UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q/A
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File Number: 000-53010
CHINA SLP FILTRATION TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 90-0475058 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
Shishan Industrial Park
Nanhai District, Foshan City, Guangdong Province, PRC
(Address of principal executive offices, Zip Code)
(86 22) 757-86683197
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ | Accelerated Filer ¨ |
Non-Accelerated Filer ¨(Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common equity, as of November17, 2010 is as follows:
Class of Securities | Shares Outstanding | |
Common Stock, $0.001 par value | 15,265,714 |
Quarterly Report on FORM 10-Q
Three Months Ended March 31, 2010
Table of Contents
PART I | ||
FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS. | 4 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 16 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | |
ITEM 4. | CONTROLS AND PROCEDURES. | 24 |
PART II | ||
OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS. | |
ITEM 6. | EXHIBITS. | 25 |
2
EXPLANATORY NOTE
China SLP Filtration Technology, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q (“Form 10-Q/A”) to restate its consolidated financial statements for the three and six months ended March 31, 2010. Subsequent to the issuance of the Company’s consolidated unaudited interim financial statements for the three and six months ended March 31, 2010, included in its Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the United States Securities and Exchange Commission (the “SEC”) on May 24, 2010, as amended on May 26, 2010 (collectively, the “Original Form 10-Q”), and in connection with the SEC’s review of the Company’s registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that the Company failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with its private placement of convertible notes which closed on February 12, 2010. Accordingly, the Company is restating its unaudited interim financial statements for the three month and six month periods ended March 31, 2010 and 2009, as set forth in the Original Form 10-Q.
See Item 1 of Part I, “Financial Statements — Note 18 — Restatements of Previously Issued Financial Statements” for a detailed discussion of the effects of the restatement of the Company’s unaudited interim financial statements for the three and six months ended March 31, 2010.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Original Form 10-Q that was affected by the restatement has been amended and restated in its entirety. No material changes have been made in this Form 10-Q/A to update other disclosures presented in the Original Form 10-Q, except as required to reflect the effects of the restatement. This Form 10-Q/A does not reflect events occurring after the filing of the Original Form 10-Q or modify or update those disclosures, including the exhibits to the Original Form 10-Q affected by subsequent events. The following sections of this Form 10-Q/A have been amended to reflect the restatement:
· | Part I—Item 1—Financial Statements (Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows), |
· | Part I—Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations (Liquidity and Capital Resources), and |
· | Part I—Item 4—Controls and Procedures |
This Form 10-Q/A is dated as of a current date and includes as exhibits 31.1, 31.2 and 32 new certifications by the Company’s Chief Executive Officer and Chief Financial Officer as required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Form 10-Q for the fiscal quarter ended March 31, 2010.
3
PART I
FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS. |
China SLP Filtration Technology, Inc.
Condensed Consolidated Financial Statements
Three and Six Months Ended March 31, 2010 and 2009
Index to Condensed Consolidated Financial Statements
Page | |
Unaudited Condensed Consolidated Balance Sheets (Restated) | 5 |
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss (Restated) | 6 |
Unaudited Condensed Consolidated Statements of Cash Flows (Restated) | 7 |
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Restated) | 8 |
Notes to Unaudited Consolidated Financial Statements (Restated) | 9 |
4
CONSOLIDATED BALANCE SHEETS
Restated March 31, | ||||||||
2010 | September 30, | |||||||
(Unaudited) | 2009 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 6,092,334 | $ | 3,297,648 | ||||
Accounts receivable - Net | 1,914,786 | 1,424,835 | ||||||
Advance to suppliers | 1,341,121 | 685,551 | ||||||
Inventory | 1,022,404 | 1,197,289 | ||||||
Prepaid expenses and other current assets | 189,535 | 45,656 | ||||||
Total Current Assets | 10,560,180 | 6,650,979 | ||||||
Deposits | 1,946,280 | - | ||||||
Property and equipment - Net | 10,130,508 | 10,711,865 | ||||||
Receivable from related party | 213,035 | 773,672 | ||||||
Land use rights - Net | 530,364 | 537,350 | ||||||
Total Assets | $ | 23,380,367 | $ | 18,673,866 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Short term loan | $ | 3,803,327 | $ | 4,578,409 | ||||
Accounts payable and accrued liabilities | 521,247 | 410,114 | ||||||
Client's deposits | - | 75,176 | ||||||
Taxes payable | 17,154 | 726 | ||||||
Warrants liabilities | 1,052,000 | |||||||
Convertible notes payable $4,140,000, net of discount -$2,134,793 | 2,005,207 | - | ||||||
Total Current Liabilities | 7,398,935 | 5,064,425 | ||||||
Total Liabilities | 7,398,935 | 5,064,425 | ||||||
Stockholder's Equity | ||||||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding | - | - | ||||||
Common stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and 14,510,214 shares issued and outstanding at March 31, 2010 and September 30, 2009 | 15,236 | 14,510 | ||||||
Additional paid-in Capital | 8,205,582 | 7,548,752 | ||||||
Retained earnings | 6,240,,212 | 4,500,532 | ||||||
Accumulated other comprehensive income | 1,520,402 | 1,545,647 | ||||||
Total Stockholder's Equity | 15,981,432 | 13,609,441 | ||||||
Total Liabilities and Stockholder's Equity | $ | 23,380,367 | $ | 18,673,866 |
See accompanying notes to financial statements
5
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
Restated 2010 | 2009 | Restated 2010 | 2009 | |||||||||||||
Net Sales | $ | 4,628,671 | $ | 2,214,940 | $ | 9,847,025 | $ | 4,540,833 | ||||||||
Cost of Sales | 3,237,311 | 1,373,921 | 6,843,833 | 2,906,402 | ||||||||||||
Gross Profit | 1,391,360 | 841,019 | 3,003,192 | 1,634,431 | ||||||||||||
Selling, General and Administration expenses | 557,461 | 275,526 | 812,138 | 758,442 | ||||||||||||
Income from Operations | 833,899 | 565,493 | 2,191,054 | 875,989 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest Income | 292 | - | 517 | - | ||||||||||||
Interest Expense | (390,355 | ) | (76,286 | ) | (452,387 | ) | (160,506 | ) | ||||||||
Gain on disposal of fixed assets | 496 | - | 496 | 16,263 | ||||||||||||
Total other income (expenses) | (389,567 | ) | (76,286 | ) | (451,374 | ) | (144,243 | ) | ||||||||
Income before Income Taxes | 444,332 | 489,207 | 1,739,680 | 731,746 | ||||||||||||
Income tax provision | - | - | - | - | ||||||||||||
Net Income | $ | 444,332 | $ | 489,207 | $ | 1,739,680 | $ | 731,746 | ||||||||
Other Comprehensive Income | ||||||||||||||||
Foreign Currency Translation Adjustments | (23,939 | ) | 14,446 | (25,245 | ) | (90,836 | ) | |||||||||
Total Comprehensive Income | $ | 420,393 | $ | 503,653 | $ | 1,714,435 | $ | 640,910 | ||||||||
Net Income Per Common Share: | ||||||||||||||||
Basic and diluted | $ | 0.03 | $ | 0.03 | $ | 0.12 | $ | 0.05 | ||||||||
Weighted-Average Common Shares Outstanding: | ||||||||||||||||
Basic | 14,897,143 | 14,510,204 | 14,701,547 | 14,510,204 | ||||||||||||
Diluted | 15,798,367 | 14,510,204 | 15,147,208 | 14,510,204 |
See accompanying notes to financial statements
6
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended March 31 | ||||||||
Restated 2010 | 2009 | |||||||
Cash Flow from Operating Activities: | ||||||||
Net income | $ | 1,739,680 | $ | 731,746 | ||||
Adjustments to reconcile net income to net cash flow provided by operating activities: | ||||||||
Depreciation | 569,358 | 352,070 | ||||||
Amortization | 6,217 | 6,204 | ||||||
Non-cash interest charges | 304,950 | - | ||||||
Gain from disposal of fixed assets | (496 | ) | (16,263 | ) | ||||
Change in operating assets and liabilities: | - | - | ||||||
Accounts receivable | (491,997 | ) | (122,271 | ) | ||||
Advance to suppliers | (656,586 | ) | 3,271,122 | |||||
Inventory | 173,173 | (124,682 | ) | |||||
Prepaid expenses and other current assets | (143,956 | ) | (337,288 | ) | ||||
Accounts payable & accrued liabilities | 111,719 | (71,094 | ) | |||||
Clients' deposits | (75,069 | ) | (93,257 | ) | ||||
Taxes payable | 16,430 | (9,843 | ) | |||||
Net cash provided by (used in) operating activities | 1,553,423 | 3,586,444 | ||||||
Cash Flow from Investing Activities: | ||||||||
Addition-property and equipment, land use right | (3,333 | ) | (6,010,706 | ) | ||||
Deposits for purchase of equipment | (1,946,280 | ) | - | |||||
Proceeds from disposal of fixed assets | 496 | 16,263 | ||||||
Proceeds from related party receivable | 559,535 | 1,066,996 | ||||||
Net cash (used in) provided by investing activities | (1,389,582 | ) | (4,927,447 | ) | ||||
Cash Flow from Financing Activities: | ||||||||
Dividend paid | - | (1,070,823 | ) | |||||
Repayment of loans | (768,535 | ) | (4,963,547 | ) | ||||
Proceeds from loans | 3,404,798 | 6,229,337 | ||||||
Net cash provided by (used) in financing activities | 2,636,263 | 194,967 | ||||||
Effects of Exchange Rates on Cash | (5,418 | ) | (19,995 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 2,794,686 | (1,166,031 | ) | |||||
Cash and cash equivalents, beginning of year | 3,297,648 | 2,367,570 | ||||||
Cash and cash equivalents, end of year | $ | 6,092,334 | $ | 1,201,539 | ||||
Supplemental information of cash flows | ||||||||
Cash paid for interest | $ | 85,329 | $ | 58,909 | ||||
Cash paid for income taxes | $ | - | $ | - |
See accompanying notes to financial statements
7
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Restated)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Retained | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings (Deficit) | Income | Equity | |||||||||||||||||||||||||
BALANCE, September 30, 2008 | 14,510,204 | $ | 14,510 | - | $ | - | $ | 7,548,752 | $ | 2,054,880 | $ | 1,602,725 | $ | 11,220,867 | ||||||||||||||||||
Net Income | - | - | - | - | - | 2,445,652 | - | 2,445,652 | ||||||||||||||||||||||||
Currency translation adjustment | - | - | - | - | - | (57,078 | ) | (57,078 | ) | |||||||||||||||||||||||
BALANCE, September 30, 2009 | 14,510,204 | $ | 14,510 | - | $ | - | $ | 7,548,752 | $ | 4,500,532 | $ | 1,545,647 | $ | 13,609,441 | ||||||||||||||||||
Shares effectively issued to former shareholders - 2/12/2010 | 2,600,000 | 2,600 | (2,600 | ) | - | |||||||||||||||||||||||||||
Cancellation of stock in recapitalization | (2,528,000 | ) | (2,528 | ) | 2,528 | - | ||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||
Shares issued to placement agents in conjunction with convertible note | 653,510 | 654 | - | - | 656,902 | - | 657,556 | |||||||||||||||||||||||||
Net Income - Restated | - | - | - | - | - | 1,739,680 | (25,245 | ) | 1,714,435 | |||||||||||||||||||||||
Currency translation adjustment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
BALANCE, March 31, 2010 - Restated | 15,235,714 | $ | 15,236 | - | $ | - | $ | 8,205,582 | $ | 6, 240,212 | $ | 1,520,402 | $ | 15,981,432 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
8
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - Expressed in US dollars)
1. | Nature of Business and Organization History: |
China SLP Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc. (the “Company” or “we”) was incorporated under the laws of the State of Delaware in March, 2007. Prior to reverse merger we had no operations or substantial assets.
Hong Hui Holdings Limited (“Hong Hui”) was formed in January, 2010 in the territory of the British Virgin Islands as a holding company by the shareholders of Technic International Inc. (“Technic”). On formation, each shareholder transferred his ownership of Technic to Hong Hui. As a result of this transaction, Technic became a wholly-foreign owned enterprise under PRC law. This acquisition was accounted for as a transfer of entities under common control.
Technic was incorporated in September 2005 under the laws of Hong Kong as a holding company that owns 100% equity interest of Nanhai Jinlong Nonwoven Co. Ltd. (“Jin Long”) located in Foshan City, Guangdong Province, the People’s Republic of China (“China”). Jin Long was established in 2000 under the laws of China. In September 2005, Jin Long became a wholly-owned foreign enterprise (“WOFE). In April 2009, Jin Long changed its name to Foshan S.L.P. Special Materials Co., Ltd (“Foshan SLP”).
On February 12, 2010, we entered into a share exchange agreement with the owners of all of the outstanding shares of Hong Hui. Under the terms of the share exchange agreement we issued and delivered to the Hong Hui stockholders a total of 14,510,204 (72,551,020 pre-split) shares of our common stock in exchange for all of the outstanding shares of Hong Hui. As a result of the share exchange or reverse merger, Hong Hui became our wholly-owned subsidiary. The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible has been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination.
On March 24, 2010 the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively showed in all periods presented.
We engage in manufacturing, marketing and sale, research and development of polyester spun-bonded nonwoven fabrics, polyester needle-punch nonwovens, spun-laced nonwovens, polylactic acid nonwovens, and special functions nonwovens ( flame retardant, anti-static, oil & water repellent, etc).
2. | Basis of presentation and principles of consolidation: |
The accompanying condensed consolidated balance sheet as of March 31, 2010, the condensed consolidated statements of operations for the nine months ended March 31, 2010 and 2009, and the condensed consolidated statements of cash flow for the six months ended March 31, 2010 and 2009 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. These unaudited consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended September 30, 2009.
Operating results for the six-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2010 or for any other period.
9
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
3. | Summary of significant accounting policies: |
These unaudited consolidated financial statements follow the same accounting policies and methods of application as the Company's most recent annual financial statements.
4. | Accounts receivable: |
March 31, | September 30, | |||||||
As of | 2010 | 2009 | ||||||
Accounts receivable | $ | 1,951,619 | $ | 1,461,721 | ||||
Less: Allowance for doubtful accounts | (36,833 | ) | (36,886 | ) | ||||
Accounts receivable – Net | $ | 1,914,786 | $ | 1,424,835 |
As of March 31, 2010 and September 30, 2009, customer accounts receivable balances exceeding 10% of the total balance are as follows:
September 30,2009 | ||||||||
Customers: | Amount | Percentage | ||||||
Wu jiang jingshan | $ | 434,556 | 30 | % | ||||
Shen zhen Ya ming water | 185,625 | 13 | % | |||||
Xiantao ruixin | 181,260 | 13 | % |
5. | Advances to suppliers: |
As of March 31, 2010 and September 30, 2009, respectively, advances to suppliers consisted of deposits on account with several key raw materials suppliers to secure preferential pricing of raw materials. The deposits also are used to ensure timely delivery of materials purchased.
6. | Inventory: |
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
Raw materials | $ | 85,239 | $ | 40,126 | ||||
Work in progress | 240,386 | 50,443 | ||||||
Finished goods | 696,779 | 1,106,720 | ||||||
$ | 1,022,404 | $ | 1,197,289 |
10
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
7. | Property and equipment: |
As of | March 31, 2010 | |||||||||||
Accumulated | Net book | |||||||||||
Cost | depreciation | value | ||||||||||
Building and plant | $ | 2,958,252 | $ | 592,938 | $ | 2,365,314 | ||||||
Machinery | 11,158,514 | 3,585,441 | $ | 7,573,073 | ||||||||
Office equipment and other equipment | 770,547 | 669,760 | $ | 100,787 | ||||||||
Vehicles | 139,553 | 48,219 | $ | 91,334 | ||||||||
$ | 15,026,866 | $ | 4,896,358 | $ | 10,130,508 |
As of | September 30, 2009 | |||||||||||
Accumulated | Net book | |||||||||||
Cost | Depreciation | value | ||||||||||
Building and plant | $ | 2,958,978 | $ | 526,654 | $ | 2,432,324 | ||||||
Machinery | 11,174,517 | 3,096,112 | $ | 8,078,405 | ||||||||
Office equipment and other equipment | 771,829 | 668,448 | $ | 103,381 | ||||||||
Vehicles | 139,753 | 41,998 | $ | 97,755 | ||||||||
$ | 15,045,077 | $ | 4,333,212 | $ | 10,711,865 |
For the three months ended March 31, 2010, depreciation expense of $271,848 was included in cost of sales and $16,285 was included in selling, marketing, and administrative expenses, for a total of $288,133.
For the three months ended March 31, 2009, depreciation expense of $158,525 was included in cost of sales and $16,035 was included in selling, marketing, and administrative expenses, for a total of $174,560.
For the six months ended March 31, 2010, depreciation expense of $536,787 was included in cost of sales and $32,571 was included in selling, marketing, and administrative expenses, for a total of $569,358
For the six months ended March 31, 2009, depreciation expense of $318,986 was included in cost of sales and $33,084 was included in selling, marketing, and administrative expenses, for a total of $352,070.
8. | Deposits: |
As of March 31, 2010, we have deposits of $1,946,280 with equipment providers to ensure timely fulfillment of our purchase contracts to build new product assembly lines.
11
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
9. | Land use rights: |
March 31 ,2010 | September 30 ,2009 | |||||||
As of | USD | USD | ||||||
Cost | $ | 621,817 | $ | 622,578 | ||||
Less: accumulated amortization | (91,453 | ) | (85,228 | ) | ||||
$ | 530,364 | $ | 537,350 |
For the three months ended March 31, 2010 and 2009, amortization expense was $3,114 and $3,110, respectively.
For the six months ended March 31, 2010 and 2009, amortization expense was $6,217 and $6,204 respectively.
10. | Accounts Payable and Accrued Liabilities: |
The restated accounts payable and accrued liabilities include fees of $75,000 ($150,000 in total) incurred and payable to each of Primary Capital and Unites Best for their advisory services provided in connection with the convertible note financing which closed on February 12, 2010.
11. | Short-term loans: |
The Company has several loans with Agricultural Bank of China, Foshan Branch and these loans are due in September 2010. The interest on the outstanding balance is payable every month at rates ranging from 5.93% to 7.75% per annum.
12. | Convertible note payable: |
On February 12, 2010, immediately following the closing of a share exchange agreement we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants. In addition to the finance cost of approximately $730,000, 654,510 common shares were issued to placement agents. The notes have the following material terms:
Maturity: The notes mature after one year. If principal is not is not paid on maturity then 150% of the principal amount shall be payable.
Interest: 10% per annum payable quarterly increasing to 15% if there is a default. $204,464 is being held in escrow from the closing proceeds and was recorded as prepaid expense.
Conversion: In the event of the closing of any equity or series of related financings resulting in aggregate gross proceeds to the Company of at least $20,000,000 (or such lesser amount as shall be approved in writing by the holder(s) of notes evidencing at least 50% of the principal amount of the notes then outstanding), a “qualified financing,” prior to the maturity date of the notes, the principal amount of the notes converts automatically into the securities sold in such financing at a 65% discount to the offering price of such securities.
Besides the stated interest expense at 10% per annum, interest expenses are recorded to accrete the note to its balance of $4,140,000 due on February 2011. Accretion on interest expenses amounted to $304,950 and $304,950 for the three months and six months ended March 31, 2010.
Allocation of the proceeds:
After allocating $1,052,000 to the initial fair value of warrants derivative liabilities, and agent fee of $730,187, the remaining proceeds received from the convertible note of $3,409,813 were allocated to placement agent common stock and convertible note payable based on their relative fair value. This results in a debt discount of $2,439,743 from the face amount of the convertible note payable, accordingly, the discount is being amortized over the life of the note to accrete the note to its redemption value. The proceeds allocation is as follows:
February 12, 2010 convertible note finance | ||||
Gross proceeds | $ | 4,140,000 | ||
Less cash fee paid to placement agent | 730,187 | |||
Net proceeds | $ | 3,409,813 | ||
Record warrant as derivative liability | $ | 1,052,000 | ||
Allocated remaining proceeds to : | ||||
Common stock issued to placement agents | 657,556 | |||
Convertible Note | 1,700,257 | |||
$ | 3,409,813 |
13. | Related party transactions: |
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
Advance to former shareholders (a) | $ | 212,329 | $ | 259,538 | ||||
Advance to current shareholders (b) | 706 | 1,413 | ||||||
Advance to director (c) | - | 73,246 | ||||||
Subtotal | 213,035 | 334,197 | ||||||
Receivable from related companies (d) | - | 439,475 | ||||||
$ | 213,035 | $ | 773,672 |
12
China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
(a) | Advance to former shareholders: |
The advance to former shareholders includes advances to three of the former shareholders. The advance is non-interest bearing and due on demand.
(b) | Advance to current shareholders: |
The advance to current shareholders includes advances to current shareholders. The advance is non-interest bearing and due on demand.
(c) | Receivable from related companies |
The receivable from related companies includes Foshan SLP owned its parents company and loans are non-interest bearing and due on demand.
14. | Subsequent events |
The Company advised shareholders of action taken to approve a change in our corporate name to China SLP Filtration Technology, Inc., which action was approved on April 22, 2010 by the board of directors and on April 22, 2010 by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted.
The name change became effective on the filing of a certificate of amendment to our certificate of incorporation with the Secretary of State of Delaware, which occurred on April 22, 2010.
15. | Earnings per Share |
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common equivalent shares, if any, by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible note (using the if-converted method) and common shares issuable upon the exercise of outstanding warrants (using the treasury stock method). Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.
The number of shares outstanding is used in calculation of basic and diluted earnings per share as below.
Three Months ended | Three Months ended | |||||||
Restated March 31, 2010 | March 31, 2009 | |||||||
Numerator for basic and diluted EPS | ||||||||
- Net income from continuing operations | 444,332 | 489,207 | ||||||
Denominator for basic and diluted EPS | ||||||||
Weighted average shares of common stock outstanding shares – basic | 14,897,143 | 14,510,204 | ||||||
Weighted average shares of common stock outstanding shares – diluted | 15,798,367 | 14,510,204 | ||||||
EPS– basic and diluted | 0.03 | 0.03 | ||||||
Restated Six Months ended March 31, 2010 | Six Months ended March 31, 2009 | |||||||
Numerator for basic and diluted EPS | ||||||||
- Net income from continuing operations | 1,739,680 | 731,746 | ||||||
Denominator for basic and diluted EPS | ||||||||
Weighted average shares of common stock outstanding shares – basic | 14,701,547 | 14,510,204 | ||||||
Weighted average shares of common stock outstanding shares – diluted | 15,147,208 | 14,510,204 | ||||||
EPS– basic and diluted | 0.12 | 0.05 |
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China SLP Filtration Technology, Inc.
Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
16. | Accounting for Warrants |
The warrants issued in conjunction with the convertible notes have the following material terms:
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000. The warrants cannot be exercised if no financing is consummated within five-year period after the issue date and become void if the notes automatically convert into common stock.
Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.
Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.
The Company analyzed the warrants and the conversion features in the notes to assess whether they meet the definition of a derivative under the guidance set forth by ASC Topic 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to ASC Topic 815 to treat the warrants as derivative liabilities. Management also evaluated whether the warrants meet the scope exception set forth by ASC Topic 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of ASC Topic 815. The provisions in ASC Topic 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
Management concluded that the warrants issued in conjunction with the private placement of convertible notes in February 2010 to certain accredited investors should be treated as a derivative liability and the derivative accounting rules under ASC Topic 815-40 were adopted to record the warrants. Fair market value of the warrants were measured using the Black-Scholes pricing model at the issuance date and recorded as warrants liabilities. Change in the fair value of the warrants is recorded in other income or loss in the statement of operations in the future reporting periods. Change in warrant value from February 2010 to March 31, 2010 were not material.
As a result of adopting accounting treatment of ASC Topic 815-40, $1,052,000 was recorded as warrants liabilities based on 1,218,857 shares entitled under the warrants and the valuation inputs as provided in the table as follows.
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Notes to Consolidated Financial Statements for the six months ended March 31, 2010
(Unaudited - - Expressed in US dollars)
17. | Recent accounting pronouncements |
In June 2009 the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.
Statement of Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855), “Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.
Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and Various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
18. Restatements of Previously Issued Financial Statements
Subsequent to the issuance of our consolidated financial statements for the three and six months ended March 31, 2010, included in our Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the United States Securities and Exchange Commission on May 24, 2010, as amended on May 26, 2010, and in connection with the SEC’s review of our registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that we failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with our private placement of convertible notes which closed on February 12, 2010. We have revised the previously issued consolidated financial statements to include the liability in our consolidated balance sheet, consolidated statements of operations, and consolidated statements of cash flows for the periods affected. The following tables highlight changes to specific accounts affected:
As reported | As restated | |||||||
March 31, 2010 | March 31, 2010 | |||||||
Accounts payable and accrued liabilities | $ | 371,247 | $ | 521,247 | ||||
Total Current Liabilities | $ | 7,248,935 | $ | 7,398,935 | ||||
Retained earnings | $ | 6,390,212 | $ | 6,240,212 | ||||
Total Stockholders’ equity | $ | 16,131,432 | $ | 15,981,432 |
A restatement of the consolidated statements of operations and comprehensive income affected the three month and six month periods ended March 31, 2010 in general and administrative expenses as follows:
Three months ended | Six months ended | |||||||||||||||
March 31, 2010 | March 31, 2010 | |||||||||||||||
As reported | As restated | As reported | As restated | |||||||||||||
Selling, General and Administrative Expenses | $ | 407,461 | $ | 557,461 | $ | 662,138 | $ | 812,138 | ||||||||
Income from Operations | $ | 983,899 | $ | 833,899 | $ | 2,041,054 | $ | 2,191,054 | ||||||||
Income before Income Taxes | $ | 594,332 | $ | 444,332 | $ | 1,889,680 | $ | 1,739,680 | ||||||||
Net Income | $ | 594,332 | $ | 444,332 | $ | 1,889,680 | $ | 1,739,680 | ||||||||
Comprehensive income | $ | 570,393 | $ | 420,393 | $ | 1,864,435 | $ | 1,714,435 | ||||||||
Earnings per share – basic and diluted | $ | 0.03 | $ | 0.02 | $ | 0.13 | $ | 0.12 |
Statements of Cash Flows for the six months ended March 31, 2010 are restated under net income and accounts payable and accrued liabilities as follows:
As reported | As restated | |||||||
March 31, 2010 | March 31, 2010 | |||||||
Net income | $ | 1,889,680 | $ | 1,739,680 | ||||
Accounts payable and accrued liabilities | $ | (38,281 | ) | $ | 111,719 |
The net cash provided by the operating activities, the net cash used in investing activities, and the net cash provided by financing activities are not affected by the restatements.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Special Note Regarding Forward-Looking Statements
This report contains some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements involve risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historical or current facts. In some cases they are identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" in our registration statement of Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010 (the “S-1”). In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.
Introduction
This section discusses and analyzes the results of operations and financial condition of China SLP Filtration Technology, Inc. (“we,” “us,” or the “Company”) which is the ultimate parent company of Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a China-based operating company located in Foshan, Guangdong Province in the People’s Republic of China. On February 12, 2010, we acquired control of Foshan in a share exchange transaction which closed on that date. In the share exchange or “reverse merger” we acquired control of Hong Hui Holdings Limited (“Hong Hui”), a British Virgin Islands company and the owner of all of the stock of Technic International Limited (“Technic”), a Hong Kong holding company which in turn is the owner of all of the equity of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares of our common stock in exchange for all of the outstanding capital stock of Hong Hui. The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible has been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination.
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.
Overview
This section discusses and analyses our results of operations and financial condition, including the results and condition of our operating company, Foshan, which have been consolidated with our own results for all periods presented. This discussion is intended to help you understand our financial results and the current facts and trends that may cause them to change, so that you may make informed judgments about our likely financial results in the future and, insofar as those results may affect our stock price and informed investment decisions.
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General
We are a PRC based manufacturer of nonwoven fabrics. We currently manufacture two types of PET nonwoven fabrics which are used in a wide range of products, including filtration products, road construction materials, home furnishings, automobile interior insulation and industrial packaging.
Our current PET products are sold primarily to PRC-based manufacturers which use our products as raw material components for end-products they sell to their customers. We recently developed a manufacturing process to manufacture polyphenylene-sulfide fiber, or PPS nonwoven fabric, which is the key product line around which our long-term growth strategy is centered.
Based on lab tests which we conducted internally we believe that our PPS nonwoven fabric is superior to other currently available high temperature filtration material because it is lighter, thicker, stronger, has higher air permeability and filtration efficiency and significantly cheaper to produce. Due to the superior characteristics of our PPS product coupled with the demand created by these new regulations, we believe that our PPS material will become a market leader for high temperature filtration applications. We expect to sell our PPS nonwoven products to operators of coal fired power plants, garbage incinerators and other heavy industrial plants.
We intend to continue to manufacture PET nonwovens but we expect that the sales of our PPS nonwoven fabrics will ultimately eclipse the sales of our existing PET nonwoven products and become our main product offering.
Our manufacturing facility, which is located in Foshan City, Guangdong Province, PRC, currently has three production lines for PET nonwovens with annual product capacity of 8,000 tons. We plan to begin commercial production of our PPS nonwoven fabric in the latter part of 2010 with the addition of three high tech production lines with annual production capacity of 3,600 tons, which will bring our total overall production capacity to 11,600 tons per year.
Three Month Period Ended March 31, 2010 compared to Three Month Period Ended March 31, 2009
The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.
Three months ended March 31 | ||||||||||||||||
2010 (unaudited) | 2009 (unaudited) | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 4,628,671 | 100 | % | 2,214,940 | 100 | % | |||||||||
Cost of Sales | 3,237,311 | 70 | % | 1,373,921 | 62 | % | ||||||||||
Gross Profit | 1,391,360 | 30 | % | 841,019 | 38 | % | ||||||||||
SG&A expense | 557,461 | 12 | % | 275,526 | 12 | % | ||||||||||
Operating Income | 833,899 | 18 | % | 565,493 | 26 | % | ||||||||||
Interest Income | 292 | 0 | % | - | 0 | % | ||||||||||
Interest Expenses | (390,355 | ) | 8 | % | (76,286 | ) | 3 | % | ||||||||
Gain on disposal of fixed assets | 496 | 0 | % | 0 | 0 | % | ||||||||||
Net Income before taxes | 444,332 | 10 | % | 489,207 | 22 | % | ||||||||||
Net Income | 444,332 | 10 | % | 489,207 | 22 | % |
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Net Sales
Net sales revenue consisted of sales of needle punched non woven fabric and thermal calendared products. Our net sales for three month period ended March 31, 2010 were $4,628,671, an increase of $2,413,731, or 109%, from $2,214,940 for the same period of prior year. The increase in net sales was largely attributable to higher sales volume after a new production line used to manufacture needle-punched nonwoven fabric was installed in February 2009. Sales of needle-punched products for the three month period ended March31, 2010 were $1,942,811 compared to $220,718 for the same period of the prior year. In addition, sales of thermal calendared materials for the three month period ended March 31, 2010 $2,308,801, as increase of $569,189 compared to $1,739,612 for the same period of the prior year.
Cost of sales principally consists of the cost of raw materials, labor, and manufacturing overhead expenses.
Our cost of goods sold for the three month period ended March 31, 2010 was $3,237,311, an increase of $1,863,390, or 136%, from $1,373,921 for the same period in 2009. The primary reason for the increase in cost of sales was an increase in our raw materials costs, which we believe was in line with our increased sales volume. 98.7% of our raw material costs consist of polyester, the cost of which increased with the price of oil.
Our raw material cost as a percentage of net sales increased to 52% of the sales for the three month period ended March 31, 2010, compared to 41% of sales for the same period of the prior year, reflecting a mix of more expensive raw materials associated with 2010 sales.
Labor cost accounted for 1% of net sales for the three month period ended March 31, 2010 compared to 2% for the same period of year 2009. Beginning in February 2009, we hired 17 additional employees to work the new production line. Labor costs also increased due to increased demand for labor.
Overhead expenses were 11% of net sales for the three month period ended March 31, 2010, compared to 19% of net sales for 2009 due to the increase of manufacturing capacity of the Company with the addition of the new production line in February 2009.
Gross Profit
Our gross profit for the three month period ended March 31, 2010 was $1,391,360, an increase of $550,341, or 65%, from $841,019 for the same period in the prior year. As a percentage of net sales, gross profit was 30% for the three month period ended March 31, 2010, compared to 38% for the same period last year. This was primarily due to increase of purchase price of the raw materials associated with 2010 sales, which price increase was caused by fluctuations in the price of oil.
Selling, Marketing and Administrative Expenses
Selling expenses include salaries, advertising expenses, cost of manufacturing, rent, and all expenses directly related to producing and selling product. General expenses include general operating expenses that are directly related to the general operation of the company but excluding selling and administrative expenses. Administrative expense includes executive salaries and other expenses related to the overall administration of the company.
Selling, general and administrative expenses for the three month period ended March 31, 2010 were $557,461, an increase of $281,935 compared to $275,526 for the same period in 2009. The increase was primarily due to increase of $25,524 in export delivery expenses, $150,000 fees incurred in connection with the Company’s convertible note financing closed in February, and $ 83,286 additional professional expenses related to the Company’s proposed equity financing.
Other expenses solely consist of interest expense.
18
Interest expense for the three month period ended March 31, 2010 was $390,355 compared to $76,286 for the same period in 2009. Interest expense as a percentage of sales increased to 8% for the three month period ended March 31, 2010 from 3% for the same period of last year. The increase in interest expense was principally due to interest on the convertible notes in the aggregate principal amount of $4,140,000. We accreted non-cash related interest expense in the amount of $304,950. Excluding the accretion of interest, our interest expense for this three-month period was the same as for the same period in 2009.
Income Tax
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. Since the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of March 31, 2010 and September 30, 2009.
BVI
Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
PRC
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan SLP. For 2008 and 2009 Foshan SLP enjoys tax free holidays. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the 2010, 2011 and 2012 in which we receive a 50% discount on income tax.
The current year tax provision was $6,328 and $[6,328] for the three and six months ended March 31, 2010, respectively. The company has recorded zero deferred tax assets or liabilities as of March 31, 2010 and September 30, 2009, net of tax allowance, because all other significant difference in tax basis and financial statement amounts are permanent differences.
Net Income
Net income for the three months ended March 31, 2010 decreased by $44,875, from net income of $489,207 for the three month period ended March 31, 2009 to net income of $444,332. The decrease was largely due to $150,000 fees incurred for the convertible note financing closed in February 12, 2010 offset by an increase in net sales generated from new needle-punch products.
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Six Month Period Ended March 31, 2010 compared to Six Month Period Ended March 31, 2009
The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.
Six Months ended March 31 | ||||||||||||||||
2010 (unaudited) | 2009 (unaudited) | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 9,847,025 | 100 | % | 4,540,833 | 100 | % | |||||||||
Cost of Sales | 6,843,833 | 70 | % | 2,906,402 | 64 | % | ||||||||||
Gross Profit | 3,003,192 | 30 | % | 1,634,431 | 36 | % | ||||||||||
SG&A expense | 812,138 | 8 | % | 758,442 | 17 | % | ||||||||||
Operating Income | 2,191,054 | 22 | % | 875,989 | 19 | % | ||||||||||
Interest income | 517 | 0 | % | - | 0 | % | ||||||||||
Interest Expenses | (452,387 | ) | 5 | % | (160,506 | ) | 4 | % | ||||||||
Gain on disposal of fixed assets | 496 | 0 | % | 16,263 | 0 | % | ||||||||||
Net Income before taxes | 1,739,680 | 18 | % | 731,746 | 16 | % | ||||||||||
Net Income | 1,739,680 | 18 | % | 731,746 | 16 | % |
Net Sales
Net sales for the six month period ended March 31, 2010 were $9.85 million, an increase of $5.30 million or 116 %, from $4.55 million for the same period of prior year. In February 2009, we installed a new production line to manufacture needle punched non woven fabric. Sales of needle-punched products for the six month period ended March 31, 2010 were $4,300,022 compared to $220,718 for the same period of the prior year. In addition, sales of thermal calendared materials for the six month period ended March 31, 2010 were $ 5,559,365, as increase of $ 1,228,361 compared to $ 4,331,204 for the same period of the prior year.
Cost of Sales
Cost of sales for the six month period ended March 31, 2010 was $6,843,833, an increase of $3,937,431, or 135%, from $2,906,402 for the same period of the prior year. As a percentage of net sales, cost of goods sold was 70% for the six month period ended March 31, 2001 compared to 64 % for the same period in 2009.
Raw material costs increased to 56% of the sales for the six month period ended March 31, 2010, compared to 40% of sales for the same period in 2009, reflecting a mix of more expensive raw materials associated with 2010 sales. 98.7% of our raw materials consist of polyester the price of which fluctuates with the price of oil.
Labor expenses were 6% of sales for the six month period ended March 31, 2010 compared to 2% for the same period in 2009. Beginning in February 2009, we hired 17 additional employees to work the new production line. Labor costs also increased due to increased demand for labor.
Overhead expenses were 12% of net sales for the six month period ended March 31, 2010, compared to 19% of net sales for the same period last year due to the increase of manufacturing capacity of the Company.
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Gross Profit
Gross profit for the six month period ended March 31, 2010 was $3,003,192, an increase of $1,368,761, or 83%, from $1,634,431 for the same period of the prior year. As a percentage of net sales, gross profit was 30% for the six month period ended March 31, 2010, compared to 36% for the same period last year. This decrease was primarily due to the increase in the purchase price of the raw materials associated with 2010 sales. This was primarily due to increase of purchase of price of the raw materials associated with 2010 sales, which price increase was caused by fluctuations in the price of oil.
SG&A Expenses
Selling, general and administrative expenses for the six month period ended March 31, 2010 were $812,138, an increase of $53,696, or 7% compared to $758,442 for the same period of the prior year. This is mainly due to a $150,000 liability incurred in connection with our convertible note financing offset by a $77,327 decrease in office expenses compared to the same period 2009.
Other Expenses
Interest expense for the six month period ended March 31, 2010 was $452,387 compared to $160,506 for the same period of the prior year. Interest expense as a percentage of net sales increased to 5% for the six month period ended March 31, 2010 from 4% for the same period of the prior year. The cause for the increase in interest expense for the six month period was principally due to record $4,140,000 of convertible notes. We accreted non-cash related interest expense, in the amount of $304,950. Excluding accretion on non-cash interest expense, interest expense for this six month period remained the same as last year, and, as a percentage of net sales, decreased to 1% from 4%.
Net Income
Net income for the six months ended March 31, 2010 was $1,739,680, an increase of $1,007,934, or 138%, from net income of $731,746 for the same period in the prior year. The increase was mainly due to the increase in sales generated from new needle-punch products.
Liquidity and Capital Resources
The following table sets forth a summary of our net cash flow information for the periods indicated:
Six Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Consolidated, unaudited) | (Consolidated, unaudited) | |||||||
Net cash provided by operating activities | $ | 1,553,423 | $ | 3,586,444 | ||||
Net cash (used in) investing activities | $ | (1,389,582 | ) | $ | (4,927,447 | ) | ||
Net cash provided by financing activities | $ | 2,636,263 | $ | 194,967 | ||||
Net cash inflow (outflow) | $ | 2,794,686 | $ | (1,166,031 | ) |
We finance our business with cash flows from operations and short-term bank loans and we use shareholders’ equity investment and retained earnings to fund capital expenditures.
Working capital consists mainly of cash, accounts receivable, advances to suppliers and inventory. Cash, inventory and accounts receivable account for the majority of our working capital.
At March 31, 2010, we had several bank loans for the total amount of $3.8 million (RMB26 million) with Agriculture Bank of China, Foshan Branch and these loans are repayable in December 2010. We have the highest credit rating for that bank.
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On February 12, 2010, we completed a financing transaction in which we raised gross proceeds of $4,140,000 through a private placement of convertible notes and warrants to certain accredited investors.
Operating Activities
Net cash provide by operating activities for the six months ended March 31, 2010 was approximately $1.55 million, compared to a cash flow of $3.59 million for the same period of the prior year. The decrease was due primarily to increase in Non-cash interest charges, decrease in advance to suppliers.
Investing Activities
Net cash provided by investing activities for six months ended March 31, 2010 was negative cash flow $1.39 million, compared to a negative cash flow of $4.93 million for the same period of the prior year. The increased cash used from investing activities because there were no large capital expenditures during the first six months of the year. Only deposits were made a new product assembly line project. The net cash used in investing activities for the same period of last year was due to the deposits for purchases of equipment and expenses relating to outfitting our facilities.
We are satisfied this cash expenditure with cash reserves and cash generated from 2009 and 2010 operations.
Financing Activities
Net cash provided by financing activities for the six month period ended March 31, 2010 was approximately $2.64 million, compared to $0.19 million for the same period of the prior year. The increase was the result of cash received from the sale of the convertible notes.
The balance of our outstanding short-term bank loans on March 31, 2010 was approximately $3.8 million, compared with $4.6 million on March 31, 2009
On February 12, 2010, immediately following the reverse merger, we entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds for $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum and interest for six month in amount of $204,464 to be held in an escrow account.
The warrants become void if the notes automatically convert into common stock.
The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $20,000,000. The warrants cannot be exercised if no financing is consummated within the five-year period after the issue date.
Future Cash Commitments
We have ambitious capital investment plans for our PPS projects in 2010 and which will require significant investment capital. This demand for investment capital will be met by the proceeds from the February private placement, and by outside financing (including the public offering) that we intend to raise as needed to continue our expansion.
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Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:
Method of Accounting
We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. Accounting policies adopted by us conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
Economic and political risks
Our operations are conducted in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
Our operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Revenue recognition
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and the seller’s price to the buyer is fixed or determinable and collectible.
Land use rights
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives range from 20 to 50 years.
Property, plant and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of plant and equipment are as follows:
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15-35 years | ||||
Machinery and equipment | 10 years | |||
Office equipment | 6-10 years | |||
Motor vehicles | 6-8 years | |||
Other assets | 6-10 years |
Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that is required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Jie Li, our chief executive officer and Mr. Eric Gan, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures and internal controls as of March 31, 2010. Based on that evaluation, Mr. Lie and Mr. Gan concluded that as of March 31, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures and internal controls was completed, our disclosure controls and procedures and internal controls were not effective in that certain “material weaknesses” existed related to (i) the U.S. GAAP expertise of our internal accounting staff, and (ii) our internal audit function.
A material weakness is a control deficiency, or a combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected.
As more fully disclosed in a Current Report on Form 8-K filed on November 18, 2010, subsequent to the issuance of our consolidated financial statements for the three and six months ended March 31, 2010, included in our Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the United States Securities and Exchange Commission on May 24, 2010, as amended on May 26, 2010, and in connection with the SEC’s review of our registration statement on Form S-1 (File No. 333-168028), originally filed on July 8, 2010, as amended on September 7, 2010 and October 15, 2010, it was identified that we failed to record a liability of $75,000 owed to each of United Best and Primary Capital (totaling $150,000) for advisory services rendered in connection with our private placement of convertible notes which closed on February 12, 2010.. This liability should have been reflected in (i) our unaudited interimfinancial statements for the three month and nine month periods ended June 30, 2010 and (ii) our unaudited interim financial statements for the three month and six month periods ended March 31, 2010.
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Our chief executive officer and chief financial officer and our Audit Committee determined, after discussions with Child, Van Wagoner & Bradshaw, PLLC, our independent registered public accounting firm, that (i) our unaudited interim financial statements for the three month and nine month periods ended June 30, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 16, 2010, and (ii) our unaudited interim financial statements for the three month and six month periods ended March 31, 2010 and 2009, as set forth in the Quarterly Report on Form 10-Q filed on May 24, 2010, as amended on May 26, 2010 should be restated and should not be relied on.
Changes in Internal Control over Financial Reporting.
Because our current accounting department is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies, our management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.
In order to correct the foregoing significant deficiencies, we are taking or have taken the following remediation measures:
· | In August 2010, we hired Eric Gan as our new chief financial officer; |
· | We are arranging necessary training for our accounting department staff; |
· | We plan to engage external professional accounting or consultancy firms to assist us in the preparation of the U.S. GAAP accounts; and |
· | We have allocated financial and human resources to strengthen the internal control structure and we have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting. |
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. However, there is no guarantee that these improvements will be adequate or successful or that such improvements will be carried out on a timely basis.
Other than described above, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 6. | EXHIBITS. |
The following exhibits are filed as part of this report or incorporated by reference:
Exhibit No. | Description | |
31.1 | Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 24, 2010
CHINA SLP FILTRATION TECHNOLOGY, INC. | ||
By: | /s/ Jie Li | |
Jie Li | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Eric Gan | |
Eric Gan | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certifications of Principal Executive Officer and Principal Accounting Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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