UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−QQ/A

(Mark One)

 

For the quarterly period ended: DecemberMarch 31, 20102011

 

For the transition period from ____________ to _____________

Commission File Number: 000-53010

CHINA SLP FILTRATION TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Shishan Industrial Park

Nanhai District, Foshan City, Guangdong Province, PRC

 (Address of principal executive offices, Zip Code)

86-757-86683197

(Registrant’s telephone number, including area code)

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The number of shares outstanding of each of the issuer’s classes of common equity, as of February 2,May 12, 2011 is as follows:

 

FINANCIAL INFORMATION

China SLP Filtration Technology, Inc.

Condensed Consolidated Financial Statements

Three months and six months ended DecemberMarch 31, 20102011 and 20092010

Index to Condensed Consolidated Financial Statements

 

 

See accompanying notes to financial statements

CHINA SLP FILTRATION TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See accompanying notes to financial statements

 

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

See accompanying notes to financial statements

 

China SLP Filtration Technology, Inc.

Notes to Consolidated Financial Statements for the three months and the six months ended DecemberMarch 31, 20102011

 

 

China SLP Filtration Technology, Inc., formerly named Perpetual Technologies, Inc. (the “Company” or “we”) was incorporated under the laws of the State of Delaware in March 2007.  Prior to a reverse merger completed on February 12, 2010, we had no operations or substantial assets.

Hong Hui Holdings Limited (“Hong Hui”) was formed in January 2010 in the British Virgin Islands as a holding company by the shareholders of Technic International Inc. (“Technic”), a Hong Kong company. On formation, each shareholder transferred its ownership of Technic to Hong Hui. This acquisition was accounted for as a transfer of entities under common control.

Technic International Ltd. (“Technic”) was incorporated in September 2005 under the laws of Hong Kong as a holding company that owned a 100% equity interest in Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin Long was established in 2000 under the laws of China. In September 2005, Jin Long became thea wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”).

On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui.   Under the terms of the share exchange agreement, we issued and delivered to the Hong Hui stockholders a total of 14,510,204 (72,551,020 pre-split) shares of our common stock in exchange for all of the outstanding shares of Hong Hui.  As a result of the share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary. The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible was recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination.

On March 24, 2010, the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively showed in all periods presented.

Through Foshan, we manufacture, market and sell nonwoven fabrics in China.

 

The accompanying condensed consolidated balance sheet as of DecemberMarch 31, 2010,2011, the condensed consolidated statements of operations for the three months and the six months ended DecemberMarch 31, 20102011 and 2009,2010, and the condensed consolidated statements of cash flow for the threesix months ended DecemberMarch 31, 20102011 and 20092010 are unaudited. These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all the disclosures required for annual financial statements under generally accepted accounting principles. However, these interim consolidated financial statements follow the same accounting policies and methods of application as the Company’s most recent annual financial statements. These interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended September 30, 2010.

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

 

Three customers individually accounted for 10% or more of the total gross accounts receivable and together accounted for 33%45% of the total gross accounts receivable at DecemberMarch 31, 2010.2011. As of September 30, 2010, one customer’s account receivable exceeded 20%,accounted for 10% or more, and combined with two other customers whose accounts receivable waswere below 10%, represented 39% of the total gross accounts receivable as of September 30, 2010.

 

As of DecemberMarch 31, 2010,2011, advances to suppliers consisted of deposits on account with several key raw materials suppliers to secure preferential pricing of raw materials.  The deposits also are used to ensure timely delivery of materials purchased.

7.6.  Inventories

Inventory consisted of the following:

Property, plant and equipment isare recorded at cost. Expenditures incurred for repairs and maintenance are charged to earnings. Betterment, additions and renewals to property, plant and equipment are capitalized. When property, plant and equipment are retired or disposed of, associated cost and accumulated depreciation are removed, and gain or loss, if any, incurred from disposal is included under other income or expense in the statement of operations.

Property, plant and equipment consist of the following:

 

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

For the three month periodmonths ended DecemberMarch 31, 2010,2011, depreciation expense of $284,579$288,190 was included in cost of sales and $17,239$16,946 was included in selling, marketing, and administrative expenses, for a total of $301,818.$305,136.

For the three month periodmonths ended DecemberMarch 31, 2009,2010, depreciation expense of $265,570$271,848 was included in cost of sales and $16,951$16,285 was included in selling, generalmarketing, and administrative expenses, for a total of $282,521$288,133.

9.8.  Deposits

AsDeposits consisted of December 31, 2010, we have deposits of $1,534,549 withpayments made to suppliers for equipment providers to ensure timely fulfillment of our purchase contracts to build new production facilities.be received.

 

10.9.  Land Use Rights

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

   

Change in cost of the land use rights from September 30, 2010 to DecemberMarch 31, 20102011 reflects the effect of changes in foreign currency exchange rate.

11.10.   Short-term Loans:

 

Other payable to related party accounts forconsisted of the amount of $920,148 the Company borrowedCompany’s borrowing from its CEO. This loan is non-interest bearing and is repayable on demand.

 

13.12.   Convertible Note Payable

On February 12, 2010, immediately following the closing of a share exchange agreement,January 31, 2011, the Company entered into a note purchasean agreement with certain accredited investors for the sale ofits convertible notes inholders to extend the aggregatematurity date of the notes from February 11, 2011 to June 30, 2011, except for one note holder to which the Company repaid the principal amount of $4,140,000 and warrants.  In addition to$100,000 plus interest when the finance cost of $730,187 which is accounted for as debt discount, 653,510 common shares were issued to placement agents.  The notes have the following material terms:matured on February 11, 2011 under its original terms.

 

Three Months Ended DecemberMarch 31, 20102011 Compared to Three Months Ended DecemberMarch 31, 20092010

The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.

 

Net Sales

Net sales consisted of revenue from sales of needle punched non-wovennonwoven product and thermal calendared products. Our net sales for the three month period ended DecemberMarch 31, 20102011 were $5,780,973,$4,895,596, an increase of $556,012,$266,925, or 11%6%, from $5,224,961$4,628,671 for the same period of the prior year.  Thermal calendared non-woven products contributed 10% of the increase in total revenue and needle-punched non-woven fabric contributed 1% to the increase in total revenue.  The increase in revenue was primarily attributable to the price increase on bothappreciation of Renminbi, our thermal calendared products and needle-punched products sold to domestic customers which price increases rangedtransaction currency against the US dollars, our reporting currency. Reflected in the transaction currency, our net sales increased by 2% from 3% to 22% and were put in place in order to pass on the higher costs of raw materials in this period.  However, as a result of the price increase, domestic sales volume declined by 6%.  Demand for our products from overseas continued to rise reflecting the global economic recovery. Our international sales during this period increased 41% in volume and 42% in sales, respectively.quarter ended March 31, 2010.

 

For the three month period ended DecemberMarch 31, 2010,2011, sales of thermal calendared products increased by $526,938,$112,482, or 18%4%, from the same period of the prior year.  Domestic sales volumeAn increase of $403,038 in thermal calendared products decreasedin domestic market was offset by 4% anda decrease of $290,556 in international sales increased by 15%.sales.

SalesInternational sales of needle-punched products increased by $29,085, or 0.6%. Domestic$156,673 and domestic sales volumeslightly decreased by 8% which decrease was offset by increased international sales. Our price increase for our needle-punched products has had a negative impact on our sales to smaller sized domestic customers which were less receptive to our price increase.$2,230.

Cost of Sales

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

Cost of sales for the three month period ended DecemberMarch 31, 20102011 was $4,223,562,$3,911,768, an increase of $612,474,$674,457, or 17%21%, from $3,611,088$3,237,311 for the same period in 2009.2010.

Raw material cost increased to 55%70% of net sales for the three month period ended DecemberMarch 31, 2010,2011, compared to 47%52% of net sales for the same period of the prior year, reflecting a mix of more expensive raw materials associated with sales. Over 98% percent of our raw materials consist of polyester, the price of which fluctuates with the price of oil. Recent surge in the price of crude oil adversely affected the purchase price of polyester resin chips, our main raw material. During the three month period ended DecemberMarch 31, 2010, the2011, our cost of raw materials increased 17%20% from the same period of the prior year. The increase of our cost of sales was due principally from the increase in the cost of raw materials.   

Labor cost accounted for 1% of net sales for the three month period ended DecemberMarch 31, 2010,2011, the same level as the same period in 2009.

Overhead expenses were 19%14% of net sales for the three month period ended DecemberMarch 31, 2010,2011, compared to 18%11% of net sales for the same period in 2009.2010. As a percentage of net sales, overhead expenses slightly increased due to lower capacity utilization and saleslower production volume, compared to the same period in 2009.2010.

Gross Profit

Gross profit represents net sales less cost of sales.  Gross profit for the three month period ended DecemberMarch 31, 20102011 was $1,557,411,$983,828, a decrease of $56,462,$407,532, or 4%29%, from $1,613,873$1,391,360 for the same period in 2009.2010.  As a percentage of net sales, gross profit was 27%20% for the three month period ended DecemberMarch 31, 2010,2011, compared to 31%30% for the same period of the prior year. The decrease in our gross profit was due primarily to the increase in cost of raw materials as a percentage of net sales.  

Selling, General and Administrative Expenses

Selling expenses include salaries, advertising expenses, rent, and all expenses directly related to selling product.  General expenses include general operating expenses that are directly related to the general operation of the company.Company.  Administrative expenses include executive salaries and other expenses related to the overall administration of the company.

Selling, general and administrative expenses for the three month period ended DecemberMarch 31, 20102011 were $812,636,$989,685, an increase of $538,613$432,224, or 197%78%, compared to $274,023$557,461 for the same period in 2009.2010. The increase was primarily due to $246,149consisted of $132,120 in legal counsel and documentation fees related to the Company’s plannedintended initial public offering, investor relation consulting fees of $70,500, and fees paid to our auditors of $57,984,$89,545, and $151,329 in stock-based employee compensation, and payroll increases.offset by a decrease in administrative expenses.

 

Other Income and Expenses

Other expenses primarily consisted of interest expense while other income was primarily interest income and change in fair value of warrants.

Interest expense for the three month period ended DecemberMarch 31, 20102011 was $777,697$326,235 compared to $58,909$390,355 for the same period in 2009.  Interest expense as a percentage of sales increaseddecreased to 13%7% for the three month period ended DecemberMarch 31, 2010,2011, from 1%8% for the same period of the prior year.  The increase inextension of the maturity date of the convertible notes helped reduce interest expense was mainly attributed to adoption of derivative accounting rules under FASB ASC 815-40 to record $4,140,000 of convertible loan notes.  These accounting rules require us to accrete interest expense, in the amount of $609,900 for the period, based on the termby decreasing accretion of the notes and the note discount. Excluding the derivative accounting driven interest expense, our interest expense was $167,797 for this three month period, an increase of $108,888, or 185%, from the same period of the prior year, primarily due to interest paiddiscount to the bridge-loan creditors.principal amount at the notes maturity date.

At DecemberMarch 31, 2010,2011, under the requirements of FASB ASC 815, management re-measured the fair value of the warrants issued in connection with the sale of convertible notes to bridge loan creditors on February 12, 2010. This re-measurement resulted in a decreasean increase of the fair value of the warrants from December 31, 2010 and accordingly a decreasean increase of the value of the warrants liabilities and reported as other incomeexpense in amount of $191,000.$44,276.

Income Tax

USA

 

The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of DecemberMarch 31, 20102011 and September 30, 2010.

 

BVI

 

Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly is exempt from payment of British Virgin Island’s income taxes.

 

PRC

 

Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan SLP. For 2008 and 2009, Foshan SLP enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the 2010 and 2011 years where there is a 50% discount on income tax.

 

The current year tax provision was $88,618$3,398 for the three months ended DecemberMarch 31, 2010.2011.  The Company has recorded zero deferred tax assets or liabilities as of DecemberMarch 31, 20102011 and September 30, 2010 net of tax allowance because all other significant difference in tax basis and financial statement amounts are permanent differences. Valuation allowance is applied to deferred tax assets derived from immaterial temporary difference in tax and financial basis financial statements.

 

Net (Loss) Income

Net incomeOur operations resulted in net loss for the three months ended DecemberMarch 31, 2010 was $57,472,2011 in amount of $372,108, compared with a decrease of $1,223,587, or 96%, from net income of $1,281,059$444,332 for the three months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in connection with the Company’s intended initial public offering and bridge financing.  

Cost of sales for the six month period ended March 31, 2011 was $8,135,330, an increase of $1,291,497, or 19%, from $6,843,833 for the same period of the prior year.  As a percentage of net sales, cost of sales was 76% for the six month period ended March 31, 2011 compared to 70% for the same period in 2009.

Interest expense for the six month period ended March 31, 2010 was $1,103,932 compared to $452,387 for the same period of the prior year.  Interest expense as a percentage of net sales increased to 10% for the six month period ended March 31, 2011 from 5% for the same period of the prior year.   The decreaseincrease in interest expense for the six months ended March 31, 2011 was mainly attributedprincipally due to significant increasesthe amortization of the convertible note discount.

Our operations resulted in net loss for the six months ended March 31, 2011 in amount of $314,745, compared with a net income of $1,739,680 for the six months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses related toand high finance cost in connection with the Company’s plannedintended initial public offering an increase in finance costs, and the adoption of FASB ASC 815 accounting rules to treat the warrants issued in connection with privately placed bridge loan notes.borrowings.