materials purchased isare included in cost of sales.
Shipping and handling amounts billed to customers in related sale transactions are included in sales revenues.
The out-bound freight expenses of $75,476 and $156,911 for 2010 and $99,029 for 2009, and 2008, respectively, are recorded in the Consolidated Statement of IncomeOperations and Comprehensive Income as a component of selling, general, & administrative expenses.
F-21Accumulated other comprehensive income
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
2. | Significant accounting policies (continued): |
| (o) | Accumulated other comprehensive income: |
Accumulated other comprehensive income represents foreign currency translation adjustments.
ASC Topic 280, “Disclosure about Segments of an Enterprise and Related Information” requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Accordingly, the Company has reviewed its business activities and determined that multiple segments do not exist to be reported.
| (q) | Fair value of financial instruments: |
Fair value of financial instruments
The carrying amount of the Company’s cash and cash equivalents approximate their fair value due to the short maturity of those instruments. The carrying amounts of the Company’s receivables, short-term loans, payables and accrued liabilities approximated their fair value as of the balance sheet dates due to their short maturities and the interest rates currently available.
Certain amounts in the 20082010 financial statements have been reclassified to conform to the 2009 financial statement presentation. Such reclassification had no effect on net income.
Income taxes expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with FASB ASC 740, these deferred taxes are measured by applying currently enacted tax laws.
The Company has implemented FASB ASC 740, which provides for a liability approach to accounting for income taxes. Deferred income taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FASB ASC 740.
Translation of foreign currency
The Company’s functional and reporting currency is the U.S. dollar (“$”). Our subsidiaries in Hong Kong and China use Chinese Yuan Renminbi (“RMB”) as their functional currency. The financial statements of these subsidiaries are translated into U.S. dollars in accordance with FASB ASC topic 830, Foreign Currency Matters. According to the topic, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statement. At the end of the fiscal year ended September 30, 2010, the Company’s accumulated foreign currency translation adjustments presented under other comprehensive income were $1,961,422.
Earnings per share
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
2. | Significant accounting policies (continued): |
| (t)
| Foreign currency transactions:
|
The functional currency of the Company is Renminbi (“RMB”). Assets and liabilities recorded in RMB are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to Other Comprehensive Income.
Earnings per share is determinedcomputed by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. At September 30, 2009
4. Accounts Receivable
The Company maintains allowance for potential credit losses on accounts receivable. Management periodically analyzes the composition of the accounts receivable, aging of the receivables and 2008, there were no dilutive securities.historical bad debt to evaluate the adequacy of the reserve for uncollectible accounts.
| | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| As of | | 2009 | | | 2008 | | |
| | | | 2010 | | | 2009 | |
| Accounts receivable | | $ | 1,461,721 | | | $ | 988,714 | | | $ | 2,231,281 | | | $ | 1,461,721 | |
| | | | | | | | | | |
| Less: Allowance for doubtful accounts | | | (36,886 | ) | | | (25,511 | ) | | | (24,208 | ) | | | (36,886 | ) |
| Accounts receivable – Net | | $ | 1,424,835 | | | $ | 963,203 | | | $ | 2,207,073 | | | $ | 1,424,835 | |
As of September 30, 20092010 and 2008,September 30, 2009, customer accounts receivable balances exceedingwith significant percentages are as follows:
| | | September 30, 2010 | | | September 30, 2009 | |
| Customers: | | Percentage | | | Percentage | |
| A | | | 27.84 | % | | | 30.45 | % |
| B | | | 6.2 | % | | | 13.01 | % |
| C | | | 5.35 | % | | | 12.7 | % |
| Total | | | 39.39 | % | | | 56.16 | % |
Three customers individually accounted for 10% or more of the total balancegross accounts receivable and together accounted for 56.16% of the total gross accounts receivable at September 30, 2009. One customer’s account receivable exceeds 10% and combined with two other customers whose accounts receivable is slightly below 10% represent 39.39% of the total gross accounts receivable as of September 30, 2010.
5. Inventories
Inventory consisted of the following:
| | | September 30, | | | September 30, | |
| | | 2010 | | | 2009 | |
| Raw materials | | $ | 205,099 | | | $ | 40,126 | |
| Work in progress | | | 39,828 | | | | 50,443 | |
| Finished goods | | | 1,319,610 | | | | 1,106,720 | |
| | | $ | 1,564,537 | | | $ | 1,197,289 | |
6. Property, plant and equipment
Property, plant, and equipment are recorded at cost. Expenditures incurred for repairs and maintenance are recorded as expense. Betterment, additions and renewals to property, plant, and equipment are capitalized. When property, plant and equipment are retired or disposed of, associated cost and accumulated depreciation are removed, and gain or loss, if any, incurred from disposal is included under other income or expense in the statement of operations.
Property, plant, and equipment consist of the following:
| | | September 30, | | | September 30, | |
| | | 2010 | | | 2009 | |
| Building and plant | | $ | 2,767,897 | | | $ | 2,958,978 | |
| Machinery | | | 11,697,862 | | | | 11,174,517 | |
| | | | | | | | | |
| Office equipment and other equipment | | | 787,240 | | | | 771,829 | |
| Vehicles | | | 142,576 | | | | 139,753 | |
| Construction in progress | | | 1,173,702 | | | | - | |
| | | | 16,569,277 | | | | 15,045,077 | |
| Less: | | | | | | | | |
| | | | | | | | | |
| Accumulated depreciation | | | (5,608,043 | ) | | | (4,333,212 | ) |
| | | $ | 10,961,234 | | | $ | 10,711,865 | |
Depreciation expense is computed using straight-line method with estimated useful lives as follows:
| Building and plant | 20 years |
| Machinery | 10 years |
| Office equipment and other equipment | 5 years |
| Vehicles | 10 years |
For the years ended September 30, 2010 and September 30, 2009, depreciation expense of $1,100,955 and $847,057 were included in cost of sales and $65,305 and $82,938 were included in selling, marketing, and administrative expenses, for a total of $1,166,260 and $929,995 respectively.
7. Deposits
Deposits were made as required to equipment suppliers to secure timely delivery for equipment ordered for the new PPS production line. As of September 30, 2010, we have deposits of $4,906,370.
8. Land Use Rights
Land use rights is amortized over a lease term of 50 years.
| | | September 30, | | | September 30, | |
| | | 2010 | | | 2009 | |
| Land use rights | | $ | 635,154 | | | $ | 622,578 | |
| Less: | | | | | | | | |
| | | | | | | | | |
| Accumulated amortization | | | (99,674 | ) | | | (85,228 | ) |
| | | $ | 535,480 | | | $ | 537,350 | |
During 2010 and 2009, amortization expense was $12,499 and $12,458, respectively. No additional land use rights were acquired during the fiscal year 2010. Change in cost of land use rights from September 30, 2009 to September 30, 2010 was caused by the effect of changes in foreign currency exchange rate.
9. Short-term Loans
The Company has several loans with Agricultural Bank of China, Foshan Branch. As of September 30, 2010, term loans of $2,989,018 (20,000,000 in RMB) and $807,035(5,400,000 in RMB) are outstanding and repayable in December 2010. The interest on the outstanding balance is payable every month at rates ranging from 5.85% to 7.75% per annum. Interest expense during 2010 and 2009 was $203,219 and $269,849, respectively.
10. Clients’ Deposits
The deposits from clients represent cash received from customers before the Company shipped products purchased by these customers.
11. Related Party Transaction
Certain related party transactions occurred during fiscal year 2010 and 2009 as follows:
| | | September 30, | | | September 30, | |
| Amount due to and from related parties | | 2010 | | | 2009 | |
| Loan payable to shareholder (a) | | $ | 160,673 | | | $ | - | |
| Advance to former shareholders (b) | | | - | | | | 259,538 | |
| Advance to current shareholders (c) | | | - | | | | 1,413 | |
| Advance to director (d) | | | - | | | | 73,246 | |
| Subtotal | | | 160,673 | | | $ | 334,197 | |
| | | | | | | | | |
| Receivable from related companies (e) | | | - | | | | 439,475 | |
| | | $ | 160,673 | | | $ | 773,672 | |
| (a) | Loan payable to a shareholder: |
To meet short-term cash need, the Company borrowed from its CEO in amount of $160,673 in August 2010. This loan is non-interest bearing and due on demand. No such borrowing was outstanding as of September 30, 2009.
| (b) | Advance to former shareholders: |
The advance to former shareholders was non-interest bearing and was repaid in 2010.
| (c) | Advance to current shareholders: |
The advance to current shareholders included advances to six current shareholders. The advance was non-interest bearing and repaid in 2010.
The advance to one of the directors was non-interest bearing and repaid in 2010.
| (e) | Receivable from related companies: |
The receivable from related companies included funds lent to three companies which have common shareholders of the Company. The loan was non-interest bearing and repaid in 2010.
12. Convertible Notes Payable
On February 12, 2010, immediately following the closing of a share exchange agreement, the Company entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants. In addition to the finance cost of $730,187, which is accounted for as debt discount, 653,510 common shares were issued to placement agents. The notes have the following material terms:
Maturity: The notes mature in one year. If principal is not paid on maturity then 150% of the principal amount shall be payable.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default. Interest on the notes was recorded for the period ended September 30, 2010 in amount of $260,863.
Conversion: In the event of the closing of any equity or series of related financings resulting in aggregate gross proceeds to the Company of at least $20,000,000 (or such lesser amount as shall be approved in writing by the holder(s) of notes evidencing at least 50% of the principal amount of the notes then outstanding), a “qualified financing,” prior to the maturity date of the notes, the principal amount of the notes converts automatically into the securities sold in such financing at a 65% discount to the offering price of such securities.
Besides the stated interest expense at 10% per annum, interest expenses are recorded to accrete the note to its balance of $4,140,000 due on February 12, 2011. Accretion on interest expenses amounted to $1,524,750 for the year ended September 30, 2010.
Allocation of the proceeds:
After allocating $1,052,000 to the initial fair value of warrants derivative liabilities, and agent commission of $404,000 and legal fees of $326,187, the remaining proceeds received from the convertible note of $3,409,813 were allocated to placement agent common stock and convertible note payable based on their relative fair value. This results in a debt discount of $2,439,743 from the face amount of the convertible notes payable; accordingly, the discount is being amortized over the life of the notes to accrete the notes to its redemption value. The proceeds allocation is as follows:
| Gross proceeds | | $ | 4,140,000 | |
| Less: | | | | |
| Commission paid to placement agent | | | 404,000 | |
| Legal fees | | | 326,187 | |
| Net proceeds | | $ | 3,409,813 | |
| | | | | |
| Record warrant as derivative liability | | $ | 1,052,000 | |
| Allocated remaining proceeds to : | | | | |
| Common stock issued to placement agents | | | 657,556 | |
| Convertible Note | | | 1,700,257 | |
| | | $ | 3,409,813 | |
Discount of notes: the convertible notes were recorded at the transaction date with discount consisted of the following items:
| Warrants | | $ | 1,052,000 | |
| | | | | |
| Stock issued to placement agent | | | 657,556 | |
| | | | | |
| Cash paid for commission and legal fees | | | 730,187 | |
| | | $ | 2,439,743 | |
Convertible notes payable, net of discount, at the transaction date was $1,700,257.
As of September 30, 2010, after $1,524,750 in accretion of interest expense, net convertible notes payable was $3,225,007.
13. Accounting for Warrants
In conjunction with issuing the convertible notes, the Company agreed to issue common stock warrants to the convertible notes investors in the debt financing transaction described in note 12. The warrants issued have the following material terms:
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $20,000,000. The warrants cannot be exercised if no financing is consummated within five-year period after the issue date and become void if the notes automatically convert into common stock.
Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of securities, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
At the time of the notes issuance, the Company also issued non-conversion warrants to the placement agent to purchase 5% of the Company’s common stock underlying the warrants issued to the convertible notes investors, exercisable at the same price at which the investors’ warrants become exercisable.
The Company analyzed the warrants issued and the conversion features embedded in the notes to assess whether they meet the definition of a derivative under the guidance set forth by FASB ASC 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to FASB ASC 815 to treat the conversion option and the warrants as derivative liabilities.
Under FASB ASC 815-10-15, a financial instrument is a derivative if it meets one of the following three criteria: i) it requires or permits net settlement; ii) there is a market mechanism for the net settlement; and iii) the net settlement can be fulfilled by delivery of assets that are readily convertible to cash. Management concluded that the conversion option embedded in the notes does not meet the above criteria and therefore is not a derivative.
Since the warrants permit the holder to perform a cashless exercise and receive a net number of shares of the Company’s common stock at the time of exercise, these warrants meet the definition of derivative instrument under ASC 815-10-15-83.
Management also evaluated whether the warrants meet the scope exception set forth by FASB ASC 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of FASB ASC 815. The provisions in FASB ASC 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by FASB ASC 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. Because the exercise price of the warrants is not fixed and will be determined by the price at which the Company completes a Financing prior to the time the warrants become exercisable, the warrants are not considered indexed to the Company’s common stock. The exception provided under FASB ASC 815-40-15 is not available therefore management determined the warrants should be accounted for as a derivative liability. The terms of the placement agent non-conversion warrants have terms identical to the investors’ warrants, therefore are accounted as a derivative liability.
Derivative instruments are initially measured and recorded at their fair value and marked-to-market at each report date until they are exercised or expire, with any change in the fair value charged or credited to income.
As a result of adopting accounting treatment according to ASC 815-40, investor and placement agent warrants are recorded as derivative liabilities and valued at $1,052,000 using a binomial option pricing model on the date of issuance and as of March 31, 2010. Because there was no trade market for the Company’s stock, management used substitute volatility in the initial and subsequent measuring of the fair market value of the warrants issued. Management re-measured the fair market value based on the adjusted volatility of publicly traded stock of three companies with business and financial size comparable to the Company’s and the remaining term of the warrants.
As of September 30, 2010, these warrants were valued at $739,000. The valuation inputs are provided in the table as follows:
| Attribute | | As of September 30, 2010 | |
| | | | | |
| Warrants Outstanding | | | 1,670,823 | (*) |
| Stock Market Price | | $ | 6.00 | |
| Exercise Price | | $ | 6.00 | |
| Risk-free Interest Rate | | | 0.27 | % |
| Estimated Volatility | | | 75 | % |
| Expected Dividend Yield | | | 0 | % |
| Warrants Life (years) | | | 4.4 | |
(*) Warrants outstanding as of September 30, 2010 is based on 8% of the total outstanding common shares on fully diluted basis and warrants issued to placement agent equal to 5% of investors’ warrants :
| Shares of common stock to be outstanding as of Sep 30, 2010 | | | 15,265,714 | |
| Shares of common stock to be issued in the public offerings | | | 4,166,667 | |
| Anti-dilutive shares to be issued to placement agent | | | 458,373 | |
| Total | | | 19,890,754 | |
| | | | |
| 8% of the fully-diluted shares outstanding immediately after IPO | | | 8 | % |
| | | | |
| Shares underlying the warrants | | | 1,591,260 | |
| | | | |
| Placement agent's non-conversion warrants (5% of investors' warrants) | | | 79,563 | |
| | | | |
| | | 1,670,823 | |
14. Equity and stock option based compensation
2010 Stock Incentive Plan
In September 2010, the Board of Directors adopted the 2010 Stock Incentive Plan (“2010 plan”) under which it may grant incentive and nonqualified stock options, restricted stock and stock appreciation rights to eligible employees, non-employee directors, or consultants. Stock options granted generally have a 5-year life and vest pursuant to terms set forth under employment agreement. Under the 2010 plan, stock options of 400,000 were granted with exercise price equal to the Company’s intended initial public offering price and will be vested over a three year period. Vesting period starts at August 1, 2010 under the compensation terms of employment contract.
The Company accounts for stock-based compensation under provisions of FASB ASC 718 – Accounting for Stock Compensation which establishes standards for the accounting for equity instruments exchanged for employee services. Under the provisions of FASB ASC 718, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
The fair value of the employee stock options granted is estimated using a binomial pricing model at the grant date with input as follows:
| Attribute | | As of September 10, 2010 | |
| | | | |
| Vested Stock Options | | | 26,740 | (*) |
| Stock Market Price | | $ | 6.00 | |
| Exercise Price | | $ | 6.00 | |
| Risk-free Interest Rate | | | 0.27 | % |
| Estimated Volatility | | | 75 | % |
| Expected Dividend Yield | | | 0 | % |
| Warrants Life (years) | | | 4.8 | |
Total cost of the share-based compensation from the issuance of the stock options is valued at $1,351,000 and will be recognized over the vesting period. For the year ended September 30, 2010, $90,310 was recognized as expense from the options granted.
The following table summarizes the activities for the stock options granted for the year ended September 30, 2010:
| | | Options Outstanding | |
| | | Number of Shares | | | Exercise Price | | | Remaining Life (years) | |
| As of October 1, 2009 | | | - | | | | | | | |
| Granted | | | 400,000 | | | $ | 6 | | | | |
| As of September 30, 2010 | | | 400,000 | | | $ | 6 | | | | 4.8 | |
| Requisite Service Periods Lapsed (months) | | | 2 | | | | | | | | | |
| Vested and exercisable as of September 30, 2010 | | | 26,740 | | | $ | 6 | | | | 4.8 | |
The Company’s 2010 stock incentive plan also granted 30,000 shares of restricted common stock to an independent director, of which 20,000 shares vest over a period of two years. At the grant date, the fair value of these restricted shares issued was measured at estimated $6 per share. As of September 30, 2010, shares of 13,333 not subject to forfeiture were recognized as shared-based compensation expense at an estimated fair market value of $6.00 per share.
Total stock-based expense was recorded as follows:
| Restricted stock | | $ | 79,998 | |
| Vested options | | | 90,310 | |
| | | $ | 170,308 | |
15. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common equivalent shares, if any, by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible note (using the if-converted method) and common shares issuable upon the exercise of outstanding warrants (using the treasury stock method). Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Using if-converted method, the Company’s fiscal year 2010’s earnings per share is anti-dilutive.
| | | September 30, 2009 | |
| | | Amount | | | Percentage | |
Customers: | | | | | | |
| Wujiang Jinshan | | $ | 434,556 | | | | 30.45 | % |
| Shenzhen Yaming Water Drainage Board Co. | | | 185,625 | | | | 13.01 | % |
| Xiantao Ruixin | | | 181,260 | | | | 12.70 | % |
| | | For the Years Ended | |
| | | September 30, 2010 | | | September 30, 2009 | |
| Net Income | | | | | | |
| (numerator for basic income per share) | | $ | 2,221,077 | | | $ | 2,445,652 | |
| Plus interest on convertible note | | | 1,472,613 | | | | - | |
| Net Income - assumed conversions | | | | | | | | |
| (numerator for diluted income per share) | | $ | 3,693,690 | | | $ | 2,445,652 | |
| | | | | | | | | |
| Weighted average common shares | | | | | | | | |
| (denominator for basic income per share) | | | 14,979,390 | | | | 14,510,204 | |
| | | | | | | | | |
| Effect of Dilutive Securities: | | | | | | | | |
| Warrants - treasury stock method | | | - | | | | - | |
| Convertible note as-if-converted method | | | 1,247,671 | | | | - | |
| Weighted average common shares | | | | | | | | |
| (denominator for diluted income per share) | | | 16,227,061 | | | | 14,510,204 | |
| | | | | | | | | |
| Basic net income per share | | $ | 0.15 | | | $ | 0.17 | |
| Diluted net income per share (anti-dilutive) | | $ | 0.15 | | | $ | 0.17 | |
| | | September 30, 2008 | |
| Shenzhen Yaming Water Drainage Board Co. | | $ | 170,715 | | | | 18.89 | % |
| | | September 30, | | | September 30, | |
| As of | | 2009 | | | 2008 | |
| Raw materials | | $ | 40,126 | | | $ | 97,158 | |
| Work in progress | | | 50,443 | | | | 21,621 | |
| Finished goods | | | 1,106,720 | | | | 727,796 | |
| | | $ | 1,197,289 | | | $ | 846,575 | |
5. | Property and equipment: |
| | | | | | | | | September 30, 2009 | |
| | | | | | Accumulated | | | Net book | |
| As of | | Cost | | | depreciation | | | value | |
| Building and plant | | $ | 2,958,978 | | | $ | 526,654 | | | $ | 2,432,324 | |
| Machinery | | | 11,174,517 | | | | 3,096,112 | | | | 8,078,405 | |
| Office equipment and other equipment | | | 771,829 | | | | 668,448 | | | | 103,381 | |
| Vehicles | | | 139,753 | | | | 41,998 | | | | 97,755 | |
| | | $ | 15,045,077 | | | $ | 4,333,212 | | | $ | 10,711,865 | |
| | | | | | | | | September 30, 2008 | |
| | | | | | Accumulated | | | Net book | |
| As of | | Cost | | | depreciation | | | value | |
| Building and plant | | $ | 2,036,198 | | | $ | 416,730 | | | $ | 1,619,468 | |
| Machinery | | | 6,782,795 | | | | 2,299,115 | | | | 4,483,680 | |
| Office equipment and other equipment | | | 775,971 | | | | 674,185 | | | | 101,786 | |
| Vehicles | | | 122,829 | | | | 30,374 | | | | 92,455 | |
| | | $ | 9,717,793 | | | $ | 3,420,404 | | | $ | 6,297,389 | |
During fiscal years 2009 and 2008, depreciation expense of $847,057 and $650,997 was included in cost of sales and $82,938 and $134,732 was included in selling, general, and administrative expenses, for a total of $929,995 and $785,729, respectively.
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
| | | September 30, 2009 | | | September 30, 2008 | |
| As of | | USD | | | RMB | | | USD | | | RMB | |
| Cost | | $ | 622,578 | | | | 4,249,920 | | | $ | 625,918 | | | | 4,249,920 | |
| Less: accumulated amortization | | | (85,228 | ) | | | (581,792 | ) | | | (73,146 | ) | | | (496,652 | ) |
| | | $ | 537,350 | | | | 3,668,128 | | | $ | 552,772 | | | | 3,753,268 | |
During fiscal years 2009 and 2008, amortization expense was $12,458 and $11,996, respectively.
The Company has several loans with Agricultural Bankand 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 China, Foshan Branchthe United States as of September 30, 2010 and these loans are repayable in September 2010. The interest on30, 2009.
BVI
Hong Hui is incorporated under the outstanding balanceInternational Business Companies Act of the British Virgin Islands and accordingly, is payable every month at an averageexempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of 7.755% per annum. Duringenterprise 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 fiscal years of 20092010 and 2008, the Company recorded interest expense of $269,849 and $150,570, respectively.
2011years where there is a 50% discount on income tax.
The Company’s subsidiary Foshan S.L.P. Special Materials Co., Ltd. is located in Foshan, China; thus, it is subject to China’s Enterprise Income Tax (“EIT”) at 25%. Pursuant to the relevant Chinese tax lawsprovision was $24,023 and regulations, as the Company’s subsidiary is a wholly-foreign owned enterprise engaged in manufacturing which was duly approved by the China tax authority, it was entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by 50% tax reduction of national tax and full exemption of local tax$0 for the immediate next three calendar years.
The effective income tax expenses differ from the EIT tax rate of 25% as follows:
| | | September 30, | | | September 30, | |
| As of | | 2009 | | | 2008 | |
| Tax at statutory rate of 25% | | $ | 546,960 | | | $ | 674,793 | |
| Tax holiday | | | (546,960 | ) | | | (674,793 | ) |
| | | $ | - | | | $ | - | |
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Yearsyears ended September 30, 2010 and September 30, 2009, and 2008
(Expressed in US dollars)
8. | Income taxes (continued): |
The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provision of FASB ASC 740.respectively. The Company has recorded nozero deferred tax assets or liabilities as of September 30, 2010 and September 30, 2009, and 2008, since nearlynet of tax allowance, because all other significant differences in tax basis and financial statement carrying valuesamounts are permanent differences.
9. | Related party transactions: |
| | | September 30 | | | September 30 | |
| Amount due from related parties | | 2009 | | | 2008 | |
| Loan receivable from shareholder (a) | | $ | 0 | | | $ | 199,503 | |
| Advance to former shareholders (b) | | | 259,538 | | | | 262,662 | |
| Advance to current shareholders (c) | | | 1,413 | | | | 0 | |
| Advance to director (d) | | | 73,246 | | | | 0 | |
| Subtotal | | | 334,197 | | | $ | 462,165 | |
| Advance to Heng Tung Resources Ltd.(e) | | | | | | | 614,265 | |
| Receivable from related companies (f) | | | 439,475 | | | | 0 | |
| | | $ | 773,672 | | | $ | 1,076,430 | |
| (a)
| Loan receivable from shareholder:
|
The Company has a loan receivable from one of its shareholders. This shareholder is responsible for the usage and repayment of principal and interest on the loan to Communication Bank of China, Hong Kong Branch. The loan carries an interest rate of prime minus 1.25%, or 4.25% per annum, and was fully paid in June 2009.
| (b)
| Advance to former shareholders:
|
The advance to former shareholders includes advances to four of the former shareholders. The advance is non-interest bearing and due on demand.
| (c)
| Advance to current shareholders:
|
The advance to current shareholders includes advances to six current shareholders. The advance is non-interest bearing and due on demand.
The advance to director includes an advance to one of the directors. The advance is non-interest bearing and due on demand.
TECHNIC INTERNATIONAL LTD.Notes to Consolidated Financial Statements| | | For the Year Ended | |
| | | September 30 | |
| | | 2010 | | | 2009 | |
| Income Tax Expense: | | | | | | |
| Current Income Tax | | $ | 24,023 | | | $ | - | |
| Change in Deferred Tax Assets – Net Operating Loss | | | 89,631 | | | | 89,631 | |
| Change in valuation allowance | | | (89,631 | ) | | | (89,631 | ) |
| | | | | | | | | |
| Total | | $ | 24,023 | | | $ | - | |
Years
The Company follows the guidance in FASB ASC 740 Accounting for Uncertainty in Income Taxes. We have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended September 30, 20092010. Our methods of accounting are based on established income tax principles and 2008
(Expressedare properly calculated and reflected within our income tax returns. In addition, we have timely filed extension of income tax returns in US dollars)all applicable jurisdictions in which we believe we are required to make an income tax return filing.
9. | Related party transactions (continued): |
We re-assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the years ended September 30, 2010 and 2009.
| (e)
| Advance to Heng Tung Resources Ltd.:
|
During the fiscal years of 2009 and 2008, the Company purchased $610,287 and $714,180, respectively, of raw materials from Heng Tung Resources Ltd. (“Heng Tung”). OneAll of the shareholders of the CompanyCompany’s income before income taxes is also the shareholder of Heng Tung. The balance in this account represents the advance to Heng Tung for the purchase of raw materials. The above transaction isfrom PRC sources. Actual income tax expense reported in the normal courseconsolidated statements of operations and is measured atcomprehensive income differ from the exchange amountamounts computed by applying the PRC statutory income tax rate of consideration established12.5% (50% discount of 25%) to income before income taxes for the years ended September 30, 2010 and agreed to by the related parties. As of September 30, 2009 there is no outstanding balance due to Heng Tung Resources Ltd.
| (f)
| Receivable from related companies:
|
for the followings reasons:
| | | For the Year Ended | |
| | | September 30 | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Income before income taxes | | $ | 2,245,100 | | | $ | 2,445,652 | |
| | | | | | | | | |
| Computed “expected” income tax expense at 12.5% in 2010 and zero in 2009 | | $ | 280,638 | | | $ | 546,960 | |
| Tax effect of net taxable permanent differences | | | (166,984 | ) | | | (546,960 | ) |
| | | | | | | | | |
| Effect of cumulative tax losses | | | (89,631 | ) | | | - | |
| | | | | | | | | |
| | | $ | 24,023 | | | $ | - | |
Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no interest and penalties recorded for the years ended September 30, 2010 and September 30, 2009.
17. Other Comprehensive Income
Other comprehensive income on the balance sheet represents accumulated foreign currency translation adjustments.
18. Recent Accounting Pronouncements
Fair Value Measurements
In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The receivable from related companies includes funds lent to three companies which have common shareholdersguidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the Company.fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim periods beginning after December 15, 2010. The Company adopted this guidance at January 1, 2010, except for the Level 3 reconciliation disclosures on the rollforward activities, which it will adopt at the beginning of January 1, 2011. Adoption did not have a material impact on our consolidated financial statements.
Receivables
In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310), Effect of a Loan Modification When the Loan is Part of A Pool That Is Accounted for as a Single Asset . ASU 2010-18 provides that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loans are non-interest bearing and due on demand.
10. | Concentration of credit risks and uncertainties: |
Concentration of credit risk exists when changes in economic, industry or geographic factors similarly affect groups of counter parties whose aggregate credit exposureincluded is material in relation to the Company’s total credit exposure.
The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents denominated in the U.S. dollar. Any significant revaluation of RMB may materially and adversely affect theimpaired if expected cash flows revenues, earningsfor the pool change. This guidance is effective prospectively for the first interim and financial position of the Company.
11. | Recent pronouncements: |
annual period ending on or after July 15, 2010. Early adoption is permitted. The Company has reviewed alladopted this guidance without a material impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, and does not believe the future adoption of any such pronouncements may be expected to causeif adopted, would have a material impacteffect on the accompanying financial statements.
19. Subsequent Events
On December 20, 2010, the Company repaid its financial condition orshort-term loans of RMB 25,400,000 to the resultsFoshan branch of the Agriculture Bank of China. On December 22, 2010, the Company obtained official approval from the same bank for a new six months term loan in the amount of RMB 20 million to meet its operations.short-term cash needs to complete installation of a new PPS production line. The loan carries an annual interest rate of 6.21% and is repayable on June 21, 2011.
On December 8, 2010, the Company obtained a loan from Standard Chartered Bank in the amount of RMB 6,000,000 for a term of 90 days. The loan carries an interest rate of 6.6% and requires the Company to deposit RMB 3,000,000 to the bank as guarantee.
TECHNIC INTERNATIONAL LTD.CHINA SLP FILTRATION TECHNOLOGY, INC.
Notes
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements give effect to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
11. | Recent pronouncements (continued): |
In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-1, “Topic 105 — Generally Accepted Accounting Principles” which amended ASC 105, “Generally Accepted Accounting Principles” to establish the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releasesterms of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Onagreement between the effective date,Company and the Codification superseded all then-existing non-SEC accounting and reporting standards. All previous referencesbridge-loan investors on the convertible notes issued to the superseded standards ininvestors, and are based on our consolidated financial statements for the year ended September 30, 2010 and the related notes, certain estimates, adjustments and assumptions that management believes to be reasonable. The unaudited pro forma consolidated balance sheet as of September 30, 2010 is presented as if the notes issued on February 12, 2010 were converted into the Company’s common stock on September 30, 2010 at a $2.10 per share conversion price. The unaudited pro forma consolidated statements of operations for the year ended September 30, 2010 are presented as if the conversion of the notes occurred on October 1, 2009.
The unaudited pro forma consolidated financial statements include adjustments to reflect the effects of the notes conversion. The unaudited pro forma consolidated financial statements do not give effect to adjustments that are unknown to us at this time, immaterial, or may arise when the conversion is eventually consummated.
Pro forma information is intended to provide investors with information about the continuing impact of a transaction by showing how a specific transaction might have been replaced by referencesaffected historical financial statements, illustrating the scope of the change in the historical financial position and results of operations. The adjustments made to historical financial information give effect to events that are directly attributable to the applicable sections of the Codification. The adoption of these sections did notprivate financing transaction consummated on February 12, 2010, factually supportable, and expected to have a material impact on the Company’s condensedcontinuing impact. The unaudited pro forma financial statements are prepared in accordance with Article 11 of Regulation S-X.
The unaudited pro forma consolidated financial statements.
In June 2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No. 46(R)”, which was included in ASC Topic 810-10-05 “Variable Interest Entities”. The provisions of ASC Topic 810-10-05 amend the definition of the primary beneficiary of a variable interest entitystatements presented below are not fact and therefore there can be no assurance that our actual results will require the Company to make an assessment each reporting period of its variable interests. The provisions of this pronouncement are effective January 1, 2010. The Company is evaluatingnot differ significantly from those set forth below or that the impact of the statement on its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensusconversion of the FASB Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses hownotes will not differ significantly from those presented below. Accordingly, the pro forma financial information is provided for illustrative purposes only and does not purport to determine whether an arrangement involving multiple deliverables contains more than one unitrepresent, and are not necessarily indicative of, accountingwhat our actual financial position and how to allocate consideration to each unitresults of accounting inoperations would have been had the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling priceconversion occurred, nor are they indicative of a deliverable. ASU No. 2009-13 also eliminates the useour future financial position or results of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company is currently evaluating the application date and the impact of this standard on its condensed consolidated financial statements.operations.
CHINA SLP FILTRATION TECHNOLOGY, INC.
TECHNIC INTERNATIONAL LTD.
Notes to Consolidated Financial Statements
Years ended September 30, 2009 and 2008
(Expressed in US dollars)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The Company has evaluated subsequent events from the balance sheet date through December 1, 2009 with the date being the date that the financial statements are issued or are available to be issued.
PERPETUAL TECHNOLOGIES, INC.
[A Development Stage Company]
CONDENSED BALANCE SHEETS
| | | September 30 | | | | | | September 30 | |
| | | 2010 | | | Pro forma | | | 2010 | |
| | | Actual | | | Adjustments | | | Pro forma | |
| | | | | | | | | | |
| ASSETS | | | | | | | | | |
| Current Assets | | | | | | | | | |
| Cash and cash equivalents | | $ | 5,295,301 | | | | (100,000 | )a | | $ | 5,195,301 | |
| Accounts receivable – Net | | | 2,207,073 | | | | - | | | | 2,207,073 | |
| Advance to suppliers | | | - | | | | - | | | | - | |
| Inventory | | | 1,564,537 | | | | - | | | | 1,564,537 | |
| Prepaid expenses and other current assets | | | 585,385 | | | | - | | | | 585,385 | |
| Total Current Assets | | | 9,652,296 | | | | (100,000 | ) | | | 9,552,296 | |
| | | | | | | | | | | | | |
| Deposits | | | 4,906,370 | | | | - | | | | 4,906,370 | |
| Property and equipment – Net | | | 10,961,234 | | | | - | | | | 10,961,234 | |
| Land use rights – Net | | | 535,480 | | | | - | | | | 535,480 | |
| Total Assets | | $ | 26,055,380 | | | | (100,000 | ) | | $ | 25,955,380 | |
| | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | | |
| Short term loan | | $ | 3,796,053 | | | | | | | | 3,796,053 | |
| Accounts payable and accrued liabilities | | | 742,384 | | | | - | | | | 742,384 | |
| Client's deposits | | | 286,700 | | | | - | | | | 286,700 | |
| Other payable - related party | | | 160,673 | | | | | | | | 160,673 | |
| Taxes payable | | | 31,406 | | | | - | | | | 31,406 | |
| Warrants liabilities | | | 739,000 | | | | (739,000 | )b | | | - | |
| Convertible notes payable $4,140,000, net of discount $1,524,893 | | | 3,225,007 | | | | (3,225,007 | )c | | | - | |
| | | | | | | | | | | | | |
| Total Current Liabilities | | | 8,981,223 | | | | (3,964,007 | ) | | | 5,017,216 | |
| | | | | | | | | | | | | |
| Total Liabilities | | | 8,981,223 | | | | (3,964,007 | ) | | | 5,017,216 | |
| Stockholders' Equity | | | | | | | | | | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 share issued and outstanding; common stock, $0.001 par value, 40,000,000 shares authorized, 15,265,714 actual, and 17,237,143 pro forma shares issued and outstanding at September 30, 2010 | | | 15,266 | | | | 1,924 | d | | | 17,190 | |
| Additional paid-in Capital | | | 8,375,860 | | | | 6,477,333 | e | | | 14,853,146 | |
| Retained earnings | | | 6,721,609 | | | | (2,615,250 | )f | | | 4,106,359 | |
| Accumulated other comprehensive income | | | 1,961,422 | | | | - | | | | 1,961,422 | |
| Total Stockholders' Equity | | | 17,074,157 | | | | 3,864,007 | | | | 20,938,164 | |
| | | | | | | | | | | | | |
| Total Liabilities and Stockholders’ Equity | | $ | 26,055,380 | | | | (100,000 | ) | | $ | 25,955,380 | |
| | | (Unaudited) | | | | |
| | | September 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash | | $ | 2,402 | | | $ | 14,680 | |
| Prepaid expenses | | | 324 | | | | 2,309 | |
| Total Current Assets | | | 2,726 | | | | 16,989 | |
| | | | | | | | | |
| PROPERTY & EQUIPMENT, net | | | 1,659 | | | | - | |
| | | | | | | | | |
| Total Assets | | $ | 4,385 | | | $ | 16,989 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accrued interest – related party | | $ | 2,138 | | | $ | 1,222 | |
| Stockholder advances – related party | | | 20,000 | | | | 15,000 | |
| | | | | | | | | |
| Total Current Liabilities | | | 22,138 | | | | 16,222 | |
| | | | | | | | | |
| Total Liabilities | | | 22,138 | | | | 16,222 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY (DEFICIT): | | | | | | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding | | | - | | | | - | |
| Common stock, $0.001 par value, 200,000,000 shares authorized, 13,000,000 and 13,000,000 shares issued and outstanding, respectively | | | 13,000 | | | | 13,000 | |
| Capital in excess of par value | | | 24,290 | | | | 24,290 | |
| Deficit accumulated during the development stage | | | (55,043 | ) | | | (36,523 | ) |
| | | | | | | | | |
| Total Stockholders' Equity (Deficit) | | | (17,753 | ) | | | 767 | |
| | | | | | | | | |
| Total Liabilities and Stockholders’ Equity (Deficit) | | $ | 4,385 | | | $ | 16,989 | |
TheSee accompanying notes are an integral part of these unaudited condensedto pro forma financial statements.statements
PERPETUAL TECHNOLOGIES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | Cumulative totals from Reactivation on Oct. 26, 2006 through September 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | |
| | | | | | | | | | | | | | | | |
| REVENUE | | $ | - | | | $ | | | | $ | 1,000 | | | $ | - | | | $ | 1,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| EXPENSES: | | | | | | | | | | | | | | | | | | | | |
| General and administrative | | | 2,895 | | | | 3,070 | | | | 18,313 | | | | 10,914 | | | | 52,324 | |
| Depreciation expense | | | 97 | | | | - | | | | 291 | | | | - | | | | 291 | |
| | | | (2,992 | ) | | | 3,070 | | | | 18,604 | | | | 10,914 | | | | 52,615 | |
| LOSS BEFORE OTHER INCOME (EXPENSE) | | | (2,992 | ) | | | (3,070 | ) | | | (17,604 | ) | | | (10,914 | ) | | | (51,615 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | |
| Interest Expense | | | - | | | | (134 | ) | | | - | | | | (600 | ) | | | (1,289 | ) |
| Interest Expense – related party | | | (316 | ) | | | (100 | ) | | | (916 | ) | | | (713 | ) | | | (2,139 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total Other Income (Expense) | | | (316 | ) | | | (234 | ) | | | (916 | ) | | | (1,313 | ) | | | (3,428 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (3,808 | ) | | | (3,304 | ) | | | (18,520 | ) | | | (12,227 | ) | | | (55,043 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME TAXES | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (3,808 | ) | | $ | (3,304 | ) | | $ | (18,520 | ) | | $ | (12,227 | ) | | $ | (55,043 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| LOSS PER COMMON SHARE: | | $ | (.00 | ) | | $ | (.00 | ) | | $ | (.00 | ) | | $ | (.00 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF SHARES | | | 13,000,000 | | | | 11,000,000 | | | | 13,000,000 | | | | 11,000,000 | | | | | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
PERPETUAL TECHNOLOGIES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
| | | For the nine Months Ended September 30, | | | Cumulative totals from Reactivation on Oct. 26, 2006 through September 30, | |
| | | 2009 | | | 2008 | | | 2009 | |
| Cash Flows from Operating Activities: | | | | | | | | | |
| Net loss | | $ | (18,520 | ) | | $ | (12,227 | ) | | $ | (55,043 | ) |
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | | | | | | | | | | | | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Non-cash expenses | | | - | | | | - | | | | 1,290 | |
| Depreciation expense | | | 291 | | | | - | | | | 291 | |
| Decrease (increase) in prepaid expense | | | 1,985 | | | | - | | | | (324 | ) |
| Increase (decrease) in accounts payable | | | - | | | | 300 | | | | - | |
| Increase in accrued interest | | | - | | | | 600 | | | | | |
| Increase in accrued interest – related party | | | 916 | | | | 713 | | | | 2,138 | |
| | | | | | | | | | | | | |
| Net Cash Provided (Used) by Operating Activities | | | (15,328 | ) | | | (10,614 | ) | | | (51,648 | ) |
| | | | | | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | | | | | |
| Purchase of property and equipment | | | (1,950 | ) | | | - | | | | (1,950 | ) |
| | | | | | | | | | | | | |
| Net Cash (Used) by Investing Activities | | | (1,950 | ) | | | - | | | | (1,950 | ) |
| | | | | | | | | | | | | |
| Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Stockholder advances | | | 5,000 | | | | 10,000 | | | | 20,000 | |
| Convertible notes payable | | | - | | | | - | | | | 10,000 | |
| Proceeds from common stock issuances | | | - | | | | - | | | | 26,000 | |
| | | | | | | | | | | | | |
| Net Cash Provided by Financing Activities | | | 5,000 | | | | 10,000 | | | | 56,000 | |
| | | | | | | | | | | | | |
| Net Increase (Decrease) in Cash | | | (12,278 | ) | | | (614 | ) | | | 2,402 | |
| | | | | | | | | | | | | |
| Cash at Beginning of Period | | | 14,680 | | | | 1,994 | | | | - | |
| | | | | | | | | | | | | |
| Cash at End of Period | | $ | 2,402 | | | $ | 1,380 | | | $ | 2,402 | |
| | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flows Information: | | | | | | | | | | | | |
| Cash paid during the period for: | | | | | | | | | | | | |
| Interest | | $ | - | | | $ | - | | | $ | - | |
| Income taxes | | $ | - | | | $ | - | | | $ | - | |
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the nine months ended September 30,2009:
None
For the nine months ended September 30,2008:
None
The accompanying notes are an integral part of these unaudited condensed financial statements.
PERPETUAL TECHNOLOGIES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements - The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2009 and 2008 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2008 audited financial statements as part of the Company’s 2008 annual report on Form 10-K. The results of operations for the periods ended September 30, 2009 and 2008 are not necessarily indicative of the operating results for the full year.
Recently Enacted Accounting Standards - 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 GAAP 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. 2009-15 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.
PERPETUAL TECHNOLOGIES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has a working capital deficit of $19,412 as of September 30, 2009, has incurred net losses of $18,520 and $12,227 during the nine months ended September 30, 2009 and 2008, respectively, has negative cash flows from operating activities, and has minimal revenue-generating activities. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans, advances, or through additional sales of common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 3 – RELATED PARTY TRANSACTIONS
Advances from a Stockholder – In September 2007, February and May 2008, and in September 2009 officers or stockholders of the Company advanced a total of $20,000 to the Company. The advances are due on demand and bear interest at 8% per annum. At September 30, 2009 the accrued interest on the advances totaled $2,138.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
In February 2007, the Company issued two convertible promissory notes for $2,500 each. In August 2007, the Company issued an additional two convertible promissory notes for $2,500 each. In December 2008, the Company issued 1,000,000 shares of common stock on conversion of the four convertible promissory notes of $10,000 along with accrued interest of $1,290.
NOTE 5 - INCOME TAXES
The Company has available at September 30, 2009, net operating loss carryforwards of approximately $55,043 which may be applied against future taxable income and which expire in 2029 and 2028. The net deferred tax assets are approximately $8,256 and $5,478 as of September 30, 2009 and December 31, 2008, respectively, with an offsetting valuation allowance of the same amount. The change in the valuation allowance for the nine-month period ended September 30, 2009 is approximately $2,778. The Company used the incremental federal income tax rate of 15% in computing its deferred tax assets.
NOTE 6 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through November 3, 2009 and determined there were no events to disclose.
CHINA SLP FILTRATION TECHNOLOGY, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Year Ended September 30, 2010
| | | Historical | | | | | | | |
| | | As | | | Pro Forma | | | | |
| | | Reported | | | Adjustments | | | Pro Forma | |
| Net Sales | | $ | 19,952,422 | | | $ | - | | | $ | 19,952,422 | |
| Cost of Sales | | | 13,772,843 | | | | - | | | | 13,772,843 | |
| Gross Profit | | | 6,179,579 | | | | | | | | 6,179,579 | |
| | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | | 2,272,881 | | | | - | | | | 2,272,881 | |
| Income from Operations | | | 3,906,698 | | | | - | | | | 3,906,698 | |
| | | | | | | | | | | | | |
| Other Income (expense) | | | | | | | | | | | | |
| Interest Income | | | 14,341 | | | | - | | | | 14,341 | |
| Interest Expense | | | (1,988,832 | ) | | | (1,630,501 | )g | | | (3,619,333 | ) |
| Loss on disposal of fixed assets | | | (107 | ) | | | | | | | (107 | ) |
| Changes in Fair Value of Warrants | | | 313,000 | | | | (313,000 | )h | | | - | |
| Total Other Income (expenses) | | | (1,661,598 | ) | | | (1,943,501 | ) | | | (3,605,099 | ) |
| Income before Income Taxes | | | 2,245,100 | | | | (1,943,501 | ) | | | 301,599 | |
| Income Tax Provision | | | 24,023 | | | | - | | | | 24,023 | |
| Net Income | | $ | 2,221,077 | | | $ | (1,943,501 | ) | | $ | 277,576 | |
| | | | | | | | | | | | | |
| Net Income Per Common Shares: | | | | | | | | | | | | |
| Basic | | $ | 0.15 | | | | | | | $ | 0.02 | |
| Diluted | | $ | 0.15 | | | | | | | $ | 0.02 | |
| Weighted-Average Common Shares Outstanding: | | | | | | | | | | | | |
| Basic | | | 14,979,390 | | | | 2,210,133 | i | | | 17,189,523 | |
| Diluted | | | 16,227,061 | | | | 962,462 | j | | | 17,189,523 | |
See accompanying notes to pro forma financial statements
CHINA SLP FILTRATION TECHNOLOGY, INC.
Notes to Unaudited Pro Forma Consolidated Financial Statements (Expressed in US dollars)
Description of Transaction and Basis of Presentation
The Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2010 and Unaudited Pro Forma Consolidated Statements of Operations for the year ended September 30, 2010 are presented to illustrate the effects of the bridge-loan financing transaction of February 12, 2010 on our financial position and results of operations had the conversion of the notes into the Company’s common stock occurred on September 30, 2010 for purpose of the Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2010, and on October 1, 2009 for the purpose of the Unaudited Pro Forma Consolidated Statements of Operations for the year ended September 30, 2010. The conversion is based on $2.10 per share conversion price or 65% discount of our expected IPO offering price of $6 per share. The convertible notes in the principal amount of $100,000 that mature and are expected to be repaid from cash on February 12, 2011 is reflected in the pro forma financial statements.
The historical information presented in the pro forma financial statements is derived from our audited consolidated financial statements as of September 30, 2010 and for the year ended September 30, 2010.
The pro forma financial statements were prepared for comparative purpose only and are not necessarily indicative of the results that may be expected in the future.
Adjustments in the Unaudited Pro Forma Balance Sheet as of September 30, 2010
| a) | To reflect repayment of a note in the principal amount of $100,000 that matures and is expected to be paid on February 12, 2011. |
| b) | To reverse warrants liability derived from the issuance of warrants in conjunction with a sale of the convertible notes on February 12, 2010 based on the provision that the warrants are void on conversion of the notes. |
| c) | To reverse the carrying amount of the notes payable of $3,225,007 ($4,140,000 gross amount of convertible notes, net of unamortized discount $914,993.) |
| d) | To record $0.001 par value common stock from the conversion into 1,923,809 shares of common stock. |
| e) | To record the additional paid-in capital from the conversion, consisted of the following: |
| Face value of the notes minus par value: | | $ | 4,038,076 | |
| Reverse void warrants: | | | 739,000 | |
| Proceeds allocated to debt: | | | 1,700,257 | |
| | | $ | 6,477,333 | |
| f) | To charge unamortized notes discount and beneficial conversion features to interest expense as a result of adoption of the accounting treatment under ASC 470-20-25-6 and 470-20-35-3 which requires unamortized notes discount and beneficial conversion features (BCF), limited to proceeds allocated to debt, be charged to interest expense upon resolution of contingency: |
| Unamortized discount | | $ | 914,993 | |
| BCF (limited to proceeds allocated to debt) | | | 1,700,257 | |
| | | $ | 2,615,250 | |
Due to different assumptions used in our pro forma balance sheet (conversion occurred on September 30, 2010) and pro forma statements of operations (conversion occurred on October 1, 2009 and no warrants liabilities were recorded), this derived interest expense is not reconciled to the interest expense adjustments in our pro forma statements of operations for the year ended September 30, 2010.
g) Based assumption that the notes were converted into the Company’s common stock on October 1, 2009, adjustments are made to reverse the interest expense recorded for (i) the $254,562 in interest payable on the notes and, (ii) the $1,524,750 in interest derived from amortization of the note discount to accrete the notes to its principal amount. The beneficial conversion feature (BCF) of $3,409,813 would be charged to interest expense under provisions of the FASB ASC 470 with limit to the net proceeds allocated to debt. Total interest expense would be $1,630,501.
The BCF is calculated as follows:
| Post-money valuation per share: | | $ | 6.00 | |
| Conversion price per share at 65% discount: | | $ | 2.10 | |
| BCF per share: | | $ | 3.90 | |
| Total BCF (1,971,428*3.90, limited to net proceeds allocated to debt): | | $ | 3,409,813 | |
h) To reverse income resulted from the changed estimated value of warrants issued along with the notes on assuming the warrants would not be issued had the conversion occurred on October 1, 2009.
i) The adjustments in the weighted-average shares of commons stock is made to include in the denominator for pro forma EPS computation the converted common stock shares and common stock shares issuable to private placement agents and to shell company owners as below:
| Total shares outstanding before conversion | | | 15,265,714 | |
| Converted shares | | | | |
| Total pro forma common stock outstanding for the year ended September 30, 2010 | | | 17,189,523 | |
j) The historical diluted weighted-average shares of commons stock is adjusted to have the total diluted pro forma number of common stock shares outstanding equal to the total basic pro forma number of common stock outstanding for the year ended September 30, 2010 as no dilutive securities would have been outstanding.
4,166,667 Shares
CHINA SLP FILTRATION TECHNOLOGY, INC.
Common Stock
PROSPECTUS
________, 20102011
Brean Murray, Carret & Co.
Brean Murray, Carret & Co. |
[RESALE PROSPECTUS ALTERNATE PAGE]
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer is not permitted.
SUBJECT TO COMPLETION, DATED JULY 8, 2010FEBRUARY 4, 2011
CHINA SLP FILTRATION TECHNOLOGY, INC.
[ ] shares of Common Stock369,725 Shares
Offered by Selling Stockholders
This prospectus relates to the sale by the selling stockholders identified in this prospectus of up to [ ]369,725 shares of our common stock comprising:stock. Prior to this offering, there has been no public market for our common stock.
· | 2,664,389 shares of outstanding common stock held by selling stockholders; and |
· | [ ] shares of common stockWe expect that the selling stockholders will acquire on conversion of outstanding convertible notes. |
· | [ ] shares of common stock that the financial advisor and placement agent will acquire on exercise of warrants. |
Of the 2,664,389 shares will be offered for sale at the price of currently outstanding$6.00 per share until our common stock being registered:becomes quoted on the Over-the-Counter Bulletin Board or listed on an exchange.
| · | 1,547,756 were acquired in the reverse merger described in this prospectus; |
| · | 964,632 were acquired by one of the placement agents and one of the financial advisors for services rendered in connection with the private placement and reverse merger described in this prospectus; |
| · | 52,001 were acquired prior to completion of the private placement and the reverse merger described in this prospectus. |
| · | 100,000 shares were acquired from a shareholder who received the shares in the reverse merger. |
We are also registering [ ]have applied to have our common stock listed on the NASDAQ Capital Market under the symbol “SLPC.” We expect our listing to be effective as of the date of this prospectus. No assurance can be given that our listing application will be approved. If our listing application is not approved we intend to complete this offering and apply to have out stock quoted on the Over the Counter Bulletin Board.
The 369,725 shares being sold under this prospectus comprise of 369,725 of the 1,923,809 shares issuable on conversion of promissoryoutstanding convertible notes in the aggregate principal amount of $4,140,000 purchased$4,040,000 issued in a private placement which was completed on February 12, 2010. These convertible notes are convertible at a price of $2.10 per share (which represents a 65% discount to the assumed public offering price of $6.00 per share for the 4,166,667 shares being offered for sale by the company in a firm commitment offering under a separate prospectus dated the date hereof which assumes a public offering price of $[ ]. We are also registering [ ] shares of common stock that the placement agent and financial advisor will acquire on exercise of warrants.hereof).
All of the selling stockholders have entered into lock-up agreements with the underwriters of the public offering under which they have agreed not to sell any of the shares being registered hereby for a period of 90 days of the date hereof. Following expiration of the lockup period the selling stockholders may sell all or any portion of their shares of common stock in one or more transactions in the public market or in private negotiated transactions. Each selling stockholderWe expect that the shares will determinebe offered for sale at the prices at which it sells its shares.price of $6 per share until our common stock becomes quoted on the Over-the-Counter Bulletin Board or listed on an exchange. Although we will incur expenses in connection with the registration of the common stock, we will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders.
We intend to apply to have our common stock listed on the NASDAQ Global Market or the NASDAQ Capital Market under the symbol “ ”. We expect our listing to be effective as of the date of this prospectus. No assurance can be given that our listing application will be approved. If our listing application is not approved we intend to complete this offering and apply to have out stock quoted on the Over the Counter Bulletin Board.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 87 for a discussion of certain risk factors that you should consider. You should read the entire prospectus before making an investment decision.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is ______, 20102011
[RESALE PROSPECTUS ALTERNATE PAGE]
TABLE OF CONTENTS
| Prospectus Summary | | | 1 | |
| Risk Factors | | | 8 | 7 |
| Caution Regarding Forward Looking Statements and Other Information Contained in this Prospectus | | | 25 | 26 |
| Use of Proceeds | | | 25 | 26 |
| Determination of Offering Price | | | 26 | |
| Dividend Policy | | | 26 | |
Selling Stockholders | | | 26 | 27 |
| Exchange Rate Information | | | 27 | |
| A-27 |
| Market Price of our Common Stock and Related Stockholder Matters | | | 30 | 32 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 31 | 45 |
| Business | | | 44 | 61 |
| Additional Disclosure Regarding Conversion of Notes and Exercise of Warrants | | | 58 | 70 |
| Security Ownership of Certain Beneficial Owners and Management | | | 63 | 71 |
| Management | | | 65 | 73 |
| Executive Compensation | | | 69 | 81 |
| Certain Relationships and Related Transactions | | | 71 | 85 |
| Description of Securities | | | 72 | 87 |
| Material United States Federal Income Tax Considerations | | | 75 | 90 |
| Material PRC Income Tax Considerations | | | 79 | 94 |
| Plan of Distribution | | | 82 | 97 |
| Legal Matters | | | 87 | 103 |
| Experts | 103 |
| Service of Process And Enforcement of Judgments | | 87 | 103 |
| Where You Can Find More Information | | | 88 | 103 |
| Index to Financial Statements | | | F-1 | |
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with additional or different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted.
This prospectus includes market size, market share and industry data that we have obtained from market research, publicly available information and various industry publications. The third party sources from which we have obtained information generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified any of the data from third party sources nor have we verified the underlying economic assumptions relied upon by those third parties. Similarly, industry forecasts and market research, which we believe to be reliable based upon management’s knowledge of the industry, have not been verified by any independent sources.
[RESALE PROSPECTUS ALTERNATE PAGE]
THE OFFERING
This prospectus relates to the resale by the selling stockholders identified in this prospectus of up to [ ]369,725 shares of our common stock including:comprising of 369,725 of the 1,923,809 shares issuable on conversion of convertible notes in the aggregate principal amount of $4,040,000 issued in February 2010. These convertible notes are convertible at a price of $2.10 per share (which represents a 65% discount to the assumed public offering price of $6.00 per share for the 4,166,667 shares being offered for sale by the company in a firm commitment offering under a separate prospectus dated the date hereof).
| · | 1,547,756 shares acquired by one of the selling stockholders in the reverse merger described in this prospectus; |
| · | 964,632 shares acquired by one of the placement agents for services rendered in connection with the private placement and reverse merger described in this prospectus; |
| · | 52,001 shares acquired prior to completion of the private placement and the reverse merger described in this prospectus; |
| · | 100,000 shares acquired by a selling stockholder from a shareholder who received the shares in the reverse merger |
| · | [ ] shares issuable on conversion of convertible notes in the aggregate; principal amount of $4,140,000 purchased in a private placement which was completed on February 12, 2010. These notes are convertible at a 65% discount to the public offering price of the shares being offered for sale by the company in a firm commitment offering contemporaneously herewith. Assuming a public offering price of $[ ] there will be [ ] shares issued on conversion of the notes; and |
| · | [ ] shares issuable on exercise of warrants issued to placement agent and financial advisor. |
All of the shares being registered are subject to a lock up agreement which expires on the 90th day following the date of this prospectus. After the lock up period expires the shares may be offered for sale by the selling stockholders from time to time. No shares are being offered for sale by the Company.
Common stock outstanding prior to the offeringcurrently outstanding | | 15,235,71415,265,714 |
| | | |
| Common stock offered by the Company in this resale prospectus | | 0 |
| | | |
| Total shares of common stock offered by selling stockholders | | 369,725 which number represents 369,725 of the 1,923,809 shares issuable on conversion of the outstanding convertible notes in the aggregate principal amount of $4,040,000 issued in February 2010. These convertible notes are convertible at a price of $2.10 per share (which represents a 65% discount to the assumed public offering price of $6.00 per share for the 4,166,667 shares being offered for sale by the Company in a firm commitment offering under a separate prospectus dated the date hereof). |
| | | |
| Common stock outstanding before the closing of the public offering of 4,166,667 shares being offered for sale by the Company in a firm commitment offering under a separate prospectus dated the date hereof | | 17,189,523. This number reflects (i) 15,265,714 shares currently outstanding plus (ii) 1,923,809 additional shares issuable on conversion of outstanding convertible notes in the aggregate principal amount of $4,040,000 which conversion will occur immediately prior to the closing of the public offering by the company. |
| | |
| Total number of share to be outstanding after the closing of the public offering of 4,166,667 shares being offered for sale by the Company in a firm commitment offering under a separate prospectus dated the date hereof | | 21,814,562. This number reflects (i) 15,265,714 shares currently outstanding; (ii) 1,923,809 additional shares that are issuable on conversion of outstanding convertible notes in the aggregate principal amount of $4,040,000 which conversion will occur immediately prior to the closing of the public offering; (iii) 4,166,667 shares being offered for sale by the company in the initial public offering under a separate prospectus dated the date hereof and (iv) 193,186 and 265,186 shares being issued to United Best and Primary Capital, respectively, on closing of the public offering by the company. |
| | |
| Total dollar value of common stock being registered | | On February 12, 2010, the closing date of the private placement of the notes and the reverse merger, the shares of our common stock were not publicly traded. Assuming a public offering price for the common stock of $[ ]$6.00 per share the dollar value of the [ ]369,725 shares being registered was the $[ ].is $2,218,350. |
| | |
| Use of Proceeds | | We will not receive any of the proceeds from the sales of the shares by the selling stockholders. |
| | | |
Our Proposed SymbolListing | | We intend to applyhave applied to have our common stock listed on the NASDAQ Global Market or the NASDAQ Capital Market. |
| | | |
| Risk Factors | | The securities offered by this prospectus are speculative and involve a high degree of risk. Investors purchasing our securities should not purchase the securities unless they can afford the loss of their entire investment. See “Risk Factors” section beginning on page 8.7. |
[RESALE PROSPECTUS ALTERNATE PAGE]
We will not receive any proceeds from the sale of the shares of common stock.
[RESALE PROSPECTUS ALTERNATE PAGE]
SELLING STOCKHOLDERS
This prospectus relates to the offer and sale of our shares of common stock by the selling stockholders identified in the table below.
ExceptPrior to this offering there has been no public market for our common stock.
We expect that the shares will be offered for sale at the price of $6.00 per share until our common stock becomes quoted on the Over-the-Counter Bulletin Board or listed on an exchange.
We have applied to have our common stock listed on the NASDAQ Capital Market under the symbol “SLPC.” We expect our listing to be effective as of the date of this prospectus. No assurance can be given that our listing application will be approved. If our listing application is not approved we intend to complete this offering and apply to have our stock quoted on the Over the Counter Bulletin Board.
Tim O’Donnell, a selling stockholder, is affiliated with Primary Capital, a broker dealer. Mr. O’Donnell purchased the securities that he is offering for resale under this prospectus in the ordinary course of business and at the time of the purchase of the securities Mr. O’Donnell had no agreement or understanding, directly or indirectly, with any person to distribute the securities. Any distribution of shares by Mr. O’Donnell will be transacted through unaffiliated FINRA members.
Except for Glenn A. Little, none of the selling stockholders is a broker dealer or an affiliate of a broker dealer. Broker dealers and, with certain exceptions, affiliates of broker dealers, are “underwriters” within the meaning of the Securities Act in connection with the sales of shares registered in this prospectus.
Except as set forth below, none of the selling stockholders has been an officer, director or affiliate of the company or any of its predecessors or affiliates within the last three years, nor has any selling stockholder had a material relationship with the company.
| ¨ | Primary Capital, a selling stockholder, is a limited liability company owned by John Leo. Under the terms of an agreement between Primary Capital and the company, dated November 17, 2009, as amended, Primary Capital was paid a fee of $202,000 at the closing of the private financing. Primary Capital is also owed an additional $75,000 for services rendered in connection with the reverse merger. In addition, on automatic conversion of the notes issued to the investors in the February 2010 private financing, Primary Capital is entitled to receive a five-year warrant to purchase 5% of the number of securities issued on such conversion, exercisable at the price at which the notes converted. If no such note conversion occurs, Primary Capital shall receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing, exercisable at the same price at which those investor warrants are exercisable. At the closing of the share exchange, Primary Capital also received 290,755 shares of our common stock. On April 20, 2010 Primary Capital purchased 673,877 shares from Newise Holdings. All of the 964,632 shares of common stock currently held by Primary Capital are being registered in this prospectus as are the shares underlying the warrants. |
| ¨ | Newise Holdings, a selling stockholder, is a British Virgin Islands company controlled by Mr. Li Jun, one of our directors. Newise Holdings received 2,321,633 of our shares in the reverse merger. In April 2010, 673,877 of these shares were sold to Primary Capital and 100,000 were sold to Mr. Ming Liu. The remaining 1,547,756 shares that were received by Newise Holdings in the reverse merger are being registered in this prospectus. Mr. Li also owns and controls United Best, a Hong Kong corporation and a selling stockholder. Under the terms of an agreement between United Best and the company (the “Consulting Agreement”), United Best was paid a fee of $202,000 at the closing of the reverse merger and private financing. United Best is also owed an additional $75,000 for services rendered in connection with the reverse merger. In addition, on conversion of the notes in the February 2010 private financing, United Best is entitled to receive a five-year warrant to purchase that number of common stock equal to 5% of the number of securities issued on such conversion, exercisable at the price at which the notes convert. If no such conversion occurs, United Best shall receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing, exercisable at the same price at which those investor warrants are exercisable. At the closing of the reverse merger, United Best also received 362,755 shares of our common stock. None of the 362,755 shares are being registered in the resale prospectus as are the shares issuable on exercise of the warrants. Additionally, under the Consulting Agreement, as amended, United Best, our foreign advisor, is entitled to a fee of 3% of the proceeds to be received by us in connection with the underwritten offering.
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| | ¨ | Joseph Nemelka, a selling stockholder, served as a director of our predecessor Perpetual Technologies, Inc. from October 2006 until February 12, 2010 and from January 2008 through December 2008 served as its chief executive officer. On December 27, 2008 Mr. Nemelka acquired 18,834purchased 9,000,000 shares of common stock from Seth Winterton for $9,000. On February 12, 2010, 12,640,000 of the 13,000,000 shares then outstanding were cancelled with 360,000 shares (or 72,000 post reverse split) remaining outstanding. Of these 72,000 shares, 18,834 were held by Joe Nemelka. None of these shares are being registered for $15,000 in May 2008.registered. The other9,152 shares being registered for resale by himMr. Nemelka represent a portion of the 47,619 shares issuable on conversion of the convertible note in the aggregate principal amount of $100,000 purchased by him in the February private placement. |
The table set forth below lists the names of the selling stockholders as well as (1) the number of shares of common stock that are being registered for resale by each of the selling stockholders; and (2) the number of shares underlying the notes acquired by each of the selling stockholders in the private placement that are being registered for resale.
EachAfter the expiration of the lock-up period, each selling stockholder may offer for sale all or part of its shares from time to time. The table below assumes that the selling stockholders will sell all of the shares offered for sale. A selling stockholder is under no obligation, however, to sell any shares pursuant to this prospectus.
After due inquiry and investigation and based on information provided by the selling stockholders, none of the selling stockholders has an existing short position in our stock.
Other than as described in this prospectus, we have not in the past three years engaged in any securities transaction with any of the selling stockholders, any affiliates of the selling stockholders, or, after due inquiry and investigation, to the knowledge of the management of the Company, any person with whom any selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons).
In addition, other than in connection with the contractual obligations set forth in (i) the share exchange agreement entered into between the Company and certain selling stockholders, (ii) the note purchase agreement (and the related registration rights agreement) entered into between the Company and each of the selling stockholders who invested in the private placement financing, and (iii) the registration rights letter agreement dated as of February 12,18, 2010 with the holders of our common stock who acquired their sharesshare prior to the private placement, (iv) the financial services agreement between the Company and Primary Capital entered into in November 2009, as amended, and (v) the financial services agreement dated November 2009, as amended, between United Best and the company, we do not have any agreement or arrangement with any selling stockholder with respect to the performance of any current or future obligations.
Name of Selling Stockholder | | Number of Shares of Common Stock Beneficially Owned Prior to the Offering (1) (2) | | | Percentage | | | Maximum Number of Shares to be Sold in Offering | | | Number of Shares Beneficially Owned after Offering | | | Percentage | |
Newise Holdings Limited PO Box 957 Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands (3) | | | | | | | | | | | | | | | | | | | | |
United Best, Room 601, Albion Plaza, 2-6 Granville Road, Tsim Sha Tsui, Kowloon, Hong Kong(4) | | | | | | | | | | | | | | | | | | | | |
Primary Capital LLC, 80 Wall Street, 5th Floor, New York NY 10005 (5) | | | | | | | | | | | | | | | | | | | | |
Ming Liu 80 Dianche Street 4th Floor, Daoli District, Harbin China | | | 100,000 | | | | * | | | | 100,000 | | | | 0 | | | | - | |
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Joseph Nemelka 159 South 975 West, Mapleton, UT 84664 (6) | | | | | | | | | | | | | | | | | | | | |
Ist Orion Corp 9025 Oakwood Place, West Jordan, UT 84088 (7) | | | 32,167 | | | | * | | | | 32,167 | | | | 0 | | | | - | |
Lorikeet, Inc 386 North 210 East, Mapleton, UT 84664 (8) | | | 1,000 | | | | * | | | | 1,000 | | | | 0 | | | | - | |
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Jayhawk Private Equity Fund II, LP 930 Tahoe Blvd 802-281 InclineVillage, NV 89451 (9) | | | | | | | | | | | | | | | | | | | | |
Blue Earth Fund LP 1312 Cedar Street SantaMonica, CA 90405 (10) | | | | | | | | | | | | | | | | | | | | |
Lumen Capital LP 265 West Trail Stamford, CT 06903 (11) | | | | | | | | | | | | | | | | | | | | |
Trading Systems LLC 14 Red Tail Drive, Highlands Ranch CO 80126 (12) | | | | | | | | | | | | | | | | | | | | |
Glenn A. Little 1103 Stewart Ave., Suite 200, Garden City, NY 11530 (13) | | | | | | | | | | | | | | | | | | | | |
Jeffrey Grossman 35 Rochelle Dr. New City NY 10956 (14) | | | | | | | | | | | | | | | | | | | | |
Grace King 1235 Park Ave New York, NY 10128 (15) | | | | | | | | | | | | | | | | | | | | |
Timothy O’Donnell 160 Henry St. Apt.3B, Brooklyn, NY 11201 (16) | | | | | | | | | | | | | | | | | | | | |
Sik Wing Sung 53 Braisted Avenue, Staten Island, NY 10314 (17) | | | | | | | | | | | | | | | | | | | | |
Name of Selling Stockholder | | Number of Shares of Common Stock Beneficially Owned Prior to the Offering (1) (2) | | | Percentage | | | Maximum Number of Shares to be Sold in Offering | | | Number of Shares Beneficially Owned after Offering | | | Percentage | |
Joseph Nemelka 159 South 975 West, Mapleton, UT 84664 (3) | | | 66,453 | | | | * | | | | 9,152 | | | | 57,301 | | | | * | |
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Jayhawk Private Equity Fund II, LP 930 Tahoe Blvd 802-281 InclineVillage, NV 89451 (4) | | | 1,190,476 | | | | 7.23 | % | | | 228,790 | | | | 961,686 | | | | 4.4 | % |
Blue Earth Fund LP 1312 Cedar Street Santa Monica, CA 90405 (5) | | | 476,190 | | | | 3 | % | | | 91,516 | | | | 384,674 | | | | 1.8 | % |
Trading Systems LLC 14 Red Tail Drive, Highlands Ranch CO 80126 (6) | | | 47,619 | | | | * | | | | 9,152 | | | | 38,467 | | | | * | |
Glenn A. Little 1103 Stewart Ave., Suite 200, Garden City, NY 11530 (7) | | | 95,238 | | | | * | | | | 18,303 | | | | 76,935 | | | | * | |
Jeffrey Grossman 35 Rochelle Dr. New City NY 10956 (8) | | | 47,619 | | | | * | | | | 9,152 | | | | 38,467 | | | | * | |
Grace King 1235 Park Ave New York, NY 10128 (9) | | | 9,524 | | | | * | | | | 1,830 | | | | 7,694 | | | | * | |
Timothy O’Donnell 160 Henry St. Apt.3B, Brooklyn, NY 11201 (10) | | | 4,762 | | | | * | | | | 915 | | | | 3,847 | | | | * | |
Sik Wing Sung 53 Braisted Avenue, Staten Island, NY 10314 (11) | | | 4,762 | | | | * | | | | 915 | | | | 3,847 | | | | * | |
* Less than 1%
(1) As of the close of business on July 7, 2010,January 31, 2011, there were 15,235,71415,265,714 shares of our common stock outstanding. Following the closing of the firm commitment underwritten offering by the company, there will be 21,814,562 shares issued and outstanding (including shares issuable on conversion of the notes and the additional shares to be issued to United Best and Primary Capital on closing of the firm commitment offering by the company).
(2) In determining beneficial ownership of the common stock, the number of shares shown includes shares which the beneficial owner may acquire within 60 days of July 7, 2010January 31, 2011 upon exercise of convertible securities, warrants or options. There are no such securities outstanding. In accordance with Rule 13d-3 in determining the percentage of common stock owned by a person on July 7, 2010,January 31, 2011, (a) the numerator is the number of shares of the class beneficially owned by such person, including shares which the beneficial owner may acquire within 60 days upon conversion or exercise of the warrants and other convertible securities, and (b) the denominator is the sum of (i) the total shares of that class outstanding on July 7, 2010,January 31, 2011, and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of other securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(3) Represents 1,547,756 shares held by Newise Holdings, a BVI company controlled by Li Jun, one of our directors. Mr. Jun has sole voting and dispositive power with respect to the shares. In addition, under the terms of an agreement between Foshan and United Best, a company controlled by Mr. Jun, United Best received, as a transaction fee following the closing of the reverse merger, 362,755 shares of our common stock. United Best will also receive warrants to purchase [ ] shares of common stock on closing of the offering which shares are being registered.
(4) Represents shares underlying warrants received by United Best.
(5) Primary Capital is the beneficial owner of 964,632 shares. Primary Capital received, at the closing of the share exchange agreement, 290,755 shares of our common stock and on April 20, 2010. Primary Capital purchased 673,877 shares from Newise Holdings. Primary Capital will also receive warrants to purchase [ ] shares of common stock on closing of the offering which shares are being registered.
(6) Represents 18,834 shares acquired by Mr. Nemelka prior to the reverse merger and [ ]47,619 shares issuable on conversion of the convertible notes at(at a 65% discount to the public offering price assuming a public offering price of $[ ].
(7) Represents 32,167$6.00). None of the 18,834 shares acquired by Ist OrionMr. Nemelka prior to the reverse merger. Laura Lee Madsen has sole voting and dispositive power with respect to those shares.
(8) Represents 1,000 shares acquired by Lorikeet, Inc. prior tomerger are being registered for resale. 9,152 of the reverse merger. Steven White has sole voting and dispositive power with respect to those shares.
(9) Represents47,619 shares issuable on conversion of the convertible notes.notes are being registered for resale.
(4) Represents 1,190,476 shares issuable on conversion of the convertible notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 228,790 of these shares are being registered for resale. Kent C. McCarthy is the Managing Member of Jayhawk Private Equity LLC, which is the General Partner of Jayhawk Private Equity GP II, LP, which is the General Partner of Jayhawk Private Equity Fund II, L.P. and has voting power and investment power over securities held by Jayhawk Private Equity Fund, L.P
(10)(5) Represents 476,190 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 91,516 of these shares are being registered for resale. Blue Earth Fund is not a broker-dealer or an affiliate of a broker dealer. Brett Conrad, Managing Member of LongBoard Capital Advisors, LLC which is General Partner of Blue Earth Fund, L.P. and has the sole voting and dispositive powers over shares beneficially owned by Blue Earth Fund, LP.
(11)(6) Represents 47,619 shares issuable on conversion of the convertible notes. Allan Lichtenberg isnotes (at a 65% discount to the Managing Memberpublic offering price assuming a public offering price of Lumen Management, LLC which is the General Partner$6.00). 9,152 of Lumen Capital Limited Partnership and has the sole voting and dispositive power overthese shares beneficially owned by Lumen Capital Limited Partnership.
(12) Represents shares issuable on conversion of the convertible notes.are being registered for resale. Gary Mc Adams has the sole voting and dispositive power over shares beneficially owned by Trading Systems, LLC.
(13)(7) Represents 95,238 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 18,303 of these shares are being registered for resale.
(14)(8) Represents 47,619 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 9,152 of these shares are being registered for resale.
(15)(9) Represents 9,524 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 1,830 of these shares are being registered for resale.
(16)(10) Represents 4,762 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 915 of these shares are being registered for resale.
(17)(11) Represents 4,762 shares issuable on conversion of the convertible notes.notes (at a 65% discount to the public offering price assuming a public offering price of $6.00). 915 of these shares are being registered for resale.
[RESALE PROSPECTUS ALTERNATE PAGE]
PLAN OF DISTRIBUTION
Prior to this offering there has been no public market for our common stock.
We expect that the shares will be offered for sale at the price of $6.00 per share until our common stock becomes quoted on the Over-the-Counter Bulletin Board or listed on an exchange.
The selling security holders and any of their pledgees, donees, assignees and successors-in-interest may, after the expiration of the lock-up period, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when disposing of shares:
| | ¨ | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| | ¨ | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| | ¨ | purchases by a broker-dealer as principal and resales by the broker-dealer for its account; |
| | ¨ | anAn exchange distribution in accordance with the rules of the applicable exchange; |
| | ¨ | privately negotiated transactions; |
| | ¨ | to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the Commission; |
| | ¨ | broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share; |
| | ¨ | a combination of any of these methods of sale; and |
| | ¨ | any other method permitted pursuant to applicable law. |
The shares may also be sold under Rule 144 under the Securities Act of 1933, if available, rather than under this prospectus. The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law. The maximum commission or discount to be received by any FINRA member of independent broker-dealer for the sale of any securities being registered hereunder pursuant to Commission Rule 415 will not be greater than eight percent (8%).
If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.
The selling security holders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to beare “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part. Broker dealers and affiliates of broker dealers may be deemed to beare “underwriters” within the meaning of the Securities Act in connection with the sales of shares registered in this prospectus.
The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.
If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether any of the selling security holders will sell all or any portion of the shares offered under this prospectus.
We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling security holder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.
We and the selling security holders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.
[RESALE PROSPECTUS ALTERNATE PAGE]
The validity of the shares sold by us under this prospectus will be passed upon by Guzov Ofsink, LLC, New York.
With respect to certain matters involving the enforcement of foreign judgments in the PRC and the bringing of original actions in the PRC predicated solely on the federal securities laws of the United States, Han Kun Law Firm, has given us certain advice.
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are a company incorporated under the laws of the State of Delaware in the United States. However, all of our business, assets and operations are located in China. In addition, a substantial majority of our directors and officers reside outside of the United States. As a result, it may be difficult for United States investors to effect service of process within the United States upon us or such persons or to enforce against us or them, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any State thereof.
Han Kun Law Offices, our counsel as to Chinese law, has advised us that there is uncertainty as to whether the courts of China would (1) recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any State thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any State thereof.
Han Kun Law Offices has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in the United States.
EXPERTSWe have appointed Vcorp Services, LLC as our agent to receive service of process with respect to any action brought against us in a court in the United States.
EXPERTS
Child Van Wagoner & Bradshaw, PLLC, independent registered public accountants, located in Utah, have audited our financial statements included in this registration statement to the extent and for the periods set forth in their report. We have relied on such reports given upon the authority of such firm as experts in accounting and auditing.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses, to be paid solely by us, in connection with the issuance and distribution of the securities being registered hereby
| SEC Registration Fee | | $ | 4,322.00 | | | $ | 4,322.00 | |
| FINRA Filing Fee | | $ | 8,700.00 | | | $ | 8,700.00 | |
| Professional Fees and Expenses* | | $ | 450,000.00 | | | $ | 450,000.00 | |
| Printing and Engraving Expenses * | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Transfer Agent’s Fees* | | $ | 1,000.00 | | | $ | 10,000.00 | |
| Miscellaneous Expenses* | | $ | 34,000.00 | | | $ | 34,000.00 | |
| Total | | $ | 499,022.00 | * | | $ | 509,022.00 | * |
* Estimates
Item 14. Indemnification of Directors and Officers.
Under our By-Laws, we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such action or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company and, in the case of a criminal action or proceeding, had no reasonable cause to believe the conduct of such person was unlawful.
Under Section 145 of the Delaware General Corporation Law (“DGCL”) the company has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. In addition the company has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
The company is required, to the fullest extent allowed by the DGCL, indemnify hold harmless each of the foregoing directors from and against any expenses, including reasonable attorney’s fees, judgments, fines, settlements and other legally permissible amounts, incurred in connection with any proceeding arising out of, or related to, such director’s position with the company. The company is required to advance to each such director any expenses, including attorney’s fees and costs of settlement, incurred in defending any such proceeding to the fullest extent allowed by the DGCL.
Such costs and expenses incurred by the Director in defense of any such proceeding shall be paid by the Company in advance of the final disposition of such proceeding promptly upon receipt by the Company of (a) written request for payment; (b) appropriate documentation evidencing the incurrence, amount and nature of the costs and expenses for which payment is being sought; and (c) an undertaking adequate under applicable law made by or on behalf of the Director to repay the amounts so advanced if it shall ultimately be determined pursuant to any non-appealable judgment or settlement that the Director is not entitled to be indemnified by the Company or any subsidiary thereof.
Under an independent directors agreement entered between the company and Richard Cohen, the company is required, to the fullest extent allowed by the DGCL, indemnify and hold Mr. Cohen harmless from and against any expenses, including reasonable attorney’s fees, judgments, fines, settlements and other legally permissible amounts incurred in connection with any proceeding arising out of, or related to, Mr. Cohen’s position with the company. The company is required shall advance to Mr. Cohen any expenses, including attorney’s fees and costs of settlement, incurred in defending any such proceeding to the fullest extent allowed by the DGCL.
The Company has obtained “side A” executive liability coverage for each of Chris Bickel and Richard Cohen with coverage of up to $2,000,000 per claim.
Item 15. Recent Sales of Unregistered Securities
Following are all issuances of securities by the registrant during the past three years which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). In each of these issuances the recipient represented that he or it was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. No general solicitation or advertising was used in connection with any transaction, and the certificate evidencing the securities that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom. Unless specifically set forth below, no underwriter participated in the transaction and no commissions were paid in connection with the transactions.
February 2010 Share Exchange
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As a result of the share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary, and the Hong Hui stockholders became holders of 14,510,204 shares of our common stock. The Hong Hui stockholders with whom we completed the share exchange are as set forth below, each of whom is a company incorporated in the British Virgin Islands and each of whom received the number of shares set forth beside their respective names:
Bestyield Group Limited, 4,353,061;
Proudlead Limited, 4,353,061;
Newise Holdings Limited, 2,321,633;
Pilot Link International Limited, 1,668,673;
High Swift Limited, 1,088,265; and
China Investment Management Inc., 725,510.
All of the above issuances were deemed to be exempt under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of ours or our executive officers, and transfer was restricted by us in accordance with the requirements of the Securities Act.
February 2010 Private Placement Transaction
On February 12, 2010, immediately following the closing of a share exchange agreement we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes, in the aggregate principal amount of $4,140,000, and warrants (which are exercisable only in certain circumstances). The closing of the sale of the notes and warrants occurred on February 12, 2010.
The terms of the notes and warrants is described elsewhere in this registration statement. See “OUR CORPORATE HISTORY – Private Placement” beginning on page 40 of this prospectus.
Placement Agent Warrant and Financial Advisor Warrant
United Best
United Best, a companyour foreign advisor controlled by Mr. Li Jun, one of our directors, provided financial services in connection with the private placementfinancing and reverse merger. United Best, is listed as a selling stockholder in the Resale Prospectus.
Under the terms of the Consulting Agreementa consulting agreement between United Best and the company United Best was paid a feecommission of $202,000 at the closing of the reverse merger.financing. United Best is also owed an additional $75,000 for services rendered in connection with financing. Additionally, under the reverse merger. consulting agreement, as amended, United Best, our foreign advisor, is entitled to be paid fee on completion of this offering a success of $750,000 (which represents 3% of the $25,000,000 in gross proceeds received by us in connection with the underwritten offering).
At the closing of the reverse merger,transaction, United Best also received 362,755 shares of our common stock. None of those 362,755 shares held bystock for their services. United Best are being registered inis also entitled to receive an additional 193,186 shares of closing of this prospectus. offering.
In addition, inas partial consideration for providing these financial services, United Best is entitled to receive, on conversion of the notes which occurs upon consummation of this offering, a five-year warrantissued to purchase that number of common stock equal to 5% of the number of securities issued o the note holders on conversion, exercisable at the price at which the notes converted. Unlike the investor warrants issuedinvestors in the February 2010 private placement transaction(which occurs upon consummation of this offering), a five-year warrant to purchase 96,190 shares of common stock (which represents 5% of the number of the 1,923,809 shares common stock issued to the note holders on conversion), exercisable at the price of $2.10 per share (i.e. the asset price at which the notes converted assuming a public offering price of $6.00 per share). Unlike the investor warrants, these warrants will not terminate but instead become exercisable uponon conversion of the notes and consummation of this offering. If the note conversion does not occur United Best will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. The shares underlying these warrants are being registered in the Resale Prospectus. Newise Holdings, a company also controlled by Li Jun, is also listed as a selling stockholder in the Resale Prospectus. Additionally, under the Consulting Agreement, as amended, United Best, our foreign advisor, is entitled to a fee of 3% of the proceeds to be received by us in connection with the underwritten offering.
Primary Capital
Primary Capital also provided financial vicesservices in connection with the private placement and reverse merger. Primary Capital is listed as a selling stockholder in the Resale Prospectus.
Under the terms of a placement agentfinancial services agreement between Primary Capital and the company, Primary Capital was paid a feecommission of $202,000 at the closing of the February 2010 private financing. Primary Capital is also owed an additional $75,000 for services rendered in connection with the reverse merger. private placement. Primary Capital is also entitled to receive $15,000 on completion of the offering and $15,000 for the next succeeding seven calendar quarters for an aggregate amount of $120,000.
At the closing of the reverse merger,financing, Primary Capital also received 290,755 shares of our common stock. AllPrimary is also entitled to receive 265,186 shares of those shares are being registered incommon stock on the closing of this prospectus. offering.
In addition, in partial consideration for providing these financial services Primary Capital is entitled to receive, on conversion of the notes whichissued to the investors in the February 2010 private placement (which occurs upon consummation of this offering,offering), a five-year warrant to purchase that number96,190 shares of common stock equal to(which represents 5% of the number of securitiesthe 1,923,809 shares of common stock issued to the noteholders on conversion,conversion), exercisable at $2.10 (which equals the price at which the notes converted.) Unlike the investor warrants,issued in the February 2010 private placement transaction, these warrants will not terminate but instead become exercisable upon conversion of the notes and consummation of this offering. If the note conversion does not occur, Primary Capital will receive a five-year warrant to purchase that number of shares of common stock equal to 5% of the common stock underlying the warrants issued to the investors in the private financing exercisable at the same price at which those investor warrants are exercisable. The shares underlying the warrants are being registered in the Resale Prospectus.
Other than the securities mentioned above, we have not issued or sold any securities without registration within the past three years.
Exemptions
All of the above issuances in connection with the February Private Placement were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of ours or our executive officers, and transfer was restricted by us in accordance with the requirements of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
| 1.1 | | Form of Underwriting Agreement (1) |
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| 3.1 | | Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.013.1 to the Registration Statement onAnnual Report of Form 10-SB10-K for the fiscal year ended September 30, 2010 filed on January 1, 2008)3, 2011.) |
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| 3.2 | | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.013.2 to the Registration Statement onAnnual Report of Form 10-SB10-K for the fiscal year ended September 30, 2010 filed on January 1, 2008)3, 2011.) |
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| 4.1 | | Specimen of Common Stockcommon stock certificate (1) |
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| 4.2 | | Form of Convertible Promissory Note (issued pursuant to Note Purchase Agreement, dated as of February 12, 2010 between the Company and the investors.) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 4.3 | | Form of Warrant (issued pursuant to Note Purchase Agreement, dated as of February 12, 2010 between the Company and the investors.) (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 4.4 | | Stock Pledge Agreement, dated as of February 12, 2010, by and among the Company and certain stockholders of the Company (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 4.5 | | Form of Warrant to be issued to underwriter |
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| 5.1 | | Legal Opinion of Guzov Ofsink, LLC re legality of the common stock being registered (1) |
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| 10.1 | | Share Exchange Agreement, dated as of February 12, 2010 between the Company, Hong Hui and the former stockholders of Hong Hui. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 10.2 | | Note Purchase Agreement, dated as of February 12, 2010 between the Company and the investors (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 10.3 | | Escrow Agreement, dated as of February 12, 2010, by and between the Company, each of the investors, and Interwest Transfer Agent , as escrow agent (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 10.4 | | Registration Rights Agreement dated February 12, 2010, by and among the Company and the Purchasers (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 10.5 | | Non Recourse Guaranty Agreement dated as of February 12, 2010, by and among the Company and certain stockholders of the Company (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on February 12, 2010) |
| 10. 6 | | Stock Pledge Agreement dated as of February 12, 2010, by and among the Company, certain stockholders of the Company and the collateral agent (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on February 12, 2010) |
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| 10.7 | | Engagement Letter Agreement, dated November 17, 2009, as amended, by and between Foshan and Primary Capital LLC, as amended (1) |
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| 10.8 | | Voting Agreement dated as of February 12, 2010 by and among the Company, the Investors, Bestyield Limited and Proudlead Limited (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on February 12, 2010). |
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| 10.9 | | Employment Agreement dated as of November 20, 2008 by and between the Company and Ji Lie (1) |
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| 10.10 | | Employment Agreement dated as of November 20, 2008 by and between the Company and Zeng Shijun (1) |
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| 10.11 | | Employment Agreement dated as of January 1, 2010 by and between the Company and Law Wawai. (1) |
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| 10.12 | | Financial Services Agreement dated November 17, 2009, as amended, between United Best and the company (1) |
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| 10.13 | | Form of Lock Up Agreement (1) |
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| 10.14 | | Independent Director’s Agreement dated May 2010 between Richard M. Cohen and the Company (1) |
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| 10.15 | | Loan Agreement dated July 27, 2010 between Foshan City SLP Special Materials Co., Ltd. and Foshan Nanhai Shishan Branch of China Agriculture Bank Stock Co., Ltd. (1) |
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| 10.16 | | The China SLP Filtration Technology, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on September 9, 2010) |
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| 10.17 | | Employment Agreement dated August 11, 2010 between the Company and Eric Gan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 11, 2010) |
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| 10.18 | | Convertible Note dated February 7, 2007 and conversion notice dated December 2008 by and between Perpetual Technologies, Inc. and 1st Orion Corp. (1) |
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| 10.19 | | Convertible Note dated February 7, 2007 and conversion notice dated December 2008 by and between Perpetual Technologies, Inc. and Lorikeet, Inc. (1) |
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| 10.20 | | Letter Agreement dated February 8, 2010 by and among the Company and Joseph Nemelka, 1st Orion Corporation and Lorikeet, Inc. (1) |
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| 10.21 | | Form of Note Extension Agreement executed on January 31, 2011 by certain of the note holders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 2, 2011) |
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| 21.1 | | List of Subsidiaries (1) |
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| 23.1 | | Consent of Guzov Ofsink to the use of the opinion annexed as Exhibit 5.1 (contained in the opinion annexed as Exhibit 5.1) (1) |
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| 23.2 | | Consent of Child, Van Wagoner & Bradshaw, independent certified public accountants, for use of their audit report relating to the financial statements of Technic International,China SLP Filtration Technology, Inc. |
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| 23.3 | | Consent of Han Kun Law Firm |
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| 99.1 | | Stock Purchase Agreement dated as of February 1, 2010 by and between Newise Holdings Limited and Ming Liu (1) |
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| 99.2 | | Stock Purchase Agreement dated as of February 1, 2010 by and between Newise Holdings Limited and Primary Capital (1) |
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| 99.3 | | Stock Sale Agreement dated as of December 27, 2008 by and between Seth Winterton and Joseph Nemelka (1) |
(1) Previously filed.
|
(1)
| To be filed by amendment.
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(b) Financial Statement Schedules. None
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement;
iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(4) That, for the purpose of determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
i. in any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
ii. any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
iii. the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
iv. any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in this registration statement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(7) That, for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time shall be deemed the initial bona fide offering of those securities.
(8) For the purpose of determining liability under the Securities Act to any purchaser, the undersigned registrant undertakes that:
i. if the undersigned registrant is relying on Rule 430B:
a. each prospectus filed by the undersigned registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
b. each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an Underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date, or
ii. if the undersigned registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned thereunto duly authorized in Foshan, PRC, on July 7, 2010.February 4, 2011.
| | CHINA SLP FILTRATION TECHNOLOGY, INC. |
| | |
| | /s/ Li Jie |
| | By: Li Jie |
| | Chief Executive Officer and Directora director (principal executive officer) |
In accordance with the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 was signed by the following persons in the capacities and on the dates indicated.
| Name and Title | | Date |
| | | |
| /s/ Li Jie | | July 7, 2010February 4, 2011. |
Li Jie Chief Executive Officer and a director (principal executive officer) | | |
| | |
/s/ Sabrina LiangEric Gan | | July 7, 2010 |
Sabrina LiangEric Gan
Controller Chief Financial Officer
(principal financial officer and accounting officer) | | |
| | |
| /s/ Li Jun | | July 7, 2010 |
Li Jun Director | | |
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| /s/ Chris Bickel | | July 7, 2010 |
Chris Bickel Director | | |
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/s/ Richard D.M. Cohen | | July 7, 2010 |
Richard D.M. Cohen Director | | |
| | |
| /s/Law Wawai | | July 7, 2010 |
Law Wawai President of Sales and Director | | |
| | |
| /s/ Su Lei | | |
Su Lei Director | | |
