UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT For the fiscal year ended May 31, |
Commission file number: 333-118259
CHINA SUN GROUP HIGH-TECH CO. | ||
| (Exact name of registrant as specified in its charter) | ||
| Delaware | 54-2142880 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer identification No.) | ||
1 Hutan Street, Zhongshan District Dalian, P.R. China | 011 – 86- (411) 8288 9800/ 8289 2736 | ||
| (Address of principal executive | Registrant’s telephone number, including area code |
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to section 12(g) of the ActAct:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes£o Yes NoS þNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.S Yes £ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesS Yes £þ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes£o Yes No£ oNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 10-KSo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes£o Yes NoS þNo
were outstanding.
CHINA SUN GROUP HIGH-TECH CO.
For the Fiscal Year Ended May 31, 2011
Table of Contents
| Page | ||
| PART I | ||
| Item 1. | Business | 2 |
| Item 1A. | Risk Factors | 7 |
| Item 2. | Properties | 14 |
| Item 3. | Legal Proceedings | 15 |
| Item 4. | Removed and Reserved | |
| PART II | ||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 |
| Item 6. | Selected Financial Data | 17 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 22 |
| Item 8. | Financial Statements and Supplementary Data | 22 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 22 |
| Item 9A | Controls and Procedures | 22 |
| Item 9B. | Other Information. | 23 |
| PART III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance | 23 |
| Item 11. | Executive Compensation | 26 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 27 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 28 |
| Item 14. | Principal Fees and Services | 28 |
| PART IV | ||
| Item 15. | Exhibits, Financial Statements Schedules | 29 |
PART I
ITEM 1. BUSINESS
History
Dalian Xinyang High-Tech Development Co. LtdLtd. (“DLXY”) was registered as a limited liability company in the People’s Republic of ChinaPRC on August 16, 2000 with its principal place of business in Dalian City, Liaoning Province, the People’s Republic of China.PRC ("PRC"). Its initial registered capital was Renminbi Yuan (“RMB”) 5,500,000 (equivalent to US$665,037), contributed by Sun Group High Technology Development Co., Ltd, a limited liability company registered in Dalian City, Liaoning Province, the People’s Republic of China,PRC, and Ms. Zhi Li, Zhi, a citizen of the People’s Republic of China.PRC. Prior to April 2006, DLXY’s principal activity was acting as a research center to develop technologically feasible nanometers to be used in lithium batteries and generated no revenue. It was considered as a development stage company. In April 2006, DLXY began the production and salessale of cobaltosic oxide, which is used as the anode of high capacity lithium ion rechargeable batteries. Sales are made primarily to battery manufacturers. Currently, all of DLXY’s operations and customers are located in the People’s Republic of China.PRC.
On July 6, 2005, $13,126,609 (RMB 100,500,000) in capital was contributed to DLXY by its two existing investors and one new investor, Ms. Jiao Wang, Jiao, in the formsform of cash and property that included the production facilities located in Dalian City. On May 10, 2006, these three shareholders transferred all of their ownership interests in DLXY to MsMs. Guimei Feng, Guimei, Mr. Gang Li Gang and Mr. Yang Kan Yang who are all citizens of the People’s Republic of China.PRC.
On February 28, 2007, we completed the Exchangea reverse acquisition transaction through a share exchange pursuant to the Plan of Exchange, by and among us, DLXY, the shareholders of DLXY Shareholders,(“DLXY Shareholders) and David Koran. Under the Agreement, (1) Mr. Bin Wang Bin received 9,500,000 shares of our common stock from Mr. Koran for $600,000 in cash, paid for by DLXY and (2) the DLXY Shareholders received (a) 30,000,000 shares of our newly issued common stock in exchange for a 70% ownership interest in DLXY and (b) a two year non-transferable option to purchase 10,000,000 shares of our common stock for an aggregate purchase price of RMB 31,800,000. As a result, we under wentunderwent a change in control, whereby the DLXY Shareholders now ownowned an aggregate of 39,500,000 of our shares, representing 93% of our common stock issued and outstanding.outstanding common stock.
On August 24, 2007, DLXYthe Company was reincorporated from North Carolina to Delaware and changed its name to China Sun Group High-Tech Co. The par value of common stock of China Sun Group High-Tech Co. is $0.001 per share.
Business
The Company has twelve production lines with an annual production capacity of 2,500 tons. During fiscal 2010 and 2011 the Company converted six production lines to the China Battery Industry Association, which conducts researchproduction of lithium iron phosphate. As of June 30, 2011, the Company had six lines for the production of lithium iron phosphate and putsfour lines for the production of cobaltosic oxide. Our two remaining lines can be converted to the production of lithium iron phosphate, if market conditions allow.
The following table sets forth reports on the battery industry, we haveproduction, in tons, of cobaltosic oxide and lithium iron phosphate during the second largest cobalt series production capacity in the People’s Republic of China. Thisfiscal years ended May 31, 2010 and 2011:
| Sales Volume (Ton) | Changes | |||||||||||||||
Products | 2011 | 2010 | Tons | % | ||||||||||||
| cobaltosic oxide | 1,102 | 1,056 | 46 | 4 | % | |||||||||||
| lithium iron phosphate | 734 | 215 | 519 | 241 | % | |||||||||||
| Total | 1,836 | 1,271 | 565 | 44 | % | |||||||||||
The Company's sizable production capacity will allow DLXY to help it meet the growing demand for anodecathode materials as the demand for lithium batteries increases. Lithium batteries are becoming widely used due to itstheir power capacity, long service life, and compatibility with carbon cathodeanode materials, necessary for battery circuitry. The expected growth of the lithium ion battery industry affords DLXYthe Company a business opportunity for increasing revenue and growth potential.revenue. In addition, DLXY’sour current operations are solely in the People’s Republic of China,PRC, which provides us with access to low-cost skilled labor, raw materials, machinery and facilities and enables us to price our products competitively in an increasingly price-sensitive market.
Industry
The lithium ion battery market is a greenclean energy resource. Lithium ion batteries are versatile, compact and light weight, and have high energy density and capacity, high voltage, and excellent energy retention characteristics. These attributes make lithium ion batteries suitable for use in portable devices in particular. Commercially, lithium ion batteries are used in various gadgets, such as mobile phones, PDAs, laptops, and digital cameras and other uses such as electric automobiles and solar and wind energy storage units. It is also used by governments, mainly for military use in submarines, underwater robots, unpiloted airplanes, and space satellites. As the cost/power ratio of lithium-based batteries continues to improve, it is expected that its usage will also extend into other applications.applications, including electric bicycles, scooters and other vehicles.
Products
The Battery Industry Association of China forecasts that the growing demand for portable products like mobile phonesCompany’s produces cobaltosic oxide and laptops, will stimulate thelithium iron phosphate both cathode materials used in lithium ion battery industrybatteries.
Cobaltosic Oxide. Battery level cobaltosic oxide (CO3O4) is cathode material used in the People’s Republic of China, which is expected to grow at an annual rate of over 30% of annual output, based on units (Source: www.any17.com/newscenter/new/dianchi/2006102405483822.html). Lithium ion batteries used in such portable products apply lithium cobalt oxide (LiCoO2) as an anode material. The China Battery Industry Association also reports that the aggregate global demand for lithium cobalt oxide is approximately 40,000 to 50,000 tons (Source: www.any17.com/newscenter/new/dianchi/2006102405483822.html). Currently, the People’s Republic of China’s lithium cobalt oxide demand is mainly supplied by overseas suppliers. The China Battery Industry Association writes that from September 2004 to late 2005, the demand for lithium cobalt oxide in China exceeded 10,000 tons, which led to a significant rise in the price of cobalt, a major component in the manufacturemanufacturing of lithium cobalt oxide. As a result of high demand, itBattery level cobaltosic oxide is reported that the price of industrial lithium carbonatederived from creosote cobalt or oxide acid cobalt which is refined from original cobalt ore using processes involving acid decomposition, extraction, cobalt sedimentation, washing, and battery lithium carbonate also increased in tandem by approximately 50% from September 2004 to late 2005.drying. Cobaltosic oxide provides superior chemical performance.
Lithium Iron Phosphate. Lithium iron phosphate (LiFePO4), also known as LIP, is a cathode material used in lithium iron phosphate batteries. LIP is derived from lithium iron and phosphate through chemical processes.
Beginning in fiscal 2008, the Company began to focus its research and development activities on technology to produce lithium iron phosphate and in 2010, the Company began producing and selling lithium iron phosphate. In fiscal 2011 the Company produced and sold 734 tons of lithium iron phosphate.
Lithium iron phosphate is quickly becoming the preferred material for anode materials of lithium ion batteries is currently in short supply infor the People’s Republic of China (Source:http://www.xiangmu.com/project/109/1943.html). In addition, cobaltosic oxide and lithium cobalt oxide continue to develop their presence, thus, presenting DLXY with noteworthy growth potential.following reasons:
| · | Longer life: Batteries powered with lithium iron phosphate have a life expectancy of 7-8 years, compared to 1-1.5 years for lead-acid batteries. |
| · | Safety: The use of lithium iron phosphate eliminates the possibility of explosions caused when cobalt and manganese lithium collide. Lithium iron phosphate has undergone rigorous safety testing and has not caused an explosion even in severe traffic accidents. |
| · | Faster Recharge: Batteries powered with lithium iron phosphate can be fully recharged within 40 minutes utilizing high current 2C fast charge and discharge, under the dedicated charger, 1.5C within 40 minutes you can recharge the battery fully, the starting current can up to 2C, but now there is no such performance of lead-acid batteries. |
| · | Able to Withstand High Temperatures: Lithium iron phosphate remains stable up to 350 ℃ -500 ℃ compared to approximately 200 ℃ for lithium manganese oxide and lithium cobalt. |
| · | Capacity. |
| · | No memory effect. |
| · | Size: small size and light weight. |
| · | Green environmental protection. |
Competition
We compete mainly with other manufacturers of battery anodecathode materials located locally in the People’s Republic of China,PRC, as well as from Taiwan area, Japan, and Korea.US. Based on our own studies and market analysis, our key competitors are Hunan HainaHaiba Advanced Material Co., Ltd., Gansu Jinchuan Group, Henan Guangkuotiandi Cobalt Product Co., Ltd., and Nanjing Hanrui Cobalt Product Co., Ltd.Ltd and Taiwan Changyuan Chemical Limited Co.
We believe that we are able to leverage our low-cost advantage to compete favorably with our competitors. The technological advances made by our research and development group have helped us reduce our costs and increase our productivity. Compared to KoreanTaiwan, US and Japanese manufacturers, we believe that we are able to source our needs for skilled labor and raw materials locally and economically. We believe that our significant production capacity shouldwill translate into greater purchasing power in the future, thereby helping us negotiate lower purchase prices for our raw materials. Furthermore, we believe our proprietary, technologies and use of a combination of manual labor and automation at the key stages of thestate-of-the-art manufacturing process enable ustechnology and our strict quality control systems produce products with significantly superior performance and cost benefits compared to enhance our production efficiency, resulting in further reduction in the cost, while ensuring high-uniformity and high-quality standards.competitors.
Raw Materials
We purchase various raw materials for use in our manufacturing processes. The principal raw materials we purchase are cobalt from which we manufacture cobaltosic oxide and lithium iron and phosphate from which we manufacture lithium iron phosphate. We obtain ourcobalt from a single supplier, Aote Gunie Zhi Pin Co., Ltd. We obtain lithium iron and phosphate from several suppliers as these raw materials are generally available from onlyseveral alternate distributors. We have not experienced any significant difficulty in obtaining these raw materials and we do not consider raw material availability to be a few suppliers. However, there are an abundance of such suppliers available.significant factor in our business. For the fiscal year ended May 31, 2009, 47% of our raw materials came from one supplier,2011, Jinchuan Group Limited, Hunan Kaitian and Aote Gunie Zhi Pin Co., Ltd. During the fiscal year ended May 31, 2009, DLXY purchased interests in a cobalt ore mine in the Congo, with the anticipation that such interests would provide us with an additional supplyaccounted for 40%, 22% and 19% of raw material and would also enable us to sell these materials to other enterprises in this industry.
Intellectual Property
On August 20,June 29, 2004, DLXY applied for the patent of its method of processing active lithium cobalt dioxideoxide at the State Intellectual Property Office of the People’s Republic of China.PRC. Upon the preliminary examination, the application conformed to the patent law and the implementation rules.
On April 1, 2005, the State Intellectual Property Office announced this patent application in the official journal of invention and patent according to the patent law.
On September 16, 2005, upon the applicant’s request for substantive examination, the State Intellectual Property Office examined the application in accordance with the patent rights. This patent application has been in the process of substantive examination.
On July20,July 20, 2008, we finally received notification of approval from the State Intellectual Property Office for our patent application pursuant to term 54 of the Patent Law and No. 75 Announcement of Patent Bureau. The patentPatent number and certificate will beZL2004 1 0020870.1 was formally granted to us on August 27, 2008.September 17, 2008 and is enforceable for 20 years.
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Government Regulation
Environmental Laws
The major environmental regulations applicable to us include the PRC Environmental Protection Law, 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. As we conduct our manufacturing activities in the People’s Republic of China,PRC, we are subject to the requirements of these environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. We plan to comply with environmental laws and regulations. We are not subject to any admonition, penalty, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as defendant for violation of any environmental laws and regulations. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.
Intellectual Property Laws
The People’s Republic of China’sPRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of copyright, 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, 1991); and |
| · | The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 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 2001 and 2003, 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, i.e., patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first to file. This means that, where more than one person has filed patent applications 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 should not 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 conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, 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. SIPO, however, has not granted any compulsory license up to now. 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. A patent holder who believes his 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. 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. Evidence preservation and property preservation measures are also available both before and during the litigation. 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 to more times of the license fee under a contractual license. The infringing party may be also fined by Administration of Patent Management in an amount of up to three 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 RMB 500,000 or approximately $62,500.
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Government Subsidy
We received a subsidy of $45,009 from the Dalian Municipal Government in September 2010 pursuant to government policies encouraging the development of clean energy products.
Research and Development
We spent $102,069$120,434 and $87,607$121,825 on research and development forduring the fiscal years ended May 31, 20092011 and 2008,2010, respectively. These research and development (R&D) costs were not added to the purchase price of our products and thus, were not passed along to our customers.
Our R&D group has also made technological improvements to our production line by increasing the lifetime and performance of mixing bowls used during anodecathode material production. We have developed a new material that enables the mixing bowl to achieve uniform heat conduction and increase the stability of anodecathode materials. As a result of our new innovation, the life cycle of the bowl’s use has been extended from 30 uses per bowl to 180 uses per bowl. At the same time, the working temperature inside the bowl can be raised from 900 degrees C to 1280 degrees C, shortening the calcining time (thermal treatment process) from 6.5 hours to 5 hours. As a result, we are able to increase production of anodecathode materials while significant lowering our costs.
In September 2008, we announced that it had completedthe successful trial production of lithium iron phosphate and successfully met the technical requirements of application after being tested by a PRC state authority.
In March 2009, we announced that its in-house R&D, engineering and technical team had successfully completedthe successful completion of testing on DLXY'sof our latest energy power battery anodecathode material, lithium iron phosphate.
In April 2009, we announced thatthe delivery of the first samplings of DLXY'sour lithium iron phosphate product had been sent to Shenzhen ShanshuShan Mu Power Battery Technology Co., Ltd., and Zhangzhou Youke Energy Co., Ltd., both based in Shenzhen, to conduct tests onfor the material'spurposes of performance and battery life.life testing. In March 2010, these companies completed the natural decay testing to determine the charge quality of batteries made with our lithium iron phosphate product.
New Material Development
Our R&D team, led by theCheng Yijing, General Technical Supervisor Cheng Yijingand Xia Shengan, Chief Engineer, has 1422 members in total. The team startedbegan the research and development of thea new battery anodecathode material (i.e. ternary anodecathode material) in October 2005. The laboratory test wasLaboratory tests were conducted in May 2006 to examine whether the ternary anodecathode material conformed to industry standards. The test hasThese tests proved that various technical parameters conformed to the industry standard. After aboutstandards. The ternary cathode material then underwent commercial testing for approximately ten months, the commercial test on the ternary anode material was completed.months. As a result, in terms of technology, the conditions for mass production of the ternary anodecathode material have matured. We are currently looking for customers for this product.
The ternary material is composed of lithium cobalt dioxide, lithium manganate and lithium nickelate. This material has the following characteristics: high specific capacity, high safety, superior performance of cycling and rate, stability performance at low and high temperatures, charge and discharge duration, high performance price ratio, etc. The material can be applied as the main anodescathodes of small-sized communication and power instruments, such as portable power tool, electronic apparatus, laptop, video camera, and is replacing the lithium cobalt oxide gradually. It also has a good prospect of application in electric autos and electric bicycle.
Employees
As of May 31, 2009,2011, we have 258had 276 employees, comprising 90264 full-time employees and 16812 part-time employees. Our full-time employees include 4121 people in marketing, 27 in171in manufacturing, 1331 in research and development and quality control, 45 in financial and accounting, and 536 in general management..management and service.
6
ITEM 1A. RISK FACTORS.
Risks Relating to Our Business and Industry
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
As we implement our growth strategies, we may experience increased capital needs and our available capital may be insufficient to fund our future operations without additional funding. Our capital needs will depend on numerous factors, including (i) our profitability, (ii) the release of competitive products by our competition, (iii) the level of our investment in research and development, and (iv) the amount of our expenditures. We cannot assure you that we will be able to obtain funding in the future to meet our needs.
| reduce our investments in research and development; |
| · | limit our marketing efforts; and |
| · | decrease or eliminate capital expenditures. |
Such reductions could materially adversely affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. We cannot provide any assurance that additional funds will be available to us, or if available, will be on terms favorable to us.
Due to our reliance on our key employees, the loss of any of our key employees or the failure to attract, integrate, motivate, and retain additional key employees could have a material adverse effect on our business, operating results, and financial condition. In addition, several members of our senior management and/or key employees have joined us in recent months and may need to spend a significant amount of time learning our business model and management system while performing their regular duties. The integration of new executives or any new personnel could disrupt our ongoing operations.
We may not realize our anticipated return on capital commitments made to expand our capabilities.
From time to time, we expect to make significant capital expenditures to obtain additional equipment, or implement new processes designed to increase our efficiency and capacity. Some of these projects require additional training for our employees and not all projects may be implemented as anticipated. If any of these projects do not achieve the anticipated revenue and profitability goals, our returns on these capital expenditures may not be as expected.
If we are unable to implement our strategies in achieving our business objectives, our business operations and financial performance may be adversely affected.
Our business plan is based on currently prevailing circumstances and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. There is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.
We may have difficulty defending our intellectual property rights from infringement.
We regard our patents and similar intellectual property as critical to our success. We rely on trademark, patent and trade secret law, as well as confidentiality and license agreements to protect our proprietary rights. We have a patent on the production of battery level cobaltosic oxide. No assurance can be given that this patent or our other intellectual property will not be challenged, invalidated, infringed, or circumvented, or that such intellectual property rights will provide us with a competitive advantage to us.
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Presently, we sell our products mainly in China. China will remain our primary market for the foreseeable future. To date, no patent filings have been made other than in China. Therefore, the measures we take to protect our proprietary rights may be inadequate and we cannot provide any assurance that our competitors will not independently develop formulations and processes that are substantially equivalent or superior to our own products.
Our future success depends on the success of manufacturers of the end applications that use our products.
As we expand our manufacture of battery level cobaltosic oxide, lithium iron phosphate and other products, our future success depends on whether end application manufacturers are willing to manufacture batteries that incorporate our products. To secure acceptance of our products, we must constantly develop and introduce different products to meet evolving industry standards. Our failure to gain acceptance of our products from these manufactures could materially and adversely affect our future success.
Even if a manufacturer decides to use lithium ion batteries that incorporate our products, the manufacturer may not be able to market and sell its products successfully. The manufacturer's inability to market and sell its products successfully, whether from lack of market acceptance or otherwise, could materially and adversely affect our business and prospects because this manufacturer may not order new products from us. If we cannot achieve the expected level of sales, we will not be able to make enough profits to offset the expenditures we have incurred to expand our production capacity, nor will we be able to grow our business. Accordingly, our business, financial condition, results of operations and future success would be materially and adversely affected.
We extend relatively long payment terms to our customers.
As is customary in the industry in China, we extend relatively long payment terms and provide generous return policies to our customers. As a result of the size of many of our orders, these extended terms may adversely affect our cash flow and our ability to fund our operations out of our operating cash flow. In addition, although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us in a timely manner would negatively affect our working capital, which in turn may adversely affect our cash flow.
Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns, or other issues, they may not pay us in a timely fashion, even on our extended terms. Our customers' failure to pay may force us to defer or delay further product orders, which may adversely affect our cash flows, sales, or income in subsequent periods.
A disproportionate amount of our sales revenue is derived mainly from the sale of cobaltosic oxide and a disruption in, or compromise of, our sales operations, or distribution channels, related to the sale of cobaltosic oxide could adversely impact our financial condition and results of operations.
Approximately seventy-two percent (72%) of our revenues in fiscal 2011 were derived from the sale of cobaltosic oxide, and approximately twenty-eight percent (28%) from the sale of our new product lithium iron phosphate (LIP). A disruption in, or compromise of, our manufacturing of cobaltosic oxide or a reduction in demand of cobaltosic oxide by our customers would have a material adverse effect on our financial condition and results of operations.
We have no firm long-term commitments from our suppliers to supply raw materials to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order.
If our suppliers experience delays, disruptions, capacity constraints or quality control problems in their operations or become insolvent, their product shipments to us could be delayed, which would decrease our production and harm our revenues, competitive position and reputation.
Further, our business would be harmed if we fail to effectively manage the production of our products. We purchase key raw materials used in the manufacture of our products from a few major source suppliers, and we may not be able to obtain supplies from replacement suppliers on a timely or cost-effective basis. A reduction or stoppage in supply while we seek a replacement supplier would limit our ability to manufacture our products, which could result in a significant reduction in sales and profitability. In addition, an impurity or variation in a raw material either unknown to us or incompatible with our products, could significantly reduce our ability to manufacture products. Our inventories may not be adequate to meet our production needs during any prolonged interruption of supply. We have products under development which, if developed, may require us to enter into additional supplier arrangements. Failure to obtain a supplier for our future products, if any, on commercially reasonable terms, would prevent us from manufacturing our future products and limit our growth.
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If the cost of our raw materials fluctuates significantly, this may adversely impact our profit margin and financial position.
Our business uses creosote cobalt, oxalic acid cobalt, iron oxide and lithium as raw materials. The price of these raw materials may fluctuate substantially in the future. If the price for these raw materials increases again, our profit margin could decrease considerably.
Intense competition from existing and new producers of cathode materials for lithium ion batteries may adversely affect our revenues and profitability.
We compete with other companies, many of whom are developing or can be expected to develop products similar to ours. Our market is large with many competitors. Many of our competitors are more established than we are, and have significantly greater financial, technical, marketing, and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. Our competitors can be expected to continue to develop and introduce new and enhanced products, which could cause a decline in market acceptance of our cobaltosic oxide products and lithium iron phosphate products. Current and future consolidation among our competitors and customers may also cause a loss of market share as well as put downward pressure on pricing. Our competitors could cause a reduction in the prices for some of our cobaltosic oxide products and lithium iron phosphate products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. We intend to create greater brand awareness for our brand name so that we can successfully compete with our competitors. We cannot provide any assurance that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.
The products and the processes we use could expose us to substantial liability.
We face an inherent business risk of exposure to product liability claims in the event that the use of our technologies or products is alleged to have resulted in adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. To date, we have not experienced any product liability claims. That, however, does not mean that we will not have any problems with respect to our products in the future. We do not currently carry product liability insurance. The lack of product liability insurance may expose us to enormous risks associated with potential product liability claims.
We may become subject to legal or regulatory proceedings which may reach unfavorable resolutions.
We may become involved in legal proceedings arising in the normal course of business. Due to the inherent uncertainties of legal proceedings, the outcome of any such proceeding could be unfavorable, and we may choose to make payments or enter into other arrangements to settle such proceedings. Failure to settle such proceedings could require us to pay damages or other expenses, which could have a material adverse effect on our financial condition or results of operations. Legal proceedings require the expenditure of substantial management time and financial resources and can adversely affect our financial performance. There is no assurance that we will not be a party to legal proceedings in the future.
Our results of operations may be materially harmed if we are unable to recoup our investment in research and development.
The rapid change in technology in our industry requires that we continue to make investments in research and development in order to develop technologies and also enhance the performance and functionality of our current products to keep pace with competitive products and satisfy customer demands for improved performance, features, functionality, and costs. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements or that we will be able to secure the financial resources necessary to fund future development. Research and development costs typically are incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business could be seriously harmed if we are unable to sell our products at favorable prices or if the market in which we operate does not accept our products.
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Our projects involve long development cycles that result in high costs and uncertainty.
The development, operation and management of our products and facilities involve a long development cycle and decision-making process. Delays at certain points in the decision-making process which involve third parties are outside of our control and may have a negative impact on our development costs, cost of sales, receipt of revenue, and sales projections. We expect that, in some cases, it may take a year or more to obtain decisions and to negotiate and close any related agreements. Such delays could harm our operating results and financial condition.
Our failure to keep up with rapid technological changes and evolving industry standards may cause our products to become obsolete and less marketable, resulting in our loss of market share to our competitors.
The lithium-based battery market is characterized by changing technologies and evolving industry standards, which are difficult to predict. This, coupled with frequent introduction of new products and models, has shortened product life cycles and may render our products obsolete or unmarketable. Our ability to adapt to evolving industry standards and anticipate future standards will be a significant factor in maintaining and improving our competitive position and our prospects for growth. To achieve this goal, we have invested and plan to continue investing significant financial resources in our research and development infrastructure. Research and development activities, however, are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. Accordingly, our significant investment in our research and development infrastructure may not bear fruit. On the other hand, our competitors may improve their technologies or even achieve technological breakthroughs that would render our products obsolete or less marketable. Therefore, our failure to effectively keep up with the rapidly technological changes and evolving industry standards by introducing new and enhanced products may cause us to lose our market share and to suffer a decrease in our revenue.
Changes in our customers' products could reduce the demand for our cobaltosic oxide and lithium iron phosphate products, which may decrease our revenues and operating margins.
Our cobaltosic oxide products and lithium iron phosphate products are mainly used for as cathode materials in lithium ion batteries by our customers. Changes, including technological changes, in our customers' products or processes may make our products unnecessary, and would reduce demand. Other customers may find alternative materials or processes that no longer require our products. If the demand for our products diminishes, our net sales and operating margins may be reduced as well.
We depend on only one factory to manufacture our products and any disruption of the operations in this factory would damage our business.
All of our products are manufactured in one factory in Gan Jing Zi Hi-tech Park, Dalian, PRC. Our operations could be interrupted by fire, flood, earthquake, and other events beyond our control. Any disruption of the operations in this factory would have a significant negative impact on our ability to deliver products, which would cause a potential diminution on sales, the cancellation of orders, damage to our reputation, and potential lawsuits. Any of the foregoing may adversely affect our business, financial position, or results of operations.
Risks Relating to the PRC
Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
All of our business operations are conducted in China and a significant portion of our sales are made in China. Accordingly, our business, financial condition, results of operations, and prospects are affected significantly by economic, political, and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
the amount of government involvement;
the level of development;
the growth rate;
the control of foreign exchange; and
the allocation of resources.
While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of economic reforms or the effects of such measures may have on our business, financial condition, or results of operations.
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China is transitioning from a planned economy to a market economy. While the Chinese government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation, and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the Chinese government are unprecedented or experimental, and are expected to be refined and improved.
Other political, economic, and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in China's economic and social conditions as well as by changes in the policies of the Chinese government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.
Any adverse changes in the economic conditions, in government policies, or in laws and regulations in China could have a material adverse effect on the overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business.
We may be unable to enforce our legal rights due to policies regarding the regulation of foreign investments in China.
The Chinese legal system is a civil law system based on written statutes, in which court decided legal cases have little value as precedents unlike the common law system prevalent in the United States. China does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies are subject to considerable discretion and variation on the part of the Chinese government, including its courts, and may be subject to influence by external forces unrelated to the legal merits of a particular matter.
China's regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. As a result, we may not be aware of any violations of these policies and rules until sometime after the violation. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that may affect our ability to achieve our business objectives. If we are unable to enforce any legal rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be materially and negatively affected. In addition, any litigation in China may be protracted and result in substantial cost and diversion of resources and management attention.
Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.
All of our current operations are conducted in China. Moreover, most of our current directors and officers are nationals or residents of China. All or a substantial portion of the assets of these persons are located outside the United States in China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of United States courts obtained against us or our officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.
Currency conversion and exchange rate volatility could adversely affect our financial condition.
The Chinese government imposes control over the conversion of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People's Bank of China publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.
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Pursuant to China's Foreign Exchange Control Regulations issued by the State Council and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment regarding foreign exchange control, conversion of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China. Conversion of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, are still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the Chinese government shall not impose restrictions on recurring international payments and transfers under current account items.
Enterprises in China, including FIEs which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
Since 1991, the exchange rate for Renminbi against the United States dollars has remained relatively stable. In 2005, however, the Chinese government announced that would begin pegging the exchange rate of the Chinese Renminbi against a number of currencies, rather than just the U.S. dollar. As our operations are primarily in China, any significant revaluation of the Chinese Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into Chinese Renminbi for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert Chinese Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Chinese Renminbi we convert would be reduced.
An outbreak of a pandemic avian influenza, SARS or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations.
During the past three years, large parts of Asia experienced unprecedented outbreaks of avian influenza caused by the H5N1 virus which, according to a report of the World Health Organization, or WHO, in 2004, “moved the world closer than any time since 1968 to an influenza pandemic with high morbidity, excess mortality and social and economic disruption.” Currently, no fully effective avian flu vaccines have been developed and there is evidence that the H5N1 virus is evolving and an effective vaccine may not be discovered in time to protect against the potential avian flu pandemic. In the first half of 2003, certain countries in Asia experienced an outbreak of severe acute respiratory syndrome, or SARS, a highly contagious form of atypical pneumonia, which seriously interrupted the economic activities and the demand for goods plummeted in the affected regions. An outbreak of avian flu, SARS or other contagious disease or the measures taken by the governments of affected countries against such potential outbreaks, may seriously interrupt our production operations or those of our suppliers and customers, which may have a material adverse effect on our results of operations. The perception that an outbreak of avian flu, SARS or other contagious disease may occur again may also have an adverse effect on the economic conditions of countries in Asia.
We may experience currency fluctuation and longer exchange rate payment cycles.
The local currencies in the countries in which we sell our products may fluctuate in value in relation to other currencies. Such fluctuations may affect the costs of our products sold and the value of our local currency profits. While we are not conducting any meaningful operations in countries other than China at the present time, we may expand to other countries and may then have an increased risk of exposing our business to currency fluctuation.
All of our assets are located in China, any dividends of proceeds from liquidation is subject to the approval of the relevant Chinese government agencies.
A majority of our assets are located inside China. Under the laws governing foreign invested enterprises in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency's approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.
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Changes in China's political or economic situation could harm us and our operational results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:
Level of government involvement in the economy;
Control of foreign exchange;
Methods of allocating resources;
International trade restrictions; and
International conflict.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in China's laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our activity to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate in the recent past, high inflation in the future may cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and thereby harm the market for our products.
The value of our securities will be affected by the foreign exchange rate between U.S. dollars and Renminbi.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs and should the Renminbi appreciate against the U.S. dollar at that time, our financial position, our business, and the price of our common stock may be harmed. Conversely, if we decide to convert our Renminbi 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 Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
Our production facilities are subject to risks of power shortages.
Many cities and provinces in China have suffered serious power shortages in the recent past. Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by continual economic growth and persistent hot weather. Local governments have recently required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels. To date, our operations have not been affected by those administrative measures. However, there is a risk that our operations may be affected by those administrative measures in the future, thereby causing material production disruption and delays in our delivery schedule. In such event, our business, results of operation, and financial condition could be materially adversely affected. Although we have not experienced any power outages in the past, we may be adversely affected by power outages in the future.
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Risks Relating to Our Common Stock
Our common stock price could be volatile, which could result in substantial losses for investors.
Our common stock price could be subject to volatility. Fluctuations in the price of our common stock could be rapid and severe and leave investors little time to react. Factors that could affect the market price of our common stock include:
| · | quarterly variations in our operating results; |
| · | general conditions in our industry or in the securities market; |
| · | changes in the market's expectations about our earnings; |
| · | changes in financial estimates and recommendations by securities analysts concerning our company; |
| · | operating and stock price performance of other companies that investors deem comparable to us; |
| · | news reports relating to trends in our markets; |
| · | changes in laws and regulations affecting our business; |
| · | sales of substantial amounts of our common stock by our directors, executive officers, or principal stockholders or the perception that such sales could occur; and |
| · | general economic and political conditions such as recessions and acts of war or terrorism. |
Volatility in the price of our common stock could be exacerbated by the relatively small number of shares of our common stock that are publicly traded. Fluctuations in the price of our common stock could contribute to an investor losing all or part of his investment.
Because our shares are deemed “penny stocks,” you may have difficulty selling them in the secondary trading market.
The Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as therein defined) less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Additionally, if the equity security is not registered or authorized on a national securities exchange, the equity security also constitutes a "penny stock." As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. These regulations generally require broker-dealers who sell penny stocks to persons other than established customers and accredited investors to deliver a disclosure schedule explaining the penny stock market and the risks associated with that market. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. These regulations also impose various sales practice requirements on broker-dealers. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. The ability of broker/dealers to sell our common stock and the ability of shareholders to sell our common stock in the secondary market is limited. As a result, the market liquidity for our common stock is severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.
We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
We do not foresee paying cash dividends in the foreseeable future.
We have not paid cash dividends on our stock and we do not plan to pay cash dividends on our stock in the foreseeable future.
ITEM 2. PROPERTIES.
All land in the People’s Republic of ChinaPRC is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for commercial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
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Corporate Headquarters
Our corporate headquarters are located on leased premises at 1 Hutan Street, Zhongshan District, Dalian, the People’s Republic of China.PRC. These offices encompass approximately 1,987 square meters. The lease term ends on 2046. The land use agreement has a 50-year term which expires in May 2049. The annual lease payment is 50,000 RMB/year.80,000 RMB and the lease expires in 2020.
Operating Facility
All of our production operations are located on premises at Gan Jing Zi Hi-Tech Park, Dalian, the People’s Republic of China.PRC. This facility consists of approximately 258,240 square feet. The land use agreement has a 50-year term which expires in May 2046. In return for the use of the premises, we pay an annual property tax of $62,500.$101,688. The operating facility is used as office space, manufacturing plants, research and development, and as employees’ living quarters which can house up to 320 individuals. There is also an eatery and hotel that is used by visitors to the operating facility which has an occupancy rate of up to 50 people.
ITEM 3. LEGAL PROCEEDINGS.
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ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Market for Our Common Stock
Our shares of common stock, par value $0.001 per share, are quoted on the Nasdaq OTC Bulletin Board under the trading symbol “CSGH” where they have traded since September 2006. The following table sets forth the high and low bid prices for our common stock for the last two fiscal years as reported on the OTC Bulletin Board. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.
Bid | ||||||||
| Quarter Ending | High | Low | ||||||
| August 31, 2008 | $ | 1.51 | $ | 0.90 | ||||
| November 30, 2008 | $ | 1.09 | $ | 0.26 | ||||
| February 28, 2009 | $ | 0.53 | $ | 0.20 | ||||
| May 31, 2009 | $ | 0.76 | $ | 0.19 | ||||
| August 31, 2007 | $ | 1.09 | $ | 0.26 | ||||
| November 30, 2007 | $ | 2.50 | $ | 0.26 | ||||
| February 29, 2008 | $ | 0.99 | $ | 0.51 | ||||
| May 31, 2008 | $ | 1.36 | $ | 0.30 | ||||
| Bid | ||||||||
| Quarter Ending | High | Low | ||||||
| August 31, 2010 | $ | 1.10 | $ | 0.70 | ||||
| November 30, 2010 | $ | 1.48 | $ | 0.60 | ||||
| February 28, 2011 | $ | 1.27 | $ | 0.85 | ||||
| May 31, 2011 | $ | 0.91 | $ | 0.45 | ||||
| August 31, 2009 | $ | 1.33 | $ | 0.50 | ||||
| November 30, 2009 | $ | 2.10 | $ | 0.98 | ||||
| February 28, 2010 | $ | 2.35 | $ | 1.40 | ||||
| May 31, 2010 | $ | 1.73 | $ | 0.82 | ||||
On August 27, 2009,May 31, 2011, there were 67923 shareholders of our common stock of record. However, we believe that there are additional beneficial owners of our common stock who own their shares in “street name.”
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements, and other relevant factors.
Equity Compensation Plans
| 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)) |
| (a) | (b) | (c) | |
| Equity compensation plans approved by security holders | ___ | ____ | _____ |
| Equity compensation plans not approved by security holders | 660,000 (1)(2) | 0 | _____ |
| Total |
| Pursuant to the employment agreements between the Company and Mr. Fu, the CEO, and Ms. Liu, the CFO, they are entitled to an aggregate amount of 450,000 shares and 300,000 shares respectively. 150,000 shares and 100,000 shares have been issued to Mr. Fu and Ms. Liu respectively as of May 31, 2011. |
| (2) | On April 1, 2011, the Company entered into an employment agreement with one employee for a term of three (3) years, expiring on March 31, 2014. Pursuant to the employment agreement the Company agreed to issue to the employee a restricted stock award of 240,000 shares of the Company’s common stock. One-third (1/3) of the restricted stock award vests immediately, (B) one-third (1/3) of the restricted stock award vests on the one-year anniversary of the agreement, and (C) one-third (1/3) of the restricted stock award vests on the two-year anniversary of the agreement, subject to the employee’s continued service to the Company on such date. |
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ITEM 6. SELECTED FINANCIAL DATA.
| YEARS ENDED MAY 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Statement of Income: | ||||||||||||
| Revenue, net | 37,033,483 | 25,294,221 | 8,275,066 | |||||||||
| Cost of revenue | 23,444,655 | 15,664,692 | 4,875,078 | |||||||||
| Gross profit | 13,588,828 | 9,629,529 | 3,399,988 | |||||||||
| Total operating expenses | 2,099,753 | 426,384 | 1,999,803 | |||||||||
| Income (loss) from operations | 11,489,075 | 9,203,145 | 1,400,185 | |||||||||
| Other income | 35,449 | 27,800 | - | |||||||||
| Income tax expense | (2,943,786 | ) | (2,490,819 | ) | (804,189 | ) | ||||||
| Net income (loss) | 8,580,738 | 6,740,126 | 595,996 | |||||||||
| Other comprehensive income: | ||||||||||||
| Foreign currency translation gain: | 479,361 | 2,362,380 | 111,889 | |||||||||
| Comprehensive income (loss): | 9,060,099 | 9,102,506 | 707,885 | |||||||||
| Basic earnings per share | 0.16 | 0.13 | 0.01 | |||||||||
| Shares used in the calculation of basic earnings per share | 53,422,971 | 53,422,971 | 49,478,020 | |||||||||
| Diluted earnings per share | 0.16 | 0.13 | 0.01 | |||||||||
| Shares used in the calculation of diluted earnings per share | 53,422,971 | 53,422,971 | 49,478,020 | |||||||||
| �� | ||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”,“can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the factors discussed above in the section entitled “Risk Factors” and the following:
· the effect of political, economic, and market conditions and geopolitical events; | |||
· legislative and regulatory changes that affect our business; |
· the availability of funds and working capital; | |||
· the actions and initiatives of current and potential competitors; |
· investor sentiment; and | |||
· our reputation. |
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report on Form 10-K.
Overview
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At May 31, 2011 we had 12 production lines and corollary process flow equipment, with a total annual production capacity of 2,500 tons.
Since 2007, we have pursued a market-oriented strategy by engaging in the businessmanufacturing, marketing and distribution of cobaltosic oxide. In 2010 we successfully developed proprietary processes for the manufacture of lithium iron phosphate (“LIP”), which is quickly becoming the preferred cathode material for lithium ion batteries. The increase in sales of LIP is the primary reason for the substantial increase in our revenues and gross margins in 2011. We believe that sales from LIP will continue to represent a larger percentage of our revenues and gross margins in the near future.
Since we began manufacturing LIP in quantity in the second quarter of fiscal year 2011, we have focused on expanding sales and sellingincreasing production of LIP. By the end of fiscal year 2011, six of our ten cobaltosic oxide products. These productsproduction lines have been converted to lithium iron phosphate production lines, while the remaining four production lines continue to produce cobaltosic oxide. We plan to increase the manufacturing capacity for lithium iron phosphate by converting two additional production lines, if market conditions allow.
Our current operations and all of our customers are primarily manufactured, marketed, and soldbased in China. China is the world leader in the People’s Republicmanufacture of China.
Management believes that our proprietary innovative technologies and processes, access to cheap labor, stable supply of low-cost raw materials and state-of-the-art equipment positions us to benefit from these growth opportunities.
For the fiscal year ended May 31, 2011, we produced 1,102 tons produced. DLXY’s products and processing capabilities include the production of cobalt ore, cobalt carbonate, nanometer-sized cobaltosic oxide and high-crystalline spherical734 tons of lithium cobalt oxideiron phosphate.
Since June 2010, we adjusted our business strategy from mass-production to production based on customers’ needs and the availability of supporting products. On May 31, 2011, our major customers included Henan Huanyu Sai Er New Energy Technology Co., Ltd (“Huanyu”), Advanced Battery Technologies, Inc. (“ABAT”), and Beijing Shuangsheng Technology Co., Ltd., which is usedtotaled 85% of our sales volume of 734 tons for fiscal year ended May 31, 2011. We have entered into Supply Agreements with the foregoing customers to supply them with lithium batteries. In April 2006, DLXY commenced productioniron phosphate. They will continue to be our key customers in fiscal year 2012. We are working persistently to increase our customer base in Shenzhen and quickly amassed sales of over $1.5 million.Shandong.
Results of Operations
Comparison of Year Ended May 31, 20092011 to Year Ended May 31, 20082010
Net Revenue
Change in sales amount
| Sales Amount ($) | Changes | |||||||||||||||
| Products | 2011 | 2010 | $ | % | ||||||||||||
| cobaltosic oxide | 34,778,265 | 36,626,121 | -1,847,856 | -5 | % | |||||||||||
| lithium iron phosphate | 13,790,074 | 4,563,001 | 9,227,073 | 202 | % | |||||||||||
| Total | 48,568,339 | 41,189,122 | 7,379,217 | 18 | % | |||||||||||
Change in sales volume
| Sales Volume (Ton) | Changes | |||||||||||||||
| Products | 2011 | 2010 | Tons | % | ||||||||||||
| cobaltosic oxide | 1,102 | 1,056 | 46 | 4 | % | |||||||||||
| lithium iron phosphate | 734 | 215 | 519 | 241 | % | |||||||||||
| Total | 1,836 | 1,271 | 565 | 44 | % | |||||||||||
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Cost of Revenue
Cost of revenue for the year ended May 31, 20092011 totaled $23,444,655$32,419,062 compared to $15,664,692$28,134,650 for the year ended May 31, 2008,2010, an increase of $7,779,963$4,284,412 or 50 %. The15%. This increase in cost of revenue resulted directly from increased production of our products which isthe increase in tandem with increased demand for them.
sales.
Gross Profit
Gross profit for the year ended May 31, 20092011 was $13,588,828,$16,149,277, with an increase of $3,959,299$3,094,805 or 41%24% from $9,629,529$13,054,472 for the year ended May 31, 2008. The2010. One hundred percent (100%) of the profit margin increase in gross profit was primarily dueattributed to revenue generated by increased customer demand and production, and consequently increasedan increase in sales of our products.
Sales and marketingMarketing
Sales and marketing expense for the year ended May 31, 20092011 totaled $574,671$148,383 compared to $ 33,400$77,870 for the year ended May 31, 2008,2010, an increase of $541,271$70,513 or 1621%91%. The increase resulted from addition inwas primarily attributable to costs associated with additional sales channels.personnel and advertising expenses as a result of increased customer demand.
Research and Development Expenses
Research and Development Expense
General and Administrative Expenses
General and administrative expenses for the year ended May 31, 2011 totaled $3,944,131 compared to $1,311,598 for the year ended May 31, 2010, an increase of $14,462$2,632,533 or 16 %.201%. The increase in general and administrative expenses was primarily attributabledue to the hiringshare-based consultancy fee of additional research$1,783,500 paid in September 2010, share-based executive compensation of $280,625 and development personnel.$48,000 paid in December 2010 and April 2011, respectively, and investor relations consulting expenses of $108,556 incurred during the year ended May 31, 2011, while there was no such expense issued during the year ended May 31, 2010. The share-based consultancy fee was one-time expense and we are not liable for any future payments pursuant to this agreement.
Income Fromfrom Operations
Income from operations for the year ended May 31, 20092011 totaled $11,489,075$11,936,329 compared to income from operation of $9,203,145$11,543,179 for the year ended May 31, 2008,2010, an increase of $2,285,930$393,150 or 25%3%. The increase resulted primarily from the increased customer demand for our products and consequently, increased sales.
Income Taxes
Provisions for income tax expenses were $3,623,736 for the year ended May 31, 2011 compared to $2,982,584 for the year ended May 31, 2010, with an increase of $641,152 or 21%. The increase resulted primarily from the increase in sales and hence profit before taxation in the Company’s PRC subsidiaries. The Company was established under the laws of the Renminbi againstState of Delaware and is subject to U.S. federal income tax and Delaware annual reporting requirements. No provision for income taxes in the U.S. dollar. This updated Renminbi valuation of DLXY’s assetsUnited States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and liabilities resulted in this gain.
do not expect to declare any dividends within the foreseeable future.
Net Income
Net income for the year ended May 31, 20092011 was $8,580,738, an increase$8,411,919, a decrease of $1,840,612$183,743 or 27%2% as compared to $6,740,126$8,595,662 for the year ended May 31, 2008.2010. The decrease in net income was primarily due to the share-based consultancy fee of $1,783,500 and the share-based executive compensation of $280,625 and $48,000 paid in December 2010 and April 2011, respectively, during the year ended May 31, 2011. Although, the gross profit for fiscal year 2011 increased by $3,094,805 compared to fiscal year 2010.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash EquivalentEquivalents
Our cash and cash equivalentequivalents were $3,879,114$18,017,266 at the beginning of the year ended May 31, 20092011, and increased to $9,209,953 by the end of the year ended$21,810,394 at May 31, 2009,2011, an increase of $5,330,839$3,793,128 or 137%21%. This net change in cash and cash equivalents represented an increaserepresents the combined effects of 74% or $2,264,888cash generated in the total amount of $10,190,968 from $3,065,951operating activities, offset by cash used in the total amount of $7,442,431 from investing activities and effects of exchange rate changes of $1,044,591 for the year ended May 31, 2008.2011.
On May 31, 2011, the majority of our cash was held in RMB denominated bank deposits with the PRC financial institution.
Our decision to maintain high cash reserves is mainly based upon (1) the projected need for new manufacturing equipment for lithium iron phosphate production in fiscal 2012 estimated to be approximately $7.44 million , (2) the projected conversion of two additional lithium iron phosphate production lines during Q2 of fiscal year 2012 and the relevant capital expenditure forecasted to be approximately $8 million, and (3) the projected purchase of new R&D equipment in the amount of approximately $3 million in fiscal year 2012.
Capital expenditures have historically been necessary to expand the production capacity of our manufacturing operations. Our prospective increase in both production lines and R&D are primarily due to the projected increased demand of our principal product lithium iron phosphate. On the basis of our current cash balances and outlook for the upcoming fiscal year, we believe we have sufficient cash resources to fund the expansion of our lithium iron phosphate production lines from 700 tons to 1,000 tons per annum.
Net cash provided by operating activities
Net cash used in investing activities
Net cash used for investing activities was $7,524,373 and $2,471,927,$7,442,431 for the yearsyear ended May 31, 2009 and 2008, respectively, an increase of $5,052,446 or 204%.2011. The increasecash outflow was primarily attributable to the purchase of equipment.plant and machinery and building in the amount of $6,643,603 during the year ended May 31, 2011.
Income Taxes
Cash paid for income tax expense was $4,626,424 for the year ended May 31, 2008.
Inflation
We believe that inflation hasdid not hadhave a material or significant impact on our revenue or our results of operations.
General
We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.
However, we will continue to evaluate various sources of capital to meet our growth requirements.needs. Such sources willmay include debt financings, thefinancing, issuance of equity securities and entrance into othersome financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.
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Contractual Obligations and Commitments
We leased an office premiseare committed under aseveral non-cancelable operating lease agreement for a period ofagreements, with terms from five to ten years, due through July 25, 2010. The annual2020. Annual lease payments are $16,932 over the next four years, $13,469 for the fifth year and $50,284 for periods thereafter. We have a minimum rental payment is $7,291.obligation totaling $131,481.
On June 9, 2007, our subsidiary,November 30, 2010, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”)unconditional 2011 Supply Agreement for Dynamic Lithium Battery Materials with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”).Huanyu. Pursuant to the Purchaseterms of the Supply Agreement, DLXY is obligedwe are obligated to purchasesupply a minimum of 470 tons of lithium iron phosphate to Huanyu during the prospecting and mining rights2011 calendar year. At May 31, 2011, we supplied 267.57 tons of a cobalt ore mine for alithium iron phosphate to Huanyu. The purchase price of $2 million overthe lithium iron phosphate and other relevant commercial terms and conditions are determined by the parties on a termmonthly basis.
On April 20, 2011, DLXY entered into an unconditional 2011 Supply Agreement for Dynamic Lithium Battery Materials with ABAT. Pursuant to the terms of 15 years. Asthe Supply Agreement, we are obligated to supply a total of 170 tons of lithium iron phosphate materials to ABAT during the 2011 calendar year. At May 31, 2009, DLXY had the capital commitment2011, we supplied 8.5 tons of $2 million in thelithium iron phosphate to ABAT. The purchase price of the prospectinglithium iron phosphate materials and mining rights which was contracted for but not provided inother relevant commercial terms and conditions are determined by the financial statements.
Critical accounting policies and estimatesAccounting Policies
Revenue recognition
In accordance with the ASC Topic 605, “Revenue Recognition,” we recognize revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
Revenue is recognized when products are delivered to customers. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. In instances where products are configured to customer requirements, revenue is recorded upon the successful completion of the Company’sour final test procedures and the customer’s acceptance.
Our subsidiary, DLXY is subject to valued-added tax (“VAT”) which is levied on the majority of the products of DLXY at the rate of 17% on the invoiced value of sales sold in the People’s Republic of China. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Companyus in addition to the invoiced value of purchases to the extent not refunded for export sales.
Accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to itsour customers in the ordinary course of business, but mitigatesmitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’management’s assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment. We write off accounts receivable when they become uncollectible,
Stock based compensation
For non-employee stock based compensation, we adopt ASC Topic 505-50, “Equity-Based Payments to Non-Employees,” stock based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC 718.
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and payments subsequently received on such receivablesliabilities denominated in currencies other than the functional currency are credited totranslated into the allowance for doubtful accounts.functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.
The reporting currency of the Company is the United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is the functional currency, being the primary currency of the economic environment in which these entities operate.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$ in accordance with ASC Topic 830-30, “Translation of Financial Statement,” using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
New Financial Accounting Pronouncements
In December 2007,May 2011, the Financial Accounting StandardsStandard Board ("FASB"(“FASB”) issued SFAS No. 141(R),ASU 2011-04, which is an update to Topic 820, “Business CombinationsFair Value Measurement.” ("FAS 141R"), whichThis update establishes principles andcommon requirements for how the acquirer of a business recognizesmeasuring fair value and measuresrelated disclosures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interestaccordance with accounting principles generally accepted in the acquiree. FAS 141R also provides guidance for recognizingUnited Sates and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of theinternational financial statements to evaluate the nature and financial effects of the business combination. FAS 141R becomesreporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for fiscalall interim and annual reporting periods beginning after December 15, 2008. This accounting standard will be applied to acquisitions occurring after May 31, 2009, and will also require the2011. The Company to expense any costs related to such acquisitions.
In June 2008,2011, the FASB ratified EITF No. 07-5, "Determining Whetherissued ASU 2011-05, which is an Instrument (or an Embedded Feature) is Indexedupdate to an Entity's Own StockTopic 220, “Comprehensive Income." ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach” This update eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity, requires consecutive presentation of the statement of net income and other comprehensive income and requires reclassification adjustments from other comprehensive income to evaluate whether an equity-linkednet income to be shown on the financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. Although EITF 07-5statements. ASU 2011-05 is effective for fiscal yearsall interim and annual reporting periods beginning after December 15, 2008, any outstanding instrument at2011. The Company does not expect the date of adoption will require a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. The Company’s adoption of EITF 07-5 did notthis guidance to have a significantmaterial impact on the Company’sits financial statements.position or results of operations.
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
The full text of our audited consolidated financial statements as of May 31, 2011 and 2010 begin on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None of the principal accountant’s reports on the financial statements for either of the past two years contains an adverse opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope or accounting principles. There were no disagreements with HKCMCPA Company Limited (formerly ZYCPA Company Limited) on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.
(b) Management’s Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, and overseen by our Audit Committee, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
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| (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
| (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Management also follows the governmental compliance to file the China State Administration for Industry and Commerce ("SAIC") report on an annual basis, for the Company's subsidiaries in the PRC. Management has ensured the completeness and consistency of these reports, which is determined as the underlying basis for the preparation of financial statements for U.S. GAAP financial reporting purpose.
Extract from 2010 SAIC report of its subsidiary namely Dalian Xinyang High-Tech Development Co., Ltd, the below figures are summarized:
Fiscal year ended December 31, 2010:
Gross income RMB318.44 million approximately Net profit RMB70.98 million approximately
As of December 31, 2010:
Cash and cash equivalents RMB160.20 million approximately
Management assessed the effectiveness of our internal control over financial reporting as of May 31, 2011. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective, as of May 31, 2011.
(c) Changes in internal controls.
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following is a list of the names and ages of our directors and executive officers, all positions and offices held by each director and officer with the Company; each director’s term of office and the period during which each director has served as such. The Board of Directors has determined that each of the directors other than Mr. Bin Wang, Ms. Zhi Li and Ms. Jiao Wang is an independent director within the meaning set forth in the NASDAQ listing rules and as required by the rules and regulations of the SEC, as currently in effect. There are no family relationships between any director and an executive officer.
There are no arrangements or understandings between any director or officer and any other person pursuant to which the director or officer was or is to be selected as a director or officer.
| Name | Age | All Positions Held with the Registrant | Term of Office(1) | Director/Officer Since | ||
| Guosheng Fu | 55 | Chief Executive Officer | 2010 | |||
| Ming Fen Liu | 58 | Chief Financial Officer | 2006 | |||
| Bin Wang | 46 | Chairman of the Board | 2006 | |||
| Zhi Li | 41 | Director | 2006 | |||
| Jiao Wang | 27 | Director | 2006 | |||
| Fudong Sui | 55 | Independent Director | 2007 | |||
| Fuqiu Ren | 46 | Independent Director | 2007 | |||
| Karlton S.M. Wong(2) | 38 | Independent Director | 2010 |
_________
| (1) | Directors serve until their successors are duly qualified and appointed. Officers serve at the pleasure of the Board. |
| (2) | Mr. Karlton S.M. Wong was appointed to serve as a member of the board of directors of the Company and a member of the audit committee on November 1, 2010. |
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Mr. Guosheng Fu was appointed as our Chief Executive Officer on September 13, 2010. Mr. Fu had has also been with the Company’s wholly-owned subsidiary, Dalian Xinyang High-Tech Development Co. Ltd (“DLXY”) since May 2002. From May 2002 until August 2003, Mr. Fu was a general manager of DLXY. From April 2003 to December 2007 he served as Assistant to the Chairman of the Board. In January 2008, he was appointed Vice President and General Manager of DLXY, in charge of its day-to-day operations. Mr. Fu has acquired extensive management experience over the last three decades and has received awards in management excellence, including Glorious Entrepreneur of Heilongjiang Province and Northeast China as well as Outstanding Figure of Brand Management of China. Mr. Fu also has extensive experience in developing and managing new industries in the energy sector, employing innovative thinking, a pioneering spirit, and a strong concept of market and brand awareness. Mr. Fu received his bachelor's degree in 1986 from Jiamusi University Department of Economics & Management in Business Management.
Ms. Ming Fen Liu has served as our Chief Financial Officer since September 2006. Since 2004, Ms. Liu has been the Chief Financial Officer of DLXY. Prior to that, in 2003, Ms. Liu was the financial manager of Sun Group Investment Company. From 2001 and 2002, Ms. Liu served as the financial supervisor for the Dalian Chemical Industry Group, a chemical fertilizer plant. She is a Certified Public Accountant in China and earned her bachelor’s degree in finance from Dongbei Finance & Economics University. Ms. Liu has experience in financial regulations, company management, and raising capital.
Mr. Bin Wang has served as the Chairman of our Board since September 2006. From September 2006 until September 2010, Mr. Wang also served as our President and Chief Executive Officer. Since 2000, Mr. Wang has served as the President of DLXY. He received his Bachelor degree from Harbin University of Science and Technology with a major in Business Management. Mr. Wang is an economist with a strong background in business management. He is the founder of Dalian Xinyang High-Tech Development Co., Ltd., our majority owned subsidiary, which is dedicated to industrial investment, high technology, utilities, real estate, and education.
Ms. Zhi Li has served as a Director of our Board since September 2006. Since 2000, Ms. Li has also been a Director of DLXY. Prior to that, she worked in the accounting department of a state-owned company. She is a Certified Public Accountant in China and graduated from the Heilongjiang Commerce College, where she majored in Accounting. Ms. Li is married to Mr. Wang, our Chairman of the Board. Ms. Li was selected to serve as a Director of our Board because of her extensive experience in enterprise development. Specifically, from 2000, she has been personally involved in the creation of new business management models in the high-tech industry and is the initiator and co-founder of the Company and DLXY.
Ms. Jiao Wang has served as a Director of our Board since September 2006. Ms. Wang, the daughter of Mr. Bin Wang, has also been a Director of DLXY since 2003. Ms. Wang has a background in marketing strategy and management and was selected to serve as a Director of our Board because of her significant experience in enterprise management. Ms. Wang graduated from Dongbei Finance & Economics University, where she majored in Administrative Management.
Mr. Fudong Sui has served as a Director of our Board since August 2007. Also, since February 2006, Ms. Sui has served as a Vice President at Dalian Household Things Co., Ltd., which produces consumer products such as detergent and air fresheners. From October 1998 to December 2005, he was the Administrative President at Liaoning North Group, which participates in the chemical industry. Mr. Sui has received undergraduate and graduate degrees in Management Administration from the Heilongjiang University. Ms. Sui was selected to serve as a Director of our Board because of his rich management experience.
Mr. Fuqiu Ren has served as a Director of our Board since August 2007. Mr. Ren has also served as a Manager in the Overseas Investment Section of Shanghai Anhemeina Investment Co., Ltd. since September 2005, as a Manager in the Financial Department from April 1996 to June 2002, and as a Director in the Financial Department from August 1990 to March 1996. Mr. Ren received Bachelor in Finance from Dongbei University of Finance and Economics, and Master in International Finance from Dongbei University of Finance and Economics. Mr. Ren was selected to serve as a Director of our Board because he has a wide range of experience in enterprise development having worked with companies in various stages of development.
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Mr. Karlton S.M. Wong has served as Director of our Board and a member of our audit committee since November 2011. Our Board has determined that Mr. Wong qualifies as an “audit committee financial expert” as defined by Item 407 of Regulation S-K. With 16 years of professional experience, Mr. Wong began his career with KPMG where he spent eight years in positions of accelerating responsibility in the areas of audit, assurance, internal control and corporate financial services. Following KPMG, Mr. Wong served as the Chief Financial Officer and a member of the board of directors of the Nixon Group, a total solution provider for intelligent building systems from May 2002 to October 2006. From November 2006 to July 2008, Mr. Wong served as the Chief Financial Officer of China Wheel Group, an aluminum alloy wheel manufacturer based in the People’s Republic of China with customers located in the United States, Europe and Japan. From August 2008 to March 2009, Mr. Wong served as the Chief Financial Officer of China Northeast City Group Ltd., a real estate development company focusing on agricultural, industrial and residential real estate in the People’s Republic of China. Mr. Wong currently serves as the Chief Financial Officer of Regal Holding Group, a manufacturer and distributor of lighting fixture products to the United States, Europe and Japan. Mr. Wong received his Bachelor of Arts in Accountancy from the Hong Kong Polytechnic University in 1994, his Masters of Business Administration degree from the Manchester Business School in 2000 and his Masters of Law from Open University of Hong Kong in 2010. Mr. Wong is a certified public accountant and a chartered financial analyst and has been a fellow member of the Chartered Association of Certified Accountants and Hong Kong Society of Accountants since 1997.
Audit Committee
On October 29, 2010, the Board established an Audit Committee and adopted a charter for the governance of the Audit Committee. The Company does not have a website containing a copy of the Audit Committee Charter. The charter was filed as an exhibit to a Current Report on Form 8-K filed with the SEC on November 1, 2010. The Committee is composed of members of the Board who meet the “independent” requirement of NASDAQ listing standards. The members of our Audit Committee are Messrs Karlton Wong, Fudong Sui and Fuqin Ren. Mr. Wong serves as Chairman of the Audit Committee. Karlton Wong qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K.
On October 29, 2010, the Board established a Compensation Committee and adopted a charter for the governance of the Compensation Committee. The Company does not have a website containing a copy of the Compensation Committee Charter. The charter was filed as an exhibit to a Current Report on Form 8-K filed with the SEC on November 1, 2010. The Committee is composed of independent directors. The members of our Compensation Committee are Messrs Karlton Wong, Fudong Sui and Fuqin Ren. Fudong Sui serves as Chairman of the Compensation Committee.
The scope of the Compensation Committee covers the following duties:
| · | Establish and periodically review the Company’s compensation philosophy and the adequacy of the compensation plans and programs for senior executives and other employees of the Company and its subsidiaries; |
| · | Establish compensation arrangements and incentive goals for senior executives; |
| · | Review senior executive performance and award incentive compensation and adjust compensation arrangements as appropriate based upon performance; |
| · | Review and monitor management development and succession plans and activities; |
| · | Review and discuss with management the Compensation Discussion & Analysis (if required) and related disclosures to be included in the Company’s annual proxy statement or Form 10-K filed with the SEC; and |
| · | Prepare the Compensation Committee Report as required by the rules of the SEC. |
The Compensation Committee’s goal in determining compensation levels is to adequately reward the efforts and achievements of executive officers for the management of the Company. The Company has not used a compensation consultant in any capacity and does not have benchmarking information but believes that its executive officer compensation package is comparable to similar businesses in the location in which it operates. Executive officers of the Company do not have a role in determining or recommending the amount or form of executive and director compensation.
Nominating and Corporate Governance Committee
On October 29, 2010, the Board established a Nominating and Corporate Governance Committee and adopted a charter for the governance of the Nominating and Corporate Governance Committee. The Company does not have a website containing a copy of the Nominating and Corporate Governance Committee Charter. The charter was filed as an exhibit to a Current Report on Form 8-K filed with the SEC on November 1, 2010. The Committee is composed of independent directors. The members of our Nominating and Corporate Governance Committee are Messrs Karlton Wong, Fudong Sui and Fuqin Ren. Fuqin Ren serves as Chairman of the Nominating Committee.
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Section 16(a) Beneficial Ownership Reporting Compliance.
The Company does not have a class of securities registered pursuant to section 12 of the Exchange Act. As a result, our directors, executive officers and persons holding more than 10% of our common stock are not required to report their ownership of the Company’s securities to the SEC.
Code of Ethics
We have adopted a code of ethics that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (the “Code of Ethics”). The Code of Ethics is designed to deter wrongdoing, and to promote the following:
| · | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. |
| · | Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer. |
| · | Compliance with applicable governmental laws, rules and regulations. |
| · | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code. |
| · | Accountability for adherence to the code. |
Nomination Procedures
There were no material changes to the procedures by which security holders may recommend nominees to our board of directors since filing our last annual report with the SEC on September 14, 2010.
Family Relationships
Director Mr. Bing Wang and Director Ms. Zhi Li are husband and wife. Director Jiao Wang is Mr. Wang’s daughter.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation of Executive Officers
The following table sets forth all compensation awarded to, earned by, or paid by China Sun Group High-Tech Co. and its subsidiaries to all persons serving as the Company’s Chief Executive Officer for services rendered in all capacities to the Company during the years ended May 31, 2011 and 2010. There were no other executive officers whose total salary and bonus for the fiscal year ended May 31, 2009 are attached hereto, beginning F-1 through F-19.
2011 exceeded $100,000.
Summary of Compensation Table
| Name and Principal Position | Year | Salary (cash or non-cash) ($) | Bonus (cash or non-cash) ($) | Stock-Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||
Guosheng Fu (1) (Chief Executive Officer) | 2011 | 17,500 | -- | 75,000 | -- | -- | -- | -- | 92,500 | ||||||||||||
| 2010 | 26,620 | -- | -- | -- | -- | -- | -- | 26,620 | |||||||||||||
Bin Wang (2) (Chief Executive Officer) | 2010 | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||
| 2011 | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||
(1) Mr. Fu was appointed as our Chief Executive Officer on September 13, 2010.
(2) Mr. Wang resigned as our President and Chief Executive Officer on September 13, 2010.
On November 15, 2010, the Company entered into an employment agreement with Mr. Guosheng Fu (“Mr. Fu”), the Company’s Chief Executive Officer. Pursuant to the terms of the employment agreement, Mr. Fu will receive an annual base salary of $30,000 in connection with his services as Chief Executive Officer. The term of employment is for a period of one year, but is automatically extended so that the Service Term is always one year; provided, however, that either party may terminate this agreement at any time. In addition, the Company agreed to grant Mr. Fu up to an aggregate amount of 450,000 shares of the Company’s common stock. The Company agreed to issue 150,000 shares of its common stock to Mr. Fu on each of December 31, 2010, 2011, and 2012, each, an award date, subject to Mr. Fu’s continuous service on each award date
Outstanding Equity Awards at Fiscal year end
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (# | Market value of shares of units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |||||||||||||||||||||||||||
| Guosheng Fu | - | - | - | - | - | 300,000 | 100,000 | - | - | |||||||||||||||||||||||||||
| Bin Wang | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Compensation of Directors
Persons who are directors and employees are not compensated for their services as a director. Non-employee director compensation is currently set at $1,500 a month. Mr. Bin Wang received no compensation for his services as a director. Directors do not receive additional compensation for attending meetings. Director compensation is reviewed annually.
The following table provides director compensation for the Company’s fiscal year ending May 31, 2011.
| Name | Fees earned or paid in cash ($) | Stock awards ($) | Option awards ($) | Non-equity incentive plan compensation ($) | Nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||
| Li, Zhi | - | - | - | - | - | - | - | |||||||||||||||||||||
| Wang, Jiao | - | - | - | - | - | - | - | |||||||||||||||||||||
| Sui, Fudong | - | - | - | - | - | - | - | |||||||||||||||||||||
| Ren, Fuqiu | - | - | - | - | - | - | - | |||||||||||||||||||||
| Wong, Karlton S.M. | 10,500 | - | - | - | - | - | 10,500 | |||||||||||||||||||||
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of our common stock as of August 23, 2011, by (i) each person who “beneficially” owns more than 5% of all outstanding shares of common stock, (ii) each director and the executive officer identified above in Item 10, and (iii) all directors and the executive officers as a group. Unless otherwise indicated, the address for each beneficial owner is c/o China Sun Group High-Tech Co., 1 Hutan Street, Zhongshan District, Dalian, the People’s Republic of China.
27
| Directors and Executive Officers: | Amount and Nature of Beneficial Ownership (1) | Percentage of Class (2) | ||||||||
| Bin Wang | 17,000,000 | (3 | ) | 30 | % | (3) | ||||
| Ming Fen Liu | 110,000 | * | ||||||||
| Zhi Li | 17,000,000 | (3 | ) | 30 | % | (3) | ||||
| Guosheng Fu | 150,000 | * | ||||||||
| Jiao Wang | 17,000,000 | (3 | ) | 30 | % | (3) | ||||
| Fudong Sui | 10,000 | * | ||||||||
| Fuqiu Ren | 10,000 | * | ||||||||
| Karlton Wong | 0 | - | ||||||||
| Officers and directors as a group (5 persons) | 17,280,000 | 31 | % | |||||||
______________
* Represents less than 1%
(1) As used herein, a person is deemed to be the “beneficial owner” of a security if he or she has voting or investment power with respect to such security or has the right to acquire such ownership within sixty (60) days. As used herein, “voting power” includes the power to vote or to direct the voting of shares, and “investment power” includes the power to dispose or to direct the disposition of shares, irrespective of any economic interest therein.
(2) Percentage ownership for a given individual or group is based on 55,962,971 shares of common stock outstanding on August 23, 2011, and calculated on the basis of (i) the amount of outstanding shares owned as of August 23, 2011 plus, (ii) the number of shares that such individual or group has the right to acquire within sixty (60) days pursuant to options, warrants, conversion privileges or other rights, if applicable.
(3) Includes 6,000,000 shares owned by Mr. Bin Wang, 5,500,000 shares owned by Ms. Zhi Li, Mr. Bin Wang’s spouse, and 5,500,000 shares owned by Ms. Jiao Wang, Mr. Wang’s daughter.
Under Item 404 of SEC Regulation S-K, a related person transaction is any actual or proposed transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to which we or our subsidiaries were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount involved exceeded or exceeds $120,000 and in which any of our directors, nominees for director, executive officers, beneficial owners of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest.
There were no transactions with any related persons (as that term is defined in Item 404 in Regulation SK) during the fiscal years ended 2011 and 2010, or any currently proposed transaction, in which we were or are to be a participant and the amount involved was in excess of $120,000 and in which any related person had a direct or indirect material interest.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
For the fiscal years ended May 31, 2011 and May 31, 2010, HKCMCPA Company Limited (formerly ZYCPA Company Limited) has billed us the following fees for audit and other services set forth in the following table:
| 2011 | 2010 | |||||||
| Audit Fees (1) | 80,000 | 75,000 | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | 80,000 | 75,000 | ||||||
(1) Services rendered for the audit of our annual financial statements included in our report on Form 10-K and the reviews of the financial statements included in our reports on Forms 10-Q filed with the SEC.
28
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
| Number | Exhibit Description | Footnote Reference |
| 3.1 | Articles of Incorporation of Capital Resource Funding, Inc. filed on February 6, 2004 | (1) |
| 3.2 | Amendment to the Articles of Incorporation of Capital Resource Funding, Inc. filed March 21, 2005. | (2) |
| 3.3 | Certificate of Incorporation of China Sun Group High-Tech Co. filed with Delaware Secretary of State on June 20, 2007. | (11) |
| 3.4 | Amended and Restated Bylaws. | (10) |
| 3.5 | Amended and Restated Bylaws | (6) |
| 10.1 | Investment Agreement dated as of August 18, 2010 by and between the Company and Wealthy Support International Investment Ltd. | (3) |
| 10.2 | Registration Rights Agreement dated as of August 18, 2010 by and between the Company and Wealthy Support International Investment Ltd. | (3) |
| 10.3 | Termination of Investment Agreement and Registration Rights Agreement dated as of September 13, 2010 by and between the Company and Wealthy Support International Investment Ltd. | (5) |
| 10.4 | Employment Agreement dated November 15, 2010, by and between China Sun Group High-Tech Co. and Guosheng Fu | (7) |
| 10.5 | Employment Agreement dated November 15, 2010, by and between China Sun Group High-Tech Co. and Ming Fen Liu | (8) |
| 10.6 | 2011 Supply Agreement for Dynamic Lithium Battery Materials dated November 2010, by and between Dalian Xinyang High-Tech Development Co., Ltd. and Henan Huanyu Sai Er New Energy Technology Co., Ltd. | (9) |
| 14 | Code of Ethics | (4) |
| 21.1 | Subsidiaries of the Registrant | (12) |
| 23.1 | Consent of HKCMCPA Company Limited (formerly Company Limited). | * |
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | * |
| 31.2 | Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | * |
| 32.1 | Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * |
| 32.2 | Certifications of Principal Financial and Accounting Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * |
| (1) | Incorporated by reference from the Registration Statement on Form SB-2 of Capital Resource Funding, Inc. filed with the Securities and Exchange Commission on August 16, 2004. File no. 333-118259. |
| (2) | Incorporated by reference from the Amendment No. 4 to the Registration Statement on Form SB-2/A of Capital Resource Funding, Inc. filed with the Securities and Exchange Commission on March 15, 2005. File no. 333-118259. |
| (3) | Incorporated by reference to Exhibits 10.1 and 10.2 to the registrant’s current report on Form 8-K filed on August 24, 2010. |
29
| (4) | Incorporated by reference from the Annual Report on Form 10-KSB of Capital Resource Funding, Inc. filed with the Securities and Exchange Commission on August 4, 2006. |
| (5) | Incorporated by reference to Exhibit 10.1 to the registrant's current report on Form 8-K filed on September 13, 2010. |
| (6) | Incorporated by reference to exhibit 3.1 to the registrant’s current report on Form 8-K filed on November 22, 2010. |
| (7) | Incorporated by reference to exhibit 10.1 to the registrant’s current report on Form 8-K filed on November 17, 2010. |
| (8) | Incorporated by reference to exhibit 10.2 to the registrant’s current report on Form 8-K filed on November 17, 2010. |
| (9) | Incorporated by reference to exhibit 10.1 to the registrant’s current report on Form 8-K filed on December 3, 2010. |
| (10) | Incorporated by reference to exhibit 3.01 to the registrant’s current report on Form 8-K filed on November 22, 2010. |
| (11) | Incorporated by reference to exhibit 3.3 to the registrant’s Annual Report on Form 10-K filed on September 14, 2010. |
| (12) | Incorporated by reference to exhibit 21.1 to the registrant’s Annual Report on Form 10-K filed on September 14, 2010. |
*Filed herewith.
30
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| China Sun Group High-Tech Co. | |
| Dated: August 29, 2011 | By: /s/ Guosheng Fu |
| Name: Guosheng Fu | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Guosheng Fu and Ming Fen Liu, and each of them, his and her true and lawful attorneys-in-fact, each with full power of substitution, for him and her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Guosheng Fu | Chief Executive Officer (Principal Executive Officer) | August 29, 2011 |
| Guosheng Fu | ||
| /s/ Ming Fen Liu | Chief Financial Officer (Principal Financial and Accounting Officer) | August 29, 2011 |
| Ming Fen Liu | ||
| /s/ Bin Wang | Chairman of the Board | August 29, 2011 |
| Bin Wang | ||
| /s/ Zhi Li | Director | August 29, 2011 |
| Zhi Li | ||
| /s/ Jiao Wang | Director | August 29, 2011 |
| Jiao Wang | ||
| /s/ Fudong Sui | Director | August 29, 2011 |
| Fudong Sui | ||
| /s/ Karlton S.M. Wong | Director | August 29, 2011 |
| Karlton S.M. Wong | ||
| /s/ Fuqiu Ren | Director | August 29, 2011 |
| Fuqiu Ren |
31
CHINA SUN GROUP HIGH-TECH CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| Report of Independent Registered Public Accounting Firm | F-2 | |||
| Consolidated Balance Sheets | F-3 | |||
| Consolidated Statements of Operations And Comprehensive Income | F-4 | |||
| Consolidated Statements of Cash Flows | F-5 | |||
| Consolidated Statements of Stockholders’ Equity | F-6 | |||
| Notes to Consolidated Financial Statements | F-7 – | F-18 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
China Sun Group High-Tech Co.
We have audited the accompanying consolidated balance sheets of China Sun Group High-Tech Co. and its subsidiaries (“the Company”) as of May 31, 20092011 and 2008,2010 and the related consolidated statements of operations and comprehensive income, cash flows and stockholders’ equity for the years ended May 31, 20092011 and 2008. The2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 include 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’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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 financial position of the Company as of May 31, 20092011 and 2008,2010 and the results of operations and cash flows for the years ended May 31, 20092011 and 20082010 and in conformity with accounting principles generally accepted in the United States of America.
(Formerly Zhong Yi (Hong Kong) C.P.A.known as ZYCPA Company Limited)
Certified Public Accountants
Hong Kong, China
August 28, 200929, 2011
F-2
CHINA SUN GROUP HIGH-TECH CO.
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 20092011 AND 20082010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| As of May 31, | As of May 31, | |||||||||||||||
| 2009 | 2008 | 2011 | 2010 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 9,209,953 | $ | 3,879,114 | $ | 21,810,394 | $ | 18,017,266 | ||||||||
| Accounts receivable, trade | 1,580,220 | 1,302,176 | 2,465,862 | 2,793,038 | ||||||||||||
| Inventories | 1,657,023 | 4,705,189 | 610,025 | 1,218,336 | ||||||||||||
| Value-added tax receivable | 124,627 | 447,346 | ||||||||||||||
| Deposits and prepayments | 439,560 | 73,235 | 1,026 | 3,049 | ||||||||||||
| Total current assets | 13,011,383 | 10,407,060 | 24,887,307 | 22,031,689 | ||||||||||||
| Non-current assets: | ||||||||||||||||
| Technical know-how | 2,608,059 | - | ||||||||||||||
| Technical know-how, net | 2,420,278 | 2,475,298 | ||||||||||||||
| Property, plant and equipment, net | 19,630,119 | 14,598,684 | 27,805,208 | 20,567,954 | ||||||||||||
| TOTAL ASSETS | $ | 35,249,561 | $ | 25,005,744 | $ | 55,112,793 | $ | 45,074,941 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable, trade | $ | 847,796 | $ | 733,490 | $ | - | $ | 2,127,244 | ||||||||
| Customer deposits | - | 338 | ||||||||||||||
| Income tax payable | 1,476,030 | 980,027 | 536,647 | 1,488,619 | ||||||||||||
| Other payables and accrued liabilities | 1,022,303 | 448,556 | 1,163,324 | 984,189 | ||||||||||||
| Total liabilities | 3,346,129 | 2,162,411 | 1,699,971 | 4,600,052 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Convertible preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding as of May 31, 2009 and 2008 | - | - | ||||||||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares and 53,422,971 shares issued and outstanding as of May 31, 2009 and 2008 | 53,423 | 53,423 | ||||||||||||||
| Preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding, respectively | - | - | ||||||||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 55,962,971shares and 53,422,971 shares issued and outstanding, as of May 31, 2011 and 2010 | 55,963 | 53,423 | ||||||||||||||
| Additional paid-in capital | 9,585,204 | 9,585,204 | 11,790,789 | 9,585,204 | ||||||||||||
| Accumulated other comprehensive income | 3,067,549 | 2,588,188 | 5,457,233 | 3,043,344 | ||||||||||||
| Statutory reserve | 1,387,775 | 899,819 | 3,342,358 | 2,277,365 | ||||||||||||
| Deferred compensation | (96,000 | ) | - | |||||||||||||
| Retained earnings | 17,809,481 | 9,716,699 | 32,862,479 | 25,515,553 | ||||||||||||
| Total stockholders’ equity | 31,903,432 | 22,843,333 | 53,412,822 | 40,474,889 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 35,249,561 | $ | 25,005,744 | $ | 55,112,793 | $ | 45,074,941 | ||||||||
See accompanying notes to consolidated financial statements.
F-3
CHINA SUN GROUP HIGH-TECH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MAY 31, 20092011 AND 20082010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| Years ended May 31, | Years ended May 31, | |||||||||||||||
| 2009 | 2008 | 2011 | 2010 | |||||||||||||
| Revenues, net | $ | 37,033,483 | $ | 25,294,221 | $ | 48,568,339 | $ | 41,189,122 | ||||||||
Cost of revenue (inclusive of depreciation) | 23,444,655 | 15,664,692 | ||||||||||||||
Cost of revenue (inclusive of depreciation and amortization) | (32,419,062 | ) | (28,134,650 | ) | ||||||||||||
| Gross profit | 13,588,828 | 9,629,529 | 16,149,277 | 13,054,472 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 574,671 | 33,400 | 148,383 | 77,870 | ||||||||||||
| Recovery of allowance for doubtful accounts | - | (806,400 | ) | |||||||||||||
| Research and development | 102,069 | 87,607 | 120,434 | 121,825 | ||||||||||||
| General and administrative | 1,423,013 | 1,111,777 | 3,944,131 | 1,311,598 | ||||||||||||
| Total operating expenses | 2,099,753 | 426,384 | 4,212,948 | 1,511,293 | ||||||||||||
| INCOME FROM OPERATIONS | 11,489,075 | 9,203,145 | 11,936,329 | 11,543,179 | ||||||||||||
| Other income: | ||||||||||||||||
| Interest income | 35,449 | 27,800 | 54,317 | 35,067 | ||||||||||||
| Other income | 45,009 | - | ||||||||||||||
| INCOME BEFORE INCOME TAXES | 11,524,524 | 9,230,945 | 12,035,655 | 11,578,246 | ||||||||||||
| Income tax expense | (2,943,786 | ) | (2,490,819 | ) | (3,623,736 | ) | (2,982,584 | ) | ||||||||
| NET INCOME | $ | 8,580,738 | $ | 6,740,126 | $ | 8,411,919 | $ | 8,595,662 | ||||||||
| Other comprehensive income: | ||||||||||||||||
| - Foreign currency translation gain | 479,361 | 2,362,380 | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| - Foreign currency translation gain (loss) | 2,413,889 | (24,205 | ) | |||||||||||||
| COMPREHENSIVE INCOME | $ | 9,060,099 | $ | 9,102,506 | $ | 10,825,808 | $ | 8,571,457 | ||||||||
| Net income per share – Basic and diluted | $ | 0.16 | $ | 0.13 | $ | 0.15 | $ | 0.16 | ||||||||
| Weighted average number of shares outstanding during the year – Basic and diluted | 53,422,971 | 53,422,971 | ||||||||||||||
| Weighted average common shares outstanding – Basic and diluted | 54,989,110 | 53,422,971 | ||||||||||||||
See accompanying notes to consolidated financial statements.
F-4
CHINA SUN GROUP HIGH-TECH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 20092011 AND 20082010
(Currency expressed in United States Dollars (“US$”))
| Years ended May 31, | Years ended May 31, | |||||||||||||||
| 2009 | 2008 | 2011 | 2010 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 8,580,738 | $ | 6,740,126 | $ | 8,411,919 | $ | 8,595,662 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation | 666,657 | 423,781 | ||||||||||||||
| Recovery of allowance for doubtful accounts | - | (806,400 | ) | |||||||||||||
| Depreciation of property, plant and equipment | 1,639,573 | 1,369,824 | ||||||||||||||
| Amortization of technical know-how | 178,038 | 130,161 | ||||||||||||||
| Shares issued for services, non-cash | 2,112,125 | - | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable, trade | (252,398 | ) | 4,504,302 | 459,273 | (1,213,221 | ) | ||||||||||
| Inventories | 3,121,272 | (4,448,436 | ) | 654,143 | 436,714 | |||||||||||
| Value-added tax receivable | 329,511 | (661,467 | ) | - | 391,661 | |||||||||||
| Deposits and prepayments | (363,191 | ) | (69,268 | ) | 2,125 | 435,697 | ||||||||||
| Accounts payable, trade | 100,064 | 75,948 | (2,180,301 | ) | 1,279,095 | |||||||||||
| Customer deposits | (343 | ) | (713,415 | ) | ||||||||||||
| Income tax payable | 475,318 | 86,788 | (1,002,687 | ) | 13,980 | |||||||||||
| Other payables and accrued liabilities | 93,496 | 19,734 | (83,240 | ) | (304,563 | ) | ||||||||||
| Net cash provided by operating activities | 12,751,124 | 5,151,693 | 10,190,968 | 11,135,010 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Payment on technical know-how | (2,206,150 | ) | - | |||||||||||||
| Purchase of plant and equipment | (3,785,437 | ) | (2,471,927 | ) | (7,442,431 | ) | (1,300,564 | ) | ||||||||
| Payment on construction in progress | (1,532,786 | ) | - | - | (1,024,906 | ) | ||||||||||
| Net cash used in investing activities | (7,524,373 | ) | (2,471,927 | ) | (7,442,431 | ) | (2,325,470 | ) | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | 104,088 | 386,185 | 1,044,591 | (2,227 | ) | |||||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | 5,330,839 | 3,065,951 | 3,793,128 | 8,807,313 | ||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,879,114 | 813,163 | 18,017,266 | 9,209,953 | ||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 9,209,953 | $ | 3,879,114 | $ | 21,810,394 | $ | 18,017,266 | ||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||
| Cash paid for income taxes | $ | 2,468,468 | $ | 2,390,636 | $ | 4,626,424 | $ | 2,127,504 | ||||||||
| Cash paid for interest | $ | - | $ | - | $ | - | $ | - | ||||||||